Reports: Modernising Company Law'': The Government's White Paper

REPORTS
Modernising Company Law:

The Governments White Paper
Robert Goddard n
Introduction
The call to reform and modernise continues to be a popular refrain of the Labour
Government. It has encompassed public institutions, the political process and
legal system. It may surprise some to learn that it has reached company law, a
subject that has, as George (now Lord) Robertson once observed in the course of
parliamentary debate, the ability to empty the Chamber quicker than any other
subject.1 The Governments recent focus on company law began in 1998 when
the (then) Secretary of State for Trade and Industry, the Rt. Hon. Margaret
Beckett MP launched Modern Company Law for a Competitive Economy2: the
rst in a series of lengthy and detailed consultation documents concerned with the
reform of core company law.3 That process of review conducted by an
independent Steering Group was more or less completed in 2001 with the
publication of the Groups Final Report.4 In July 2002, the Government offered
the rst part of its response in the form of the White Paper Modernising Company
Law,5 endorsing the ethos of the Final Report and accepting many, but not all, of
its recommendations.
This article introduces the White Paper with a specic objective in mind: to
determine the role and purpose ascribed to company law. At rst glance this task
may appear unduly narrow. This impression is short-sighted because it overlooks
the fact that by considering the Governments view of company law, it is possible
to understand its attitude towards corporate activity. Indeed, it enables us to
answer this question: how does the Government perceive its role in regulating
companies, their directors, shareholders and those affected by corporate activity?
Before exploring this question, some background detail is required. This will
n
Lecturer in Law, Aston University. I am grateful for the helpful comments provided by the
anonymous referees. Some of the themes in this article are drawn from my doctoral research,
conducted at the Faculty of Law, University of Cambridge, with reference to which I gratefully
acknowledge the nancial support of the AHRB and the supervision provided by Professor Brian
Chefns.
1 HC Deb vol 972 col 112 22 October 1979. He also observed that The triumph of boredom over
suppression was the hallmark of the progress of the last Companies Bill.
2 Modern Company Law for a Competitive Economy (London: DTI, 1998).
3 The principal consultation documents were: Modern Company Law for a Competitive Economy:
The Strategic Framework (London: DTI, 1999), hereafter The Strategic Framework; Modern
Company Law for a Competitive Economy: Developing the Framework (London: DTI, 2000),
hereafter Developing; and Modern Company Law for a Competitive Economy: Completing the
Structure (London: DTI, 2000), hereafter Completing. Other consultation documents were
published dealing with, for example, company formation and capital maintenance, oversea
companies and the registration of company charges.
4 Modern Company Law for a Competitive Economy: Final Report: Vols I and II (London: DTI,
2001), hereafter Final Report.
5 Cm 5553-I and II.
402
r The Modern Law Review Limited 2003. (MLR 66:3, May). Published by Blackwell Publishing Ltd.,
9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
May 2003]
Modernising Company Law
include an overview of the Department of Trade and Industry (DTI) Review,

necessary not only to set the scene but also because the Review provided the
foundation for the White Papers recommendations.
Company law reform: background

The DTI Review6
Established in 1998, the Review was the most extensive of its kind since the
modern foundations of company law were established in the middle of the
nineteenth century.7 This is not to suggest that company law has remained
unchanged since then. Reform and amendment have taken place in a typically
piece meal fashion and company law has been repeatedly subject to review.8 Thus,
during the rst 60 or so years of the twentieth century, a pattern of regular review
was established. This culminated in the Loreburn, Wrenbury, Greene, Cohen and
Jenkins reports.9 Although valuable, these reports were often criticised for their
failure to consider and discuss the underlying philosophy and values of company
law.10 It was with the last of these reports that of the Jenkins Committee in 1962
that the established pattern of regular review disappeared. New concerns
nevertheless emerged: after 1972, the implementation of European Directives
became imperative; the 1980s saw the criminalisation of insider dealing; the 1990s
were witness to the work of the Cadbury, Greenbury and Hampel committees;11
and during the closing years of the century, the Law Commissions examined
shareholder remedies and directors duties.12 It was against this background that
the Review was undertaken.
The Reviews remit was the main components of company law, excluding
insolvency and nancial services. Surprisingly the subject of directors
6 See further the papers in J. De Lacy (ed), The Reform of UK Company Law (London: Cavendish
Publishing, 2002) and an article by a member of the Steering Group: Lady Justice Arden,
Reforming the Companies Acts The Way Ahead [2002] JBL 579. For earlier discussion, predating the completion of the Review, see The David Hume Institute, Hume Papers on Public
Policy, Vol 8, Number 1, Corporate Governance the Reform of Company Law (Edinburgh:
Edinburgh University Press, 2000).
7 For an account of the Review process, see J. Rickford, A History of the Company Law
Reviewin J. De Lacy (ed), The Reform of UK Company Law (London: Cavendish Publishing,
2002). Horrwitz observes: the foundations of modern British company law were laid in 1856
when liberalism was at its peak. The guiding principle then xed was fullest freedom for
shareholders in the formation and management of companies on the condition that fullest
information was given to the public (W. Horrwitz, Historical Development of Company Law
(1946) 62 LQR 375, 386). For background to the mid-nineteenth century reforms, see F. Hyde,
Mr Gladstone at the Board of Trade (London: Cobden-Sanderson, 1934), chapter 8.
8 For an early discussion of company law reform, see E. Manson, The Reform of Company Law
(1889) 5 LQR 61.
9 Respectively: (1906) Cd 3052; (1918) Cd 9138; (1926) Cmd 2657; (1945) Cmd 6659; and (1962)
Cmnd 1749.
10 See, for example, Lord Wedderburns criticism of the Cohen and Jenkins Reports: Fabian Tract
363: Company Law Reform (London: The Fabian Society, 1965).
11 Respectively: Report of the Committee on the Financial Aspects of Corporate Governance
(London: Gee, 1992) (hereafter The Cadbury Report); Directors Remuneration: Report of a
Study Group chaired by Sir Richard Greenbury (London: Gee, 1995); The Committee on
Corporate Governance, Final Report (London: Gee, 1998).
12 Shareholder Remedies, Cm 3769, Report 246 (London: The Stationery Ofce, 1997); Company
Directors: Regulating Conicts of Interest and Formulating a Statement of Duties, Cm 4436,
Report 261 (London: The Stationery Ofce, 1999).
r The Modern Law Review Limited 2003
403
The Modern Law Review
[Vol. 66
remuneration was excluded, the justication being its separate consideration

by the DTI.13 In June 2002, however, the Government did announce the
introduction of the Directors Remuneration Report Regulations.14 The Review
was the responsibility of a Steering Group consisting of 14 members drawn from
legal practice, academia, business and the civil service. A larger, more broadly
constituted consultative committee including representatives from professional
bodies and the TUC provided guidance and acted as a sounding board for
the Reviews recommendations. Working Groups (of which there were 14),
chaired by a member of the Steering Group, were formed to consider particular
issues and areas. Although described as being independent of Government, the
DTI administered the Review and a civil servant was responsible for its
management. The Reviews initial remit came from the Government. In the
course of the Review, various consultation papers were issued as the Groups
proposals attracted comment. These proposals were revised and a rm view
was taken on all but a few subjects. Nearly all of the Reviews proposals
received majority support from respondents.15 Regarding company charges,
however, opinion was divided and the Law Commissions are now focussing on
this issue.16
The stakeholder debate

