

With these aims in mind, on 15 July 2013, the Department for Business, Innovation and Skills (BIS) published a discussion paper entitled “Transparency & Trust: Enhancing the transparency of UK company ownership and increasing trust in UK business”, which puts forward a number of proposals aimed at improving transparency in the ownership and control of companies in the UK and strengthening the law surrounding the disqualification of directors. The paper is open for comment until 16 September 2013, following which the Government will publish its findings and introduce enabling legislation.
Financial liability for reckless directors already exists in some jurisdictions. For instance, in the US, directors of telecommunications company WorldCom paid approximately US$18 million to investors following the company’s bankruptcy in the early 2000s.
As a means of encouraging responsible corporate governance, the paper proposes amending directors’ statutory duties currently contained in the Companies Act 2006 for certain key sectors, such as banking. Under the new system, directors of banks would have a primary duty to promote financial stability over and above the interests of their shareholders.
This proposal follows on from recommendations made in June 2013 by the Parliamentary Commission on Banking Standards, according to which the UK Corporate Governance Code should be amended to require the directors of large banks to prioritise the “safety and soundness” of the bank over the interests of shareholders.
The current rules governing the disqualification of directors are examined in detail in the discussion paper. In particular, the paper suggests the following reforms:
The paper expresses concerns over the transparency of pre-pack administrations. A pre-pack occurs where negotiations for the sale of a company’s business and assets are undertaken prior to administration. The sale is then executed when the administrator is appointed or shortly thereafter. BIS considers that pre-packs have a tendency to result in businesses being sold at under value, notably to previous owners or connected persons with little or no open market valuation. In order to combat this perceived lack of transparency, BIS has launched an independent review into pre-pack administrations. The review will specifically examine whether pre-packs provide value for creditors and encourage growth. The review is expected to conclude in early 2014.
BIS has also announced plans for an independent review of insolvency practitioners’ (IPs) fees. The aim of the review is help unsecured creditors (or even debtors) exert more effective control over fees. The complaints procedure for those dissatisfied with the actions of an IP is also set to be reformed.
BIS envisages that the registry would be maintained by Companies House, however, companies would be placed under an obligation to provide information in respect of the names and addresses of beneficial owners, and details of the shares in which they are interested. It is envisaged that these details would be provided to Companies House upon incorporation and then on a periodic basis. Further, section 1112 of the Companies Act 2006 would apply in respect of information provided by a company to Companies House. It would therefore be an offence to provide false or misleading information knowingly or recklessly.
At present, BIS considers that companies traded on the Main Market of the London Stock Exchange would be exempt from the above filing requirements since such companies are already subject to strict disclosure rules. Other types of company may also be exempt.
The discussion paper is seeking feedback on whether the central register should be made publicly available or whether access should be restricted to certain law enforcement and tax authorities and other regulated entities.
The discussion paper also proposes that Part 22 of the Companies Act 2006 (“Information about interests in a company’s shares”) be extended so that it applies to all companies (at present it only applies to public companies). To ensure that this information is obtained, the paper considers imposing a requirement on companies to identify any beneficial owner or persons acting together and holding more than 25% of the company’s shares or voting rights. If the company is not able to identify a beneficial owner for any reason, the paper proposes giving companies the option of applying to court for assistance in this regard. The paper suggests that companies should be required to notify Companies House if they make an application to the court in these circumstances.
The discussion paper proposes banning the creation of new bearer shares (that is, shares which belong to whoever holds the physical share warrant). Such shares are seen as reducing the transparency of ownership as legal ownership may be transferred without the need to change ownership details on the register of members. The paper also proposes setting a time limit within which existing bearer shares should be converted into ordinary registered shares.
While the paper acknowledges that nominee directors can be used in legitimate commercial scenarios, it points out that they can also be used as a means of masking the true owners of companies. Accordingly, the paper proposes a number of different options regarding the use of nominee directors. The options include improving awareness of directors’ duties amongst nominee directors and creating a requirement that nominee directors disclose both their status and who they act for to Companies House, breach of which would result in automatic disqualification from acting as a director.
Corporate directors are often incorporated offshore in jurisdictions with minimal public reporting requirements. As such, they are seen to result in complex corporate ownership structures which hide the beneficial owners’ real identity. In the interests of promoting transparency, the consultation paper proposes a blanket prohibition on corporate directors.
Further, at present the proposals are only UK-wide, although it is hoped that other countries, in particular G8 countries, will follow the UK in adopting similar measures. If the UK is the first country to adopt full corporate transparency, there is a risk that it might suffer a competitive disadvantage. The UK’s offshore centres in particular may see their clients leave for countries such as Hong Kong and Singapore which are under less pressure to meet corporate openness requirements.
The reforms have come under fire from the Confederation of British Industry (CBI) on the grounds that they do not provide a proportionate response to the problem of promoting responsible capitalism. Katja Hall, CBI Chief Policy Director, has criticised the proposed reforms to directors’ duties on the basis that requiring directors in the banking sector to single out and prioritise “safety and soundness” of the bank over and above other important directors’ duties will lead to an inconsistent and piecemeal approach to directors’ duties across the UK economy.
The CBI also believes that the proposed reforms to directors’ disqualification regulations are excessive and unnecessary given that there are already tough criminal sanctions in place for directors who engage in fraudulent behaviour. The existing rules also provide for clawback pay from individuals if they are found to have mis-managed a company. As such, the CBI believes the focus should be on enforcing laws which already exist rather than on introducing a whole new set of procedures.
The Government’s proposals are still in early stages and, as with all proposed legislation, the devil will be in the detail of the final version. The Government’s current plan is to introduce the reforms before the end of the current Parliament, which is likely to be some time in early 2015. However, given that the results of the consultation process will need to be collected and considered, it seems unlikely that the Government’s plans will become a reality. As 2015 draws nearer, the focus of the Government’s attention will shift to election campaigning. The proposals are therefore unlikely to get the attention they need to make it onto the statute books before the next election. For the moment, although it is a question of watching this space, it seems there is a long way to go before the reforms will make their mark on the UK’s corporate landscape.
For further information, please contact Nick Hutton, Partner, on +44 (0)20 7264 8254 or nick.hutton@hfw.com, or Alex Kyriakoulis, Partner, on +44 (0)20 7264 8782 or alexis.kyriakoulis@hfw.com, or your usual HFW contact. Research conducted by Tessa Huzarski, Trainee.
Download a PDF version of ‘Breaking the Glass: The UK’s plans for greater corporate transparency’