Tim Polding, Head of Commercial Department at Liverpool-based legal firm, Lees Lloyd Whitley, offers an overview of the Companies Act for Bytestart readers – and what to look out for.
What is the Companies Act 2006?
The Companies Act is one of the biggest legal reforms ever to face businesses, involving eight years of consultation. Some of the components of the Companies Act have already become law, although much of the legislation won’t come into force until October 2008.
The aims of the legislation are the simplification and modernisation of company law together with shareholder engagement through the promotion of a long-term investment culture. The priority has been to “think small first” by reducing the burden on small private companies, boosting enterprise, encouraging investment and promoting long term performance.
Initial criticisms of the Act focus on the general disappointment it engenders despite its sheer size and the amount of effort expended in a number of different quarters. The view is that reform has been achieved but without the simplification and clarity which were espoused beforehand. As a result, further legislation and judicial clarity are likely to be required urgently once the Act comes into force.The Act contains 1,300 sections, approximately one third of which are genuinely new, comprising 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.
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 will come into force in October 2008 with transitional provisions due to be published later this year. 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.
These requirements 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 before this part of the legislation comes 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.