On 1 October 2007, a number of key provisions of the Companies Act 2006 (the Act) will come into force introducing changes to the existing company law regime in a number of areas. An overview of the key changes are outlined below:
The general duties of directors, which have to date existed at common law, are to be codified. Of the seven express duties laid out in the Act, those that are coming into force on 1 October 2007 are:
- duty to act within powers;
- duty to promote the success of the company;
- duty to exercise independent judgement; and
- duty to exercise reasonable skill, care and diligence.
The remaining three duties (the duty to avoid conflicts of interest; the duty not to accept benefits from third parties; and the duty to declare an interest in a proposed/existing transaction or arrangement with the company) are due to come into force on 1 October 2008.
Directors' liabilities: The Act codifies the common law on the ratification of acts of directors, putting shareholders' ability to ratify a director's conduct which amounts to negligence, default, breach of duty or breach of trust in relation to the company on a statutory footing. Under the Act, ratification may be effected by ordinary resolution (subject to anything in the company's articles requiring a higher majority) but any vote in favour cast by the director whose conduct is the subject of the vote, or any member connected with that director, must be disregarded.
Substantial property transactions: Shareholder approval will be required before a company may enter into a transaction with a director involving a non-cash asset which has a value of not less than £5,000 (raised from £2,000) but which exceeds 10% of the company's asset value or £100,000.
Loans, quasi-loans and credit transactions: The prohibitions on loans, quasi-loans and credit transactions made by a company to a director are to be abolished. Instead, if the company is a public company (or a private company associated with a public company), member approval will be required for such transactions. If the company is a private company, member approval will only be required for loans to directors. There are certain exemptions which apply, and some changes have been made to the scope of these exemptions, including an increase in monetary thresholds.
Directors' service contracts: The Act contains a definition of directors' service contracts which specifically includes letters of appointment. Directors' service contracts will have to be made available for inspection by shareholders until one year after their expiry. Shareholder approval will be required for service contracts in excess of two years (under the previous regime it was required for contracts in excess of five years).
Payment for loss of office: The corresponding provisions in the Companies Act 1985 (the "1985 Act") are re-stated and extended to include payments to directors and their connected persons for loss of any office or employment in connection with the management of a company.
Directors' report: The Act introduces new provisions relating to the business review section of the directors' report to be included within the annual report of the company. The Act states that the purpose of the business review is to inform shareholders of the company and help them assess how the directors have performed their duty to promote the success of the company. A quoted company will also be required to include additional information in the business review, including the main trends and factors likely to affect the future development, performance and position of the company's business, and information on corporate social responsibility matters. These requirements come into effect for financial years starting on or after 1 October 2007. There is an exemption for small companies from the requirement to include a business review in the directors' report.
Derivative actions: The Act introduces a new derivative claims procedure which will apply (subject to transitional provisions) to all derivative claims commenced after 1 October 2007. The statutory provisions are intended to reflect the recommendation of the Law Commission to introduce a more modern, flexible and accessible derivative claims procedure. The Act prescribes a wider range of circumstances in which a derivative action may be brought by a shareholder than is the case under current law. Before a substantive claim can be brought, the shareholder will be required to make a prima facie case. The court is required to consider various factors in considering whether to permit the claim to proceed.
Exercise of shareholders' rights: The Act permits shareholders of companies whose shares are traded on a regulated market, and who hold shares on behalf of another person, to nominate that other person to receive all communications that the company sends to its shareholders as well as copies of company accounts and reports. A company will not be required to act on nominations before 1 January 2008. In addition, the Act contains enabling provisions to allow any company to include provisions in their articles permitting shareholders to nominate another person or persons to enjoy all rights, or specified rights, of the nominating shareholder.
Shareholders register: The Act introduces new provisions which allow companies to apply to the court to reject a request to inspect or receive a copy of the register of members, where it considers that the inspection or copy requested is not sought for a "proper purpose".
Proxies: Proxies will now be able to speak and vote on a show of hands at all general meetings (having previously, at plc meetings, only been able to vote on a poll) and will count towards a quorum. Shareholders will be able to appoint more than one proxy provided each proxy is appointed to exercise the rights attached to different shares.
Notices: The notice period to be given before calling general meetings of public or private companies will be reduced to 14 days, other than the AGM of a public company which will still require 21 days notice under the Act (and the Combined Code of course continues to provide that relevant companies send AGM papers to shareholders at least 20 working days before the meeting).
Private company AGMs: Subject to the company's articles, the requirement for private companies to hold an AGM will be dispensed with.
Public company AGMs: Under the Act, a public company must hold an AGM within six months of its financial year end (as opposed to every 15 months as prescribed under the 1985 Act. The six month period is transitionally extended to seven months to correspond with the time limit under section 244 of the 1985 Act (period allowed for laying and delivering accounts and reports) which is expected to be repealed on 6 April 2008. In relation to public companies incorporated before 1 October 2007, the new time limit will not apply to the first AGM held after 30 September 2007.
Polls: The Act requires the results of any poll taken at a general meeting of a "quoted company" (which includes companies listed on the Official List but not AIM) to be made available on a website. Shareholders of a quoted company will be able to require the directors to obtain an independent report on any poll taken, such report to be made available on a website.
Annual accounts: Private companies will no longer have to lay annual accounts and reports for financial years ending on or after 1 October 2007 before shareholders at general meeting.
Auditors: For financial years beginning on or after 1 October 2007, the auditors of a private company will, subject to certain exceptions, be deemed to have been automatically re-appointed without the need for an appointing resolution of shareholders.
Record keeping: The Act introduces a ten year time limit on the requirement to keep records of all resolutions and meetings (the previous requirement was to keep such records indefinitely). There will no longer be a requirement to keep records of managers' meetings.
Written resolutions: The Act introduces new provisions relating to written resolutions made by private companies. A simple majority (in the case of an ordinary resolution) and a 75% majority (in the case of a special resolution) will be sufficient to pass the resolution (previously unanimity was required to pass all written resolutions). A number of additional procedural requirements have also been introduced relating to written resolutions. The Act also makes provision for shareholders with voting rights representing not less than 5% (subject to any lower percentage specified in the company's articles) of the total voting rights to require circulation of a written resolution.
Extraordinary resolutions: The Act will abolish the concept of an extraordinary resolution.
Political donations: The requirement for shareholders' approval of political donations will be retained, but a single authorising resolution made by shareholders of a UK holding company will be sufficient to cover all wholly owned subsidiaries. Donations to trade unions will also be exempted from the scope of political donations (unless the donation is made to the trade union's political fund).