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IMPLEMENTATION OF PART OF THE COMPANIES ACT 2006 |
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The implementation of the new Companies Act continues on 1 October 2007, when various significant provisions are brought into force (SI 2007/2194 as amended by SI 2007/2607). The key areas affected are shareholder decision making and directors, so clearly this phase of implementation will have an impact on every company. Any differences are highlighted below. The new section numbers and the paragraphs in Company Law Memo 2007 are given for each topic so that readers can refer to a more detailed discussion in the context of the relevant topic if they wish. The changes will also be dealt with in the online updates.
These changes occur on 1 October 2007. In many cases, they will apply straight away but transitional provisions are in force to deal with ongoing situations. This means that, for example, where the legislation requires shareholder consent for a transaction, the new provisions apply for transactions entered into on or after this date and the old provisions remain in force as far as transactions entered into before this date are concerned. Similarly, the new provisions concerning shareholder resolutions and meetings apply where notice of a resolution or meeting is given on or after 1 October 2007, and the old rules apply if notice was given before that date. The provisions brought into force in this phase that relate to accounts apply to financial years starting on or after 1 October 2007. The application of particular provisions may cause some confusion during the transitional period; for details, companies should consult SI 2007/2194 and SI 2007/2607.
Looking ahead, the next implementation phases will occur on 6 April 2008, when the key areas affected will be accounts and audit, and finally on 1 October 2008, when the remainder of the new Act will come into force.
Shareholder decisions
The bulk of the provisions of the new Act coming into force on 1 October deal with shareholder meetings and resolutions. The changes will streamline the decision making process for private companies in particular, by eliminating many of the unnecessary procedural steps and other obstacles they encounter. All companies will have to take note of the changes, however, since many of them are applicable to public as well as private companies.
Resolutions
One of the biggest changes introduced by the new Act in this phase of implementation is the new written resolution procedure available to private companies. It is available for all decisions, except those to remove and/or replace directors or auditors before their term of office expires, as was the case under CA 1985. A private company’s articles cannot exclude shareholders’ right to take decisions in this manner. If private companies already have written resolution procedures set out in their articles, they will be able to choose which one to use.
The major advantage of the new procedure is that it does not require unanimity, so it is likely to be far more widely used. Instead, special and ordinary resolutions can be carried by the same majorities as at a meeting. In addition, there is a deadline within which the resolution must be carried (within 28 days of being circulated), so if the requisite number of votes has not been received by the company in favour of the resolution by the deadline it will have been rejected. Both the board and the shareholders can propose a written resolution.
Transitional arrangements apply to ensure that the correct documents are still attached to written resolutions. To this end, ss 300A-300D have been inserted into the new Act, dealing with documents to be sent out on resolutions to disapply pre-emption rights, to approve financial assistance, to give authority for an off-market purchase or contingent purchase of the company’s own shares and to approve a payment out of capital.
Ordinary resolutions and special resolutions are governed by the new Act, but their features remain largely the same (with the exception of the notice requirements, which now depend on the type of meeting, see below). The special notice procedure for ordinary resolutions to remove and/or replace directors and auditors is also set out in the new Act, requiring 14 clear days’ notice to be given.
Extraordinary resolutions do not appear in the new Act as a form of shareholder decision. Those provisions which used to require this form of resolution by statute now require a special resolution instead (s 125 CA 1985 and ss 84, 165 IA 1986 have been amended by Sch 4 SI 2007/2194). However, this does not put any additional burden on the company as special resolutions do not require a longer notice period any more (see below). In line with this change, Table A has been amended for companies incorporated on or after 1 October 2007 so that it no longer requires an extraordinary resolution (reg 117 TA 1985 amended by SI 2007/2541). However, companies can still require that some decisions are made by extraordinary resolution by stipulating this in their articles (para 23 Sch 3 SI 2007/2194). Therefore, companies incorporated before 1 October this year which are governed by Table A will still have to pass an extraordinary resolution to authorise a liquidator to distribute the company’s assets to the shareholders.
