The Companies Act 2006, which received Royal Assent in November 2006, is an important piece of new law. At 1,300 sections, the Act is the longest ever to pass through Parliament. It has been a long time in the making and, as it will not be fully in force until October 2008, it will be a long time coming into effect. But is there a danger that companies could suffer 2006 Act burnout or alternatively just lose interest in it altogether?
Not the end of the story
The new Act certainly is a gargantuan piece of legislation. But even with 760 pages, 1,300 sections and 16 schedules this is by no means the end of the story. Next year will see the publication of non-statutory guidance, transitional provisions and a plethora of secondary legislation needed to add detail to the bare bones of the Act.
Trade and Industry Secretary Alistair Darling is reported as being adamant that the new Act is the end of the road, so far as the reform of company law is concerned. But so many amendments were pushed through in the latter stages of the Parlimentory process that further work to tie up loose ends is inevitable.
Coming into force in 2006, 2007 and 2008…
A very limited number of parts of the Act will be brought into force at an early stage, including those relating to the Takeovers and Transparency Directives (in order to meet EU deadlines). At the beginning of November 2006, Lord Sainsbury confirmed that provisions oncompany communications with shareholders would be introduced in January 2007 and that there would be further consultation in February 2007 on detailed implementation plans.
The Government intends to commence all parts of the Act by October 2008, but at the moment it is not apparent whether that means that the bulk of it will come into effect on 1 October 2008 or whether provisions will be drip fed before then. Nor is there any clear indication when some of the more hotly-debated provisions, such as codification of directors' duties and the new derivative claims procedure, will come into force. Company lawyers all remember the horror of the last big piece of company legislation, the 1989 Companies Act, which was introduced in dribs and drabs over a period of time and eventually ran out of steam, with many of its parts never becoming law. Let’s hope the 2006 Act does not suffer a similar fate.
The key changes to be introduced by the Act affecting all companies are:
- the introduction of a statutory statement of directors’ duties;
- protections against disclosure of directors’ and shareholders’ home addresses;
- the introduction of a new procedure for members to bring claims against directors on behalf of the company;
- a simplified form of company constitutional document; and
- a new power for companies, subject to shareholder approval, to agree to limit their auditor’s liability.
Private companies will benefit from:
- more straightforward provisions on accounts;
- shorter, simpler default constitution;
- no requirement to have a company secretary or hold an AGM;
- easier use of written resolutions for taking decisions;
- abolition of the prohibition on financial assistance for the purchase of a company’s own shares; and
- simpler rules on share capital.
Provisions affecting public companies include:
- new model constitution;
- electronic communication with shareholders as the default position (subject to approval);
- a requirement to send information to indirect shareholders upon request;
- extended reporting in the business review, including disclosure of information about supply chains; and
- new requirements on disclosure of major shareholdings by investors under the Transparency Directive.
Size may be off-putting
The new Act is supposed to be one third purely restatement of existing laws, one third almost restatement of existing laws (but just put in simpler language) and one third genuinely new law. So although there is a lot that is familiar, there is a substantial amount of new material to get to grips with. The sheer size of the new Act could be off-putting to many companies and small businesses already feeling overburdened by regulation and red tape. They may be unable to muster the energy to make the most of its benefits.
Will cost savings materialise?
It is worth bearing in mind what the DTI says about the savings it hopes will be made by UK plc under the new regime. The stated aim is that the Act should make an important contribution to a "better regulation agenda" and represent a significant step forward in ensuring that company law remains up to date, flexible and accessible for everyone who uses it. The DTI estimates that businesses will benefit to the tune of around £250 million a year including an annual £100 million benefit for small companies. But the reality might be rather different.
Whereas the Government claims familiarisation costs are not expected to be significant, it is doubtful whether this is correct. For example, whilst some costs of training and familiarisation will be borne by advisers, to some extent they will also be passed on to clients. Industry commentators have voiced concerns about this, particularly in relation to the new provisions on directors’ duties which are likely to result in new uncertainty, increased legal costs and additional bureaucracy.
So what next?
It’s certainly not full steam ahead at this stage, simply because a lot of fine detail needs to be settled before proper action can be taken, but all companies will be affected when the Act comes into force. There is no avoiding the fact that companies will have to tackle the changes in policy and procedure that will be required.