Companies Act 2006

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The Companies Act 2006 (c.46) is a statute of the United Kingdom regulating companies within that jurisdiction. It received Royal Assent on 8 November 2006.

The Act also has the distinction of being the longest in British Parliamentary history, with 1,300 sections and covering nearly 700 pages, and containing no less than 15 schedules. The Act supersedes the Companies Act 1985. Although the Act amends or restates almost every facet of English and Scottish law in relation to companies, the key provisions are:

• the Act codifies certain existing common law principles, such as those relating to director's duties.
• it implements the European Union's Takeover and Transparency Obligations Directives
• it introduces various new provisions for private and public companies.
• it otherwise amends or restates almost all of the Companies Act 1985 to varying degrees.^[1]

The reception of the legal profession in the United Kingdom to the Act has been slightly lukewarm.[1] Concerns have been expressed that too much detail have been inserted to seek to cover every eventuality.^[2] Whereas a complete overhaul of company law was promised, the Act seems to very much leave the existing structure in place, and only simplify certain aspects at the margins. In other areas, it appears to have complicated and obfuscated previously settled law.

Contents 1 Implementation 2 Directors 3 General provisions 4 Private companies 5 Public and listed companies 6 External Links 7 Footnotes

[edit] Implementation

The provisions of the Takeovers and Transparency Obligations Directives and to company communications are likely to come into force in January 2007. The government intends to consult for the timetable for implementation of the remainder of the Act in February 2007. Subject to that consultation, the remainder of the Act is expected to be brought into force by October 2008.

Part of the reason for the staggered implementation is that, despite its size, a great many sections provide for subsidiary legislation to be brought in by Secretary of State, which as yet has not been drafted. Although it is unclear how extensive these regulations will be, past experience suggests that they are likely to be equally voluminous.

[edit] Directors

Main article: Board of directors

The Act replaces and codifies the principal common law and equitable duties of directors, but it does not purport to provide an exhaustive statement of their duties, and so it is likely that the common law duties will survive in a reduced form. Traditional common law notions of corporate benefit have been swept away, and the new emphasis is on corporate social responsibility. The seven codified duties are as follows:

1. to act within their powers - to abide by the terms of the company's memorandum and articles of association and decisions made by the shareholders;
2. to promote the success of the company - directors must continue to act in a way that benefits the shareholders as a whole, but there is now an additional list of non-exhaustive factors which the director's must have regard to. This had been one the most controversial aspect of the new legislation at the drafting stage. These factors are:
   1. the long term consequences of decisions
   2. the interests of employees
   3. the need to foster the company's business relationships with suppliers, customers and others
   4. the impact on the community and the environment
   5. the desire to maintain a reputation for high standards of business conduct
   6. the need to act fairly as between members
3. to exercise independent judgment - directors must not fetter their discretion to act, other than pursuant to an agreement entered into by the company or in a way authorised by the company's articles
4. to exercise reasonable care, skill and diligence - this must be exercised to the standard expected of someone with both the general knowledge, skill and experience reasonably expected of a person carrying out the functions of the director (the objective test) and the actual knowledge, skill and experience of that particular director (the subjective test)
5. to avoid conflicts of interest - methods for authorising such conflicts by either board or shareholder approval are also to be introduced
6. not to accept benefits from third parties
7. to declare an interest in a proposed transaction with the company - there are to be carve outs for matters that are not likely to give rise to a conflict of interest, or which the directors are already aware of. There will be an additional statutory obligations to declare interests in relating to existing transactions.

Although the changes to director's duties were the most widely publicised (and controversial) feature of the legislation, the Act also affects directors in various other ways.

• The shareholders' ability to ratify any conduct of a director (including breach of duty, negligence, default or breach of trust) will be regulated by the statute (instead of common law, as was previously the case). Under the Act the law will change so that directors who are also shareholders will not be entitled to vote in relation to any ratification resolution.
• Existing restrictions on companies indemnifying directors against certain liabilities will be relaxed to permit indemnities by group companies to directors of corporate trustees and occupational pension schemes.
• The Act will give shareholders a statutory right to pursue claims against the directors for misfeasance on behalf of a company (a derivative action), although the shareholders will need the consent of the court to proceed with such a claim.
• Certain transactions between the company and its directors which were previously prohibted by law will become lawful subject to the approval of shareholders (for example, loans from the company to its directors)
• The Act will require at least one director on the board of the company to be a natural person, although corporate directors are still permitted.
• The current age restriction of 70 for directors of public companies will be abolished. A new minimum age of 16 will be introduced for all directors.
• Directors will have the option of providing Companies House with an address for service, which will in future enable their home addresses to be kept on a separate register to which access will be restricted.

[edit] General provisions

The Act contains various provisions which affects all companies irrespective of their particular status.

