Company law: where do the main political parties stand?

With the general election looming, this briefing looks at what the three main political parties have proposed for corporate governance, takeovers, small and medium-sized businesses, and regulation in their recent policy statements and election manifestos. We discuss some of the main proposals below and assess the possible implications their proposals may have.

1. Corporate governance

The main political parties’ proposals were made in the aftermath of the Walker Review, an independent review of corporate governance in the UK banking industry, in November 2009.

Labour

The Labour Government welcomed the Walker Review, with Lord Myners, the Financial Secretary to the Treasury, commenting that the Government had to address “the weaknesses in board practice, risk management, control of remuneration and exercise of ownership rights identified by the Review…” In its manifesto, the Labour Party states that it will:

• Strengthen the Companies Act 2006 “where necessary” in order to create strong businesses comprising of skilled managers, accountable boards, and committed shareholders with long-term commitment;
• Strengthen the UK’s Stewardship Code for Institutional Shareholders, requiring institutional shareholders to declare how they vote, and for bank remuneration policies to be approved by shareholders.

Conservatives

The Conservative Party also welcomed the Walker Review, but criticised it for not going far enough. The Party’s manifesto says that it will: 

• Abolish the current tripartite system of regulation – abolish the FSA and put the Bank of England in charge of prudential supervision.

Liberal Democrats

The Liberal Democrats also supported the Walker Review, but, like the Conservative Party, did not believe it went far enough. Vince Cable, the Party’s Treasury spokesman, commented at the time that the recommendations should be compulsory, not voluntary.  

2. Takeovers

The recent controversial Kraft/Cadbury takeover has brought the subject of takeovers back into the political sphere.

Labour

Although at the time, the Business Secretary, Lord Mandelson, said the takeover was something that had to be decided by Cadbury’s shareholders, he has now changed his position and in the last couple of months has called for a wide-ranging review of UK takeover law. The Party’s manifesto includes some proposed reforms which would have a huge impact on takeovers: 

• Raise the threshold of shareholder support for company takeovers to a two-thirds majority, rather than the existing 50 per cent plus one share majority;
• Examine the possibility of “limiting votes” to those on the voting register before the bid is announced;
• Ensure that bidding companies are “more transparent” about their long-term plans for the business they want to takeover and their advisers’ fees;
• Require bidding companies to set out how they will finance their bids;
• More disclosure of who owns shares in the companies;
• Extend the “public interest” test in UK merger control so that it is applied to potential takeovers of infrastructure and utility companies.

Conservatives

The Conservative Party’s manifesto does not explicitly deal with takeovers. However, Shadow Business Secretary, Kenneth Clarke, commented that the Cadbury takeover was a matter for its shareholders.

Liberal Democrats

At the time of the Cadbury takeover, the Liberal Democrats were critical of the Government’s willingness to allow a state-controlled bank, Royal Bank of Scotland, to finance Kraft’s bid. Its manifesto proposes to: 

• Ensure that “takeover rules serve the UK economy” by restoring a public interest test, so that a broader range of factors, other than competition, can be considered by regulators when takeovers are proposed;
• Ensure that the outcome of takeover bids are determined by the long-term shareholder base.

3. Small and medium-sized businesses

Labour 

• New UK Finance for Growth, which will use £4bn billion of public and private funds to help businesses looking to develop and grow, in exchange for an equity stake in the company;
• Growth Capital Fund, announced in the last Budget, will inject money into, small and medium-sized companies in businesses with turnovers of between £1m and £25m.

Conservatives

Although there are no direct manifesto commitments, the Conservative Party recently commissioned a report by the American entrepreneur Doug Richard (an ex-‘dragon’ on the BBC’s Dragon’s Den television programme). His report, Small Business and Government: the Richard Report, proposed, amongst other things, the extension of the Enterprise Investment Scheme, which helps smaller trading companies to raise money by offering tax reliefs to investors who purchase shares in the companies.

Liberal Democrats

Establish Local Enterprise Funds and Regional Stock Exchanges. Local Enterprise Funds will help local investors put money into growing businesses in their own locality. Regional Stock Exchanges will allow businesses to access equity without the heavy regulatory requirements of a London listing;

• Reintroduce the Operating and Financial Review to ensure that directors’ social and environmental duties will be covered in company reporting.

3. Regulatory burden

Labour 

• Seek to reduce the costs of regulation by more than £6bn by 2015.

Conservatives

The Conservative Party policy document Regulation in the Post-Bureaucratic Age, published in October 2009, criticises the rise in regulation since Labour came to power in 1997, and proposes to: 

• Reduce the burden of red tape on business with a ‘one in one out’ rule for new regulation;
• Force each government department to reduce the regulatory burden by 5 per cent each year by eradicating costly and inefficient regulation.

The Conservative manifesto reiterates the need to cut the regulatory burden, and also to: 

• Reduce the number of forms that need to be completed to register a new business. It aims to create a ‘one-click’ registration model, so that Britain becomes the fastest place in the world to start a business;
• End restrictions on tenants in social housing starting a business from their homes.

Liberal Democrats 

• Cut regulation by assessing the cost and effectiveness of regulations before and after they are introduced;
• Operate a ‘one in one out’ system so that for every regulation introduced, another one is scrapped;
• Change the ‘culture’ of regulators to help, not hinder, business.

Comment

The election manifestos and policy statements of the three main parties have revealed some common ground and one big difference between them.

All the parties have welcomed the recommendations of the Walker Review (even if they don’t all think it has gone far enough), put forward plans to financially help small and medium-sized businesses, and made commitments to cut regulatory burden.

However, differences emerge on the issue of takeovers – a sensitive subject in the wake of the Cadbury takeover by Kraft. Labour has promised to bring in a ‘Cadbury law’ to protect British companies from foreign takeovers, whilst the Liberal Democrats want to create a ‘public interest’ test to ensure that issues other than just competition are taken into account when deciding whether a takeover should be allowed. The Conservatives, on the other hand, have rejected calls to change the UK takeover rules at all.

The proposed changes by Labour and the Liberal Democrats, if brought in, would have a big impact on how takeovers are conducted and potentially make it more difficult for bidders to succeed. Consequently, business leaders, as well as lawyers, are awaiting the outcome of the election with even greater interest than usual.