UK institutions responsible for the reform of corporate law can very well make their own great plans, but in reality the focus and initiative has to be shifted towards Brussels. This essay will discuss the effects of this shift on English company law. For a better understanding, one must first look at the evolution of UK Company Law, then at the European Union’s reforms, the interconnection between the two, and finally at the current and future possible impact of the shift on British company law.
1. UK Reform
Since the foundations of company law were set in UK through the first Companies Act, passing in 1844, there has been a 20-year cycle of review resulting in Acts adopted in 1862, 1883, 1908, 1929, 1948, 1980, 1985, with the new Act entering in force in 2006. This indicates that there is a conscious effort to keep company law relevant to current needs (Omer, 2009).
The Joint Stock Companies Act 1856 established the framework for the modern-style company, incorporated by registration and enjoying limited liability. From 1856 to the present day, the institution of the ‘company’ and the legislation dealing with it has not suffered any paradigm shifts. However, the Parliament has been busy in company affairs from time to time, passing, amending, and consolidating the Acts. The prevailing sentiment at the start of the general review of company law in 1998 was critical towards the ‘numerous additions, amendments and consolidations that have ‘created a patchwork of regulation that is immensely complex and seriously out of date’ (Company Law Review Act 1998). The Company Law Review was created to overhaul this untidy, complex, and difficult to understand legislation. The declared aims of the project were to embark on a fundamental review of the framework of core company law, in order to achieve a company law that was competitive, and to provide a framework in which British businesses could grow and compete effectively in an economic sense.
The result of this long process led to what was the longest Act in the history of the Parliament: the Companies Act 2006 (CA 2006). Although this represents a major reform, it is not a revolution, as Dignam acknowledges (2011). It is a consolidating statute which reflects the incremental growth of company law with few fundamental changes. Its four key objectives as noted in the Regulatory Impact Assessment are: (1) to make it easier to set up and run a company; (2) to ensure better a regulation and a ‘Think Small First’ approach; (3) to enhance shareholder engagement and a long-term investment culture; and (4) to provide flexibility for the future.
2. EU Reform
Since UK’s accession to the European Union in 1972, its options regarding law reform were bounded by its obligations to implement Community rules (Ferran, 2001). The objectives of the Treaty on the Functioning of the European Union (TFEU) include the facilitating of trade and the removal of barriers to people’s freedom to establish their businesses and invest their capital on a basis of equality throughout the EU. In order to achieve this integrated financial market, a plan for the ‘harmonisation’ of domestic company law was instituted (See TFEU, art. 44 (2) (g)). The legislative procedure dictates that the European Commission in Brussels makes proposals for Directives (or less often, Regulations) which are then adopted by the Council of the EU and the European Parliament. The flexible method of the Directive was chosen because the Directives are only binding on the member state, which must implement in their own law by its own legislation (Pettet, Lowry, and Reisberg, 2012).
The thirteen Company Law Directives (out of which the fifth and tenth have not yet been adopted, and the ninth has been redrawn) have led to a number of important changes in technical company law. Such changes are the abolition of the external effect of the ultra vires rule (First Company Law Directive 68/151/EEC), reforming the accounting and audit requirements (Fourth Company Law Directive 78/660/EEC, Seventh Company Law Directive 83/349/EEC and Eighth Company Law Directive 84/253/EEC), the area of mergers and acquisitions (Third Company Law Directive 78/855/EEC, Sixth Company Law Directive 82/891/EEC, Tenth Company Law Directive 2005/56/EC and Thirteenth Company Law Directive 2004/25/EC) and many others.
Moreover, the European Union enacted the European Company Statute (the Societas Europaea or SE) by EC Regulation in 2001 which is intended to be available to companies above and beyond the legal forms available at a national level. According to Johnson, this could be compared to a ‘European citizenship’ in the sense that it does not impinge upon the nationality of the legal person, which has to be granted by the member state where the company is registered (2005). However, it gives rise to an extra bundle of rights and advantages not available to the national corporate form, among them, the right to corporate mobility within the EU subject to a specific set of processes which must be followed.
3. Impact of the reform shift to EU
The desired effect of the Company Law harmonisation programme is to bring national laws closer together in order to help achieve a common European market. However, a direct consequence of this is that UK (and of course other Member States) will not have the unhindered freedom to regulate (or deregulate) as they wish. As a result, Ferran opined that ‘[t]he UK is unable to update its company laws in ways that have commended themselves to other common law states that, historically, had company law systems derived from the British model’ (2001).
Another possible outcome is that this will cause further market integration in Europe by lowering obstacles for cross-border offering and trading, while also making it easier and more attractive to transfer the real seat of a company or reincorporate (Luca, 2005). For instance, it is not possible for a Public Limited Company (PLC) in the United Kingdom to transfer the registered office to another Member State without winding up the UK operations and reregistering in another Member State, whereas the SE rules provide this opportunity. However, the UK has shown little interest in this, as a government consultation on the issue of interest in SE and Societas Privata Europeae (SPE) in 2008 attracted only 14 responses. Therefore, it is unlikely that it will become a more attractive form than the UK private companies form.
At first glance, the UK Government has been sympathetic towards the liberalising approach of the European Union, due to the impact it will have on other Member States. However, as noticed by Cremers and Wolters, the debate on company law reform in the United Kingdom has not been greatly influenced by the European developments, although a number of directives were implemented during and after the last reform process (2011). The main reason for this is that the UK corporate law system has always been at the forefront of innovation, and, as a result, some EU reforms were either modelled after the English model (e.g. The Market Abuse Directive), or they already existed, but not in a codified form (e.g. the abolition of the ultra vires rule).
In conclusion, the shift of Company Law reform focus from the UK to the European institutions has not had a great impact so far on domestic law, but the harmonisation process is far from being over. The consequence of levelling the playing field and harmonising the set of rules that govern Company Law can have the effect of being able to satisfy people’s preferences more than a decentralised system. This can also lead to excessive regulation and an increasing legal uncertainty in an already complex Company Law. Therefore, the drawbacks in how the harmonisation program affects UK Company Law seem to outweigh the advantages.
In order for this to change in the future, the European Commission needs to propose more freedom-enhancing measures. As Gérard Hertig said in a conference in Brussels in 2004, the European Union, through the Commission should ‘have the courage of doing [almost] nothing’.