Corporate law full circle, yet still inadequate?

"Other recommendations include a continuation of the present prohibition of no-par shares, a requirement that share premiums (paid-in surplus) be made unavailable for dividends, that secrecy as to corporate control be prevented by requiring disclosure of their identity by persons who are beneficial owners of substantial shareholdings, and that certain changes be made in the rules governing shareholders' meetings and in those which relate to winding-up of companies." (my emphasis added)

You might be forgiven for thinking that this is a quote about recently proposed company law reform. The reference to identifying beneficial owners of shares is a contemporary issue proposed to reduce the possibility of tax avoidance and evasion. Transparency being the panacea to all of life's problems, if you believe Transparency UK and Tax Research UK.

However, this is not a quote about the recent debate, it is in fact a response to the 1945 Cohen Report on Company Law Amendment by Professor Dodd at Harvard University in 1945 Harvard Law Review Vol 58 p1258. 71 years ago this was proposed and it was knocked back. Recent debate after the decision Eckerle [2013] EWHC 68 also raised questions not only about who beneficiaries were but also if they were sufficiently protected from investment intermediaries who legally hold the shares.

The response is, company law is not working sufficiently. Transparency of who owns these companies and shares, more liability on those who act for companies or shareholders.

Yet, far from me believing that transparency will resolve the matter, it is not even a company law problem and therefore, reforming company law will not solve the problem. The problem here is tax law.

Take, for a moment, that a register of beneficial shares is introduced. Who is actually going to be on that register? Will you or I be on that register as beneficiaries of shares invested in through our pension schemes? What about wealthy individuals in other jurisdictions where kidnapping and money laundering are much more prevalent? There would have to be some exceptions and a defined scope of what is disclosed, when and where. Those companies and trusts that are legitimately run should not be forced to disclose private wealth either, whether on or off shore. Those exceptions and scope will be exploited and do nothing to prevent individuals intent on avoiding or evading tax from doing so.

It is difficult to see why we should treat a company differently from a natural person. If we say all beneficial interests in shares have to be disclosed then why not force disclosure in other senses where a natural person may simply hold someone's wealth for them not through shares but through non-dom status or simply being domicile in a different jurisdiction? I speculate, but there are probably other ways of avoiding tax and a beneficial ownership register is unlikely to have much effect. It might deter some politicians and public figures and companies but for the majority of smaller fish, would we really be concerned? Would these bigger companies just not exploit other means minimising their tax liabilities?

Prest v Petrodel Resources Ltd [2013] UKSC 34 sort of brought us full circle in company law from Salomon v Salomon [1897] AC 22. A company is a separate legal entity, as recognised in Salomon but the question arose as to when those behind it could be liable for the company's obligations and liabilities. Essentially, the answer was never and this was the issue in Prest where it was all but confirmed that the company is responsible just like you or I for our obligations and liabilities, and the courts would not hold those behind the company responsible for the company's liabilities and obligations. Thus, even if there is a beneficial register, company law would not hold the beneficiaries liable for anything the company has done, so it is not company law that requires any reform. If you want to make these individuals liable it is tax law that requires reform. Arguably, tax law might not even need reform, since if the company is used to evade tax, which is unlawful, then the individuals would be liable in their own right. However, if they want to make tax avoidance unlawful then tax law needs to change. If they want to tackle tax evasion then there needs to be cross-border co-ordination on tax law. It is not company law that is inadequate.

Without going in to more detail, if there wants to be more enforcement then there needs to be better enforcement. Over the years the state has been taking a more hands off approach, expecting shareholders to do more but equipping them with no tools or incentives to do so. So all of a sudden the state is realising that they need to do something and improve their own enforcement powers. It was 1945 as well that Cohen recognised that shareholders were inadequate monitors and the Board of Trade (now BIS) had ineffective powers in the Companies Act 1929 to investigate misfeasance.

In short, one should take great caution in listening to the drum that Transparency UK and Tax Research UK are beating very loudly. These problems have come up before and just disclosing everything is not an appropriate answer. Their rhetoric is to marginalise anyone through brash language who does not agree with them, and do not adequately engage with criticisms or concerns. If you do not believe me about the brash language just listen to BBC Radio 4's Today show on the 15th April at 08:10 where Richard Murphy of Tax Research UK speaks and 12th April from 08:45 where Robert Barrigton of Transparency International UK speaks, both highly dismissive of any argument against transparency. Indeed Murphy argues that he is a Professor in International Political Economy, and contends markets operate better with greater transparency... well that is one argument, his professorship status has little to do with that though, and it certainly is not the case that full transparency makes for a better market, particular in a liberal market economy where competition is more important than a co-ordinated market economy. It is a problem with "rational" economics and economists. The fact is the argument for transparency is not as simple as market value and financial gain, maximising returns in the short term. It is a complex issue with competing interests and considerations that cannot be boiled down to 0s and 1s.


This has very much been the start of a new project and getting the ideas down. Let's see where this goes...