Two views on whether the Companies Act 2006 was worth the effort

BIS-sponsored evaluation finds it was, but company law academic finds the Act “complex in a way that makes even an airplane look simple”

The Companies Act 2006 (the Act) was ten years in gestation and remains the longest single Act ever passed by the UK parliament. Company law practitioners, immersed in the detail of the Act’s 1,300 sections and 16 schedules, don’t often ask: Was the Act worth the effort?

Two publications have looked at this question recently and reached different conclusions.

The Department of Business, Innovation and Skills (BIS) commissioned a third party research company  to “evaluate the main outcomes of the Act and the consequences of the regulatory changes for companies, shareholders and other stakeholders”.  The resulting report (the BIS Report) was published last year and can be accessed here.  Unsurprisingly, the BIS Report decides that the Act certainly was worth the effort.

Arad Reisberg, Reader in Corporate and Financial Law at University College London, in a paper published in 2010 titled “Corporate Law in the UK after Recent Reforms: The Good, the Bad and the Ugly”, comes to a rather more equivocal conclusion.  Mr Reisberg’s paper can be downloaded here.

The BIS Report

The BIS Report finds that:

“On the whole the changes are not seen as overly burdensome by companies and in particular key deregulatory measures such as the removal of the requirement for private companies to hold AGMs and the greater use of written resolutions have been particularly welcomed by companies and stakeholders, and seen as increasing flexibility”.

“Stakeholders in particular noted a number of positives resulting from the Act including a reduction in bureaucracy, greater privacy for directors and shareholders, greater clarity on directors’ duties and greater engagement with shareholders.”

The BIS Report is a voluminous production with a complex statistical methodology; here is a summary showing its main findings and sources of evidence.

Mr Reisberg’s paper

Mr Reisberg’s paper contains a wide-ranging review of the process by which the Act came into being, as well as a critique of the end result of that process.  The paper contains an analysis (at Part C) of whether the Act has assisted in making the UK an easy place in which to start a small private business, looking at a triple test of whether the Act provides easy access to corporate form, minimum interference with management and appropriate investor protection.  Part D of the paper examines the state of UK corporate law.

Part E of the paper “suggests a number of brief explanations on what went wrong”, including that:

“…the scale of [the] project, the blurred objectives, the confused content and ‘too much details’ – achieved very little and [led] to delayed implementation”

“the ‘weakest link’ in the process [was] pressure groups and lobbying in Parliament which derailed years of deliberations and distorted incentives”

“corporate law was not treated….as part of a bigger and more comprehensive package of reforms in other areas”.

Part F of the paper concludes that:

“what is good in the CA 2006 (i.e. most suitable or right for a particular purpose) is trivial and, at parts, quite bad (i.e. having negative and undesirable qualities). Secondly, what is bad is very bad for business, and quite ugly (i.e. likely to cause trouble, and threatening or ominous) too. Finally, the ugly truth is that reform has made very little difference (the CA 2006 is not ‘fit for purpose’) and has failed not only to deliver on its key objectives but also failed to focus on the real important challenges ahead”

Mr Reisberg makes three suggestions for the future.  Firstly, that there should be a corporate law think tank to assist BIS in its company law deliberations.  Secondly, “selective intervention”, rather than a wholesale reform of legislation, should be preferred. Finally, a statute expressly for private or close companies should be introduced.

In that final recommendation, Mr Reisberg anticipates the work being done at European level on a “Small Business Act for Europe”.

UPDATE 27 June 2012: Everything that’s wrong with the Companies Act 2006

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