In this briefing, we consider some of the changes the 2006 Act will make in relation to aspects not covered in earlier briefing notes, including takeovers and offers of shares to the public by private companies, together with issues relevant to public companies with regard to membership, re-registration and striking off. This briefing note should be read in conjunction with our earlier briefings, ‘Companies Act 2006: Introduction and background’ and ‘The Companies Act 2006: What’s new (from 6 April)?’.
In order to implement the EU Takeovers Directive, the following provisions came into force on 6 April 2007.
The Takeover Panel, while remaining a non-statutory body, will be placed on a statutory footing as the competent body for regulating takeovers of public companies. This and related issues were referred to in our earlier briefing, ‘The Companies Act 2006: What’s new (from 6 April)?’. The composition of the Takeover Panel will not change and it has indicated that it expects to use its statutory powers only rarely, while continuing to rely on the generally voluntary co-operation of takeover parties and advisers.
Companies with shares traded on regulated markets will be able to pass special resolutions opting in to certain other provisions of the Directive relating to measures designed to frustrate takeovers. Further special resolutions can be passed subsequently to opt out of the relevant provisions. Members of an “opted-in” company will be unable to agree between themselves or with the company certain restrictions designed to frustrate a takeover, including restrictions on share transfers and giving disproportionate voting rights to minority shareholders. A bidder who acquires 75 per cent of the voting shares of an opted-in company will be able to force the target company’s directors to call a general meeting.
There are detailed (but arguably minor) changes to the provisions for “squeeze-out/sell-out” under what are currently sections 428- 430F of the 1985 Act. These provisions, which apply to all companies, may be used respectively to oblige or entitle a minority shareholder to sell shares. In order for rights to arise, a bidder will need to offer to acquire all of the shares in a company, or where the shares are divided into classes, all the shares in at least one class. In each case, the offer need not be made in respect of shares already held by the bidder. In more detail:
- “Shares already held” will include any which the bidder has agreed to acquire, whether unconditionally or conditionally.
- However, shares will not count as already held if the contract under which they are to be acquired (i) is made with the aim that the shareholder will accept the offer when made and (ii) is made for no (or negligible) consideration other than the bidder’s promise to make the offer. Shares the subject of usual forms of irrevocable undertaking will therefore count toward the 90 per cent thresholds.
- The “squeeze-out” and “sell-out” rights will only arise where the bidder acquires both 90 per cent of the relevant shares (or class) and - for the first time - shares carrying 90 per cent of the relevant voting rights. This will make no practical difference except in relation to companies whose voting rights are distributed other than one vote per share.
Where an offer is made to include shares allotted after the date of the offer, the 90 per cent calculation is to be made by reference to the shares allotted at the time the calculation is made. This means that a bidder may achieve the 90 per cent thresholds, serve notices requiring minority shareholders to sell and then find that further share issues by the target company take its holding below 90 per cent. In these circumstances, the notices served will remain valid but no further notices can be served on new shareholders until the 90 per cent thresholds are again achieved.
Section 983 deals with a minority shareholder’s right to be bought out by the bidder. The Act provides that all shares the bidder has agreed to acquire under conditional and unconditional contracts are included in calculating whether or not the 90 per cent threshold has been achieved for this purpose. This could lead to a situation where, if certain conditions to those contracts are subsequently not fulfilled, the bidder could be required to acquire the minority shareholder’s shares even though the bidder’s shareholding has dropped to below the 90 per cent threshold. To protect the bidder, the section also provides that the bidder is not obliged to purchase the shares unless it has acquired or unconditionally contracted to acquire 90 per cent or more of the shares by the end of the period within which shareholders can exercise sell-out rights.
There are also changes in the time limits for the procedures. Essentially, the limit will be three months from the time allowed for accepting the offer. For “squeeze-out” rights in offers made for companies whose securities are not admitted to trading on a regulated market there will be an additional six-month long-stop. Provision will be made to ensure that the procedures still apply where offers are made on different terms in relation to shares which have no dividend rights, where the offer cannot be made to particular shareholders; eg due to the lack of a current valid address and where offers cannot be made to or accepted by certain overseas shareholders (notably in the USA) due to local law prohibitions.