One of the rst issues to confront the Review concerned the so-called stakeholder
debate.17 In whose interests should the company be run? What rights, if any,
should company law give those affected by corporate activity? The words
interests and rights are, of course, difcult in this context. We could envisage
a right to be consulted, a right to participate in corporate decision making or to
13 See further: Directors Remuneration, URN 01/1400, (London: DTI, 2001).
14 DTI Press Release P/2002/397. See further: SI 2002/1986. The Regulations came into force on 1
August, 2002. In brief, they require that quoted companies produce a report on directors
remuneration as part of the annual reporting cycle. The Regulations contain a novel element:
they provide the shareholders with a mandatory vote on the report, albeit one that is advisory in
nature.
15 One notable exception concerned the scope of the unfair prejudice remedy sections 459461 of
the Companies Act (1985) following ONeill v Phillips [1999] 1 WLR 1092, in which the House
of Lords asserted the contractual basis of the concept of unfair prejudice. The Steering Group
endorsed ONeill, whereas a majority of respondents wanted its reversal in order that a more
expansive view of unfair prejudice could be adopted (Completing, paras 5.75 5.81). For further
discussion of ONeill, see R. Goddard, Taming the Unfair Prejudice Remedy Sections 459
461 of the Companies Act 1985 in the House of Lords (1999) 58 CLJ 487 and by the same
author, Shareholder Remedies in Scotland: Anderson v Hogg (2003) 7 Edinburgh Law Review
93.
16 The Law Commission for England and Wales, Registration of Security Interests: Company
Charges and Property other than Land (London: The Stationery Ofce, 2002); The Law
Commission for Scotland, Discussion Paper on Registration of Rights in Securities by Companies
(Edinburgh: The Stationery Ofce, 2002). On the latter, see D. Guild, The Registration of
Rights in Security by Companies 2002 SLT 289.
17 See The Strategic Framework, chapter 5.1; Developing, chapters 25. For an introduction to the
debate, see further J. Dean, Directing Public Companies: Company Law and the Stakeholder
Society (London: Cavendish Publishing, 2001); A. Gamble and G. Kelly, Shareholder Value
and the Stakeholder Debate in the UK (2001) 9 Corporate Governance 110; G. Kelly and J.
Parkinson, The Conceptual Foundations of the Company: A Pluralist Approach [1998]
Company, Financial and Insolvency LR 174; M. Clarkson (ed), The Corporation and Its
Stakeholders: Classic and Contemporary Readings (Toronto: University of Toronto Press,
1998); M. Blair, Ownership and Control: Rethinking Corporate Governance for the TwentyFirst Century (Washington: Brookings Institution, 1995); J. Parkinson, Corporate Power and
Responsibility: Issues in the Theory of Company Law (Oxford: Clarendon Press, 1993).
404
May 2003]
have ones interests reected in that process, a right to compensation, and so on.
Whilst the Review did address this question of scope, it observed nevertheless that
its task was essentially concerned with law reform, not with wider ethical or
managerial issues about the behaviour and standards of participants in
companies, except to the extent that it is appropriate to reect them in company
law.18 Indeed, the Review earlier observed, apparently endorsing Kaldor-Hicks
efciency,19 that:
ywe interpret our terms of reference as requiring us to propose reforms which promote a
competitive economy by facilitating the operations of companies so as to maximise wealth
and welfare as a whole. We have not regarded it as our function to make proposals as to
how such benets should be shared or allocated between different participants in the
economy, on grounds of fairness, social justice or any similar criteria. Such questions are, of
course, extremely important but we do not consider that they fall within the scope of this
Review.20
On the issue of scope, the Review canvassed opinion on two positions: the
pluralist and the enlightened shareholder value approaches. The enlightened
shareholder value approach reects the status quo. It holds that corporate purpose
is the maximisation of shareholder value. The pluralist approach rejects the view
that shareholder wealth maximisation should be the primary objective. It holds
legitimate conduct which does not maximise shareholder value but which, for
example, promotes the interests of other stakeholders. The Review rejected
pluralism in favour of the enlightened shareholder approach.21 It did this largely
for practical reasons, including the problems associated with policing the
directorial discretion to override the interests of shareholders in favour of other
stakeholders, and the fact that a pluralist approach would potentially permit
directors to frustrate a takeover bid.
The Reviews response was the proposal that directors duties should be
framed inclusively requiring that the company be run in the collective best
interests of shareholders, which can only be achieved by taking into account
wider interests and that companies of economic signicance prepare an
Operating and Financial Review (OFR). The OFR is intended to be qualitative
in character, containing all information that is material in assessing the companys
performance and future prospects, including its relationships with employees
and its impact on the community and environment. These proposals reect the
Reviews opinion that companies should be run in a way which maximises
overall competitiveness and wealth and welfare for all.22 A caveat followed
this aspiration: the means which company law deploys for achieving this
objective must take account of the realities and dynamics which operate in the
running of commercial enterprise. It should not be done at the expense of turning
company directors from business decision makers into moral, political or
economic arbiters.23
18 The Strategic Framework, para 5.1.2 (emphasis in the original).

19 On which, see further: B. Chefns, Company Law: Theory, Structure and Operation (Oxford:
OUP, 1997), 15.
20 The Strategic Framework, para 2.5.
21 See Developing, paras 2.192.26 and 3.173.31.
22 Developing, para 2.21.
23 Ibid.
405
[Vol. 66
The Reviews guiding principles

(a) The starting principle
Given the White Papers adoption of many of the Reviews recommendations
(often without reference to the underlying rationale), it is necessary to consider the
framework within which the Reviews recommendations were made. This is
because the adopted framework was central to the Reviews perception of the
function and purpose of company law. In commenting on the underlying ethos of
the Review, Wheeler is unconcerned with hiding her distaste. [T]he market
orientation of the Steering Group, she observes, is rather repugnant.24 A
comment of this kind is perhaps a startling way to begin this section. Nevertheless,
Wheelers focus on the Groups market orientation is apposite. The Reviews
starting principle was the assumption that effective economic activity is most
likely to be brought about by free economic choices.25 In the Final Report, those
guiding principles which shaped the Reviews recommendations were restated.
The starting principle was framed in the following terms:
company law should be primarily enabling or facilitative i.e. it should provide the means
for those engaged in business and other corporate activity to arrange and manage their
affairs in the way which they believe is most likely to lead to mutual success and effective
productive activity.26
The Review added, however, that a case could be made for regulatory
intervention. Four justications were given, with the qualication added that
[w]hen intervention is necessary it should be designed, so far as possible, to avoid
inhibiting freedom of choice and exibility for development.27 The justications
given are interrelated and the Review offered illustrations for each. An interesting
aspect about the illustrations is the purpose that intervention is intended to serve.
They cast light on the Reviews perception as to the nature of regulation and the
legitimate grounds for company law based regulatory intervention. The rst
justication arises where legal provision is required to achieve an outcome that is
otherwise unobtainable, for example, obtaining the companys separate legal
personality. The second where the desired outcome is predictable, such that the
law can supply the parties with default rules for example, a model constitution
thereby reducing transaction costs. Third, where individuals are unable to protect
their interests (because of, say, market failure), then legally mandated protection
is justied. Finally, where the public interest intrudes upon the activity in
question.
At this stage, several observations can be made concerning these justications
and their illustrations. The rst two justications reect very clearly the Reviews
emphasis upon the enabling or facilitating function of company law: each
supports and facilitates the process of private ordering. Thus, company law
provides the structure the separate legal personality and limited liability of the
company, and background legal rules which enables the parties to conduct
economic activity through the corporate form. In these rst two justications
there is clear resonance with a private conception of company law. This approach
envisions a narrow (but important) role for the state in corporate affairs. Within
24
25
26
27
406
S. Wheeler, Corporations and the Third Way (Oxford: Hart Publishing, 2002) 48.
Final Report, para 1.15.
Developing, para 2.6.
May 2003]
it, signicant emphasis is placed upon the value of individual autonomy. There is
thus a high regard for the parties contract and a reluctance to interfere with
decisions taken by the directors and shareholders. Within this framework,
enabling (opt in) and default (opt out) rules facilitate private ordering.
Mandatory rules around which the parties cannot contract are not
objectionable per se, as the private approach recognises that a basic framework
of rules is necessary in order to facilitate and protect the process of private
ordering from abuse. Thus, it is legitimate for the state to protect property rights,
hold individuals to promises made, nd certain conduct (such as theft) unlawful
where it threatens private ordering, and supply contractual terms.
Returning to the third and fourth justications, they appear at rst sight
different in character from the rst two. Yet, the illustrations provided by the
Review reveal a different picture, as each is capable of being reconciled with the
private conception of company law. The third justication, market failure, is
illustrated by legal rules designed to protect shareholders from the potential abuse
arising from directors personal interest in transactions with the company and
mandatory disclosure rules enabling the parties to take action if they wish. It
would not be difcult to argue that these rules are central in any system of
company law, and that in supplying them the law is performing a function no
different to that involved with the supply of a model constitution. This third
example is also illuminating for the signal it sends as to the moral basis of the rules
in question. It suggests that the basis of intervention is the parties inability to
contract, rather than with the normative desirability of the content of the rules in
question or the desired behaviour. It might be thought that with the fourth
justication, we move away from the inherently private, internal perspective of
the rst three justications. However, this fourth justication the intrusion of the
public interest is illustrated by the mandatory disclosure of information to the
public and rules which outlaw fraud and dishonesty. Mandatory disclosure
provisions facilitate the ow of information to the market. Rules prohibiting fraud
and dishonesty protect the process of private ordering from abuse. Without them,
condence in the process of private ordering is undermined.
The preceding justications are of further interest in that they reveal the
difculties associated with conceptualising company law regulation in terms of
familiar dichotomies. Much does, of course, depend on what is understood by
regulation. Narrowly dened it is linked directly to action on the part of the state,
the purpose of which is to control behaviour and the exercise of choice. A broader
denition recognises that non-state institutions can perform this function. An
alternative denition might recognise that the provision of a framework whether
by the state or other societal institutions within which individuals exercise
autonomy, is regulatory in nature. It is therefore no longer appropriate if it ever
was to speak of the regulatory choice as being between state command and
control on the one hand, and self-regulation on the other. Such a dichotomy fails
to capture the complexity and diversity of regulation in terms of justication and
form. Company law contains many illustrations of this point. For example, the
existence of certain regulatory forms such as the Takeover Code described as
the product of self-regulation, can be attributed in part to indirect government
inuence.28 Are these properly described as self-regulatory? Indeed, adopting
28 See further S. Bowden, Corporate Governance in a Political Climate: The Impact of Public
Policy Regimes on Corporate Governance in the UK in J. Parkinson, A. Gamble and G. Kelly
(eds), The Political Economy of the Company (Oxford: Hart Publishing, 2000).
407
[Vol. 66
Collins view that contract is a form of self-regulation,29 suggests that we should

