We have now been reporting on various aspects of the Companies Act 2006 (the Act) for more than two years and this article is intended to serve as a reminder of some of the key changes introduced by the Act which affect private companies. As the principal provisions of the Act are being implemented in stages between January 2007 and October 2009, the sub-headings below are followed by the date upon which the relevant provision(s) came, or are due to come, into force.
Directors' duties - 1 October 2007 and 2008
Directors' general duties are being codified in statute. There are seven statutory duties, namely, (i) the duty to act within powers; (ii) the duty to act in good faith to promote the success of the company for the benefit of members; (iii) the duty to exercise independent judgement; (iv) the duty to exercise reasonable care, skill and diligence; (v) the duty to avoid conflicts of interest unless the matter has been authorised by directors; (vi) the duty not to accept a benefit from a third party (unless the benefit cannot reasonably be regarded as likely to give rise to a conflict); and (vii) the duty to declare any interest in a proposed transaction or arrangement. Directors are also required to declare their interest in existing transactions or arrangements in accordance with section 182. The provisions on directors' duties came into force on 1 October 2007 (other than provisions relating to conflicts of interest, third party benefits and declarations of interests which are due to come into force on 1 October 2008).
In considering his duty to act in good faith to promote the success of the company for the benefit of members, a director is required to have regard to, amongst other matters, (i) the likely consequences of any decision in the long term; (ii) the interests of the company's employees; (iii) the need to foster the company's business relationships with suppliers, customers and others; (iv) the impact of the company's operations on the community and the environment; (v) the desirability of the company maintaining a reputation for high standards of business conduct; and (vi) the need to act fairly as between members of the company.
Directors' long-term service contracts - 1 October 2007
There is a new definition of "service contract" which includes letters of appointment. Shareholder approval is required for any service contract with a guaranteed term of more than two years.
Substantial property transactions - 1 October 2007
Generally, a director (or his connected person) of a company (or its holding company) cannot enter into an arrangement to acquire (or dispose of) a substantial non-cash asset from (or to) the company, unless shareholder approval has been obtained or the arrangement is conditional on such approval being obtained. There are a number of exceptions to the new rules. Significantly, there is no requirement for shareholder approval to the extent that a transaction relates to anything which a director is entitled under his service contract. An asset is "substantial" if its value either (i) exceeds 10% of the company's net asset value and is more than £5,000 or (ii) exceeds £100,000.
Loans to directors - 1 October 2007
Generally, a company cannot make a loan or give a guarantee or provide security in connection with a loan to one of its directors (or a director of its holding company) unless prior shareholder approval has been obtained. The exceptions to the new rules include carve-outs for loans with a value not exceeding £10,000.
Payments for loss of office - 1 October 2007
Generally, a company cannot make a payment for loss of office to a director (or a director of its holding company) without shareholder approval. The new definition of "payment for loss of office" is wider than under the previous regime and catches (amongst other things) payments to directors for loss of office or employment. There are certain exceptions including payments made in discharging an existing legal obligation.
Directors' age limit - 1 October 2008
There will be a minimum age limit of 16 years for directors. Any director who is younger than 16 will cease to be a director when the new provision comes into force.
Natural person - 1 October 2008
From 1 October 2008, there will be a requirement for all companies to have at least one director who is a natural person. However, there are transitional provisions for private companies which, on 8 November 2006, did not have any directors who were natural persons but which had at least one director. Such companies will have until 1 October 2010 to appoint a director who is a natural person.
Directors' residential addresses - 1 October 2009
Directors will be able to use a service address (e.g. the registered office) for disclosure to the public records maintained by the Registrar of Companies (although they must still provide details of their usual residential address to the Registrar).
Other directorships - 1 October 2009
A director will no longer be required to provide details of his other directorships for inclusion in the register of directors kept by the company or on the forms required to be submitted to the Registrar of Companies.
