Principles of Modern Company Law

Introduction

Disclosure is a very important aspect of the modern company law. It is mandated by the need to ensure transparency and accountability in the company. The modern company may have many stakeholders and to a great extent transparency and accountability is required to ensure the interest of these stakeholders. Shareholders, employees, consumers, general public and even the general environment, may be the stakeholders as they are impacted by the actions of the company. The disclosure regime in the company law is structured for the purpose of protection of these different stakeholders in the company. It is also noteworthy that the levels of disclosure and access to information is different for the shareholders, creditors and public.

The shareholders are the investors in the company. The disclosures to the shareholders are necessitated by the need to ensure that the principle of Shareholders’ Primacy is being conformed with. The employees in the company as well as the consumers and the general public are also impacted by the company’s operations, decisions and actions. For that reason, it is mandatory that the company allows stakeholders to gain insight into how the company functions; what its decisions are; and what the impact of its actions may be.

There are several provisions in the Companies Act 2006 (CA 2006), which contain obligations of disclosure. These provisions are related to the routine statutory disclosures, disclosures that are mandatory at the Stock Exchange, or even disclosures to be made by the directors of the company. There are trading disclosures that are to be made by all companies and then there are other kinds of disclosures that may be applicable to some or other of the companies depending on their nature. For example, disclosures at the Stock Exchange are essential for the public company as such company trades on the Stock Exchange. Such disclosures at Stock Exchange are not necessary for private companies.

Disclosures are considered to be central to maintaining the transparency and accountability of the company and its officers and directors. In fact, many of the provisions that mandate disclosure, are necessitated by the need for such transparency. Therefore, it can be said that disclosure regime leads to the creating of corporate governance structures that allow for greater transparency and accountability by the company or its directors.

Due to the underlying theme of transparency and accountability, it can be said that disclosure is one of the main provisions of modern company law. This essay will use the provisions of the CA 2006 to emphasise on the importance of disclosure in the modern company law.

Principle of Disclosure and its Relevance in the Modern Company Law

The CA 2006 is the result of a reform of the Company law, which was undertaken in the late 1990s. The need for reform was felt for making the company law fall in line with the modern practices and needs of the companies. It is also worthwhile to note that the reforms undertaken in company law, and manifested in the current CA 2006, were also motivated by a desire of the government to make the United Kingdom the preferred destination for doing business.[2] To that end, a need was felt for devising a system that maximises “openness and independence”.[3] The need for creating a new regime that was allowed “to flourish freely in a climate of discipline and accountability” was openly expressed by company law review.[4] To that end, principles of disclosure have an important place in company law.

In the modern company law, the principle of disclosure becomes very relevant due to multiple factors. One of the factors is that modern company law allows for the principle of limited liability, which means that the liability of the shareholders is limited and the directors have no liability for the debts of the company. This is divergent from the traditional concept of business, where the owner of the business has unlimited liability for the debts of the business.[5] It has been said that: “The price paid for the limited liability for a company’s debts is the obligation to make available to the public a great deal of information about the company including its accounts.”[6] This is very essential for public companies who are allowed to invite public to subscribe to their shares, for which reason, the rules of disclosure are more stringent for public companies as compared to private companies.

Another factor responsible for the increasing importance of disclosure in the modern company law is the need for complying with standards of corporate governance. Disclosure is a necessary condition for ensuring transparency in the functioning of the company. Transparency and disclosure are now considered to be inter-related. Corporate governance framework requires that there should be informed decision making by shareholders, potential investors and other stakeholders. This is required in the different areas of capital allocation, financial performance monitoring and corporate transactions.[8] Corporate governance must maintain certain standards that are necessary for reducing unethical and unscrupulous corporate practices. In order to achieve healthy corporate governance, the company must be seen to be transparent and for that purpose, a company would need to adopt “accurate accounting methods, make full and prompt disclosure of company information and make disclosure of conflict of interests of the directors or controlling shareholders, etc.”[9] This brief discussion clarifies that disclosure is an essential aspect of company law and it has a lot of relevance for public companies.

A company encounters disclosure obligations at different stages in its life, with some of the disclosure obligations arising even before or around the time of the inception of the company. For instance, when the company is in the process of raising capital, it has to follow disclosure obligations that are required under the law. At other times as well, disclosure obligations will arise for the company so that the third parties that are dealing with the company can make informed decisions about the company.[10] Consequently, there are many categories of disclosure that are provided in the CA 2006. What is clear is that the disclosure regime is an underlying provision for the Company law and that the regime is structured through multiple provisions in the company law that relate to different kinds of disclosure requirements. Some of the disclosure requirements require disclosure to public, while others requirements are for disclosure to shareholders and creditors.