view shareholder agreements as self-regulatory in nature.
One further point can be made concerning the Reviews reference to the public
interest. Presented as the fourth justication implies its mutual exclusivity from
the rst three justications. Only on a very narrow interpretation can this be the
case. It is, after all, difcult to deny that a public interest exists in the states
provision of a structure for corporate activity.
(b) Competitiveness
To state that company law is primarily enabling or facilitative is to describe its
character. Without more, it tells us little about the purpose or role envisioned for
it. In this regard, competitiveness was central to the Review. In one of the early
consultation documents The Strategic Framework the Steering Group
identied its predominant objective as being the development of company law
for a competitive economy. This required, the Group believed, the pursuit of
policies that facilitate productive and creative activity in the most competitive
and efcient way possible for the benet of everyone, with appropriate freedom
for managers and others controlling companies, ensuring that in order to
maximise wealth and welfare, they are enabled to exercise their proper function in
managing resources.30 It is not, the Group further observed, for the law to
substitute for the business judgments involved, but to provide optimal conditions
for their proper exercise.31
The Review explained that company law contributes to competitiveness on two
levels. First, it affects the competitiveness of British companies through, for
example, costs of compliance. Second, it inuences the extent to which the UK is
an attractive venue for incorporation. Thus, as the Final Report exalts: [o]ur
company law needs to be internationally competitive, to ensure that we retain our
existing companies and attract new ones.32 This leads the Report to state that the
main driver in the design of company law rules must be to provide the means
for effective collaborative business activity and in particular effective generation
of wealth, in the broadest sense.33 In the context of competitiveness, the Review
also recognised that British company law gives the founders and controllers of the
company great exibility in the design and structure of their business. This was
viewed as a strength that should be maintained within a framework in which
transparency and market forces ensure its proper exercise. This brings us to the
Reviews emphasis upon transparency.
(c) Freedom with Transparency
Sealy argues that disclosure is one key word which more than any other sums up
the underlying principles of [UK] company law.34 He also observes that when it
29 H. Collins, Regulating Contracts (Oxford: OUP, 1999); cf J. Black, Decentring Regulation:
Understanding the Role of Regulation and Self-Regulation in a Post-Regulatory World
(2001) 54 Current Legal Problems 103, 121.
30 Strategic Framework, para 2.4.
31 Strategic Framework, para 2.4.
32 Final Report, para 1.13. The Review had earlier observed, however, that [g]enerally, the
evidence suggests that company law is not a major consideration in the decision whether or not
to locate business in the UK (The Strategic Framework, para 5.6.3).
33 Final Report, para 1.12.
34 L. Sealy, The Disclosure Philosophy and Company Law Reform (1981) 2 Company Lawyer
51, 51.
408
May 2003]
comes down to a choice between having a xed rule about something on the one
hand and having no xed rule as to what a company must do but saying that
whatever it does has to be openly disclosed, the natural choice within the
traditions of English company law has always been to opt for the second
approach.35 The Final Report implicitly endorses this view, but offers a further
justication for disclosure: the efciency of private ordering, captured in the view
that the basic framework of our law should provide the maximum possible
freedom to the participants, but combined with the necessary supporting
transparency to empower the effective exercise of that freedom.36
(d) The case for regulation and methods of regulation
In the Final Report, deregulation and substantial simplication were said to be the
net effect of the Reviews proposals, especially concerning private companies.37 It
was nevertheless stated that the Reviews purpose was not simply one of
deregulation. In this regard, and consistent with the private focus of the
justications for regulatory intervention already noted, additional rules were
proposed. These were justied by their role in facilitating the operation of markets
and eliminating abuse. As for the structure of the regulatory regime, the Review
purports to endorse the status quo, observing that a delegated and devolved
structure of subordinate regulatory rules and best practice codes is essential.38
This said, Ferran has observed in the light of the Reviews proposal for the
establishment of the Company Law Reform Committee (CLRC), charged with
keeping the law up to date that it will be hard in reality to maintain that [the]
structure headed by the CLRC is a private sector initiative in self-regulation. The
Steering Groups claims simply to be building upon the existing structural
arrangements cannot be taken at face value.39
(e) Accessibility and codication
The Review recognised that in addition to the laws policy content of encouraging
efcient behaviour, compliance is dependent on the manner in which the law is
expressed and understood. It therefore called for effective communication, both
direct and through various forms of intermediation40 and advocated a statutory
statement of directors duties.41
The White Paper

Introduction
Titled Modernising Company Law, the White Paper was published on 16 July
2002. Its stated purpose was the explanation of the Governments key proposals
35
36
37
38
39
L. Sealy, Company Law and Commercial Reality (London: Sweet and Maxwell, 1984), p 21.
Para 1.28.
E. Ferran, Corporate Law, Codes and Social Norms Finding the Right Regulatory
Combination and Institutional Structure (2001) 1 Journal of Corporate Law Studies 381, 393.
40 Final Report, para 1.18.
41 Final Report, chapters 3 and 6. See further: J. Birds, The Reform of Directors Duties in J. De
Lacy (ed), The Reform of UK Company Law (London: Cavendish Publishing, 2002); S.
Worthington, Reforming Directors Duties (2001) 64 MLR 439 and by the same author,
Corporate Governance: Remedying and Ratifying Directors Breaches (2000) 116 LQR 638.
409
[Vol. 66
for the simplication and modernisation of company law, the system of law
viewed as regulating the manner in which companies are organised and run.42 The
Paper the rst in what is likely to be a series of such documents does not
comment on all that the Review recommended. Nothing is said, for example, on
the recommendation to introduce a statutory derivative action. The Paper
nevertheless provides a great number of draft clauses forming part of a new
Companies Bill. Further clauses are to be published. Importantly it contains an
outline of policy on most of the major issues, although it lacks the level of
sophistication that characterised the Review. This is not surprising as the Review
forms the foundation for much that is contained in the White Paper. Within this
article, attention focuses on this outline of policy, rather than with a detailed
examination of the many draft clauses.
The Paper is divided into ve parts. Part I contains an introduction; Part II an
outline of Government policy; Part III provides notes on the draft clauses; Part IV
provides a regulatory impact assessment, and Part V summarises the questions on
which views are sought. Whilst Part II forms the focus of the remainder of this
article, neither the Secretary of States preface nor Part I should be overlooked.
Turning to the preface, it contains a telling observation. The Secretary of State
(now the Rt. Hon. Patricia Hewitt MP) observes that [m]arket frameworks drive
enterprise and productivity, and company law is a key part of that framework.43
With this position taken, she adds that the modernisation of company law
provides the opportunity to create a market framework that promotes
condence, opportunity and prosperity for all.44 This is to take an instrumental
view of company law, under which it is viewed as supporting and facilitating
market-based contracting. This view shapes the Governments perception of its
function: to ensure that company law serves this purpose. In this context, this is
what is understood by modernisation. Indeed, when the Secretary of State
observed shortly before the Papers publication that the programme of company
law reform was concerned with rewriting the settlement between business and
society for the modern economy,45 she perceived this to involve responsible
government creating the right market framework for successful and responsible
business. Its about the relationship we need between the state and the market in
the modern economy.46
The Governments perception of its role in corporate governance as articulated
in the above comments, is part of a wider pattern of change witnessed over the
past twenty or so years. This change relates to the manner in which the regulatory
function is conceived and is accurately captured by Professor Mayers observation
that the focus of government involvement in business has moved from
substituting for markets to assisting them to function.47 This new focus shapes
the Governments view of company law. It resonates throughout the White Paper
and is an approach that differs greatly from the so-called adversarial view of the
company one regarding it as an arena of fundamentally opposed interests
that characterised thinking within the Labour Party for much of the twentieth
42
43
44
45
Part I, para 2. The White Paper thus excludes, for example, a discussion of insolvency law.
Preface, p 3.
Preface, p 3.
In a speech delivered on 5 July 2002 at the Faculty of Law, University Cambridge, available at:
ohttp://www.dti.gov.uk/ministers/speeches/hewitt050702.html4.
46 Ibid.
47 C. Mayer, Dance of business and government changes tempo Financial Times, 28 August
2002, 9. For related discussion, see J. Moon, The Social Responsibility of Business and New
Governance (2002) 37 Government and Opposition 385.
410
May 2003]
century.48 Indeed, it was largely foreshadowed by policy development in the