Electronic communications - 20 January 2007
Generally, companies are able to send and receive documents and information in electronic form, provided certain procedures have been followed and conditions have been met. "Electronic form" is widely defined and includes email and fax.
The new regime enables a company to communicate with shareholders by posting documents or information on its website, provided certain procedures are followed. To communicate using its website, a company first needs to ask shareholders individually to agree to website communication. If a shareholder does not respond within 28 days he is deemed to have consented to website communication.
Companies are, however, still required to notify shareholders when relevant documents are posted on the website. Such notification will require to be in hard copy or, if the shareholder has agreed, in electronic form.
When a company communicates with a shareholder electronically, the shareholder is entitled to require the company to send a hard copy of the relevant document to him (regardless of whether or not he has consented, or is deemed to have consented, to receive communications in electronic form).
SHAREHOLDER MEETINGS AND RESOLUTIONS
Proxies - 1 October 2007
The rights of proxies have been extended. Proxies can now speak at general meetings and can vote on both a show of hands and a poll. Shareholders can appoint multiple proxies (provided each appointment is in respect of different shares). The time limit for return of proxies must be no earlier than 48 hours before the meeting, however, in calculating this period "non-working days" need not be taken into account.
Written resolutions - 1 October 2007
There are new statutory rules dealing with written resolutions of private companies. Written resolutions no longer require unanimity. Written resolutions will be passed if agreed to by the relevant majority (i.e. 75 per cent. for special resolutions and a simple majority for ordinary resolutions).
Notice periods - 1 October 2007
There have been changes to the notice periods for general meetings of private companies. Under the new rules, general meetings require notice of at least 14 days (even if a special resolution is to be proposed at the meeting), although the articles may specify a longer period. There are new provisions clarifying when documents or information sent to shareholders are deemed to be received.
Annual general meetings - 1 October 2007
Private companies no longer need to hold AGMs (unless required to do so by their articles). Notwithstanding the provisions of its articles, a company will not be required to hold AGMs going forward if, immediately prior to 1 October 2007, it had in force an elective resolution under section 366A of the Companies Act 1985 dispensing with the requirement to hold AGMs under that Act.
Consent to short notice - 1 October 2008
General meetings may be called on shorter notice than the 14 days required by the Act if the relevant majority of members agree. The relevant majority is members holding 90 per cent. (or such higher percentage (not exceeding 95 per cent.) as may be specified in the company's articles) of the nominal value of the shares giving a right to attend and vote at the meeting.
Inspection of register of members - 1 October 2007
Members of a company and other third parties are entitled to inspect and obtain copies of the register of members. However, with a view to preventing the abuse or improper use of information gleaned from the register, anyone wanting to inspect or obtain a copy of it must provide certain information to the company including a description of the purpose for which the information is to be used. Where it considers that the information is not being sought for a proper purpose, a company can apply to the court for a direction that it need not comply with the request.
Exercise of members' rights and information rights - 1 October 2007
There are new provisions enabling members of companies to nominate third parties to enjoy or exercise all or any of the rights of the member (including rights to receive notices of, and to vote at, general meetings), provided that this is authorised by the company's articles.
Offer of shares to the public by private company - 6 April 2008
The general prohibition on private companies offering securities to the public will remain. However, private companies will be able to offer securities to the public (i) as part of arrangements under which it is to re-register as a public company before the securities are allotted or (ii) if, under the terms of the offer, it undertakes to re-register as a public company within six months.
Distributions in kind - 6 April 2008
There will be new provisions clarifying the manner in which the amount of a distribution in kind should be determined where a company has distributable profits.
Financial assistance - 1 October 2008
Private companies will generally no longer be subject to the prohibition on giving financial assistance. However, the financial assistance prohibition will continue to apply to (i) financial assistance given by a public company (or one of its subsidiaries (including a private company)) for the purpose of an acquisition of shares in that public company and (ii) financial assistance given by a public company that is a subsidiary of a private company for the purpose of an acquisition of shares in that private company.