Public disclosure has been an important part of the company law since the mid 19th century when companies were allowed to be registered.[11] Public disclosure enables scrutiny into the company and it is considered to be an effective method of driving best practices in companies for the purpose of protecting public interest. In the modern company law, public interest is increasingly concerned with the predominant areas of concern being environmental protection, business impact on communities, and the increase in the number of stakeholders in the business.[12] Therefore, disclosure regime has also expanded under the modern company law. The public disclosure regime is the most onerous for the registered companies that are limited by shares (Ltd/plc).[13] In such companies, constitutional documents, details of members and directors, details of capital, annual returns and accounts and reports, are all subject to public disclosure.

Public companies have certain duties towards their shareholders. Primarily, the company is under a duty to disclose all relevant information to the shareholders so that the shareholders are enabled to take informed steps on important decisions of the company that are to be made during the Shareholders’ meetings.[15] Company law is based on the principle of Shareholder primacy, or the realisation of the shareholders’ value. Directors in the company are appointed for the purpose of leading or managing the day to day business of the company. However, the directors have to do this in line with the principal objectives of the shareholders. Therefore, it can be said that the company is governed indirectly by the shareholders. Shareholders have to decide upon the decisions as per the majoritarian rule.[16] The disclosure regime in the CA 2006 is structured in a way to put the duty of disclosure on the company and its directors primarily. These duties also lead to the ensuring of the protection of shareholders’ interest.

Some of the disclosure requirements are routine statutory disclosures, while other kinds of disclosures are also to be made at different times in the company’s life. These are discussed in some detail hereafter.

Information on business documents are mandatorily past of the disclosure regime. The rationale behind this mandatory disclosure is that such business documents can be a source of misleading information.[17] There are some basic provisions that are made to ensure that the company’s information is displayed. An example of the same is in CA 2006, section 82, which provides that the name of the company must be displayed on most business documents. The name is also required to be reflective of the limited liability nature of the company. Therefore, the warning of ‘public limited company’, ‘plc’, etc. should be put prominently in the name of the company. It is noteworthy that the failure to disclose the information mandated by section 82 may lead to criminal consequences for the company as well as for the responsible officers of the company under section 84 of the CA 2006. Similar trading disclosures are also applicable to overseas companies who are doing business in the UK as per CA 2006, section 1051.

The company’s registered office is also required to have a range of information in the premises. Some of this information is restricted to the members of the company, so that they can inspect the company’s affairs from time to time, while some of this information may be available to the public as well.[18] There are different provisions in the CA 2006, which mandates the keeping or publishing of such information. These provisions are: section 162, which mandates the maintaining of registers of directors; section 165 mandates the maintaining of the addresses of directors; members’ shareholdings information is to be kept under sections 808 and 809. This information is subject to disclosure and open to the public as well.

There is also a requirement to file various kinds of returns at the Companies House in the prescribed format. Accordingly, companies file annual returns, annual accounts, change in capital of the company, articles of association, memorandum of association, information of charges on the assets of the company. If these disclosure obligations are not complied with, the non-disclosure leads to criminal offences under the CA 2006, sections 441, 451-453.

Disclosure at the Stock Exchange

As the companies trade at the Stock Exchange, such trade would not be possible in a free and transparent manner, unless the companies are mandated to publish information about themselves at the Stock Exchange. The investors can only freely trade in the stock of the company, if they have the relevant information about the company with them. The requirement of disclosure is mandatory for public listed companies.

Hampel Report[20] had stated that due to the strict disclosure regime mandated by law, public companies have become the most accountable organisations in the society. This accountability was derived from the fact that public companies regularly publish trading results and audit statements of accounts, publishing of the information on remuneration, governance, and operations.[21] The report went on to stress on the importance of disclosure regime. The European Commission’s ‘Transparency Directive’,[22] also stressed on the need and utility of disclosure and accountability. The Directive was implemented through the CA 2006 Part 43. As per this, a company trading its shares on regulated markets, is required to mandatorily publish information about itself, including yearly and half-yearly reports.

Disclosures by directors

There are certain provisions in the CA 2006, which require the director of the company to make disclosures. An example is section 182, which requires the director to disclose his interest in any transaction or arrangement, entered into by the company. In case the director of a company is interested in any such transaction, then he is required to disclose such interest to other directors of the company.