Elective resolutions are not a feature of the new Act either, because it makes the elective regime the norm for private companies. There is only one remaining elective resolution: to give the directors authority to allot shares for more than 5 years (this will be replaced on 1 October 2008, when it comes into force along with the other provisions relating to shares, by a power for the boards of private companies with only one class of shares to allot shares without the shareholders' authority, unless their articles state otherwise (s 550 CA 2006)). Otherwise, the “elective” matters have been changed as follows: » all companies have to circulate their accounts among the shareholders, but only public companies have to lay them before a general meeting (private companies: s 252 CA 1985 was repealed on 1 October 2007 by Sch 2 SI 2007/2194; public companies: s 252 CA 1985; then ss 423, 437 CA 2006 as of 6 April 2008); » only public companies are required to hold AGMs (s 336 CA 2006, in force on 1 October 2007); » private companies can consent to shorter notice of a general meeting if 90% of shareholders agree, unless the articles require more (up to 95%) (s 307 CA 2006, in force on 1 October 2007); and » auditors will have to be appointed for each financial year, unless the directors conclude that audited accounts are unlikely to be required (private companies: s 485 CA 2006, in force on 1 October 2007; public companies: s 489 CA 2006, due to come into force on 6 April 2008).
The new Act also preserves shareholders’ common law power to make decisions by informal unanimous agreement.
The filing requirements for resolutions and agreements that affect a company’s constitution are now governed by the new Act. Like the old provision, all special resolutions (and their informal equivalents), any resolutions or agreements binding all of the shareholders or the whole of a class, and any other resolutions specified by statute must be filed at Companies House within 15 days of being passed. Failure to do so renders the company and every officer in default liable to a fine. For the time being, extraordinary and elective resolutions must still be filed at Companies House within 15 days as well.
Provisions in force: ss 29, 30, 281-300 CA 2006 CLM: ¶2083, ¶3480, ¶3526+; ¶3577+; ¶3590+, ¶3600, ¶6607, ¶8457, ¶8578, ¶8616, ¶8664
Meetings
Of as much significance to private companies as the new written resolution procedure is the fact that they are no longer obliged to hold AGMs. These two changes in particular will reduce the administrative burden on private companies and are likely to result in most private companies holding shareholder meetings infrequently, if at all. If a private company wishes to hold annual meetings, for example to keep shareholders up to date and involved in company management, it may do so. However, it will not be a statutory AGM, and so the relevant procedures will have to be set out in the company’s articles (para 32 Sch 3 SI 2007/2194). In line with this change, the matters that were dealt with at AGMs have been changed as follows: » private companies no longer have to lay their accounts before the shareholders at AGMs (although they still have to circulate them to the shareholders), and the appointment of their auditors is not tied to this meeting any more; » directorial appointments made by the board do not have to be confirmed by the shareholders (appropriate changes have been made to Table A to reflect this as far as companies incorporated on or after 1 October 2007 are concerned, SI 2007/2541); and » shareholders’ waiver of pre-emption provisions, the renewal of the directors’ authority to allot shares and the approval of dividends by shareholders can all be carried out at ordinary general meetings. The terms “extraordinary general meeting” and “EGM” are no longer necessary, since non-AGM general meetings will be the norm. Shareholder meetings are therefore now referred to as “general meetings” or public company AGMs, as appropriate. Amendments have been made to Table A for private companies incorporated on or after 1 October 2007 so it does not refer to AGMs (SI 2007/2541). Private companies already incorporated and relying on Table A will still have references to AGMs in their articles. These references do not imply an obligation to hold AGMs (unless the articles include an extra specific provision to this effect) so there is no need for companies to remove them unless they wish to do so for clarity.