Labour Party between 1987 and 1992, which included signicantly, for the
perception of the function of company law the rejection of Government
intervention at the level of company decision-making.49
The White Papers outline of policy

The Part II outline of policy extends to a little over 40 pages. On the whole it
articulates rm proposals for reform and seeks comment on specic issues. It
contains sections concerned with, inter alia, improving governance (shareholders
and decision-making; directors; and company reporting and audit), the institutional arrangements for keeping the law up to date, and methods for simplifying
and streamlining the law. For ease of reference these section headings are adopted
in the discussion that follows.
(a) Introduction
In the opening paragraphs of Part II, the Paper makes clear that the starting point
for company law is the small rm, a view encapsulated in the oft-repeated cry to
think small rst.50 This formed one of the Reviews central policies, which the
Government adopts. Core company law should therefore be concerned with the
needs of small business with additional provisions provided, if necessary, for
larger companies.51 It is recognised, however, that the law:
needs to balance various interests, including those of shareholders, directors, employees,
creditors and customers, but it should avoid imposing unnecessary or inappropriate burdens.
Company law should make it easy to start and run businesses.52
Notwithstanding this reference to the balancing of interests, it will be seen that the
Paper endorses shareholder primacy. Within the introduction there is no further
discussion of those interests which company law needs to balance. This is
unsurprising given the Papers focus on the needs of small business and the fact
that large, public companies are invariably the focus of the stakeholder debate.
This said, limited liability operates to transfer a proportion of the risk of failure
from shareholders to creditors. The disqualication cases provide ample evidence
of this. It is unfortunate that the introduction makes no further reference to those
company law rules designed to protect creditors interests53 or to the question
whether it is desirable for all small businesses to have access to limited liability.54
48 See further B. Clift, A. Gamble and M. Harris, The Labour Party and the Company in J.
Parkinson, A. Gamble and G. Kelly (eds), The Political Economy of the Company (Oxford: Hart
Publishing, 2000).
49 See further M. Wickham-Jones, Anticipating Social Democracy, Preempting Anticipations:
Economic Policy-Making in the British Labor Party, 19871992 (1995) 23 Politics and Society
465, 486.
50 Part II, para 1.3. On 30 September 2002 at the Labour Party Conference, the Secretary of State
for Trade and Industry repeated this call.
51 Part II, paras 1.3 1.6.
52 Part II, para 1.3.
53 For a discussion of the Reviews recommendations, see further J. Armour, Share Capital and
Creditor Protection: Efcient Rules for a Modern Company Law (2000) 63 MLR 355.
54 On which point, see further J. Freedman, Limited Liability: Large Firm Theory and Small
Firms (2000) 63 MLR 317 and P. Halpern, M. Trebilcock and S. Turnbull, An Economic
Analysis of Limited Liability in Corporation Law (1980) 30 UTLJ 117.
411
[Vol. 66
Instead, the view that the corporate form should be widely available prevails and
discussion returns to whether there should be a separate corporate structure for
small businesses.55 The Paper rejects this argument, agreeing with the Review that
core company law should be tailored to the needs of small business.
(b) Improving governance shareholders and decision making
The view that [o]ne of the purposes of company law is to create a framework
within which a company can take decisions56 dominates this section of Part II.
As such, it is largely concerned with simplifying the mechanisms by which
shareholder decision making takes place. Given that some of the recommendations entrench majority rule, it is surprising that there is no discussion of the law
concerning (minority) shareholder remedies. This said, some interesting comments
are made on the role of shareholders in corporate governance. For example, the
Paper states that it is crucial to effective corporate governance that the owners of
the company hold the directors to account for the companys performance57 and
that the Government is especially concerned to ensure the effectiveness and
integrity of the governance regime for quoted companies.58 These observations
should not be overlooked. The rst point reects a central facet of the
Governments attitude to corporate governance and company law: that its role
is with strengthening and encouraging the role played by existing actors, rather
than with intervening directly itself in corporate decision making. Thus,
shareholders are encouraged to exercise voice on a range of matters. This largely
explains why, to give a recent example, the Directors Remuneration Report
Regulations took the form they did providing a mandatory, advisory vote for
shareholders as opposed to direct Government intervention over the level of
remuneration awarded.59
This section contains many recommendations. A single constitutional document
is proposed, to replace the separate articles and memorandum of association. The
Paper agrees with the Review that separate model constitutions should be
available for private and public companies. On the subject of shareholder
meetings, it is proposed to remove the requirement that private companies hold an
annual general meeting (AGM). The Paper notes that for many private companies
the AGM is an unnecessary formality that carries out no business of
substance.60 An opt-in regime is proposed, under which shareholders can
decide, by ordinary resolution, to hold an AGM. The Government recognises,
however, that for some private companies in particular those larger companies
with a wide shareholder base the AGM serves a useful function. It seeks
respondents views on whether a single shareholder should be empowered to
requisition the holding of an AGM. Public companies will continue to be required
to hold an AGM, although by unanimous shareholder consent they can dispense
with this requirement. As for the timing of the AGM, the Paper proposes a direct
link with the companys annual reporting cycle. It thus recommends that private
55 For further discussion of this debate, see B. Rider and M. Andenas (eds), Developments in
European Company Law: Vol 2/1997: The Quest for an Ideal Legal Form for Small Businesses
(London: Kluwer Law International, 1999). Note also: V. Finch and J. Freedman, The Limited
Liability Partnership: Pick and Mix or Mix-up? [2002] JBL 475.
56 Para 2.6.
57 Para 2.37.
58 Para 2.42.
59 SI 2002/1986.
60 Para 2.11.
412
May 2003]
companies be required to hold their AGM within ten months of the end of the
previous nancial year, and public companies six months.
On the subject of shareholder resolutions, the Paper proposes that the statutory
written procedure be expanded. The requirement for unanimity is to be removed,
allowing private companies to pass a written ordinary resolution with a simple
majority of the eligible votes. Similarly, a written special resolution can be passed
with 75% of the eligible votes. Turning to the unanimous consent rule, the
Government recommends its preservation, but rejects the Reviews call for its
codication. In considering the rights of benecial owners of shares, the Paper
agrees with the Review that companies should be able to recognise these rights at
the request of the registered shareholder.
There is also discussion of the role of institutional investors in corporate
governance. This is not surprising for, as Sir Adrian Cadbury has argued, it is
considered by many to be one of the most important issues in contemporary
corporate governance.61 Whilst the Paper does not provide concrete proposals, it
does note the Governments belief that institutional shareholders should be
required to disclose publicly how they have voted their shares in British quoted
companies. This requirement is said to be in the public interest, the only
justication offered. The Governments proposals are now awaited.62 It is
interesting nevertheless to reect on this proposed disclosure requirement. Is the
Government concerned with the ow of information to the market or, as is likely,
is its concern with the effect that disclosure will have on the voting behaviour of
institutional shareholders? Does a disclosure requirement of this kind change the
manner in which the incidents of share ownership are perceived? Clearly the
Government will need to make a clear case for a disclosure requirement. If
the intention is to create greater institutional shareholder activism, it is necessary
to ask whether a disclosure obligation will provide the required incentive.63 On a
wider level, some may question the appropriateness of focusing on institutional
shareholding voting given that empirical research is inconclusive in nding a clear
relationship between the presence of institutional share ownership and rm
performance.64 Indeed, a recent study indicates that corporate investors exercise
greater control than institutional shareholders and that there is no signicant
61 A view he articulated in a speech given in the Faculty of Law, Cambridge University under the
auspices of the Facultys Centre for Corporate and Commercial Law, in February 2002. Sir
Adrians position is unsurprising, given that in The Cadbury Report it was stated that Because
of their collective stake, we look to the institutions in particular, with the backing of the
Institutional Shareholders Committee, to use their inuence as owners to ensure that the
companies in which they have invested comply with the Code (para 6.16).
62 These will be made against the background of Paul Myners review of institutional investment
and the Governments own consultation paper on shareholder activism. See further The Myners
Review of Institutional Investment (London: HM Treasury, 2000), Institutional Investment in the
UK: A Review (London: HM Treasury, 2001) and Encouraging Shareholder Activism (London:
HM
Treasury,
2002).
Links
to
these
documents
are
available
at:
ohttp://www.dwp.gov.uk/consultations/consult/2002/myners/index.htm4.
63 For a discussion of incentives in the context of institutional shareholders, see H. Short and K.
Keasey, Institutional Shareholders and Corporate Governance in the United Kingdom, in K.
Keasey, S. Thompson and M. Wright (eds), Corporate Governance Economic, Management
and Financial Issues (Oxford: OUP, 1997).
64 See, for example: M. Faccio and M. Lasfer, Institutional Shareholders and Corporate
Governance: The Case of UK Pension Funds, chapter 25 in J. McCahery, P. Moerland, T.
Raaijmakers and L. Renneboog (eds), Corporate Governance Regimes Convergence and
Diversity (Oxford: OUP, 2002). Faccio and Lasfer conclude from their research that pension
funds do not add value to the companies in which they hold large stakes. Our results cast doubt
on the monitoring role of pension funds that are considered, in theory, to be the main
promoters of corporate governance in the UK.
413
[Vol. 66
relationship between institutional shareholdings and board turnover in average or

