The changes address directors' duties, reporting requirements
and derivative claims. They also clarify the position on liability
for disclosures under the Companies Act and for implementation of
the EU Transparency Obligations Directive. Draft clauses on a
proposed regime for liability have been issued today for a short
period of public consultation.
Alun Michael, Minister for Industry and the Regions said: "Our
aim has always been to encourage meaningful strategic,
forward-looking information to assist shareholder engagement while
avoiding disproportionate burdens on business, in line with our
better regulation agenda."
On directors' duties, yesterday's amendments seek to put beyond
doubt that the need to have regard to certain factors (including
the interest of the employees and impact on the environment) is
subject to the overriding duty to act in the way the director
considers, in good faith, would be most likely to promote the
success of the company for the benefit of its members as a
whole.
The Government also proposed new powers relating to derivative
claims including a requirement for the courts to dismiss
non-meritorious applications at an early stage.
Summary of changes
Directors' duties
On directors' duties, amendments have been introduced to put
beyond doubt that the need to have regard to certain factors
(including the interest of the employees and impact on the
environment) is subject to the overriding duty to act in the way he
considers, in good faith would be most likely to promote the
success of the company for the benefit of its members as a whole.
The list of factors is not an exhaustive list of the matters that
may be considered by directors. The phrase "so far as reasonably
practicable" in the clause has been deleted in the light of
concerns as to what it implied.
Narrative reporting
The requirements have been streamlined with the requirements for
quoted companies being more closely aligned to those for unquoted
companies. All companies (other than small) will need to produce a
Business Review.
Quoted companies will need to ensure that, to the extent
necessary for an understanding of the development, performance or
position of the company's business, their Business Review
includes:
(a) the main trends and factors likely to
affect the future development, performance and position of the
company's business; and
(b) information about
(i) environmental matters (including the
impact of the company's business on the environment),
(ii) the company's employees, and
(iii) social and community issues,
including information about any policies of
the company in relation to those matters and the effectiveness of
those policies.
If the Review does not contain information on (i) (ii) or (iii)
above, it must state so.
Compared to the earlier Operating and Financial Review (OFR)
provisions, the new arrangements are that:
- Auditors will continue to be required to report on the
consistency of the Directors' Report with the annual accounts (as
is required by the Accounts Modernisation Directive) but there will
not be any additional requirement to check for other
inconsistencies that auditors may come across in performing their
role as auditor;
- All companies that now have to produce a Business Review will
be exempted from disclosing information that is seriously
prejudicial to the company's interests. This exemption was
previously only provided for companies that had to produce an OFR;
and
- There will not be any statutory reporting standards for the
Business Review.
Derivative claims
The Government proposes amendments to the clauses relating to
derivative claims (under which a shareholder, acting as the
company, may bring an action against a director for breach of
duty), in particular, to require the courts to dismiss
non-meritorious applications at an early stage.
The new clauses seek to:
- introduce a two-stage procedure for permission to continue a
derivative claim;
- give the courts an explicit power to adjourn the permission
application;
- require the Court to take into account any evidence before it
as to the views of members who have no personal interest, direct or
indirect, in the matter; and
- provide express power to make consequential orders that could
include costs and civil restraint orders.
Liability
The new draft clauses on liability will leave in common law that
directors remain liable only to the company for statements
contained in the annual accounts under the principles laid down in
the Caparo case.
For narrative reporting under company law, the clauses specify
that:
- Directors should only be liable for statements or omissions in
the directors' report, directors' remuneration report and any
summary financial statement derived from those reports, if such
statements are untrue or misleading and are made in bad faith or
recklessly;
- Directors should also be liable for deliberate and dishonest
concealment of material facts;
- Directors would be liable only to the company.
For disclosures under Takeover Directive (TOD) implementation,
the new clauses specify that:
- Issuers, whose securities are traded on a regulated market
should be liable for statements disclosed as required under TOD
implementation;
- Issuers should only be liable if such statements are untrue or
misleading at the time, and are made in bad faith or recklessly, or
there is deliberate and dishonest concealment of material facts;
and
- Issuers would be liable to an individual investor or other
third party only if he had reasonably relied on the statement for
investment purposes, and suffered loss as a result of the statement
or omission.
Liability for directors' report statements in non-Company Law
Reform Bill contexts, e.g. in prospectuses would not be
affected.
