This is the first in a series of briefings on some of the more significant detailed provisions of the new Act. It considers the origins and background of the legislation and sets the stage for further notes on various detailed aspects.
History and objectives
The Companies Act 2006 started its Parliamentary life in 2005 as the Company Law Reform Bill. The Act received Royal Assent on 8 November 2006, representing the culmination of around 10 years of Law Commission deliberations, consultations, representations, drafting and debate. At around 760 pages, with exactly 1,300 sections, plus 16 schedules, it is said to be the largest statute ever passed into law by Parliament. The Act also provides for numerous sets of secondary legislation, permitting the Secretary of State for Trade and Industry to fill in the fine technical detail of certain sections, or to extend, limit or amend various provisions by way of statutory instrument. When these are produced, we will have a code of company law for the United Kingdom - unlike earlier Acts, the Act will have direct effect in Northern Ireland - which can without exaggeration be described as epic in scale.
In order to understand the overall thrust of the new Act, it is helpful to look back at its origins.
The legislation was developed under the banner of “Modern Company Law for a Competitive Economy”. The objective was to adapt established rules - largely originating in the 19th century - to fit the realities of 21st century business (or at least its acceptable face). Deregulation and the removal of obstacles to profitable and sustainable enterprise, for the benefit of the economy as a whole, were to be the keystones of the new law. Subsidiary slogans included “Think Small First” - this entailed stating simple and “light-touch” provisions for private companies (irrespective of asset value, number of employees or number of shareholders), reserving more restrictive regulations for charitable and public companies (whether or not listed) and providing a top-level set of additional obligations for companies with shares traded on public markets.
The clear justification for this approach - by contrast to the former pattern of stringent regulation for all companies, with exemptions for smaller enterprises - is the overwhelming numbers of small private companies when compared to the numbers of public and quoted companies. The position of the very largest privately owned companies (which may in some cases have asset values, employee numbers and other business measurables which rival at least the smaller quoted companies) may be anomalous under the new rules, but they will be the exception.
The Act also provided a timely opportunity for a response to the well-publicised boardroom scandals of the early years of the century. For the first time, the duties owed by company directors are spelt out in statute. It was felt that laying down the duties in this clear manner would both give guidance to the well intentioned and mean that rogues had less room to hide, as the high standard of behaviour expected of directors would be evident.
Another much-quoted principle was that of “enlightened shareholder value”, whereby companies would be obliged to take account of the interests of “stakeholders” other than their shareholders. This category includes employees, suppliers, customers and the community and environment in which companies operate. Previously, only the interests of members of the company (and in some cases those of creditors) were expressly protected, with a subsidiary duty to “have regard” to the interests of employees. Accordingly, the Act gives directors a list of the principal factors, to include the interests of those “stakeholders”, which they should consider in reaching their decisions. For more information, see our earlier briefing note The Companies Act 2006: Directors’ Duties and First Commencement Order.
In addition to its sheer size, the Act is notable for two innovative features. First, the Act is drafted in relatively “plain English”, rather than the sometimes archaic terms used in earlier legislation. Secondly, the Act includes a number of sections having no function other than to “signpost” the need to refer to other sections of the Act on related topics. While these are helpful, it remains to be seen if the Act will achieve one of its stated objectives by reducing the need for companies to take professional advice in order to understand the law. The language itself may be more straightforward, but the underlying subject matter remains in many cases complex and highly technical.
The government has confirmed that the Act will be fully in force by October 2008. A few preliminary sections are already in force (see our earlier briefing notes). Further provisions will come into force on 6 April 2007. We understand that the remaining provisions are likely to be brought into force piecemeal, by way of numerous statutory instruments. The vast majority of the Act is not yet in force. Transitional provisions have not yet been published to specify how some of the new provisions will apply to existing companies, although the DTI has indicated its views on certain issues following consultations. In the main, its approach is to preserve existing bargains, so that for example companies formed before certain of the Act’s deregulating measures come into force will only be able to take advantage of the new provisions if their members expressly approve this - by amending articles of association, for example. As noted above, numerous sections of the Act allow the Secretary of State to make regulations (with varying degrees of parliamentary scrutiny) supplementing, amending, extending or restricting various provisions. Until the relevant secondary legislation is issued and can be analysed, we will not have a full picture of the detail of the new regime.
Parts of our briefing notes rely on the contents of the guidance notes on the Act issued by the DTI (since there is, as yet, no other authoritative guidance in the form of cases decided by the courts). As those notes make clear, they are not part of the Act and have not been approved by Parliament. Moreover, the notes contain a number of apparent errors and inconsistencies with the Act as published. However, they do serve as a useful guide to the government’s intentions.
For the Companies Act 2006, see: http://www.opsi.gov.uk/acts/acts2006/ukpga_20060046_en.pdf
Or perhaps more useful, the related DTI guidance notes (which do not have legal effect):
Please note that except as indicated in this note, the amendments covered above are not in force as at 15 February 2007. The government has indicated that it will make announcements in February 2007 as to when it proposes to bring the amendments into effect (no later than October 2008)
Other briefing notes
For notes on the key topic of directors’ duties and details of provisions already in force, see our earlier briefing note The Companies Act 2006: Directors’ Duties and First Commencement Order. For our views on the overall impact of the Act on companies’ day-today business, see our earlier briefing note Companies Act 2006: Business as usual?
Further briefing notes will deal with the following subjects:
- Electronic Communications and Public Company Shareholdings
- Directors and Secretaries
- Constitution, Capacity and Execution of Documents
- Members’ Meetings and Resolutions
- Share Capital and Members’ Rights
- Capital Maintenance and Reduction, Financial Assistance and Distributions
- Accounts, Auditors and Websites
- Takeovers, Offers to the Public and Miscellaneous Provisions