New law affects all UK companies

A large part of the Companies Act 2006 goes live today, 1 October 2007, and all UK companies will be affected by the changes. Some of the provisions now in force are the more controversial ones, whilst others are much-anticipated streamlining amendments.

Directors’ new statutory duties

A director now has a statutory duty:

  • to act within his powers and only exercise those powers for the purposes for which they are conferred;
  • to act in good faith to promote the success of the company for the benefit of its members;
  • to exercise independent judgment subject to any restrictions contained in any agreement entered into by the company or in the company’s constitutional documents; and
  • to exercise reasonable care, skill and diligence.

(Directors’ statutory conflicts of interest duties do not go live until 1 October 2008).

The duty to promote the success of the company for the benefit of the members replaces the duty to act in the best interests of the company and requires directors to give proper consideration to certain factors, set out in statute, when reaching decisions. These include the interests of the company’s employees and the impact of the company’s operations on the community and the environment.

If directors are not already aware of their new duties and their impact on their board procedures and decision recording, it would be prudent to get up to speed as quickly as possible. See our briefing Changes to directors’ duties and government’s guidance.

Business review restated

New contents requirements apply from today to the business review that, unless subject to the small companies regime, all companies must include in their directors’ report. They apply to reports for financial years beginning on or after 1 October 2007.

A stated purpose of the business review is to inform members and help them assess how the directors have performed their new duty to promote the success of the company. Directors should consider what disclosures may be required in light of this statement.

Derivative claims by shareholders

From 1 October 2007, under a new court procedure, disgruntled shareholders may bring a claim on behalf of their companies against a director for negligence, default, breach of duty or breach of trust. But any damages awarded in a successful claim will go to the company, not to the shareholder bring the action. There is a fear that directors’ may have increased exposure to claims from the “double whammy” of their statutory duties and the derivative claims procedure. Companies should check any directors’ liability indemnity arrangements and D&O cover in the light of the possible increased risk of litigation. Note that directors’ indemnities cannot cover derivative claims.

Transactions with directors

Changes apply from today to certain transactions between companies and their directors, whereby shareholder approval is needed for:

  • directors’ service contracts lasting more than two years (previously five years);
  • payments to directors for loss of employment as a director (not just loss of office) exceeding existing contractual entitlements;
  • substantial property transactions between companies and their directors (or their connected persons) in relation to non-cash assets with a value exceeding the lower of 10% of the company’s asset value and £100,000 with a de minimis threshold of £5,000 (previously £2,000);
  • loans of more than £10,000 made by the company to a director (previously directors’ loans were prohibited save for certain loans of less than £5,000).

Streamlined shareholder resolutions and company meetings regime

Private companies no longer need to hold AGMs (subject to their constitutional documents); notice periods for all shareholder meetings are reduced to 14 days (unless constitutional documents require otherwise); revised proxy arrangements apply; and it is easier to pass written resolutions (unanimity no longer required).

Public companies still have to hold AGMs and written resolutions are unavailable, but notice periods for shareholder meetings, other than AGMs, are reduced to 14 days (unless constitutional documents require otherwise) and revised proxy arrangements apply.

Access to register of members

New provisions regulating the right to inspect a company’s register of members are now in force. These apply once a company has filed an Annual Return made up to a date after 30 September 2007. When requesting access to the register a person must provide information such as their name and address and what the information will be used for. In some cases there will also be a proper purpose test to satisfy. These safeguards are intended to prevent abuse of shareholder information by boiler room scam operators, for example.

Indirect investor rights

All companies now have the option to adopt nomination articles. Such articles would give shareholders the right to nominate another person, such as the beneficiary of a trust holding, to enjoy or exercise some or all of the members’ rights in relation to the company. Rights in connection with share transfers cannot be included in the nomination. But companies adopting such articles should be aware of increased costs and administrative burdens. Beneficiaries should consider the trust’s purpose and be wary of exercising rights if it could prejudice tax planning, for example.

Traded companies are subject to a new automatic nomination provision. Members can request that indirect investors, such as holders of PEPs and ISAs, enjoy certain information rights. Companies need not act on a nomination before 1 January 2008.

Other 1 October 2007 provisions

Also live are provisions dealing with political donations and expenditure, fraudulent trading, protection of members against unfair prejudice and company investigations.

Is it in force?

Some of the Act’s provisions were introduced in November 2006 and others during 2007. More comes into force on 6 April 2008, with the remainder going live on 1 October 2008. BERR (formerly DTI) has published a detailed table of commencement dates.

Link to more briefings on the Act

More briefings are available on the Companies Act 2006 page on our website.