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In its December 2012 action plan on company law and corporate governance, the European Commission announced that it will be considering how to improve the environment for SMEs, and it seems likely that as part of this exercise it will explore the possibility of introducing a new corporate vehicle for single member companies. Separately, the idea of a new corporate form designed specifically for individual entrepreneurs who would be both the sole shareholder and the sole director has been on the domestic agenda in the UK for some time.
Both ideas are attractive in theory, and whilst the authorities will probably face some difficulties if they decide to press ahead with them, the Commission, in particular, may have the political will to turn its version of a bespoke single member company into reality.
An appetite for reform?
Over the past few years, the corporate governance framework has received more attention than the wider company law regime. As a consequence of the financial crisis, the role of listed companies and their directors has been under the spotlight both in the UK and in the EU. Domestically, of course, we are still recovering from the upheaval caused by the introduction of the Companies Act 2006, and there has been little appetite even to contemplate any further significant reforms to the company law regime.
Company law is, however, too important to the proper functioning of the economy to be ignored altogether. The UK government has, in recent years, undertaken an exercise to assess the impact of the Act, and has consulted on a number of specific issues, including the contents of statements of capital and the rules governing the registration of company charges. Of particular interest as far as SMEs are concerned is the statement on the BIS website that it intends to consider 'whether a new corporate form for single person businesses could reduce costs for small entrepreneurs'. It should be noted that the reference here is to a sub-category of single member companies, namely those which have a single member who is also the company's sole director, and that therefore a new corporate form along these lines would presumably not be available for use in the standard group context (since the Companies Act 2006 requires a company to have at least one director who is a natural person (section 155)).
The Commission has been even more active on the company law front. In 2011, it published an in-depth report by a group of experts on the future of EU company law (Report of the Reflection Group on the Future of EU Company Law (5 April 2011)), and the report was followed up in February 2012 with a public consultation on company law, in which the Commission sought views as to the areas in which it should focus its efforts. Amongst other things, the experts' report recommended that Member States should be required to introduce a simplified corporate form designed for companies with only one member, and this idea was highlighted in the public consultation, in the context of possible alternatives to the troubled project to develop a European private company. In contrast to the emphasis in the UK on the position of individual entrepreneurs, the EU appears to be taking a broader view, seeking to improve the environment for SMEs generally, whether they take the form of groups of companies or single person businesses.
The December 2012 action plan on European company law and corporate governance marks the latest stage in the Commission's work in this area. The action plan covers considerable ground as far as corporate governance issues are concerned, but adopts a more focused approach in relation to company law, dealing mainly with measures designed to facilitate cross-border activities. It is in the context of this discussion of cross-border issues that the action plan comments as follows:
The action plan does not contain an explicit promise to introduce a new corporate form, and indeed feedback to the February 2012 public consultation suggests that stakeholders are not convinced that a new vehicle for single member companies is required. In light of the recommendation of the April 2011 experts' report, however, it would be surprising if the Commission did not give the idea of a new vehicle serious consideration.
Thus, whilst it is by no means certain that concrete proposals will eventually materialise, possible reforms in this area are undoubtedly on the agenda, both in this country and in the EU.
The nature of the possible reforms - EU
As noted above, the primary goal of any reforms at EU level would be to make it easier for SMEs to operate across the EU's internal borders.
To this end, the April 2011 experts' report suggested that a directive could:
The key to realising the full benefit of such a directive would be to introduce detailed measures harmonising the substantive law applicable to the entity in each Member State, and this is where the difficulties lie.
True, it would be relatively easy to agree on some of the broad areas which the measures should address. For example, they would surely need to contain the following:
However, it would in all likelihood be extremely difficult to reach agreement amongst the Member States on the detail of these provisions. Would the new corporate form be subject to reduced financial reporting obligations? Would it be subject to a minimum capital requirement? What would be the rules governing the appointment of directors? It seems likely, too, that there would be plenty of scope for disagreement around the fringes of the areas detailed in the bullet points above. For example, should the harmonised measures address the thorny issue of directors' duties? Should they seek to impose a uniform framework on employee participation? The fact is that the more detailed the proposed harmonisation measures, the more likely it is that agreement will prove to be just as elusive as it has been in connection with the European private company.
The alternative approach would be to shy away from imposing too prescriptive a substantive regime, and it may be the case that the mere introduction of a new corporate form in each Member State would produce some benefits, even if the legal rules applicable to such entities were not harmonised to any great extent. A UK SME seeking to establish wholly-owned subsidiaries in France, Finland and Greece, for example, might be pleased to find that there was available in each of those jurisdictions a corporate vehicle designed specifically with single shareholders in mind, even if the subsidiaries were not subject to identical rules on, say, capital maintenance.
Whilst it is open to debate whether the benefits of such a light-touch approach would be worth the effort of introducing new legislation, it is quite conceivable that the Commission would regard it as a pragmatic solution to some of the difficulties facing SMEs, and perhaps even as a first step towards a future fully-harmonised regime.
The nature of the possible reforms - UK
A purely domestic move towards a new corporate structure for single person businesses would be designed not so much to promote cross-border activities as to assist individual entrepreneurs in the UK, and it would face a different set of problems, too. The difficulties involved at EU level in reaching a consensus amongst Member States with different legal traditions and different priorities would, of course, not arise, but for the UK reforms to be worth undertaking they would need to create a considerably less burdensome regime than that which applies to private companies generally, and this would involve a fundamental re-thinking of the nature of a company.
The sorts of question which would need to be addressed might include the following:
Quite apart from these difficult conceptual questions, the task of implementing any substantive changes would be daunting, not least because the Companies Act 2006 is still regarded as being very much in its bedding-down stage.
It is difficult to say whether the UK government is prepared to undertake a reform project which, though discrete in nature, might well turn out to be fairly substantial in terms of the amount of work involved. The project would fit neatly into its on-going efforts to cut red tape in the interests of boosting the economy, and there is no doubt that any measure designed to assist small entrepreneurs would be widely welcomed. Given the potential scale of the project, though, and given that the Companies Act 2006 did, after all, introduce measures designed to reduce the burden on smaller companies generally, the government may feel that this a reform which can remain on the back-burner for a little while longer.
It is impossible to say with any certainty that a new corporate vehicle - whether for single member companies generally or for single person companies specifically - is on the horizon. Both the EU and the UK government are eager to promote SMEs, and a new corporate form might well help them to achieve that aim, but the process of developing a new vehicle would face various hurdles. Perhaps the most that can be said at present is that the idea remains on the agenda, and that, in the short term at least, the Commission may be more likely to press ahead with reforms than the UK government.
Nigel Banerjee can be contacted at email@example.com.
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