The Companies Bill (formerly the Company Law Reform Bill) received Royal Assent on 8 November 2006 and is now the Companies Act 2006. The second commencement order made under the Act was laid before Parliament on 8 February 2007, approved last week and published today. It will come into force on 6 April, simultaneously with the final tranche of changes effected by the first commencement order. Following the distribution of our briefing notes:
- specifically on the banking aspects of the new Act (September and December 2006);
- in January 2007, on: (a) the new code of conduct for directors (coming into effect, in large part, on 1 October 2007); and (b) those provisions of the Act which came into force in January by virtue of the first commencement order;
- in February 2007, titled ‘Companies Act 2006: Introduction and background’, ‘Companies Act 2006: Business as usual?’ and ‘Companies Act 2006: Electronic communications and public company shareholdings’; and
- last month on ‘Directors and secretaries’, ‘Members’ meetings and resolutions’, ‘Share capital and members’ rights’, ‘Accounts, auditors and websites’ and ‘Capital maintenance and reduction, financial assistance and distributions’,
a further update regarding the Act is set out below. It is (unless otherwise stated) addressed to directors of all companies, public or private, quoted or not, large and small.
New from 6 April 2007 Takeover regulation
Part 28 of the Act (Takeovers etc) will spring into effect on 6 April. However, many companies have been subject to roughly equivalent provisions since last May, thanks to the Takeovers Directive (Interim Implementation) Regulations 2006. By way of reminder, these provisions govern four major areas:
- they confirm the new status of the Panel on Takeovers and Mergers. The Panel will continue to be an unincorporated body, independent of Government and responsible for enforcing the City Code, but on a statutory footing and with enhanced powers. The DTI will be responsible for enforcing other provisions in the Act;
- they implement those provisions in the European Directive on Takeover Bids which can serve to override steps taken prior to a bid which might frustrate it (the so-called “breakthrough provisions”). Note that these relate only to companies with voting shares admitted to trading on a regulated market (including the main list, but excluding for example AIM and PLUS);
- they replace the existing compulsory acquisition (or squeeze-out and sell-out) provisions of the Companies Act 1985 (CA 1985); and
- in respect of financial years beginning on or after 20 May 2006, they introduce new disclosure requirements for certain companies’ directors’ reports. These must now address matters such as the share and control structures of those companies (whether or not they happen to be the subject of a takeover offer). The companies affected are those, and only those, voting securities of which were, at the end of the relevant financial year, traded on a regulated market.
The main changes from 6 April are as follows:
- other than to a limited extent (eg squeeze-out and sell-out provisions in respect of takeover offers made before 6 April 2007), we say good-bye to the interim takeover regulations of last May and farewell to sections 428-430F Companies Act 1985. Each will be repealed from 6 April, and the two-track regime that has been in place since last May - one set of rules for takeovers subject to the Takeovers Directive and another set for those not so subject - will be a thing of the past;
- save as mentioned above (and in respect of the new criminal offences imposed on companies/directors who knowingly or recklessly publish offer/defence documents which do not comply with certain Panel rules), Part 28 will apply to takeovers of all City Code-governed companies - not merely those traded on a regulated market; and
- the Panel will be able to make and amend rules even in so far as they relate to matters contained in the Takeovers Directive (contrast the position under the interim regulations). The City Code has already been amended, prospectively, to reflect its new statutory status. While the squeeze-out etc provisions are “re-stated” “in a clearer form”, the procedure is largely unchanged.
Fees to Registrar
Section 1063 (giving the Secretary of State a power to make regulations governing the payment of fees to the Registrar) also arrives on 6 April. Of course a broadly equivalent power exists already in company law - and we wait to see the regulations themselves. A transitional provision guarantees that the Registrar won’t miss out on any fees in the interim!
Amendments to Enterprise Act 2002
Section 1281 will also come into effect on 6 April, amending that part of the Enterprise Act which governs the release of certain consumer and competition information. It paves the way for a public authority - in certain circumstances - to disclose prescribed information, specifically excluding that obtained in connection with competition functions, for use in civil proceedings or otherwise for the purpose of establishing, enforcing or defending legal rights. The basic idea is to put brand owners, IP rights holders and consumers in a better position to seek redress from counterfeiters, pirates and those who have flouted trading standards.
The Government has consulted on a draft order to implement these changes. No order has to date been made.
Repealed from 6 April 2007
Section 41 CA 1985 - deemed authentication of documents This section of CA 1985, as amended by the Companies Act 1989, provides that a document requiring authentication is deemed sufficiently authenticated by the signature of a director, secretary or other authorised officer of the company concerned.
