Slaughter and May‘s Nigel Boardman, James Shirbin and Andrew Blake argue that English law needs drastic reform to remain internationally competitive.
English law occupies a privileged position. Thanks in significant part to the City’s role as a major global financial centre, England has become the jurisdiction of choice for many enterprises and deals (and subsequent disputes) that may otherwise have little territorial connection to the UK. The primary beneficiaries of this happy arrangement have been London’s major commercial law firms, who have received a steady flow of major transactional and litigious work.
We cannot, however, assume that this is the natural and permanent order of things. Financial hubs, driven by the relative rise and decline of key markets, may shift. Other jurisdictions may seize the initiative, if they have not already, by enacting reforms that attract more business to their shores. If English law is to remain pre-eminent, it must also be commercially attractive, which means that it cannot afford to continue indulging costly inefficiencies that do nothing to safeguard core legal principles.
Consider, for example, the unduly onerous disclosure obligations imposed on a company conducting a rights issue. Any such raising which results in a 10% or more increase in the issuer’s share capital necessitates a prospectus, typically requiring eight or more weeks’ preparation time and potentially costing millions of pounds. If the issuer must also hold a general meeting in connection with the rights issue, the timetable will be further extended. The result is that raising further capital from a company’s own shareholders is a protracted and costly process.
As a matter of policy, this obligation to provide a prospectus appears unnecessary, inefficient and without any obvious benefit, particularly when the issuer is main board-listed. A rights issue is primarily an offer to existing shareholders. The continuous disclosure regime means that shareholders, and the market generally, should already have sufficient current information about the company to know whether they wish to increase their investment. Removing the requirement for a prospectus would also reinforce the position of pre-emption rights as a cornerstone of English company law by simplifying the process for companies to make offers to their existing shareholders.
Australia – a jurisdiction closely comparable to this one – has already embraced this concept. Since 2007, a listed Australian company which confirms that it has published all price-sensitive information it holds can undertake a rights issue without a prospectus. The only other documentation required is a straightforward circular setting out the terms of the offer to shareholders and the raising’s effect on the control, financial position and future plans of the company.
By comparison, recent efforts here to reform the prospectus requirement for rights issues are manifestly inadequate. The proportionate disclosure regime introduced in 2012 as part of the implementation of the EU Prospectus Directive merely removes some of the (fairly mechanical) content requirements for a rights issue prospectus by a main board-listed entity, leaving the greater part of this unnecessary burden in place.
Additionally, Australian companies conducting pro rata capital raisings face no requirement to obtain shareholder approval, regardless of the size of the offer. They can also conduct ‘accelerated’ offers under which large institutional investors are given only a few days to decide whether to follow their rights, with retail shareholders allowed a longer period. This means that the bulk of the funds sought can be secured rapidly, which in turn delivers certainty and reduces underwriting fees.
By contrast, English companies conducting pro rata issues must keep them open for all shareholders, and subject to the volatile whims of the market, for at least 14 days. Although innovative structures which may achieve a similar result to an accelerated rights issue – such as a placement with a clawback by way of open offer – are not unknown here, they are comparatively and unnecessarily unwieldy. The prospect of accelerated offers to large wholesale investors, raised as far back as the 2008 report of the Rights Issue Review Group, remains unrealised.
THE LITIGATION COSTS SPIRAL
An even more obvious and urgent need for reform exists in relation to major commercial disputes, where the rules of disclosure have failed to keep up with technology and business practice and become unfit for modern litigation. Because of advancements in electronic communication, the amount of documentation and other data in existence has increased (and continues to increase) exponentially.
In large commercial cases, disclosure has too often worked as follows. One side spends vast amounts of time and money identifying documents potentially relevant to the dispute. In order to avoid any hint of judicial criticism or, on occasion, for more cynical reasons, they then disclose a list of documents which far exceeded those required to be disclosed. Next, the other side spends vast amounts of time and money sifting through the documents disclosed. Witnesses and experts feel compelled to comment on this mountain of material. Trial bundles grow, sometimes to several hundred files, and trial estimates lengthen. Costs spiral, and the stakes become higher, with the losing party ultimately required to foot an astronomical legal bill.
Although this state of affairs is clearly unsustainable, recent efforts to reform the disclosure process fall some way short of what is required to effect a meaningful and necessary change. Consider Lord Jackson’s reforms, implemented in 2013, which made it so that standard disclosure is no longer the default rule in high-value litigation. Instead, having seen disclosure reports produced by the parties, the court chooses from a menu of options, which includes, along with several other options, the old approach.
While these changes should be welcomed for drawing attention to the issue, and for forcing judges and lawyers to consider disclosure early in proceedings, what is needed to keep English law commercially viable and competitive is a more radical departure from the old rule. It remains all too easy for judges to order standard disclosure, and send the parties into a costs spiral. If this becomes standard practice then the only appreciable effect of the recent disclosure reforms will be to add an extra layer of costs in producing a disclosure report.
The most recent ‘Doing Business’ report by the World Bank ranked the UK 36th in the world for enforcement of contracts. Such figures must no doubt be taken with a pinch of salt, but the numbers remain staggering. Enforcing a low-to-mid-value contractual claim in the UK typically costs 39.9% of the value of the claim. This compares unfavourably with Germany (14.4%), France (17.4%), Australia (21.8%) and even the US (30.5%).
In an information age characterised by ever-increasing numbers of electronic documents and records, we must move away from the idea that justice can only be done by an all cards on the table approach. It may be true that some commercial parties are happy to fork out for comprehensive disclosure, but there is only so much that most parties will be willing to take before they decide to litigate elsewhere. We must also remember that we are not just seeking to attract multinationals with bottomless pockets – we would also like England to be home to smaller, more dynamic businesses, which may be less willing or able to throw millions of pounds at a disclosure exercise.
One solution would be to fix the level of costs recoverable for disclosure. Another would be to follow the German system, in which there is no disclosure until a pleaded fact is contested, at which point the parties must reveal the documents upon which they rely.
A similar approach, which may offer the best way forward, is to follow the International Bar Association rules, which are frequently used in arbitrations. Each party discloses the documents upon which it relies. The parties are then entitled to submit requests for specific disclosure on narrow grounds. In other words, it is only documents crucial to the case as litigated that are disclosed.
REFORM OR DECLINE
In the short term, inefficiencies in undertaking capital raisings, settling commercial disputes and other legal processes create a financial benefit for London’s commercial law firms – more disclosure for fundraisings or in litigation necessitates more chargeable hours by more lawyers. On a broader and longer view, however, failing to address the progressive creep of ever greater legal and regulatory burdens risks endangering the appeal of English law, and thereby impeding the flow of commercial dealings governed by it – the lifeblood on which the continued success of those advisers depends.
It is, of course, beyond the power of lawyers in private practice to alone institute such reforms. They can, however, lead the way in making the case to both English and European legislators and regulators that real changes are required. As the examples given here indicate, there is ample room for significant reforms that would both increase the commercial attractiveness of this jurisdiction and be consistent with justifiably cherished principles such as the right of pre-emption and access to justice.
Although there may be no single obvious threat to English law’s current status as the preferred governing law for many major companies, transactions and disputes, complacency is not an option. Only by keeping it internationally competitive can we ensure that English law – and English lawyers – continues to be a favoured choice for global business.
Nigel Boardman is a partner at Slaughter and May. James Shirbin and Andrew Blake are both visiting lawyers at the firm.