Continuing with our series of articles on the newest proposals included in the Company Law Reform Bill, and with a departure from our proposed feature on the accounts and audits part of the Bill, we discuss below the latest amendments which on 3 May 2006, the Government introduced into the Bill.  This is an attempt to appease the CBI who have made many of their concerns regarding the Bill, in particular regarding the statutorisation of directors' duties and the provisions regarding derivative shareholder action, apparent in the media.  This accommodation by the DTI illustrates clearly the desire within the Government to ensure that this latest proposed overhaul of company law attempts to strike a balance among all those exposed to company law on a daily basis (i.e. shareholders, directors and the general public) by making the body of rules as relevant as possible to these various interest groups.  Thus, while the flexibility may mean that there are various re-thinks on the Bill in the coming months the net result presented to Parliament for final consideration should be a bill which meets the needs of as broad an array of interested parties as possible.

The main new clauses to be introduced are designed to maintain the proposed reform's  intended "Light Touch".  The measures include changes to (i) Directors' Duties; (ii) Narrative Reporting; and (iii) Derivative Claims.  As part of the re-think the Government will also clarify the position on Disclosures under the Companies Act and the implementation of the EU Transparency Obligations Directive, though given the scope of this article, these shall be considered separately in another edition.

As regards directors' duties the Government's latest amendments seek to clarify priorities for directors.  Directors are still required to have regard to certain factors, for example, the interest of employees and the environment.  However, it is now clear that this is subject always to the overriding duty of directors to act in the way they consider in good faith would be most likely to promote the success of the Company for the benefit of its members as a whole.  This clarifies directors' concerns that they would have exposure to a wide array of pressure groups e.g. environmental groups and the like, raising the spectre of a US-style flurry of class actions.  The clarification is an attempt to emphasise that directors' duties are primarily to the Company and the various other matters are merely to be taken into account where this would not adversely impact on their primary duty.

Narrative reporting is to be streamlined so that the requirements for quoted companies now more closely mirror those for unquoted companies.  Under the proposed new rules all companies, other than small companies will have to produce a Business Review ( as required under EU law ).  The purpose of the Review is to inform shareholders of the Company and help them to assess how the directors have performed their duty to promote the success of the Company under the new s.156.  Quoted companies will have to ensure that their Business Review includes information about the main trends and factors likely to influence that company's future development and information regarding environmental matters, the company's employees and social and community issues.

The new system will also mean that for all companies, Auditors will continue to be required to report on the consistency of the Directors' Report with the annual accounts but there will not be any requirement to check for any other inconsistencies. All companies will be exempted from disclosing in the Business Review information which is seriously prejudicial to their interests. This exemption was previously provided only for those Companies that had to produce an Operating and Financial Review (the Government announced its intention to abolish these on 28 November 2005).

The Government is also proposing a new requirement for courts to dismiss as early as possible spurious or unfounded shareholder derivative actions, making the qualification test for success in bringing such claims more stringent. 

These latest amendments will be discussed as part of the Lords Report Stage of the Bill scheduled for later this month.

Next edition we shall focus on the proposed provisions regarding accounts and audits under the Bill with a summary of the state of the Bill thus far to follow thereafter.

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