poorly performing companies.65 There are clearly difcult and unresolved
questions here. For example, is it possible to reconcile the governments public
interest justication with the view expressed by the Institutional Shareholders
Committee that [t]he duty of institutional shareholders and agents is to the end
beneciaries and not to the wider public?66 As the Paper recognises, it is
necessary to ask whether company law is the appropriate vehicle with which to
address the concerns raised.
(c) Improving governance directors

One of the noticeable aspects of Part II is that it avoids engaging debate
on the rst issue with which the Review had to grasp: in whose interests should
the company be run? In the context of directors duties, the White Paper
settles the issue without debate, expressing agreement with the Review
that:
the basic goal for directors should be the success of the company in the collective best
interests of the shareholders, but that [the] directors should also recognize, as the
circumstances require, the companys need to foster relationships with its employees,
customers and suppliers, its need to maintain its business reputation, and its need to consider
the companys impact on the community and the working environment.67
The Government thus endorses shareholder primacy. This is reected throughout

the Paper. For example, as has already been noted, the Paper reiterates the
importance of the shareholders holding the directors accountable for the
companys performance. This is signicant because it reveals that notwithstanding
the inclusive duty, attention continues to focus on the relationship of economic
agency that of principal and agent between the directors and shareholders.68
Some regard this conceptualisation as too narrow.
The proposed inclusive duty does however refer to stakeholders (although it
avoids using this term). Their interests the reason for using quotation marks
here will become apparent are reected through directorial duty owed to the
company. The draft clause provides that the director must promote the success of
the company for the benet of the shareholders as a whole. In so doing, he must
take account of those material factors that it is practicable in the circumstances
for him to identify. The following material factors are given,69 but it is clear that
this list is not exhaustive.
65 J. Franks, C. Mayer and L. Renneboog, Managerial Disciplining and the Market for (Partial)
Corporate Control in the UK, chapter 19 in J. McCahery, P. Moerland, T. Raaijmakers and L.
Renneboog (eds), Corporate Governance Regimes Convergence and Diversity (Oxford: OUP,
2002).
66 Institutional Shareholders Committee, The Responsibilities of Institutional Shareholders and
Agents Statement of Principles (2002), p 2 (available at: ohttp://www.abi.org.uk/Display/
File/38/Statement_of_Principles.pdf4). See also: HM Treasury Press Release 108/02 (21
October 2002).
67 Para 3.3.
68 This is not to suggest that directors duties are owed to individual shareholders, but rather that
the economic model of principal-agent is reected in company law through the equating of the
companys interests with that of the shareholders. The Court of Appeal has recently asserted in
Peskin v Anderson [2001] 1 BCLC 372, that the general rule remains that directors duties are
owed to the company (see further: I. Moore, Fiduciary Duties owed to Shareholders: The
Court of Appeal applies the Brakes [2001] LMCLQ 456.
69 Schedule 2, Clause 2.
414
May 2003]
(a)
(b)
(c)
(d)
the companys need to foster its business relationships, including those with
its employees and suppliers and the customers for its products or services;
its need to have regard to the impact of its operations on the communities
affected and on the environment;
its need to maintain a reputation for high standards of business conduct;
its need to achieve outcomes that are fair as between its members.
The approach taken in the draft clause is not without precedent in English
company law. First enacted in 1980, section 309 of the Companies Act (1985)
provides that directors are to have regard to employees interests in the
performance of the directorial function.70 It is a duty owed to the company and
cannot be enforced by an employee. That the Paper adopts this approach is
revealing. It signals that in company law the stakeholder debate is viewed as being
an aspect of directorial decision making, rather than with the provision of specic
forms of protection or voice for non-shareholder stakeholders in corporate
affairs. It is to leave the issue within the directorial community.
As Wedderburn has noted in the context of the inclusive duty framed by the
Review, the material factors cited above are framed differently from Section 309.71
Section 309 refers to interests; the above statement refers to the companys
relationship with its employees. It is thus for the directors to consider the
position of stakeholders in the context of the duty to promote the companys
success for the benet of shareholders. Considering relationships with stakeholders in decision making is seen as contributing to the companys success.72
The success of the company for the benet of the shareholders thus provides
the justication. This is quite different from recognising that (say) employees
have an interest in the company, or that the nature of the employees rm
specic investment per se deserves protection.73 Thus, as Wedderburn observes of
the Review, it is because of the dominance of shareholder value that employees
are reduced from persons whose interests must be respected, or at least considered,
to suppliers of labour, alongside other suppliers of goods and services.74
It should, however, be remembered that the inclusive duty does not say that
employees must be viewed as being equal to suppliers or customers. The duty is
framed exibly and provides the directors with the discretion (but not the
70 On which see D. Prentice, A Company and its Employees: the Companies Act (1980) (1981) 10
ILJ 1; P. Xuereb, The Juridication of Industrial Relations Through Company Law Reform
(1988) 51 MLR 156; Lord Wedderburn, Companies and Employees: Common Law or Social
Dimension? (1993) 109 LQR 220, and by the same author, Employees, Partnership and
Company Law (2002) 31 ILJ 99.
71 Lord Wedderburn, Employees, Partnership and Company Law (2002) 31 ILJ 99.
72 There is an obvious parallel with the OECD Principles of Corporate Governance (Paris: OECD,
1999). In the context of The Role of Stakeholders in Corporate Governance, these provide
that: The competitiveness and ultimate success of a corporation is the result of teamwork that
embodies contributions from a range of different resource providers including investors,
employees, creditors, and suppliers. Corporations should recognise that the contributions of
stakeholders constitute a valuable resource for building competitive and protable companies.
It is, therefore, in the long-term interest of corporations to foster wealth-creating co-operation
among stakeholders. (35). In the preface to the Principles, it is stated that Common to all
good corporate governance regimes y is a high degree of priority placed on the interests of
shareholders (8).
73 See further D. Kershaw, No End in Sight for the History of Corporate Law: The Case for
Employee Participation in Corporate Governance (2002) 2 Journal of Corporate Law Studies
34; J. Michie and C. Oughton, Employee Participation and Ownership Rights (2002) 2 Journal
of Corporate Law Studies 139; G. Kelly and J. Parkinson, The Conceptual Foundations of the
Company: A Pluralist Approach, with J. Parkinson, A. Gamble and G. Kelly (eds), The
Political Economy of the Company (Oxford: Hart Publishing, 2000).
74 Lord Wedderburn, Employees, Partnership and Company Law (2002) 31 ILJ 99, 110.
415
[Vol. 66
compulsion, as Lord Wedderburn would undoubtedly wish) to treat the

