Corporate Clips

corporate update - european public limited liability company regulations; directors liability

May 2004

In this edition of Short Lines, we examine recent developments in two areas we have looked at in earlier Short Lines - the creation of the pan-European Company (the "Societas Europaea" or "SE") and the law relating to directors' liability.

Setting up a SE - Implementation

As outlined in February 2002[i] , in 2002 the EU after years of stalling adopted the European Company Statute (ECS), which provided the legal framework for a new form pan-European public limited liability company, the Societas Europaea. Linked to the ECS is a Directive concerning employee involvement in the SE. The ECS comes into force across the EU this year, on 8th October.

The SE enables pan-European businesses to have one corporate vehicle with a common management and reporting structure operating under one set of legal rules, without the need for a network of branches and subsidiaries. It is hoped that this will facilitate the operation of pan-European businesses.

In order to effectively implement the ECS and transpose the linked Directive into UK law, a draft statutory instrument (SI) has been produced by the UK Government[ii]. The SI sets out the procedures for registering a SE at UK Companies House, the penalties and sanctions for contravention of the ECS and which of the 31 options available in implementing the ECS the Government has decided to adopt.

The overall UK approach to implementation has been to apply a 'light touch' and, where possible, align the provision in the SI with existing company law relating to UK public limited liability companies (PLCs) (e.g. by providing that SEs must have a minimum of two directors but not prescribing a maximum number).

One of the main decisions facing the Government in implementing the ECS was whether to adopt a 'European' two tier board structure for the SE - a board exercising management functions and the other exercising a supervisory role in relation to those functions - as the ECS allows this where no provision for a two-tier system is made in national law. Whilst UK company law dictates neither a one-tier nor a two-tier board, it generally assumes a one tier board.

Given that there is nothing in UK company law preventing a two tier board (and a company can implement such a structure through its constitutional documents), the Government decided not to adopt a two tier board structure, taking the view this would be overly prescriptive.

The Government hopes that its light touch approach coupled with the alignment of the SI with existing company law in relation to PLCs will make the UK an attractive European jurisdiction in which to incorporate an SE.

Director's Liability Update

As business life for directors continues to become more litigious, a key concern for directors is how they can limit their personal liability.

The existing law on exempting directors from liability fails to adequately address changes in the business environment over the last 70 years as it date backs to the 1929 Companies Act when the standard of care and skill required of directors was lower. In particular, it does cater for the fact that a director may face a legal action for breach of the duty of skill and care[iii] even where he has acted in good faith and in the belief that his actions were in the best interests of the company. Coupled with this deficiency, there are widespread concerns about the coverage and cost of insurance against such litigation.

The UK Department of Trade and Industry (DTI), recognising these issues, has recently published a consultation paper on directors' and auditors' liability[iv] . This paper builds on the work of the Company Law Review (July 2001) ( CLR )[v] and the Higgs Review (January 2003)[vi]

The existing law on exempting directors from liability contained in section 310 of the Companies Act 1985 prohibits a company from generally exempting its officers or its auditors from or indemnifying them against liability for any negligence, default, breach of duty or breach of trust in relation to the company. However, it allows the company to take out directors and officers (D&O) insurance although it does not allow an excess to be paid by the company.

In the consultation paper, the DTI have put forward two alternatives to the substance of the existing law in areas such as negligence and exploitation of corporate opportunities but not fraud or illegal conduct:

Adopting the recommendations of the CLR these recommendations include:

Expressly permitting a third party to indemnify a director against liability. It is uncertain at present whether a parent company can give indemnities to directors of a subsidiary company and vice versa.
Allowing a company to indemnify a director in advance against the costs of defending proceedings (at present a director can only be indemnified if he successfully defends such proceedings). If the director were unsuccessful, he would have to reimburse the company.
Allowing the company to indemnify the director against any "excess of loss" requirement in a D&O liability insurance policy.

Reforms based on the US Model . A radical departure from the existing law would be to reform the law along the lines of the US model. This would permit a company to eliminate or limit the liability of directors to the company or its shareholders, with shareholder approval, for monetary damages for breaches of certain duties such as the duty of care. Directors would also be indemnified by the company where they have acted in good faith and with a reasonable belief the conduct concerned was in the best interests of the company.

The consultation, which occurs against the backdrop of widespread recognition that the existing law has not kept up to pace with the realities of business life, is welcome. However, given that the options on the table considerably diverge and the continued delay in reforming a number of areas of company law, it remains to be seen when the Government will be in a position to present a bill before Parliament

Useful URLs

The European Public Limited Liability Company Regulations
http://www.dti.gov.uk/cld/auditors_directors.pdf
DTI Consultation on Director and Auditor Liability
http://www.dti.gov.uk/cld/final_report/index.htm
Modern Company Law Report
http://www.dti.gov.uk/cld/non_exec_review
The Higgs Review

Charles Claisse/Nadia Christodoulo

[1] Short Lines, The European Company and Electronic Communications with Shareholders, February 2002

[2] http://www.delni.gov.uk/consultDebate/files/AnnexB_Draft_European_
Public_Limited_Liability_Regulations_2004.doc

[3] /Short_Lines/CorpGovern_TheImportance_0403.htm

[4] http://www.dti.gov.uk/cld/auditors_directors.pdf

[5] http://www.dti.gov.uk/cld/final_report/index.htm

[6] http://www.dti.gov.uk/cld/non_exec_review