After eight years of consultation and deliberation, the UK Companies Act 1985 is finally being reformed. The Companies Act 2006 received Royal Assent in November 2006 and will make a number of key changes to the existing legislation.
The majority of its provisions will come into force by October 2008, although certain provisions are already, or about to be enforced.
The principal changes to UK company law made by the Act include the following:
Historically dealt with by English common law principles, the main directors’ duties have now been codified in statute by the Act.
In particular, rather than simply acting in the best interests of the company and its shareholders, a director must now act in good faith to promote the success of the company for the benefit of its members.
In doing so the director needs to regard certain other influences such as employee interests, business relationships with suppliers and customers, community and environmental interests and the consequences of any decisions in the long term.
In addition, directors' duties of skill and care have been set out in the Act, as have their obligations to take care to avoid conflicts of interest.
STREAMLINED PROVISIONS FOR PRIVATE COMPANIES
The UK Government has been concerned for some time that there is too much red tape in relation to the operation and administration of smaller private companies. For this reason some of the more burdensome provisions are being dropped.
For example, private companies no longer require a company secretary and in addition, to the great relief of many lawyers, in certain circumstances private companies may now give financial assistance in connection with the purchase of their own shares. They may also reduce their share capital without court approval.
NEW PROCEDURE FOR DERIVATIVE ACTIONS
The new Act also lays down a new procedure for derivative actions, i.e shareholders claiming against directors in the name of the Company. It remains to be seen whether the new process will assist shareholders in more US style collective shareholder litigation.
Auditors are being given the power to agree liability limits with companies.
UK PANEL ON TAKEOVERS AND MERGERS
The UK Panel on Takeovers and Mergers, historically an independent body, has now been put on the statutory footing, implementing the provisions of the EU Takeover Directive.
POWER TO CORRESPOND WITH SHAREHOLDERS
In order to implement provisions of the EU Transparency Directive, the new Act gives broader powers for companies to correspond with their shareholders and organise meetings electronically.