companys relationship with its employees differently from that of suppliers and
creditors.
Related to the stakeholder debate is corporate social responsibility. As will be
seen, the Paper touches upon this issue in the context of the Operating and
Financial Review. In addition to the proposed inclusive duty, the Paper makes
further recommendations. These include the codication of directors duties in a
statutory statement replacing the common law and equitable rules. The directors
duty of skill and care is to be framed by reference to a dual objective/subjective
standard.75 The liberalisation of the shareholder consent rule in cases of
directorial appropriation of corporate property is proposed.76 For private
companies, the board will be able to consent to directorial appropriation of
company information, property and opportunities, providing that there is
nothing in the companys constitution invalidating the authorisation. It will be
a default rule in operation. In public companies, if board approval is to be
valid there must be specic provision in the companys constitution providing
for authorisation of this kind. The effect of this proposal is subtle but
signicant. It turns what was traditionally viewed as a matter for the shareholders
(linked to the directors duciary capacity), into an issue of directorial decision
making.77
The statutory statement is not to include a duty in relation to creditors, the
possibility of which the Review had raised. Several common law authorities
suggest that where the company is insolvent, or insolvency is threatened, directors
are required to consider the interests of creditors when discharging their duties to
the company.78 In these circumstances, the interests of the company are equated
with those of the creditors. Relevant in this context are various Insolvency Act
(1986) provisions in particular section 214, concerned with wrongful trading
under which directors may become liable to contribute to the pool of assets
available for distribution to creditors on the winding-up of the company.79
Discussion within the Paper centres on Section 214. The inclusion of a Section 214
like duty within the statutory statement is rejected, on the grounds that it might
encourage excessive caution on the part of directors and that its incorporation in
the statement would unhelpfully conate company and insolvency law y The
Government does not believe it appropriate to single out one requirement from
insolvency law and include it within the codication of common law duties owed
75 See further J. Birds, The Reform of Directors Duties, in J. De Lacy (ed), The Reform of UK
Company Law (London: Cavendish Publishing, 2002); C. Riley, The Company Directors Duty
of Care and Skill: The Case for an Onerous but Subjective Standard (1999) 62 MLR 697; S.
Worthington, Reforming Directors Duties (2001) 64 MLR 439 and by the same author,
Corporate Governance: Remedying and Ratifying Directors Breaches (2000) 116 LQR 638.
76 See Schedule 2, Clause 6.
77 Lady Justice Arden, a Steering Group member, cites this change as illustrating the success of the
Review at the economic level (Lady Justice Arden, Reforming the Companies Acts The
Way Ahead [2002] JBL 579, 598).
78 See, for example, West Mercia Safety Wear v Dodd [1988] BCLC 25 (CA) and Nicholson v
Permakraft (NZ) Ltd. [1985] 1 NZLR 242 (NZ HC). In Lonrho Ltd. v Shell Petroleum Co Ltd.
[1980] 1 WLR 627, Lord Diplock stated that it was the duty of the board to act in the best
interests of the company, but that these interests are not exclusively those of its shareholders
but may include those of its creditors (634). Note also Yukong Lines Ltd v Rendsburg
Investments Corporation and others [1998] BCC 870 and, for valuable discussion, see A. Keay,
The Duty of Directors to Take Account of Creditors Interests: Has it Any Role to Play?
[2002] JBL 379.
79 See further: V. Finch, Corporate Insolvency Law (Cambridge: Cambridge University Press,
2002), ch 15.
416
May 2003]
by directors to companies.80 The Paper makes no mention of the common law

authorities. It therefore leaves unanswered questions concerning the relationship
between Section 214 and the common law authorities and, signicantly, what
status these authorities will have following codication.81
The Paper does, however, ask whether it would be appropriate to include a
reference to creditors as one of those factors to which directors are to have regard
in promoting the success of the company. In making directors aware of their
obligations, the Review recommended that directors be required to sign a
declaration stating that they had read and understood the statutory statement of
duties. The Paper rejects this approach, preferring instead that Companies House
should send new directors details of their legal obligations. It is also noted that the
civil remedies available for breach of directorial duty are likely to be codied,
providing a workable solution can be devised; the Reviews proposals for Part X
of the Companies Act (1985) will be subject to future consultation; and the
provisions of the Combined Code will not be put into legislative form. Currently
companies may act as directors of other companies. The Government proposes to
prohibit this practice, although opinion is sought on this issue.
(d) Improving governance company reporting and audit82
This section of the Paper begins by observing that: Good company reporting is
essential. It provides information to shareholders, as well as creditors, employees
and others who may have an interest in companies and their activities y the
Government is rmly committed to improving the quality rather than the mere
quantity of company reporting.83
This section is complex. It does not seek to provide details of the form and
content of annual nancial reports and statements as this will be the remit of the
proposed new Standards Board. Instead, it is concerned with explaining which
nancial statements companies will be required to produce. It states that
companies will be required to publish:
(a)
(b)
(c)
(d)
(e)
nancial statements (prot and loss account; balance sheet; cash ow

statement);
a supplementary statement, to replace the existing directors report (for
companies not preparing an Operating and Financial Review (OFR));84
an OFR (for companies of economic signicance);
a directors remuneration report (for quoted companies only), and
an optional summary statement.
The Paper rejects the introduction of an Independent Professional Review (IPR).

The IPR would have provided for a less rigorous form of audit for certain
companies. Little enthusiasm was found for this proposal. There will therefore
continue to be a threshold below which an audit is not required. Other
recommendations are made, including extending the role of auditors in relation
to the cash ow statement and Operating and Financial Review.
80 Para 3.13.
81 I am grateful to one of the anonymous referees for suggesting that I include discussion of these
issues.
82 See also Co-ordinating Group on Audit and Accounting Issues: Interim Report (URN 02/1092)
(London: DTI, 2002).
83 Para 4.1.
84 On which see further text accompanying n 85.
417
[Vol. 66
In this section of Part II, the Government sets out its proposals for the new
OFR. It is in this context that the Paper refers to stakeholders and the issue of
corporate social responsibility (CSR). Companies of economic signicance will be
required to publish an OFR. Around one thousand companies currently satisfy
the criteria of economic signicance provided.85 The OFR is qualitative in
character and forward-looking. It requires companies to publish material
information relating to the companys activities, including information about
future plans, opportunities and risks. It will also require information on those
material factors identied in the context of the inclusive duty, such as the
companys relationship with employees and its impact on the environment. What
is material will be for directors to decide.
In describing the benets that the OFR will bring, the Paper rst mentions that
the information provided will help shareholders hold directors to account. After
this point is made, it is added that the OFR:
ywould also be a major benet for a wider cross-section of a companys stakeholders.
The new requirement to report, for example, on material environmental issues would be a
major contribution to both corporate social responsibility and sustainable development
initiatives. The Government has long recognised, and promoted, the business case for these
and sees the OFR as the opportunity for directors to demonstrate their response to this
business case.86
The validity of the assertions made is dependent on the effect that increased
disclosure brings. It is also dependent on the extent to which shareholders have the
means (and the incentive) to hold directors accountable.87 The above quotation is
interesting for other reasons. First, the OFR is seen not as requiring socially
responsible behaviour whatever that might be but as requiring disclosure of the
companys policies in this regard. This is consistent with the role ascribed to
disclosure within company law and is reected in Sealys earlier comment on the
place of disclosure within the traditions of English company law.88 Second, the
desirability of socially responsible behaviour is recognised not because of its
inherent worth, but rather because a business case exists for it. Here there is a
clear similarity to the manner in which the inclusive duty was framed by reference
to the overriding obligation to the companys shareholders. It is difcult not to be
reminded of Bowen LJs view, articulated over a century ago, that [t]here are to
be no cakes and ale except such as are required for the benet of the company.89
Indeed, to take a wider view, it should not escape attention that the business
case justication is now commonly used by the Government and has, for
example, underpinned the case for tackling age discrimination in the workplace.90
85 Where any two of the following three criteria are met: (a) turnover greater than d50 million
(public companies) and d500 million (private companies); (b) balance sheet total greater than
d25 million (public) and d250 million (private); and (c) employee total greater than 500 (public)
and 5,000 (private).
86 Para 4.32.
87 See further V. Finch, Company Directors: Who Cares About Skill and Care? (1992) 55 MLR
179, 180189.
88 See text accompanying n 35 above.
89 Hutton v West Cork Railway (1883) 23 Ch.D. 654, 673 (CA). See further B. Pettet, The Stirring
of Corporate Social Conscience: From Cake and Ale to Community Programmes (1997) 50
Current Legal Problems 279.
90 As opposed to recognising, for example, that discrimination offends the dignity of the
individual (on which, see further S. Fredman, Discrimination Law (Oxford: OUP, 2002) 62).
Note also the strength of the economic arguments in the Governments Green Paper Work and
Parents: Competitiveness and Choice (Cm 5005) (London: DTI, 2000). See further: C. Hay, No
Left Turn? What to Expect from New Labour in Power in J. Stayner and G. Stoker (eds),
Contemporary Political Studies 1997 (Nottingham: Political Studies Association, 1997).
418
May 2003]
Finally, it is revealing that discussion of CSR within the Paper relates only to the
largest companies, unlike the DTIs annual report on CSR, in which it is
recognised that CSR is also relevant to small and medium-sized companies.91 Is
this apparent inconsistency shaped by the Governments perception of the role of
company law in matters of CSR? It is interesting to note also the following
statement contained within the DTIs annual CSR report, which reveals that the
Government continues to justify CSR in economic terms:
y the overall Government view is based on a simple but profound insight that in the
emerging economy of the 21st century, the policies we need to care for society and the
environment are the same policies that we need to create a successful economy.92
(e) Keeping the law up to date institutional arrangements

