The limited liability company
The limited liability company remains the fundamental vehicle for private industry across the globe. It is in acknowledgement of this reality that the law regulating private enterprise through companies has continued to receive special attention from legislatures the world over.
Right from the early days of the European community, it was realized that some measure of harmonization of national laws would be required to ensure a common market. The European Community Treaty in what was formerly Article 54(3)(g), now Article 44(2)(g) permits the Council of Ministers to adopt directives which are towards protection of interest of members and others by coordinating safeguards which are required by member states of companies and firms with a view to making them equivalent throughout the community. The Council is to act through directives and national legislatures are required to give effect to these directives and if need be amend their national laws to comply with them.
In the period between1968-1989, the European Commission (EC) embarked on a program of harmonization that resulted in the adoption of a series of numbered directives, known as Company Law Directives, each targeting an area(s) of company law. The UK joined the EC in 1972. By virtue of membership, Community Law acquired relevance for the UK and requisite steps were taken to implement a wide range of directives. By 2005 the UK had implemented all the Company Law directives. Some of the changes created have been drastic and controversial while others have been basic. There has been abandoning of old legal doctrines and similarly, entrenching of others. A proper assessment of the impact of Community legislation on UK law is best achieved by scrutiny of the specific directives and the changes they have wrought on existing law.
The Companies Act 2006 (CA 2006) received royal assent on the 8th of November, 2006 and with its 1300 sections is the largest piece of legislation in parliament's history. The effect of the act was to provide a comprehensive restatement of company law and it supersedes all prior acts.
The main European Company Law Directives which have been implemented into UK Law are the first, second, third, fourth, sixth, seventh, eighth, eleventh and twelfth. By way of example, the first company law directive was implemented in section 9 of the European Community Act 1972 (ECA) and sections 35-36C of CA 1985, the third via the Companies (Mergers and Divisions) Regulations 198713, the eighth in CA 1989 and the eleventh through the Overseas Companies and Credit and Financial Institutions (Branch) Disclosure Regulations 1992. Further, the Directive coordinating Regulations on Insider Dealing was implemented in the Criminal Justice Act 1993 and the Directive amending the fourth and seventh directives on company accounts applied in the CA 1985 (Accounts of Small & Medium Sized Enterprises and Publication of Accounts in ECUS) Regulations. More recently, Council Regulation 2001/2157/EC on the Statute for a European company (SE) and Council Directive 2001/86/EC supplementing the statute with regard to involvement of employees were implemented in the European Public Limited Liability Company Regulations 2004. Directive 2003/6/EC on Insider Dealing and Market Manipulation was implemented in the Financial Services and Markets Act 2000 (market Abuse) Regulations 2005. The 2006 act provides further refinement of this process by creating specific provisions complying with community law.
Evidently there has been a lot of movement in UK company law over the past few decades caused primarily by from community company law and it is no longer enough for the UK company lawyer ‘merely to absorb legislative changes emanating form Westminster'.
Charlesworth (2005) identified several problems that are inherent in the interaction between community and domestic law. Where delegated legislation is used to implement the former, there is the potential of going beyond what was intended. Another difficulty lies in the possibility that adapting these directives to existing law may apply them to a wider spectrum of companies than those covered by the directive, thereby creating a twotier system of law. Finally, a problem arises when either the directive has not been implemented by the due date or the implementing legislation does not comply with the terms of the directive. The European Court of Justice (ECJ) considered this scenario and in Karella v Greek Ministry for Industry, Energy & Technology held that the directive would have vertical direct effect as between the member state and an individual company. As between two companies, the national court would be expected to interpret the existing legislation in the light of the wording and purpose of the directive in order to achieve the result intended.
Hannigan (2005) breaks the directives down on the basis of the measures they intended to achieve. He ends up with six categories: measures affecting particular classes of corporate entities, measures with respect to corporate governance, those with respect to accounts and auditors, measures with respect corporate restructuring, mergers and takeovers, measures affecting listed companies and lastly, provisions for distinct European entities. An analysis of three of these will suffice to amply illustrate the actual impact on UK domestic law.
Measures affecting particular classes of corporate entities are covered in four directives: the first, second, eleventh and twelfth. As earlier stated, the first company law directive was incorporated by the section 9 of ECA and later in sections 35 to 36C of the companies Act 1985. It addresses two issues relevant to the UK to wit compulsory disclosure by companies of certain documents and particulars and secondly, the validity of transactions entered into by the company. In relation to disclosure, the first directive was amended in 2003 via directive 88/27/EC and implemented in the UK via the Collective Investment Schemes (Miscellaneous Amendments) Regulations 2003. Sections 82 of the 2006 act allow the Secretary of State to make regulations requiring companies to display specific information in particular documents while sections 83 and 84 create civil and criminal sanctions for failure to comply.
The directive further provides relief from the doctrine of ultra vires which had formed an integral part of UK company law for over a century. The House of Lords in Ashbury Railway Carriage and Iron Company Ltd v Riche concluded that a transaction outside a company's objects clause was beyond its contractual capacity and so ultra vires and void. This remained the position till 1973 when change came in the form of Section 9(1) of ECA which reads as follows; "In favour of a person dealing with a company in good faith, any transaction decided on by the directors is deemed to be one which it is within the capacity of the company to enter into." This provision was later incorporated into section 35 of CA 1985. The new section 35 (1) as amended by the 1989 Act provides that the validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company's memorandum. Section 39 of the new act simply re-enacts this position. Here we have a most perfect example of a turnaround from an age-old legal principal precipitated by the dictates of community law. The second directive provides minimum requirements for the formation of public limited companies and rules on the maintenance, increase and reduction of capital. It is one of the most significant directives prescribing detailed capital rules with relation to maintenance of capital and distribution to members. It was implemented in CA 1980 as amended by CA 1981. Article 23 of the directive calls for rules prohibiting the giving of financial assistance by companies. A general prohibition on reduction of capital was contained in section 151 of CA 1985. The 2006 act, while retaining the prohibition for public companies allows private ones to reduce capital by special resolution with the support of a solvency statement or confirmation of the resolution by the court. The detailed provisions of the act are contained in chapter 10 (sections 641-652) which come into force on the 1st of October, 2008. Whereas the directive has not caused a great shift in the law, it has created a more thorough and effective regime on the matter of capital maintenance.
