The Companies Act 2006
The Companies Act 2006, which is the biggest shake up in company law for a generation, passed onto the statute books on 8 November 2006. Although the bulk of the new Act may not come into force until October 2008, some provisions are to become law imminently and all companies will be affected.
The Act makes numerous modifications, but changes of particular note to public companies that will apply from 20 January 2007 include:
Electronic communications with shareholders
The 2006 Act makes it easier for companies to communicate with their shareholders through their website. If the correct procedure is followed, shareholders will be deemed to consent to communication through the company’s website (provided that either the company’s articles allow electronic communication or the shareholders have given their consent in general meeting). Information or documents that are required to be sent or supplied by the Act (eg, annual reports and notices of meetings) can then be communicated to shareholders through a website and it can become a company’s default means of communication. Shareholders will still however be able to make a specific request to receive hard copy documents.
Companies will still be required to communicate with their shareholders directly, as a notice (potentially electronically) will have to be given to each shareholder when certain information is made available on the company’s website. However, companies should be able to generate significant cost savings as a bulk print of a glossy annual report can be avoided through the use of these provisions. Early consideration should therefore be given to checking whether any existing e-communication authorities in your company’s articles are sufficient or whether further approval from shareholders is required in order to enjoy the advantages of the new regime.
Investigation of share ownership
There is no significant change to the section 212 (which will become section 793) company investigation provisions however, from 20 January onwards, companies will need to issue new style section 793 notices rather than old style section 212 notices. There is therefore a danger that if the wrong notice is sent then the available time period could have expired before the mistake is rectified. (The provisions of section 212/793 enable a public company to investigate the identity of the persons who have ultimate ownership of its shares.)
Disclosure of major shareholdings
A new regime for the disclosure of major shareholdings is being introduced (see section 2 of this briefing). Other key changes introduced by the new Act, which will require action when the relevant provisions are brought into force, include:
First statutory statement of directors’ duties
This new statement sets out the duties owed by directors to their companies. It is accepted that generally this statutory statement repeats the existing common law and should not therefore result in a change of focus for directors. However, the duty on directors to act in the best interests of the company is replaced by a new duty to "act in the way [the director] considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole".
It remains to be seen whether this change of focus will alter the course of decisions. For example, recommending a takeover offer – even at a substantial premium to a company’s share price – may not be likely to promote the success of the company. Company boards will therefore need to consider the new obligations both in terms of the day-to-day running of the company and also when taking decisions that may affect its future. Procedures for recording board deliberations and decisions should also need to be reviewed.
Rights for indirect shareholders
Nominee shareholders in listed companies will be permitted to nominate a person who holds a beneficial in a share to receive the information to which a registered shareholder is entitled. This change may have significant administrative cost implications for companies as a large percentage of shares in public companies are held through nominee structures (for example on behalf of holders of ISAs or PEPs).
Shareholder derivative claims
A new procedure for members to bring claims against directors on the company’s behalf will be introduced. This change received significant comment when it was first proposed due to a fear that it may lead to an increase in shareholder activism. Clearly directors should be alert to the existence of the new procedure but it is hoped that shareholders will not attempt to use the existence of this new procedure to wield a stick at the management of the company.
These are just a few examples of the changes that are being introduced by the new Act. Companies will have to review and update their internal policies and procedures and they may need to amend their articles if they wish to make the most of the benefits of the new regime. We would be happy to help you with this exercise and will be providing bespoke training for those who are interested.
We are producing regular e-bulletins which focus in more detail on important aspects of the Act and which highlight when particular provisions go live. If you would like to subscribe to these bulletins please contact any of the people listed at the end of this briefing.
The Transparency Directive
The Companies Act 2006 is also being used as the vehicle to implement the requirements of the EU Transparency Obligations Directive which has to be introduced into UK law by 20 January 2007. The Directive is aimed at improving market transparency of information on issuers and holdings of their shares. Companies with shares admitted to the Official List will be the most affected by these changes. The provisions relating to notification of major shareholdings will also apply to companies listed on the AIM and PLUS Markets.
In general, most UK companies will not need to change their practices to comply with the new legislation but it is worth noting a few of the key obligations where a change in business procedure may be required:
New content and timing requirements for financials
Generally speaking, the new rules introduce tighter deadlines for publishing periodic financial reports (including a new four month deadline for the publication of an annual report). Auditors should be fully aware of the changes but it is worthwhile reviewing internal procedures so as to ensure that the new time periods can be met.
