The Companies Act 2006 and SMEs - does better regulation mean more or less?
10th September 2007 Look for the pages on the government website dealing with the Companies Act 2006, and you will find them optimistically sheltering under the heading "Better Business Framework". After all, the key objectives behind the new Act included "better regulation", "think small first" and "making it easier to set up and run a company". Even the DTI's new name – Department for Business, Enterprise and Regulatory Reform – seems to promise some relief for hard pressed SMEs.
But dig into some of the detail and it soon becomes clear that the legislation divides corporate Britain into two camps – big and small – with little room in the middle for those who fit neither category. Worse is to come when the realisation dawns that it is only the smaller end of the corporate sector which truly benefits from the Act's deregulation. For larger companies, the reality can be that there is often more regulation rather than less.
To some extent Whitehall's hands were tied. Much of the regime governing plcs is now constrained by the EU's company law directives. It was only with the private company that the UK government was able to make decisions in isolation and here they have indeed succeeded in creating perhaps Europe's most deregulated regime for smaller companies.
To take one example, the ban on private companies giving financial assistance for the purchase of their own shares will disappear in October next year. Rumour has it that the DTI wanted to remove it for public companies as well, but found that European law was against them.
Or look at the quoted sector. Companies with shares listed on a regulated market – the full list in London's case – must abide by Brussels derived legislation which aims to create a level playing field across financial markets in the EU. The FSA's policy of light touch regulation can sometimes battle against a heavier hand in Europe.
But sometimes the extra rules are home grown. The rather complicated Companies Act 1985 regime for disclosing major shareholdings in public companies was swept away with its repeal in January this year. That was a requirement of the EU's Transparency Directive which advocated new rules on much the same lines but with higher thresholds (no disclosure required until a shareholding had reached 5%, for example, rather than the UK's previous limit of 3%).
That EU regime, however, was a minimum requirement. National governments were free to adopt tougher rules if they wished. And the Treasury and the FSA, faced with the choice between the new Europe-wide rules and the UK's old, tougher, stance, opted to have both. So we now have two sets of complicated rules in place of the old unified regime, with the choice between the two depending on where the company was incorporated and the market on which its shares are traded.
There is also the risk that welcome clarifications of existing law are used as an opportunity to slip in new requirements. Take the familiar subject of directors' duties. From 1 October this year, the old judge-made law on fiduciary duties, some of it 150 years old and creaking at the edges, is replaced by a new comprehensive code. The modern language largely reflects the old law but is presented in a plain English, easy-to-read format.
But the legislature could not resist the odd tweak here and there. One major innovation is the concept of "Enlightened Shareholder Value", a roundabout way of bringing "stakeholders" into the picture. So directors can no longer satisfy themselves that, once they have looked after their shareholders, they have discharged their duties in full. Now they have to "have regard to" a list of six factors which include, among others, employees and suppliers, the long term consequences of any decision, the community and the environment.
None of that overrides the directors' obligation to promote the success of the company. Concern for the environment does not trump the employees, for example; neither is to be preferred over shareholders. Rather, they are all to be put into the mix from which the board's decision ultimately emerges.
But the risk is that a seeming disregard for the environment, say, could be taken as a breach of duty and create liability for those who were party to the decision. The safeguard is to ensure there is clear written evidence available to show that relevant factors were indeed considered, even if they were dismissed in favour of some other measure of success. That means having systems and procedures in place which result in full discussion of these stakeholder issues in the papers before the board.
All that may be fine for the FTSE 100 and those with plentiful resources to throw at best practice and corporate governance. But while there can be no compromise on proper compliance, the reality is that many SMEs already struggle to keep up with new regulation and the ever-increasing burdens on board members and company secretariats.
The Companies Act 2006 may free the small private company from quantities of red tape, but there remains a risk that it reappears to tie middle-ranking enterprises in ever more intricate knots.
Writing for FSN, Martin Webster is a Partner at Pinsent Masons, the Law Firm. He is the author of The Director's Handbook , paperback, 224 pages, £25, published by Kogan Page, www.kogan-page.co.uk
Writing for FSN, Martin Webster is a Partner at Pinsent Masons, the Law Firm. He is the author of The Director's Handbook , paperback, 224 pages, £25, published by Kogan Page,