The short cut to setting up

Company formation has been simplified.

Setting up a business in the UK has been easier than in most other European countries for a long time.

The Companies Act introduced last year hasn’t changed this – and it promises to make it easier for businesses to operate once they have been set up.

It is more modern, more understandable and more flexible.

Charles Mayo,

Partner,

Simmons & Simmons

The Act’s purpose is to replace – and simplify – thousands of pages of earlier corporate legislation.

It effectively takes into account how small businesses operate – for instance, by making accounting and financial reporting easier for small- and medium-sized enterprises (SMEs), removing the requirement for a company secretary and annual shareholder meetings, and clarifying rules on share capital.

Better company law

The legislation is still substantial, with 1,300 sections, but it’s a significant improvement, according to Charles Mayo, partner at law firm Simmons & Simmons.

“It is more modern, more understandable and more flexible,” he says.

“The end result should be much better company law – and better company law is key to the UK's competitiveness.”

Global best practice

The new legislation, scheduled for implementation before the end of 2008, also aims to bring the way business is done up to the standards of global best practice.

For listed companies – including those listed on the Alternative Investment Market (AIM) – the Act encourages sustainable investment by increasing shareholders’ engagement with the companies they own.

It clarifies existing practice on directors’ responsibilities, for instance, and makes communicating with shareholders easier.

“My view is that the responsible and well-advised director should welcome, not fear, the codification of directors’ duties,” says Mayo.

“It seems to me that what matters is the quality of decision-making.”

The common-sense approach

One reason for the Government’s light-touch approach is the fact that the legislation is the result of extensive consultation with business.

The Act has the backing of, among others, the Confederation of British Industry (CBI) – the UK’s chief employers’ organisation.

A second reason is the UK’s long tradition of common-sense, proportional regulation.

A trend towards clarity

For example, at the 2005 CBI conference Gordon Brown, who was Chancellor at the time, discarded the requirement that listed companies produce an operating and financial review (OFR) detailing non-financial risks.

Instead, the Act simply requires that companies disclose information about their key suppliers.

In short, the legislation changes only what needs to be changed.

In drafting it, the UK Government learned from the impact of more draconian regimes, such as Sarbanes-Oxley, on inward investment.

In fact, the clarification of rules – on, for example, AIM listings – is more likely to attract than discourage UK listings, because it boosts some of the UK regulatory regime’s existing advantages, including transparency.