A number of the key provisions contained in the 2006 Act will come into force on 1 October 2008. Once these changes are in effect there will be no further implementations until 1 October 2009 when all the remaining provisions of the 2006 Act will commence. But what should a company director be concerned about now?
Directors’ conflicts and updating of Articles of Association
The 2006 Act sets out the seven general duties owed by a company director to that company. Four of these duties, including the duty to promote the success of the company, came into effect on 1 October 2007 and boards should already be taking those duties into account in their decision making. Once the remaining three duties relating to directors’ conflicts of interest and receipt of benefits are implemented this October, this statutory codification will be complete.
Generally directors must avoid all situations where their own interests might conflict with those of the company. This restriction is broad ranging and catches direct, indirect and potential conflicts. However, as discussed in more detail in our last Bulletin, the 2006 Act allows some relief for directors of both private and public companies in that there will be no breach of the rules if the board of directors (excluding the interested director) authorise a fellow director’s involvement in the relevant matter. For a public company this authority must be contained in the articles, but for a private company incorporated after 1 October 2008 the board may approve a conflict provided the articles do not contain a restriction against this. Note however, for a private company incorporated before that date, the transitional provisions have not automatically applied the new law. Therefore, where a private company incorporated before 1 October 2008 wishes to allow directors’ conflicts to be considered by the directors rather than the shareholders, its members need to pass an ordinary resolution to permit that.
Many companies will be in the process of amending their articles this year to take account of the new conflict rules and other changes introduced by the 2006 Act. If you are doing so, we would suggest in particular that the indemnity provisions, which are usually set out at the end of the articles, should be reviewed. All directors should ensure the indemnity provisions in their company’s articles no longer refer to provisions of the 1985 Act as these have been repealed. They have been replaced by similar provisions in the 2006 Act save that the scope of the indemnity that can be given to directors was broadened last October to allow a company to indemnify a director of a pension trustee company against liability for the company’s activities as trustee of a scheme. Whatever indemnity is given, it is sensible to check with the company’s insurers to make sure it dovetails with the company’s Directors and Officers (D&O) insurance.
A company reviewing its articles will want to consider if any time limits included in its current articles, e.g., the notice period for a meeting, are now longer than those required under the law and, if they are, if they wish to reduce them. A 14 day notice period is now sufficient for all general meetings other than a public company AGM which still requires 21 days.
It is likely also that most existing articles contain outdated terminology, e.g. references to extraordinary general meetings and extraordinary resolutions and these references may be tidied up when other changes are being made. It is advisable to remove any reference in the articles (such as the inclusion of Regulation 53 of Table A) to shareholders’ decisions being made by unanimous written resolution as for a private company any shareholder written resolution should be passed using the new statutory procedure. A public company cannot use any written resolution procedure for shareholder decisions.
Outside the articles, there are two other changes to note in relation to director appointments. One affects the use of corporate directors, where a company is appointed as a director and is represented at board meetings by one or more different people. The Government is keen to have more board accountability to shareholders so from 1 October 2008 the law will require all companies to have at least one natural person as a director. There is a grace period of two years for a company in existence on 8 November 2006 which had only corporate directors but after 1 October 2010 this provision applies to every board. In addition, from 1 October this year a director must be at least 16 years old; previously there was no official minimum age.