A Missed Opportunity?

A very debilitating but rarely fatal condition, NLO – “New Law Overload - that can affect the economic health of a business - will be on the increase once a large part of the new Companies Act comes into force on 1 October!

Despite the best efforts of lawyers, accountants and other professional advisers, many businesses are still unaware of the impact of this new legislation.

The Government originally intended this new law would carry out:

• “A fundamental review” and “modernisation” of corporate law – yet large chunks of the old statute remain.
• Adopt a “simple” framework for companies – yet this is the largest statute ever, with 1,300 sections and 16 schedules, plus hundreds of pages of subordinate legislation.
• Use “ clear, concise and unambiguous language” – just try reading it!
• “Think small first” – some progress here but there is room for much more.

What has gone wrong?

Well, reform of company law is not exactly a vote winner so resources and parliamentary time were limited. And the Act was effectively drafted by a committee – with several hundred people involved in the process.

In many ways, the new Companies Act represents a huge missed opportunity and further reform is unlikely for at least a generation.

But significant changes do come into force on 1 October:

• The new statutory code of directors’ “general” duties affects the way directors make decisions.
• Shareholders can now sue directors more easily if their decisions have an adverse effect on the company.
• the balance of power between the directors, controlling shareholders and minority investors fundamentally shifts through the new laws governing shareholder meetings and the passing of resolutions.
• Many new provisions, 200 sections in all, take effect.

Notwithstanding the defects of the new Companies Act, everyone involved in running companies and advising them needs to understand how the new law affects them and their company.

Key activities

* Many companies should review their governing documents.

* Investors and other shareholders should review or implement Shareholders Agreements to protect their position.

* Directors should document their decision making processes more carefully, reviewing the governance structure of the company and taking care to keep up to date with changes in the law.

Published 05/10/2007.