It is to be repealed with effect from 6 April - not because it has ceased to be a sensible provision, but on the basis that it is no longer needed. It “has been overtaken by common law developments and scope to use a company’s articles to provide for this”. It may be worth checking your articles of association to see if they do so provide.
Sections 293-4 CA 1985 - age discrimination
These provisions enshrine a historic legal principle whereby an individual is not capable of being appointed a director of a public company, or of a private company in its group, if at the time of appointment he or she is aged 70 or older. (If a director attains that age during the year, the director vacates office automatically at the next Annual General Meeting.) Don’t panic! There were always a number of exceptions. In particular, the specific appointment of such a director at a general meeting on special notice is permitted. There is also an opt-out provision - your company’s articles of association may override the general principle.
In any event, the law changes on 6 April, at least as a matter of statute. Section 293 and section 294, which imposes a duty on directors to disclose their age, are “no longer regarded as necessary” and have been repealed.
Do check your articles however, which may repeat (rather than override) the prohibition in such a way that the general principle survives in relation to your company. Listed companies will also need to be alert to any sensitivity on the part of their shareholders or representative groups as to the appointment or re-election of directors who have reached a certain age. This has been identified in the past, by organisations like Manifest, Morley and PIRC, as a “corporate governance issue”. The Combined Code on Corporate Governance also provides that the names of all directors submitted for election or re-election should be accompanied “by sufficient biographical details and any other relevant information” to enable shareholders to make an informed decision.
Section 311 CA 1985 - tax-free payments
This provision makes it unlawful for a company to pay a director remuneration which is either free of income tax, or otherwise calculated by reference to or varying with any amount or rate of income tax.
Until 6 April that is. Section 311 is not being replaced - on the basis that any tax which a company has agreed to pay is itself taxed as part of a director’s emoluments, and because the company is required to disclose in its accounts an estimate of the tax which it has undertaken to pay.
Sections 323 and 327 CA 1985 - dealing in share options etc These sections make it a criminal offence for directors of a company and certain of their family members to deal in options in respect of its (or another group company’s) listed shares or debentures. Contrast the grant by a company of share options, which is of course permitted.
These sections too are going on 6 April, and are not being replaced.
Sections 324-326 and 328-9 (and Parts 2-4 of Schedule 13) CA 1985 - disclosure of directors’ interests and dealings Many readers will immediately recognise these sections, which impose basic company law obligations:
(a) on directors, to disclose any interests they or certain of their family members may have in their company’s (or another group company’s) shares or debentures, as well as any changes in such interests;
(b) on companies, to keep a register of those interests; and
(c) on a listed company, to notify the stock exchange accordingly.
These offences, which are criminal in nature, cease to exist on 6 April, as will the corresponding disclosure requirements applicable to directors’ reports approved on or after that date. Listed companies are subject to the Financial Services Authority’s Disclosure and Transparency Rules. DTR3 deals with reporting transactions in a company’s securities by socalled PDMRs (“persons discharging managerial responsibilities”, including directors). PDMRs and their connected persons must notify the listed company concerned within four business days of a transaction; the listed company must notify the market as soon as possible thereafter and no later than the end of the next following business day. The Government “does not wish to goldplate the [EU Market Abuse] Directive requirements by applying them to other companies”…
AIM companies are subject to London Stock Exchange rules re-issued on 20 February which require them:
(a) to notify deals by directors “without delay” (Rule 17); and
(b) to ensure that each of their directors discloses “without delay” all information which the company needs in order to comply with Rule 17 “insofar as that information is known to the director or could with reasonable diligence be ascertained by the director” (Rule 31).
Section 438 CA 1985 - civil proceedings
This section, which empowers the Secretary of State to bring civil proceedings on a company’s behalf, expires on 6 April (without prejudice to any proceedings brought before that date). It is being repealed “as it is no longer needed”.
Timing for implementation - what’s next?
The Government published, on 28 February 2007, a comprehensive timetable for bringing the remainder of the Act into force, with significant additional tranches coming onstream on each of 1 October 2007, 6 April 2008 and 1 October 2008. One or more commencement orders are awaited.
The final text of the Act was published on 7 December 2006 and the first and second commencement orders were made on 20 December 2006 and 29 March 2007 respectively. This briefing note summarises only the most important of the changes coming into effect on 6 April. The full texts of the Act and both commencement orders can be obtained from the Office of Public Sector Information (www.opsi.gov.uk)