In this section, the Paper outlines its proposals for keeping company law up to
date. A new Standards Board is proposed, which would be given responsibility for
making detailed rules on certain accounting, reporting and disclosure issues. More
specically, it is proposed that the Board be responsible for: (a) the form and
content of the nancial statements mentioned above, (b) the detailed disclosure
requirements of the OFR, (c) the form and content of the summary statement and
(d) the Combined Code.
The Combined Code arose from the work of the Cadbury, Greenbury and
Hampel Committees and is a code of corporate governance best practice.93 It is a
condition of listing on the London Stock Exchange that companies state in their
annual report the extent of their compliance with the Code. If there is noncompliance with any of the Codes provisions, then reasons must be provided.
Disclosure is thus a fundamental aspect of the Codes operation given that its
provisions are not mandatory. In the White Paper, the Government states that the
Code has a central and evolving role in continuing to uphold high standards of
corporate governance.94 The Paper proposes that the Code remains a nonstatutory document and that the Board will keep the Code under active review and
be responsible for compliance. Thus, the Board will be responsible for determining
the frequency with which the Code is reviewed and developing rules under which
companies disclose the extent of their compliance with it.
The Review recommended the establishment of a Company Law and Reporting
Commission (CLRC), charged with the task of ensuring that company law is kept
up to date and responsive to current needs.95 Similarly, the formation of a Private
91 Business and Society Corporate Social Responsibility Report 2002 (London: DTI, 2002).
92 Ibid, 6.
93 Respectively: Report of the Committee on the Financial Aspects of Corporate Governance
(London: Gee, 1992), Directors Remuneration: Report of a Study Group chaired by Sir Richard
Greenbury (London: Gee, 1995), The Committee on Corporate Governance, Final Report
(London: Gee, 1998). It has been observed that: All of the reports of these committees have
shared a similar set of assumptions about both the nature of corporate governance and the
means through which it should be reformed. Governance is understood to be primarily about
the relationship between shareholders (who are viewed unproblematically as the sole owners of
a company) and managers. The objective of the various committees has therefore been to come
up with proposals which in some sense improve the quality of this relationship, without
recourse to heavy-handed government intervention. (J. Parkinson and G. Kelly, The
Combined Code on Corporate Governance (1999) 70 The Political Quarterly 101, 101).
94 Para 5.12.
95 See further: E. Ferran, Corporate Law, Codes and Social Norms Finding the Right
Regulatory Combination and Institutional Structure (2001) 1 Journal of Corporate Law Studies
381.
419
[Vol. 66
Companies Committee (PCC) was advocated, its function being to advise the
CLRC and Standards Board on issues affecting private companies. The Paper
supports the view that company law should be kept up to date, but rejects both of
the Reviews recommendations on the grounds that the exibility introduced by
the Bill and the Governments continued commitment to consultation on
company law, render the CLRC and PCC superuous. Whilst history teaches
us that commitment alone may not be sufcient, there now exists a far broader
political consensus concerning the importance of economic competitiveness and
the role of small rms in the economy.96
This section contains discussion of the importance of compliance and sanctions.
Compliance is seen as essential in promoting efciency and providing condence
in company disclosed information. This, the Paper argues, contributes to
condence in the marketplace. Criminal sanctions for those procedural offences
relating to the provision of accounts and reports are to remain and are justied
because they encourage compliance. Criminal sanctions will not be imposed for
breaches relating to the form and content of the annual nancial statements.
Rather, the Secretary of State or an authorised body (to succeed the Financial
Reporting Review Panel) will have the power to order that the directors produce
revised accounts or statements.
Those who followed the Reviews progress will remember that at rst the
Steering Group expressed a preference for avoiding the use of criminal offences.97
This view changed, however, as the Group recognised that criminal sanctions for
certain regulatory offences are highly efcient and enable high compliance levels
to be achieved before recourse to enforcement proceedings.98 This provides an
interesting insight into the justication for characterising particular offences as
criminal: the need to secure compliance, rather than the character of the offence
itself.
(f ) Other ways of simplifying and streamlining the law
This section contains a mixture of proposals under the simplication heading,
some of which are mentioned in earlier sections. The discussion of these is in
places somewhat cursory. For example, reference is simply made to the draft
clauses and support expressed for the Review, or agreement is expressed with the
Review but no draft clauses provided. Some of the recommendations in this
section are discussed in earlier sections (such as the model constitutions for public
and private companies). It is clear that further consultation will be required on
certain issues. Turning to capital maintenance, signicant change is proposed in
the form of an alternative regime for the reduction of capital, requiring a solvency
statement by directors but not requiring the approval of the court. For public
companies, creditors would have the right of objection. The Paper also expresses
support for the removal of the prohibition on the giving of nancial assistance by
private companies for the purchase of their own shares and the requirement that
companies have an authorised share capital.
Other recommendations within this section include the provision that new
companies should have unlimited capacity and that a single person should be able
to form both public and private companies. It is also proposed to remove the rule
96 On the latter, see T. May and J. McHugh, Small Business Policy: A Political Consensus?
(2002) 73 The Political Quarterly 76.
97 The Strategic Framework, p vi.
98 Completing, para 13.29; see also The Final Report, paras 15.1915.20.
420
May 2003]
which makes it mandatory for private companies to have a company secretary, the
Paper observing that company secretaries specic role is not essential to good
corporate governance; that is properly the responsibility of directors.99 In the
context of sanctions, the Paper supports the Reviews position that having
company convictions and those of directors and ofcers drawn to the attention of
the public and shareholders, would act as a deterrent. The Government is
currently considering how this objective might be achieved.
(g) Transitional regime
Although recognising that it is too early to make a denitive decision on the
transitional process, the Paper outlines two possible ways forward. The rst would
require that any company wishing to take advantage of the new Companies Act
should re-register. As the Paper states, this would be highly confusing. Under the
second proposal, the new Act would automatically apply to existing companies.
This second approach would however contain special rules dealing with, for
example, transactions commenced before the Act came into force.
Conclusion
Some twenty or so years ago, a minister in the Conservative Government observed
that [t]he purpose of our company law is to provide a framework whereby
industry and commerce can advance, using it as a sound base y [W]e do not
consider that it is a proper role for the law to require specic practices to be
observed merely because they are thought to be desirable. y [Company law]
should prohibit that which is wrong and provide a framework which permits,
rather than requires, the development of desirable practices.100 In many ways this
statement foreshadows the Review and White Paper, and reveals a surprising
political consensus. It emphasises the signicance of individual autonomy within a
framework in which the laws purpose is to provide a supporting structure for
private ordering. It is reected in the Governments perception of the function of
company law. Increased legislative provision including, for example, the
codication of directors duties is not inconsistent with this private conception.
In this regard, the relevant question is the purpose which legislation is intended to
serve.101
The Review recognised that company law inuences the extent to which the UK
is an attractive venue for incorporation. The UKs membership of the European
Union has a signicant bearing on the development of UK company law. The
Centros102 decision in particular has focussed attention on policy development
at the European level. In this regard, there are signs that current European
policy endorses the perception of company law taken by the Review and
99 Para 6.6 (emphasis in original).
100 HC Deb vol 972 cols 155159 22 October 1979 (Mr Reginald Eyre, Under Secretary of State for
Trade).
101 This should be remembered, particularly in the context of the debate concerning the
juridication of company law (on which, see further: C. Riley, The Juridication of Corporate
Governance in J. De Lacy (ed), The Reform of UK Company Law (London: Cavendish
Publishing, 2002)).
102 Case C-212/97 Centros Ltd v Erhvervs-og Selskabsstyrelsen [2000] 2 WLR 1048; [2000] 2 BCLC
68. See further M. Siems, Convergence, competition, Centros and conicts of law: European
company law in the 21st century (2002) 27 ELRev 47.
421
[Vol. 66
White Paper.103 Several developments deserve attention. The rst concerns