Public companies are still required to hold AGMs, although the new Act changes the deadline for doing so. An existing public company’s first AGM after 30 September 2007 should be held in accordance with CA 1985, i.e. in each calendar year but with a gap of no more than 15 months between AGMs (s 366 CA 1985; para 35 Sch 3 SI 2007/2194). Its subsequent AGMs should be held in accordance with the new Act. As a transitional measure, the deadline in the new Act has been changed from requiring an AGM to be held within 6 months of the accounting reference date to within 7 months of that date (s 336 CA 2006 amended by para 15 Sch 1 SI 2007/2194). This gives companies time to get used to the new deadline. It is not known for how long the transitional deadline of 7 months will apply.
The provisions governing the conduct of general meetings also come into force on 1 October 2007. Directors can still call meetings, either on their own initiative or when prompted by the shareholders or auditors. A meeting can still be requisitioned by shareholders with the right to vote and holding 10% in value of the total paid-up share capital, and this threshold drops to 5% if more than a year has passed since the last shareholder meeting held at their request or at which they could circulate a resolution. Shareholders can no longer call a general meeting directly under the legislation, although there is nothing to prevent a company from including this right in its articles. The court’s power to call a meeting is preserved.
Notices of meetings must include, as a minimum, the date, time and place of the meeting and the general nature of the business to be considered. If a special resolution is to be considered at the meeting, the text of the resolution must be included. As under CA 1985, various documents must be included with the notice, depending on the business to be considered. A proxy notice must still be included in the notice of the meeting, setting out shareholders’ rights under the legislation and the articles. The same persons are entitled to receive notice as under CA 1985, although accidental non-receipt does not render the meeting invalid.
Shareholders can still circulate a statement before a general meeting, although their qualification for doing so depends upon their entitlement to vote on the resolution in question or at the meeting (rather than on their entitlement to vote at the next AGM, as under CA 1985). Auditors can still circulate statements as well.
The necessary notice periods are now dependent on the type of meeting, rather than the type of resolution. General meetings require 14 clear days’ notice, and public company AGMs need 21 clear days’ notice. A company’s articles can set out longer notice periods. Equally, general meetings can still be held on short notice with the consent of at least 90% of a private company’s shareholders (which can be increased to 95% in the articles) or 95% of a public company’s shareholders. Public companies’ AGMs can only be held on short notice with the consent of all of the shareholders.
The position of proxies is improved under the new Act as they can be appointed to exercise any or all of the shareholder’s rights (including the right to speak at the meeting, which was not included under CA 1985). In addition, shareholders can appoint a proxy in relation to each share or bundle of £10-worth of stock if they wish (although this would be unusual). Proxy appointment forms will have to be returned to the company by the same deadlines as were in force under CA 1985. Notice of revocation of an appointment should be received by the company by the beginning of the meeting.
Corporate shareholders will be able to appoint one or more corporate representatives, although if more than one is appointed by the same shareholder and they exercise the same power in different ways, the power is deemed not to have been exercised.
The default quorum for meetings is two, except where a company only has one shareholder in which case it is one. Shareholders, corporate representatives and proxies can all count in the quorum (but if a shareholder has appointed more than one representative or proxy, only one of them will count).
Little changes in terms of the voting procedure: the new Act allows shareholders one vote per shareholder (or proxy) on a show of hands, or one per share or £10-worth of stock on a poll. The thresholds for being able to demand a poll remain the same and further details, such as the chairman’s casting vote, will be set out in the articles.
Provisions in force: ss 281-287, 301-335, 336-340, 360 CA 2006 CLM: ¶3620+, ¶3646+, ¶3711+, ¶3777+, ¶3800, ¶3815+, ¶3836+
Administrative requirements
Company records
Companies must keep minutes of shareholder meetings as well as copies of all resolutions not passed at meetings (whether written resolutions or other informal decisions). These records can be kept in hard copy or electronic form, but must be retained for at least 10 years. Copy records can be provided for a fee of 10p per 500 words (or part 500 words copied), plus the reasonable costs of sending the copies out (SI 2007/2612). The records must still be available for inspection for at least 2 hours between 9am and 5pm on each business day.