• Company formation - the procedure for incorporating companies will be modernised to facilitate incorporation over the Internet. The restrictions on one persons forming companies other than private companies will be abrogated.
• Constitutional documents - a company's articles of association will become its main constitutional document, and the company's memorandum will be treated as part of its articles. The Act will provide for a simplified set of model articles for private companies that are intended to be more reflective of the way that small companies operate, and will replace the existing Table A. Existing companies will be permitted to adopt the new model articles in whole or in part.
• Corporate capacity - under the new Act a company's capacity will be unlimited unless its articles specifically provide otherwise.
• Execution of documents - Formalities for execution as a deed are to be further revised, so that a single director can execute a document as a deed on behalf of the company by a simple signature in the presence of a witness.
• Share capital - the requirement for an authorised share capital will be abolished. Companies will be able to redenominate their share capital from one currency to another without an order of the court.
• Distributions in kind - The Act addresses the current uncertainty in the law in relation to the transfer of non-cash assets by a company to a shareholder, and whether this should be treated as a distribution.^[3]
• Shareholder meetings - shareholder meetings will be able to be held more quickly. Special resolutions will require only 14 days' notice unless proposed at an AGM.
• Shareholder communications - companies will be able to communicate electronically with their shareholders or by website with the their shareholders by express agreement (which agreement can be obtained under the articles, or by the shareholder failing to indicate that they do not wish to communicate via the website, as well as by more conventional methods).
• Auditor's liability - auditors will be permitted to limit their liability for claims in negligence, breach of trust or breach of duty so long as the shareholders' have approved the limitation in advance. This change was made after intensive lobbying by the accounting profession in the United Kingdom.

[edit] Private companies

Main article: Private company limited by shares

One of the more touted aspects of the new legislation will be the simplification of the corporate regime for small privately held companies. A number of the changes brought about by the Act apply only to private companies. Significant changes include:

• Company secretaries - a private company will no longer need to appoint a company secretary, but may do so if it wishes.
• Shareholders' written resolutions - the requirement for unanimity in shareholders' written resolutions will be abolished, and in future they can be passed by an affirmative vote of 75% of all of the eligible votes for both ordinary and special resolutions. In addition, members holding 5% of the voting rights (or such lower amount specified in the articles) can require that a written resolution be circulated for approval.
• Abolition of AGMs - private companies will no longer be required to hold Annual General Meetings, although they can elect to do so in their articles if they wish.
• Short notice of meetings - private companies can convene meetings on short notice where consent is given by 90% in nominal value of shares carrying the right to vote.
• Allotment of shares - where private companies have only one class of shares, the directors will have unlimited authority to allot shares unless the articles otherwise provide.
• Financial assistance - the Act abolishes the prohibition on private companies providing financial assistance for the purchase of their own shares, and the related "whitewash" exemption procedure.
• Reduction of share capital - private companies will be able to reduce their share capital without the need to obtain a court order.
• Filing of accounts - the period in which accounts must be filed has been reduced from 10 months to 9 months from financial year end.

[edit] Public and listed companies

Main article: Public limited company

The Act also seeks to promote greater shareholder involvement, and a number of new requirements are introduced for public companies, some of the provisions of which only apply to companies whose shares are listed on the main board of the London Stock Exchange (but, importantly, not to companies whose shares are listed on AIM).

• Business review - the Act imposes additional requirements for companies listed on the main board of the LSE in their annual report and accounts. These now include:

1. main trends and factors likely to affect future development, performance and position of the business;
2. information on environmental matters, employees and social issues; and
3. information on contractual and other arrangements essential to the company's business.

• AGM and accounts - main list companies will be required to hold their AGM and file accounts within 6 months of the end of the financial year. They will also be required to:

1. publish their annual report and accounts on their website;
2. disclose results of polled votes at general meetings on their website;
3. give certain minority shareholders the right to require independent scrutiny of any polled vote, the results of which must be published on the company's website.

• Political donations and expenditure - the Act contains simplification and clarification to the existing provisions requiring shareholder approval for political donations and expenditure, and clarifies a number of grey areas (such as expenditure relating to trade unions).
• Enfranchising indirect investors - nominee shareholders of main list companies will be able to nominate persons whom they hold shares on behalf of to receive copies of company communications and annual reports and accounts. All companies will also be able to include provisions in their articles to identify some other party to exercise additional rights of the shareholder. This is to address the concern that shares in publicly listed companies are frequently held in an intermediaries name, which makes it more difficult for them to exercise their rights as shareholder.
• Voting by institutions - the Act empowers the government to introduce regulations in the future that would force institutions to disclose how they have voted. The government has indicated it will only introduce regulation after full consultation and if a voluntary disclosure scheme does not work.
• Paperless share transfers - the Act gives the government power to make regulations requiring (as well as permitting) paper-free holding and transferring of shares in main list companies. Some law firms have expressed reservations as to how paper-free holding and transfers would work in practice.
• Transparency Obligations Directive - the Act brings into force the European Directive imposing obligations on main list companies in relation to financial reporting, disclosure of major acquisitions or disposals of its shares and the dissemination of information about the company to its shareholders and the public generally. The Act gives the Financial Services Authority power to make rules to implement the requirements of the Directive, which would be implemented by way of changes to the existing Listing Rules and Disclosure Rules. The Act also introduces a statutory compensation scheme for misleading or inaccurate statements in reports.
• Takeovers - the EU Takeover Directive was implemented by interim regulations in the United Kingdom in May 2006. The Act extends the statutory basis for the regulations in relation to certain matters, such as the the statutory footing of the Takeover Panel, and the City Code on Takeovers and Mergers. It also extended the "minority sweep up" provisions which were introduced by an amendment to the Companies Act 1985, and addresses certain practical problems which had arisen in relation to their operation.

[edit] External Links

• Companies Act 2006
• Companies Act 2006 PDF
• DTI announcement
• Updated - Companies Act For Websites (2007)

[edit] Footnotes