Abolition of authorised share capital - 1 October 2009
A company limited by shares will no longer be required to state its authorised share capital in its memorandum of association. The concept of authorised share capital is therefore abolished, except where a company has restrictions in its constitution.
Allotment of shares - 1 October 2009
To allot shares, directors will generally need to be authorised by the company's articles or by an ordinary resolution of the company. However, directors of private companies with only one class of share will have the power to allot shares without obtaining such authorisation, unless they are prohibited from doing so by the articles.
Statutory pre-emption provisions - 1 October 2009
The existing statutory pre-emption provisions under the Companies Act 1985 will be re-enacted in substantially their current form. The articles of a private company may exclude these pre-emption provisions as under the existing regime.
Share premium account - 1 October 2009
The uses to which the share premium account can be put will be narrowed. Companies will still be able to apply the share premium account to pay up bonus shares and to write off the expenses of share issues and commissions paid on share issues.
Redenomination of share capital - 1 October 2009
Unless prohibited by its articles, a company will be able to convert some or all of its share capital into another currency by passing an ordinary resolution changing the nominal value of the shares.
Reduction of capital by private company - 1 October 2009
In addition to court approved reductions, private companies will be able to reduce their capital by way of a special resolution supported by a solvency statement from directors (i.e. without obtaining court approval). It will be an offence for directors to make the solvency statement without having reasonable grounds for the opinions within it.
Business review - 1 October 2007
The new rules for private companies largely restate the requirement to include within the directors' report a business review and applies to financial years beginning on or after 1 October 2007 (small companies are exempt from this requirement). The Act states that the purpose of the business review is to inform members and help them assess how the directors have performed in their duty to promote the success of the company under section 172.
Secretary - 6 April 2008
Section 270 of the Act provides that a private company is no longer required to appoint a company secretary. If a private company does not have a secretary, anything required or authorised to be done by or to the secretary of the company may be done by or to a director or (following the commencement of section 270(3)(b)(ii) which is expected to occur on 1 October 2009) by or to a person authorised by the directors.
Period allowed for filing accounts - 6 April 2008
All private companies with financial years beginning on or after 6 April 2008 must deliver their annual report and accounts to the Registrar of Companies within 9 months of their financial year-end. The 10 month filing period contained in the Companies Act 1985 will continue to apply to all financial years which began before 6 April 2008.
Execution of documents - 6 April 2008
In addition to the current methods of executing a document by a company in England and Wales, a document will be validly executed by a company if signed by a director in the presence of a witness.
Objections to company names - 1 October 2008
There will be additional rights to object to a company name where it is the same as a name in which the person raising the complaint has goodwill or where the name misleadingly suggests a connection with the person raising the complaint.
Change of name - 1 October 2009
A company will be able to include provisions in its articles enabling it to change its name other than by means of a special resolution.
Memorandum and articles of association - 1 October 2009
The memorandum of association will no longer set out the objects of the company. Instead, going forward, the memorandum of association will only contain details of the initial subscribers. For existing companies, provisions contained in the memorandum will be treated as provisions of the articles of association. A company's objects will be unrestricted unless specifically restricted by the articles.
Re-appointment of auditors - 1 October 2007
For financial years beginning on or after 1 October 2007, the auditor of a private company will, in certain circumstances, be deemed to be re-appointed if no auditor has been appointed within the relevant time period prescribed in the Act.
Liability limitation agreements with auditors - 6 April 2008
There are new rules enabling companies to enter into agreements limiting the liability of their auditors, subject to (i) compliance with certain provisions of the Act and (ii) shareholder approval.
Senior statutory auditor - 6 April 2008
The auditor's report for all financial years beginning on or after 6 April 2008 must be signed (in his own name) by (i) the auditor (in the case of the auditor being an individual) or (ii) the senior statutory auditor on behalf of the auditor (in the case of the auditor being a firm).