The Companies Act 2006 marks the first comprehensive reform of UK company law for decades. Between now and October 2008, it will gradually replace the Companies Act 1985, (which in the main consolidated earlier legislation, with few significant amendments). The 2006 Act has therefore generated much attention and not a little concern from those - directors not least - who will have to learn to live with and work under the new regime.
But is there really any need for concern? Companies whose shares are traded on public markets are experiencing very wide-ranging changes in the rules which govern them, under the Act and under European Commission directives dealing with takeovers and disclosures of interests in shares. But even those companies, to say nothing of the far larger body of unquoted trading companies, may find that relatively little of importance will change in their day-to-day activities as a result of the 2006 Act.
This note examines a number of the headline-making features of the 2006 Act and asks if their impact may have been overstated.
There will be a new statutory statement of the duties owed by company directors.
True, but for the most part this will simply embody the existing “common law” rules arising from decisions made by the courts. Directors who are observing best practice under the current rules seem unlikely to fall foul of the new statutory regime (though it is undoubtedly true that the Act reflects a trend towards higher market expectations of directors, for example in the area of corporate social responsibility). The only really novel aspect of the new rules will be the need for directors “to have regard to” a number of specific factors when considering how best to promote the success of their companies. The factors include the interests of employees of the company - did you know that the 1985 Act already requires these to be considered? - together with the interests of other “stakeholders” such as suppliers and customers. Directors are also to consider the company’s impact on its community and the environment, and to take account of the longterm implications of any action. But it is the company’s members (ie shareholders) for whose benefit the company must be run and only the members can enforce the duties. Proposals to allow other “stakeholders” such as environmental activists to enforce the duties direct (ie without the need for a shareholding) were defeated during the parliamentary progress of the new legislation. There will be more extensive requirements for disclosure of directors’ personal interests in the company’s transactions, with fines for non-compliance in some cases. For more detail, see our previous briefing note The Companies Act 2006: Directors’ Duties and First Commencement Order.
It will be easier for members to challenge directors’ decisions in the courts.
Well, maybe. There will be a change in the rules, so that challenges to any breach of duty will be possible, even in some cases where directors have not made any personal gain and where they do not control a majority of the company’s shares. But will this mean more challenges, or more successful ones? The courts will still have to decide whether or not to allow claims to go forward and will only do so if satisfied that someone seeking to promote the success of the company would proceed with the claim. It seems unlikely, to take an extreme example, that activists opposed to the legitimate activities of a particular company could acquire shares in the company (even if they were available to buy) and then mount a successful challenge. The courts will not interfere in everyday business decisions unless there is evidence of wrongdoing (for instance if a decision was made with the ulterior motive of lining directors’ own pockets).
Private companies will no longer need company secretaries. Quite right, but they will still be able to have a secretary if they wish. Furthermore, in most cases, the secretary is also one of the directors, so the same person will continue to carry out the same administrative duties, either under the same or a different title.
Private company deregulation
Private companies will no longer need to hold AGMs, lay accounts before members in general meeting or appoint auditors annually. They will also be able to hold general meetings on short notice with the agreement of members holding 90 per cent of their voting shares. But private companies are already able to take advantage of the “elective regime” which provides exactly the same relaxations. The “elective” position simply becomes the default position, so that private companies will have to make an active decision if they want to be subject to greater administrative burdens.
Private companies will be able to give financial assistance for the acquisition of their shares and make loans to directors. It would be more strictly correct to say that the 2006 Act will not prohibit financial assistance in so many words. The 1985 Act does so, but in a way which solvent companies can circumvent in many cases. Under the new rules, a private company will be able to assist in the acquisition of its shares (for example, it might lend money or transfer assets to the buyer, or pay deal costs). However, unless its directors are genuinely satisfied that this will promote that company’s - not the wider group’s - long-term success and will otherwise be in accordance with their duties (as considered above), disgruntled members could challenge the transaction. Furthermore, if the assistance would cause a reduction in the company’s net assets, it could in some cases (for example, where the company does not have enough profits to pay dividends) amount to a reduction of share capital, for which additional steps would have to be taken. There are also separate restrictions on certain payments to directors in relation to an acquisition or disposal. In practice, as now, companies with bank borrowings or shares in the hands of private equity or other institutional investors will find that their financing documents contain contractual restrictions on any transactions of this kind in any case.