Changes to these provisions will take effect from 1 October 2007. Trade unions will remain subject to the rules relating to political donations, so far as concerns payments to their political funds. However, provision of company premises for union meetings and the provision of company vehicles and paid time off for trade union officials will be exempt. Holding companies will only need to approve donations by their subsidiaries if they are the ultimate holding company, or the highest UK company in the relevant group.
Offers to the public - private companies
Private companies (other than unlimited companies or companies limited by guarantee without a share capital) will still be prohibited from offering shares to the public. From 6 April 2008, a private company which makes such an offer will have to re-register as a public company or be wound up.
The Act provides that an offer will not be regarded as an offer to the public if:
- it is made only to persons already connected with the company (this will include existing members or employees, members of their families and others) and renunciation of the offer can only be made in favour of another person so connected;
- it is an offer to subscribe under an employee share scheme and can be renounced only in favour of another person entitled to hold shares under the scheme or to a person already connected with the company (as above); and
- it cannot properly be regarded in all the circumstances as being calculated to result directly or indirectly in securities of the company becoming available to persons not in receipt of the offer.
Public Companies - Members, striking off and re-registration
The following changes will come into force on 1 October 2008.
A public company will be able to have a single member. Currently only private companies can be single member companies. A public company will - provided it has not previously been reregistered as limited or unlimited - be able to re-register direct as a private unlimited company. At present, a public company has to convert first to a private limited company and then separately to an unlimited company. However, an unlimited company will not be able to re-register direct as a public company; it will still need to re-register first as a private limited company.
There will be a new procedure whereby the Registrar will be able to process an application by a public company to re-register as a private limited company during the 28-day period in which dissenting members may apply to the court to cancel the resolution to re-register. The Registrar must first be satisfied that no such application can be made. This provides statutory recognition to existing Companies House practice. If dissenting members do seek such an order, they must notify the Registrar. Public companies which have ceased to trade will be able to use the informal application for striking off which currently applies only to private companies under section 652A of the 1985 Act.
The following changes also take effect from 1 October 2008. The Act introduces new provisions to prevent the registration of companies with names in which other parties have established goodwill (for the purpose of extracting “ransom” payments). The provisions of the existing Business Names Act 1985, which includes restrictions on the names businesses can use, will be incorporated into the Act and widened. As a result, they will apply to any business other than individuals trading under their own surnames (plus forenames or initials) and partnerships (with no corporate partners) trading under names made up of the partners’ names. Companies may be required by later regulations to provide their names and other specified details to those who may request them in the course of business.
Companies will be able to provide in their articles for methods of changing their registered names other than by special resolution in the manner prescribed by the Act. Some companies may choose to provide for change by ordinary resolution or with some other sanction.
Fines for breach of the law
In general, companies will not incur criminal liability for breaches of the new Act where the only “victims” of the offence are the company or its members. Fines levied on a company arguably penalise its members. Where others may potentially suffer, criminal liability will continue to be imposed on the company. The relevant changes will come into force as the relevant sections imposing liability are brought into effect.
A Welsh company is a company which has notified the Registrar that its registered office is to be in Wales, rather than England and Wales. From 1 October 2008, a Welsh company will be able to cease to be such and choose that its registered office will be in England and Wales. This is not possible under the 1985 Act.
Winding up expenses
The Act will reverse the effect of the House of Lords decision in Buchler and another v Talbot and others, in re Leyland Daf, so that property subject to a floating charge will be available to fund the general expenses of a winding up. It is not currently clear when this change will take effect, as it is classed as a “miscellaneous provision” to come into force at the same time as related sections of the Act (it is unclear which these are). Clearly, it would be helpful for it to be effective as soon as possible in order to minimise uncertainty for lenders and insolvency practitioners.
Scope and extent
Unlike the 1985 Act and earlier legislation, the provisions of the 2006 Act will have direct effect in Northern Ireland. It will also extend certain other company law provisions to Northern Ireland.
The full picture
We still, of course, await the raft of secondary legislation - statutory instruments, often passed with relatively limited parliamentary scrutiny - for which the 2006 Act provides. These will serve to fill in some of the fine detail of certain provisions, to remove - it is hoped - some uncertainties in the scope and effect of some of the new provisions (notably in relation to unlawful financial assistance) and to reverse any unintended changes in the law which may have been caused by the rather rushed passage through Parliament of the amended Companies Bill.
Please get in touch with your usual Wragge & Co contact, or one of the partners named below, for further advice.
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):