In the United States, state corporation law endows corporations with most of the legal powers possessed by natural persons. Among other things, to cite but a few examples, a corporation may sue and be sued in its own name, hold real and personal property in its own name, and so on. One relatively obscure exception to this general rule, however, is a universal requirement that directors of a corporation must be natural persons.

This limitation stands in sharp contrast to other forms of business organizations. In the U.S., for example, a corporation may serve as the general partner of a limited partnership. Corporations and other legal entities may enter into partnerships as members with the same management rights as natural persons. Corporations may serve as members and, more pertinently for present purposes, as managers of limited liability companies.

In other work, done with Todd Henderson of the Chicago Law School, I have argued that limiting board membership to natural persons forecloses a valuable opportunity to experiment with using service companies—so-called Board Service Providers (BSPs)—that would serve on or, preferably, as a company’s board of directors.[1] In our view, BSPs offer many advantages over natural persons as directors.

Unlike the U.S., until recently BSPs would have been lawful in the United Kingdom. Prior to 2006, the U.K. had no restrictions on the appointment of a corporation as a director of another company. In 2006, however, the U.K. Companies Act was amended to require that a company have at least one director who was a natural person.  This provision was understood to permit corporate directors to continue serving on company boards, but only so long as at least one board member was a natural person.

In 2015, Parliament adopted the Small Business, Enterprise and Employment Act, which amended the Companies Act to provide that “a person may not be appointed a director of a company unless the person is a natural person.”  Existing non-natural person directors of U.K. companies originally were to be phased out by October 2017, but in September 2016 the U.K. government indefinitely postponed implementation of the ban.  It did so in order that the government could consider permitting exceptions in limited circumstances, as authorized by the statute.  As of this writing (late spring 2017), the government has not yet defined the scope of such exceptions or the situations in which they will be granted, but action was expected in the near future.

This article evaluates the reasons offered for restricting corporate directors to natural persons and finds them wanting. It therefore proposes that the U.K. government either repeal the relevant legislation or, at least, be liberal in granting exemptions to the natural person restriction. It begins by briefly traces the history of corporate directors under U.K. law. It then argues that there are several legitimate reasons for companies to use corporate directors. Finally, it summarizes and critiques the arguments advanced in favor of the legislation restricting the use of corporate directors.

The stated rationale for restricting the use of corporate directors was that they lack transparency and impede holding accountable the individuals ultimately influencing the company. Concern about the use of corporate directors to conceal fraud and other misconduct is legitimate. Despite the low frequency at which U.K. companies use corporate directors, the Serious Fraud Office estimated that corporate directors figured in a quarter of the cases it investigated.

Transparency concerns, however, could be addressed by improved disclosure rather than a flat prohibition. Improved transparency itself promotes accountability, of course. In addition, accountability concerns also could be enhanced by an improved focus on individual liability for the persons who control the company.

 

Stephen M. Bainbridge is the William D. Warren Distinguished Professor of Law at UCLA School of Law.

 

[1] Stephen M. Bainbridge & M. Todd Henderson, Boards-R-Us: Reconceptualizing Corporate Boards, 66 Stan. L. Rev. 1051 (2014).