The same is likely to apply to loans and similar arrangements (eg guarantees) with private company directors. Although the new Act will allow these, provided the members vote in favour, lenders and other institutions are unlikely to want them in place. Moreover, the tax implications of these arrangements may make them unattractive.
There are many and various other detailed changes which are unlikely to impact on the everyday activities of a company but which will only come into play if a company does something out of the ordinary (such as reduces its share capital, purchases some of its own shares, or issues redeemable shares). In those cases, companies would be well advised to consult their solicitors, who will be able to guide them through the amended procedures. There will also be changes which affect all companies but which may be of relatively limited practical significance. For example, auditors will be able to negotiate caps on their liability, and will no doubt take full advantage of this, but companies will only be affected if they have to make a claim against their auditors.
Other administrative changes, such as renumbering of Companies House forms to correspond with the section numbers in the new Act, will barely register with many busy directors, or will be easy to comply with. Will many companies want to pay their directors free of income tax? It seems unlikely (institutional shareholders in particular seem unlikely to favour this), even though the 2006 Act will allow this. There are many similar examples.
It is true that for some companies and their directors, very significant changes may occur. For example, allowing directors to give service addresses on the public record, rather than their home addresses, is bound to be of huge importance to directors of companies engaged in controversial or unpopular businesses or projects, who currently have to apply for express permission to withhold their home addresses for fear of personal attack. For most companies, however, the change will be a matter of passing interest at best.
So, what are the changes that companies will find most important or helpful? To some extent, this can only be an exercise in speculation, but the list is likely to include:
Increased use of electronic communication
The new Act takes as read that email and websites will in future be the preferred means of communication between companies and their members. Although individual members may be able to insist in some cases on hard copy documents, in other cases annual accounts, notices of meeting, written resolutions and other documents may be displayed on a website or sent and received by companies in electronic form, in the same way as has become the norm for general business communications. Traditional notices of meeting and written resolutions bearing physical signatures seem destined to become the exception. Savings in terms of time and printing costs should be significant. Some of these provisions are already in force and we would be happy to advise companies how to benefit from the new rules.
New rules on general meetings and members’ resolutions As now, private companies will be able to pass any members’ resolution in writing, unless it is to terminate the tenure in office of a director or auditor. However, as noted above “writing” will no longer imply a signed hard copy. In addition, written resolutions will no longer require unanimous support. Instead, written ordinary or special resolutions will require only the same level of support as the same resolutions would need to be passed at a meeting; that is a simple majority and 75 per cent respectively. Public companies (listed or not) will still have to hold meetings, but only 14 clear days’ notice will be needed, even if special resolutions are proposed (except for the AGM which will still need 21 clear days’ notice). No private company will need to hold an AGM unless it wishes to do so; if so, the notice required will be 14 clear days only (unless shorter notice is agreed by the holders of 90 per cent or more of the voting shares).
Execution of Documents
Any document, including a deed, will be duly executed if signed by a single director in the presence of a witness who also signs the document. Existing modes of execution (eg by the signatures of two directors or a director and the secretary, or by sealing) will remain equally valid. The days of frantic dashes by courier between remote directors, or questionable practices involving faxed signatures, will thankfully be over.
Don’t panic! But…
We hope this note will reassure you about the impact of the new Act on your business. Of course, any change in the law tends to cause a degree of uncertainty until we can assess how the new law is applied and interpreted by the courts. At a detailed level, almost every company will need to take some action in response to the new Act - if only, for example, to review its articles of association to ensure they provide maximum flexibility. The Government has indicated that existing companies will need to amend their articles to take advantage of a number of the deregulating measures that will apply automatically to companies formed after the new Act is in force. We will aim to cover some of these more detailed aspects in future briefings. 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): http://www.opsi.gov.uk/acts/en2006/ukpgaen_20060046_en.pdf
Please note that except as indicated in this note, the amendments covered above are not in force as at 31 January 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)