Take Note Of The Law

The Companies Act 2006 applies to all businesses in England, Wales and Northern Ireland. There will almost certainly be a separate piece of legislation enacted in Scotland which will largely mirror the principal reforms being introduced in the rest of the UK. The Act applies across the board to all companies (whether private or public and, if private, whether limited by share capital or guarantee or community interest companies) regardless of turnover. 

The Companies Act 2006 comprises of 1,300 sections, approximately one third of which are genuinely new, including the following areas:

 Company formation and constitution;

• Company members and directors’ duties and powers;
• Derivative actions and secretaries;
• Company meetings and political donations;
• Company accounts and auditors;
• Private and public companies, share capital and allotments;
• Company takeovers and investigations;
• Companies not formed under the Act and unregistered companies.

 

What should businesses have done already?

By now all companies should have made sure that order forms and other documents, whether hard copy or electronic, have been amended to include the company’s registered name (as opposed to just the trading name), number, place of registration and registered office. It is easy to overlook the updating of a company’s website in a similar way but such an oversight will make the company liable for a fine. Any officer of the company could also find themselves liable for a fine if they have authorised the issue (albeit innocently) of a non compliant document.

Parts of the legislation relating to public company takeovers and transparency provisions are already in effect and any companies involved in a takeover will need to be aware of and comply with these, particularly in relation to the disclosure of major shareholdings and periodic financial reporting. Again, a failure on the part of the officers of a company to comply with the new disclosure requirements will result in them (as well as the company) being liable for a fine. The officers of a company will undoubtedly be looking to its senior management team to build in appropriate levels of protection by way of checks and balances to ensure compliance.

What do businesses need to do?

Administration is being simplified, particularly with regard to establishing a new business, and the financing of succession or management buyouts will be made easier.  Electronic communication as a valid form is acknowledged with, for example, a company having the right to issue a notice in respect of a general meeting in electronic form or by notice posted on the company’s website.

Such a notice should also indicate the method of communication the company will accept in return and confirm the shareholder’s statutory right to a hard copy of the notice. More time and cost effective communication with shareholders reduces one of the perceived burdens of company legal procedures.

The Institute of Chartered Secretaries and Administrators has published a useful guidance note on electronic communications with shareholders under the Act, which includes recommendations in terms of the approach and best practice that companies may wish to adopt.

In the interests of greater efficiency, it is important for a company to review the communication provisions in its articles of association and consider any appropriate amendments to them to capitalise on the flexibility now offered under the Act.

The majority of the provisions of the Act have now come into force

The key areas covered are:

• The codification (at last) of directors’ duties;
• Improved rights for shareholders; and
• Deregulation for private companies.

With regard to directors’ duties, the Act introduces a new obligation to promote the company’s success. So, in future, when making any decision on behalf of the company, in addition to considering the likely long term consequences, the directors will also be expected to consider the interests of the employees, the need to foster business relationships, the impact on the community and the environment and the need to act fairly between shareholders.

What counts as ‘success’ for these purposes will be for the members to determine.  They will set the objectives of the company and it will be for the directors to promote the success of the company in accordance with those objectives. In many companies, the members will probably not articulate any precise objectives beyond commercial success and therefore value for the shareholders. For companies formed for specific purposes, for example, with charitable aims and objectives, success will be measured against those objectives. Either way, it will be important that a company disseminates information relating to the requirements for success to its directors and senior management team either through its website or via some other appropriate media.

One further contentious issue is whether or not directors and senior managers should keep documentary evidence of the factors which they have taken into account in case of any subsequent legal challenge. There is no statutory requirement for additional record keeping or the active provision of additional information regarding decision making.  However, the approach is likely to vary from company to company and from transaction to transaction depending on the circumstances.

Many decisions of an everyday nature will require no additional documentation. In a public company (especially one that is listed), however, directors may be concerned to ensure that their decisions are challenge proof which may lead to more detailed documentation of board decisions. On controversial matters, a board of directors may also want to bolster its decisions with reports and advice from consultants so as to show, not only that the board has had regard to the statutory factors, but it has also exercised appropriate care and skill in considering them.

These new statutory requirements placed upon directors are conceivably very onerous indeed. While there are no major changes to the existing implied duties that flow from being a company director, the codification will certainly define and reinforce those duties. Businesses should take the opportunity now that this part of the legislation has come into force to ensure that their own house is in order and that the directors are fully aware of their responsibilities.

Shareholders will benefit from improved rights, with indirect shareholders receiving more information and voting rights. Again perhaps the most important aspect of this part of the legislation for directors to be aware of is the right of the shareholders to sue directors individually for negligence or fraud. While any such action would require the permission of the court (which is only likely to be granted if the claim would promote the success of the company) it is imperative that a company’s directors fully understand the implications.

Deregulation for private companies will mean, among other things, that they will no longer be required to have a company secretary or to hold annual general meetings in order to conduct their business. In addition private companies will be able to give financial assistance for the acquisition of their own shares and to reduce their share capital without the need for court approval.

There will be various transitional provisions and guidance published over the next few months and every company should be giving serious consideration now to how it will comply with the new regime.

Tim Polding advises readers on the main considerations in the Companies Act 2006 which includes IT implications including communications and record keeping.