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New rules on corporate directors

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04/02/2015

The Small Business, Enterprise and Employment Bill (the Bill) is currently working its way through Parliament and is likely to become law in the Spring.

The law currently provides that each company must have at least one director who is a natural person but it does not prohibit the use of corporate directorships (section 155). One of the Bill’s provisions is to insert a new section (section 156A) into the Companies Act 2006 which will require all directors to be natural persons and to prohibit the appointment of corporate directors. Any appointment purportedly made in contravention of this provision will be void.

On 27 November last year, the Government published a consultation paper seeking views on the extent to which there should be exceptions to the proposed blanket prohibition. The consultation closed on 8 January.

The Government accepts that there is a strong argument for permitting companies with shares admitted to trading on a regulated market to be permitted to appoint corporate directors. Regarding the subsidiaries of a quoted parent, the Government’s position in the consultation is that there are strong arguments for allowing dormant and wholly owned subsidiaries to appoint corporate directors but in other cases the nature of the parent/subsidiary relationship will have to be considered.

A regulated market does not include AIM, and the Government is seeking views on the extent to which any exceptions should be extended to companies whose shares are traded on other prescribed markets. For public companies whose shares are not traded, the Government is asking whether an exception should apply and, if so, whether the exception should apply only to large companies or only to large companies in a corporate group.

For private companies, the Government is suggesting that any exception be dependent upon the size of the company. Any exception should not, however, apply to shell companies which, in the Government’s view, are too easily used as vehicles for criminal activity.

Corporate directors are frequently used in the context of corporate groups with parent companies frequently appointing a nominee to the board of their subsidiaries. The Government’s proposal in these cases is that each case will need to be considered on a case-by-case basis, with account being taken of the nature of the subsidiary, the parent/subsidiary relationship and of the proposed corporate director.

The Government is not proposing to change the existing regime for LLPs.

There will be a transitional period for companies with corporate directors, by which, after one year of the new legislation coming into force, any remaining corporate directors will cease to be directors (subject to the statutory exceptions, as finally agreed).

WM comment
The Government does not appear to be considering an exception for investors who appoint a nominee corporate director to represent their interests in their investee companies.

Many large groups use corporate directors. So too do pensions trustees who often have a corporate directorship. They should “watch this space” closely to find out to what extent they may benefit from an exception to the rule prohibiting corporate directorships.

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