Responsibility for annual and half yearly reports
Annual and half yearly reports will have to include a directors’ responsibility statement. This change does not actually alter directors’ liability but directors may be sensitive to the new inclusion of a responsibility statement in black and white for all to see.
Interim management statements
Unless a company already produces quarterly reports, it will be required to publish an interim management statements (IMS). An IMS does not need to comply with the content requirements for quarterly reports and it is expected that an IMS will simply include disclosure on material events and transactions that have taken place during the relevant period, their impact on the financial position of the company and a general description of the company’s current financial position.
Notification of major shareholdings
From 20 January 2007, the relevant provisions of the Companies Act 1985 (sections 198 onwards) governing disclosure of interests in shares will be repealed and instead disclosure of major shareholdings by companies and shareholders alike will be regulated by the Financial Services Authority. The new disclosure regime will be included within the FSA’s Disclosure and Transparency Rules (the existing Disclosure Rules will be amended and renamed).
The new rules will not apply to all UK public companies as is currently the case, but instead will only catch certain publicly traded companies (including those with shares traded on the Official List or AIM) that are incorporated in the UK or whose principal place of business is in Great Britain. Broadly speaking, for UK listed companies the new rules do not amount to a change as major shareholders (that is those with shares carrying voting rights of at least three per cent) are relevant thresholds and companies are then required to announce to the market the details of shareholder notifications received.
One change however is that publicly traded companies are now required to notify the market monthly of any changes in their share capital and companies were required to make public the total number of issued shares and voting rights in respect of shares admitted to trading by 31 December 2006, as well as any subsequent changes that take place before 20 January.
Changes to AIM rules, plus nomad responsibilities to be codified
The London Stock Exchange has recently consulted on changes to the AIM rules, including a new rulebook for nominated advisers. The consultation closed on 1 December 2006 and the new rules are expected to be introduced early this year.
The Exchange is keen to point out that it is not its intention to overburden AIM with regulation as it is well recognised that a large part of AIM’s success has been due to its “light-touch” regulatory environment. However, it is generally accepted that AIM needed to undergo a period of evaluation and strengthening so as to maintain market confidence in the LSE’s junior exchange.
The Exchange is proposing some minor changes to the AIM regulatory framework. One of these minor changes involves the introduction of a requirement for each AIM company to maintain an up to date website that contains certain company information.
Market practice has evolved over recent years and the number of companies, whether listed or otherwise, that do not already have their own website is small. Generally companies include information for shareholders in an “investor relations” section of their website so as to keep it separate from the customer facing information. This proposed change should therefore, in the majority of cases, only require the addition of further information to a company’s website so as to ensure it is fully compliant with the new rules.
Due to the widespread use of the internet as a medium for communication, it is entirely possible that the regulatory authorities will begin to further dictate specific content requirements for company websites. This minor change to the AIM rules could be the first step towards such a regime. A couple of other changes worth noting include:
- the introduction of the concept of a warning notice that can be issued to an AIM company or nomad following a breach of the AIM Rules where the Exchange does not believe that the breach warrants a more serious sanction; and
- an increase to the cap on fines which can be levied by the AIM Executive Panel, from £25,000 to £50,000 for each breach of the AIM rules.
New rulebook for Nomads
The proposed new rulebook for nomads, AIM Rules for Nominated Advisers, essentially codifies the existing responsibilities that are placed on a nominated adviser. Nevertheless it is worth drawing attention to a couple of the new obligations which could have an indirect effect on the companies for which a nomad is responsible.
The new rulebook makes it clear that a nominated adviser’s ultimate responsibility and obligation is to the Exchange rather than to the company. This concept is nothing new however the new rulebook takes it a stage further by requiring a nomad to contact the Exchange immediately if it has any concerns about the appropriateness of an AIM company once it has been admitted.
Similarly, in exceptional circumstances the Exchange will be able to direct a nomad's actions in order to preserve the reputation of AIM. Quite how these changes will impact the operation of the market remains to be seen however it is expected that such procedures will be used rarely. The tone and manner in which the new rulebook codifies the responsibilities of nomads does suggest that nomads are expected to take more responsibility and be more accountable for the AIM companies that they manage. Nomads may therefore wish to revisit their standard form nominated adviser agreements to check that they provide sufficient protections. Similarly, AIM companies may find that their nomad seeks to amend their existing agreement in light of the new rulebook.
The consultation period ended on 1 December 2006 and the final form of the new AIM rules and nomad rulebook is expected shortly. AIM companies will have six months to comply with the new rules after they come into effect.