The directors of the company owe a fiduciary duty to the company as well as its shareholders.[23] There is an obligation on directors of the company to produce a business review which informs members of the company and “help them assess how the directors have performed their duty under the Companies Act 2006, s.172.”[24] Section 417 imposes on the directors of the company, as positive duty of disclosure. In Item Software (UK) Ltd v. Fassihi, Arden L.J., explained that a director who is in breach of the duty of loyalty may be under a further duty to disclose the breach to the company on the basis that a duty of disclosure is an incident of the core duty of loyalty.[25] Furthermore, EU Accounts Modernisation Directive,[26] provides a definition or explanation of a business review as that which:

“requires a balanced and comprehensive analysis of the development and performance of the company during the financial year and the position of the company at the end of the year; a description of the principal risks and uncertainties facing the company; and analysis using appropriate financial and non-financial key performance indicators (including those specifically relating to environmental and employee issues) […] This will include information on environmental matters and employees, on the company’s policies in these areas and the implementation of those policies. Moreover, key performance indicators must be used where appropriate (including those specifically relating to environmental and employee issues).”

Clearly, there is a mandate for greater transparency and accountability in the company’s operations, which are required by the disclosure regime. The directors of the company are under the duty to provide these disclosures. This demonstrates how essential disclosure is seen even from the perspective of the directors having fiduciary duties towards the shareholders and the company. Not only these stakeholders, the directors may also be under s fiduciary duty to disclose non-financial key performance indicators as well. In Re Chez Nico (Restaurants) Ltd,[27] Browne-Wilkinson VC observing on the liability of a director to disclose pending negotiations for the sale of the company’s undertakings before purchasing the shares in the company, held:

“I consider the law to be that […] in certain special circumstances fiduciary duties, carrying with them a duty of disclosure may arise which place the directors in a fiduciary capacity vis-a-vis the shareholders.”

Clearly, the duty of disclosure from the director to the shareholders is seen as a fiduciary duty. In the recent times, one more area has been added to this in countries around the world, that is, linking director’s remuneration to the performance of the company and allowing shareholders’ greater say in the remuneration to be paid to directors.[29] In the UK, this requirement is applied to quoted companies. As per section 420 (1) and (2) if the CA 2006, it is required that the directors of quoted companies prepare a directors’ remuneration report. Such a report must clearly provide a statement of the company’s policies in regard to the remuneration for directors. If the directors fail to comply with these Regulations, they would have each committed an offence and be liable to a fine.

Directors are also required to prepare annual accounts and reports of the company. The different accounts that are to be prepared by directors include individual accounts under CA 2006, section 394 and group accounts under section 399. Reports to be prepared by the directors include strategic report under section 414A, directors’ report under section 415 and directors’ remuneration report under section 420. Moreover, these reports have to be sent by to the Registrar of the Companies under section 441 and the shareholders of the company under section 423.[31] In public companies, the accounts and reports are also to be laid before the general meetings under section 437. The CA 2006, section 463 provides that directors are liable to compensate the company for any loss suffered by the company suffers as the result of any untrue or misleading statement in (or any omission from) the strategic report, the directors’ remuneration report or the directors’ report.

Conclusion

The principle of disclosure is an essential aspect of modern company law. The importance of this principle can be gauged from the fact of the principle of disclosure underlying many provisions of the CA 2006. It is noteworthy that CA 2006 was enacted after the need to reform the company law was felt. One of the important areas of reform was seen in the disclosure regime, which was extensively applied to the CA 2006. Disclosure is related to transparency of the company and transparency itself is a major aspect of sound corporate governance. Why this becomes relevant to modern company law is because of the growth of public companies limited by shares, where the company is allowed to raise capital by allowing public to subscribe to its shares. In order to protect the interest of the shareholders as well as prospective investors, disclosure is mandated by the CA 2006.

Principles of disclosure are applied at different stages of the life of the company. Some of the mandated requirements of disclosure become applicable to the company even before its inception. While many mandatory disclosure provisions are applied at different stages. The levels of disclosure are different with respect to public (public disclosure), shareholders and creditors. Some levels of public disclosure are mandated for all companies, but it is particularly onerous for public companies limited by shares. This is so because of the nature of the company being public, where public is invited to subscribe to the shares of the company.

A reading of the provisions of the CA 2006 indicates that the principle of disclosure is very important in the modern company law. The principle is the underlying for many of the CA 2006 provisions

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