corporate social responsibility (CSR). In a Communication published in early July
2002, the Commission observed that [in] principle, adopting CSR is clearly a
matter for enterprises themselves, which is dynamically shaped in interaction
between them and their stakeholders.104 The Commission thus takes a noninterventionist stance in corporate affairs.
The remaining developments concern the work of the Commissions High Level
Group (HLG) of Company Law Experts, which has been charged with the
development of EU company law policy. The Group was formed by the
Commission in September 2001 following the European Parliaments rejection of
the Commissions proposals for a directive on the conduct of takeover bids. In
January 2002, the HLG published its recommendations for the takeover
directive.105 Of particular interest is the HLGs rejection of the view that a target
companys directors should be able to frustrate a bid in order to consider the
interests of shareholders and stakeholders. In this regard the HLG observed
that [d]efensive mechanisms are often costly. Most importantly, managers are
faced with a signicant conict of interests. Shareholders should be able to decide
for themselves and stakeholders should be protected by specic rules (e.g. on
labour law or environmental law).106 The scope of company law in the takeover
context is thus dominated by shareholder primacy. This approach, which mirrors
the UK position, has since been endorsed by the Commission in its revised
proposals for the Thirteenth Company Law Directive, published in October
2002.107
The HLGs work extended beyond the subject of takeovers. In April 2002 it
published a wide-ranging consultation paper titled A Modern Regulatory
Framework for Company Law in Europe.108 In the course of discussion concerned
with articulating general themes, the HLG stated its belief that the primary
purpose of company law was:
to provide a legal framework for those who wish to undertake business activities efciently,
in a way they consider to be best suited to attain success. Company law should rst of all
facilitate the running of efcient and competitive business enterprises. This is not to ignore
that protection of shareholders and creditors is an integral part of any company law. But
going forward the Group believes the primary focus of the European Union should be to
develop and implement company law mechanisms that enhance the efciency and
competitiveness of business across Europe.109
103 See also K. Hopt, Common Principles of Corporate Governance in Europe? in J. McCahery, P.
Moerland, T. Raaijmakers and L. Renneboog (eds), Corporate Governance Regimes
Convergence and Diversity (Oxford: OUP, 2002).
104 European Commission: Communication from the Commission: Corporate Social Responsibility
A business contribution to Sustainable Development (2 July 2002, Brussels, COM(2002) 347
Final), 7.
105 Report of The High Level Group of Company Law Experts on Issues Related to Takeover Bids,
Brussels, 10 January 2002.
106 Ibid, 2.
107 COM(2002) 534 nal (2 October 2002). For further background, see T. Raaijmakers, Takeover
Regulation in Europe and America: The Need for Functional Convergence in J. McCahery, P.
Moerland, T. Raaijmakers and L. Renneboog (eds), Corporate Governance Regimes
Convergence and Diversity (Oxford: OUP, 2002).
108 Brussels: The European Commission, 2002. See further: DN: IP/02/625. The consultation
document is available at: ohttp://europa.eu.int/comm/internal_market/en/company/company/
modern/index.htm4.
109 Ibid, chapter 2, para 3.
422
May 2003]
The similarity with this purpose and the starting principle adopted by the DTI
Review is striking.110 The HLGs nal report,111 published in November 2002,
endorsed this view as to the purpose of company law and stated that an
important focus of the EU policy in the eld of company law should be to develop
and implement company law mechanisms that enhance the efciency and
competitiveness of business across Europe.112 The Commission welcomed the
HLGs nal report and declared that a company law action plan would be
published in early 2003.113
Returning to the White Paper, it is clearly too early to determine the nal form
that the new Companies Bill and eventual Companies Act will take, not only
because of the vagaries of the political process, but also because the Government
has yet to publish proposals on all of the Reviews recommendations. Moreover,
at the Papers publication, the results of other consultations were not known,
including Derek Higgs review of the role of non-executive directors114 and the
Law Commissions work on company charges.115 This said, it is clear that the
pattern of reform reected in the White Paper is evolutionary
not revolutionary and that major changes to the White Papers proposals are
unlikely. The Paper articulates a role for company law that largely reects its
current structure and values.116 Within that structure, freedom of contract
and respect for contract are central117 and the advantages of various forms
of regulation are recognised. Disclosure, once viewed as the quid pro quo of
the States grant of incorporation,118 is linked explicitly with the efciency of
private ordering. Supporting private ordering and the market provide
the principal justications for company law-based regulatory intervention.
Whether the White Papers recommendations will achieve this purpose and
indeed the broader objective of competitiveness is a difcult question,
110 It is of interest that the civil servant responsible for managing the DTI Review, Mr. J. Rickford,
is a member of the European High Level Group.
111 Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for
Company Law in Europe (Brussels, 4 November 2002), available at: ohttp://europe.eu.int/
comm/internal_market/en/company/company/modern/index.htm4.
112 Ibid, 41.
113 DN: IP/02/1600 (4 November 2002).
114 The nal report has now been published: D. Higgs, Review of the Role and Effectiveness of NonExecutive Directors (London: DTI, 2003). The Financial Reporting Council has announced its
intention to implement the Higgs Report recommendations through amendment to the
Combined Code. See further DTI Press release (20 January 2003).
115 The Law Commission for England and Wales, Registration of Security Interests: Company
Charges and Property other than Land (London: The Stationery Ofce, 2002); The Law
Commission for Scotland, Discussion Paper on Registration of Rights in Security by Companies
(Edinburgh: The Stationery Ofce, 2002).
116 Unlike, for example, the very prescriptive Corporate Responsibility Bill (2002 Bill 145),
introduced into the House of Commons on 12 June 2002, which has failed to proceed.
117 On the former, see P. Davies, Company Law (Oxford: OUP, 2002), 7 and D. Sugarman, Is
company law founded on contract or public regulation? The Law Commissions paper on
company directors (1999) 20 Company Lawyer 162, 181. On the latter, see M. Whincop, An
Economic and Jurisprudential Genealogy of Corporate Law (Aldershot: Ashgate Publishing,
2001). Lord Irvine has recently observed that [i]nformed market freedom underlies the
operation of English companies legislation (Lord Irvine of Lairg, The Law: An Engine for
Trade (2001) 64 MLR 333, 344).
118 See further: C. Villiers, Disclosure Obligations in Company Law: Bringing Communication
Theory into the Fold (2001) 1 Journal of Corporate Law Studies 181, 187.
423
[Vol. 66
one beyond the scope of this article.119 It is nevertheless clear that the White Paper
provides a powerful illustration of the Governments ideological position on the
legitimate role of state intervention in corporate affairs.
119 But see further, albeit in the context of the Reviews recommendations: E. Ferran, Company
Law Reform in the UK (December 2001, paper available on ohttp://www.ssrn.com4,
id=294508); E. Ferran, Corporate Law, Codes and Social Norms Finding the Right
Regulatory Combination and Institutional Structure (2001) 1 Journal of Corporate Law Studies
381 and J. Armour, Share Capital and Creditor Protection: Efcient Rules for a Modern
Company Law (2000) 63 MLR 355.
424

Reports: Modernising Company Law'': The Government's White Paper

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Reports: Modernising Company Law'': The Government's White Paper

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REPORTS

Modernising Company Law:

Modernising Company Law

include an overview of the Department of Trade and Industry (DTI) Review,

Company law reform: background

The Modern Law Review

remuneration was excluded, the justication being its separate consideration

The stakeholder debate

r The Modern Law Review Limited 2003

Modernising Company Law

18 The Strategic Framework, para 5.1.2 (emphasis in the original).

The Modern Law Review

The Reviews guiding principles

Modernising Company Law

The Modern Law Review

Collins view that contract is a form of self-regulation,29 suggests that we should

r The Modern Law Review Limited 2003

Modernising Company Law

The White Paper

The Modern Law Review

r The Modern Law Review Limited 2003

Modernising Company Law

century.48 Indeed, it was largely foreshadowed by policy development in the

The White Papers outline of policy

The Modern Law Review

r The Modern Law Review Limited 2003

Modernising Company Law

The Modern Law Review

relationship between institutional shareholdings and board turnover in average or

(c) Improving governance directors

The Government thus endorses shareholder primacy. This is reected throughout

r The Modern Law Review Limited 2003

Modernising Company Law

The Modern Law Review

compulsion, as Lord Wedderburn would undoubtedly wish) to treat the

r The Modern Law Review Limited 2003

Modernising Company Law

by directors to companies.80 The Paper makes no mention of the common law

nancial statements (prot and loss account; balance sheet; cash ow

The Paper rejects the introduction of an Independent Professional Review (IPR).

The Modern Law Review

r The Modern Law Review Limited 2003

Modernising Company Law

(e) Keeping the law up to date institutional arrangements

The Modern Law Review

r The Modern Law Review Limited 2003

Modernising Company Law

The Modern Law Review

White Paper.103 Several developments deserve attention. The rst concerns

r The Modern Law Review Limited 2003

Modernising Company Law

The Modern Law Review

r The Modern Law Review Limited 2003

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