The eleventh directive imposes disclosure requirements in respect of branches opened in member states and was implemented by the Overseas Companies and Credit Financial Institutions (Branch) Disclosure Regulations 1992. Prior to this, overseas companies that established a place of business in the UK were already subject to certain registration and disclosure requirements. The implementation of the directive resulted in the creation of a ‘branch' regime alongside the ‘place of business regime' applicable in the UK. The 2006 resolves the conflict by adopting the regime of the directive. Part 34 of the act is headed ‘Overseas Companies'. Section 1044 defines an overseas company while sections 1046 to 1048 contain the registration requirements. Other requirements are contained in sections 1048 to 1053. Miscellaneous provisions are contained in the rest of the sections up to section 1059. The provisions come into effect in October 2009, effecting another fundamental alteration of UK law courtesy of harmonization of community law. The twelfth directive on formation of one member companies was implemented by the Companies (Single Member Private Limited Companies) Regulations with further provisions in section 1(3A) of CA 1985 and now sections 3 to 6 of the new act . As a result of this partly community induced reform, it is now possible for a single person to form a limited liability company.
The second category of directives that we consider are those that contain measures on accounts and audits. The relevant ones are the fourth and seventh company law directives on accounts and the eighth on auditors. The fourth directive deals with the presentation and content of company's individual accounts and the seventh with consolidated or group accounts. They were implemented by the CA 1981 and 1989 respectively. In 2002, The International Accounting Standards Regulation 29 was adopted, stipulating that from 2005 onwards, listed companies within the EU would have to prepare their consolidated accounts in accordance with the International Financial Reporting Standards (IFRS). The Standards which have endorsed many of the International Accounting Standards (IAS) are now collectively referred to as International Accounting Standards (IAS). In November 2004, CA 1985 (International Accounting Standards and Other Accounting Amendments) Regulations 2004 implemented these changes by altering the Act. It was intended that ultimately, all UK companies will have to comply with a single set of Financial Reporting Rules. Part 15 of CA 2006 whose provisions took effect from the 6th of April 2008 caters for this area of law. Its twelve chapters contain detailed provisions on content, publication, laying before Annual General Meeting, filing and revision of accounts.
The eighth directive lays down equivalent minimum requirements and qualifications for statutory auditors across member states. Part 16 of the new act came into force on the 6th of April this year (except sections 485-488) and contains detailed provisions on audit of both private and public companies. It entrenches the provisions of the eighth directive though this has not greatly altered the position prior to the directive save to impose a more elaborate regulatory framework. In May 2003, the Commission issued a communication, ‘Reinforcing the Statutory Audit in the EU' containing both short and medium term goals aimed at harmonizing the quality of statutory audits throughout the EU. The comprehensive provisions governing the form, content and publication of group and individual accounts, the director's report and the auditor's report make comprehensive provisions on all matters pertaining to the statutory auditor his qualifications, role, independence, discipline and oversight. These reforms on auditors range from rules on the independence of statutory auditors to harmonization of minimum standards for statutory audits of quality assurance.
The final category of directives that we consider are those on corporate restructuring, mergers and takeovers. The third, sixth and tenth directive on cross border mergers deal with mergers and the thirteenth deals with take over bids. Mergers and divisions are catered for in Part 27 of the new act which implements the European Directive on Cross Border Mergers. The provisions have been in force since 6th of April, 2008. In relation to take over bids, the EC Takeovers Directive is implemented in Part 28 of the 2006 Act which came into effect in April 2007. It amongst other things put the Takeover panel on a statutory footing. Generally, many of the substantive provisions of the directive are derived form the City Code and therefore the impact of the directive on the actual rules is on the whole fairly minimal. However, some of the changes have impacted the panel which now will be separated in its rule making and judicial functions
The impact of the program on harmonisation on the company law of any member state turns partly on the pre-existing condition of the domestic Law of that state and partly on whether the transactions regulated by a particular directive are important in that state's practice. For the UK, the most important directives have been the first which triggered fundamental change in the common Law doctrine of ultra vires, the second with its tightening of the rules on dividend distribution and capital maintenance, and the forth which led to a rethink on the relations hip between the law and accountancy practice.
All these have been addressed in detail in foregoing paragraphs. Of lesser impact were the eighth on audits and eleventh on branches of companies. These have caused no dramatic changes in existing law. According to Gower 2003, the impact of community law on UK domestic company Law has been substantial but not comprehensive, with the greatest impact being felt in the areas of financial reporting & capital maintenance. Generally, there have been instances when the harmonisation process has demanded a complete overhaul of domestic law and yet in others, the impact has been negligible. UK domestic law, and indeed the law of all other member states has undergone changes that would not have been anticipated. Simply put, today's company law has acquired a look it would not have, but for the harmonisation process. The effect cannot be said to be negative or positive, just change.
It cannot be denied however, that harmonization of diverse national system is something that only community Laws can achieve and guarantee. Even then, national context differs substantially and achieving harmonization for all areas may not be practically possible.