Similarly, board meeting minutes must be retained for at least 10 years, including records of any contracts entered into between a company and its director who is also its sole shareholder.
These copying fees also apply to copies of: directors’ service contracts or memoranda of their terms, directors’ qualifying indemnity provisions and reports on ownership of a public company’s shares.
Provisions in force: ss 231, 248, 249, 355-359 CA 2006 CLM: ¶3222+, ¶3473+, ¶3864+
Register of shareholders
Although the rules governing the contents and maintenance of the register of shareholders are still contained in CA 1985, the procedure for inspecting the register is now set out in the new Act. Companies must still allow shareholders and others to inspect and copy the register. However, now persons wishing to inspect or copy the register must state the purpose for which the information is to be used as well as details about themselves and any third party to whom the information will be passed. There is a new offence of providing false, misleading or deceptive material in connection with such a request. On receipt of a request, a company has 5 days within which to comply or apply to court to be excused from compliance on the ground that the request was not made for a proper purpose. If the company allows inspection or supplies copies of the register, it must inform the person of when the register was last updated and whether there have been any changes since that date. Failure to comply with these provisions renders the company and any officer in default liable to a fine.
The fees for providing copies of register entries are now (SI 2007/2612): » £1 for up to 5 entries; » £30 for up to the next 95; » £30 for up to the next 900; » £30 for up to the next 99,000; and » £30 for the rest of the register. The company can also add on a reasonable charge for sending the copies out. The fee for inspecting the register and index is now £3.50 for up to an hour.
These copying fees also apply to making copies of a public company’s register of interests in shares (see ¶3990+).
Provisions in force: ss 116-119 CA 2006 CLM: ¶3930+
Directors
Many of the provisions in the new Act which came into force on 1 October 2007 deal with directors. These affect two vital aspect of being a director: the general duties directors owe to their companies and the transactions they enter into with their companies that need shareholder approval. The definitions of director and shadow director remain the same.
Private companies are still required to have at least one director, and public companies must still have two. If it is discovered that a director’s appointment is invalid, his acts on behalf of the company will nevertheless stand.
Shareholders’ right to remove a director by ordinary resolution is now set out in the new Act. Special notice of such a resolution is still required.
Provisions in force: ss 154, 160, 161, 168, 169, 250, 251 CA 2006 CLM: ¶464, ¶2180, ¶2212+, ¶2230, ¶2271, ¶2301, ¶2946+, ¶3130, ¶3460, ¶4115
Directors’ duties
Some, but not all, of the provisions governing directors’ duties are now in force. The codified general duties replace common law duties which had arisen through case law, and the new Act specifically states that this case law can still be used in interpreting the codified versions of these duties. Therefore, much of the explanation of directors’ common law duties in Company Law Memo 2007 is still relevant. The duties are not mutually exclusive: more than one may (and is likely to) apply in any given situation.
Directors are under a duty to act within their powers as set out in the company’s constitution and to exercise those powers for a proper purpose. This duty was part of the common law duty to act honestly and in good faith in the interests of the company and for a proper purpose. Directors are still under a common law duty to act within their authority as their companies’ agents (see ¶2350+) and a statutory duty to act within their limitations (see ¶2554+).
Directors must promote the company’s success. This formed the other part of directors’ common law duty to act honestly and in good faith in the interests of the company and for a proper purpose. The codified duty requires directors to act in a way which the directors believe in good faith will promote the company’s success for the benefit of the shareholders as a whole. In making their decisions, directors must consider: » the long and short term consequences; » the interests of the employees; » the need to foster business relationships; » the impact on the community and environment; » the need to maintain the company’s business reputation; and » the fairness of the possible outcomes between the shareholders. This is merely a list of the basic factors that are likely to be relevant in relation to any decision. Other factors may also have to be taken into account, depending on the decision and the nature of the company’s business. It is important that directors give proper consideration to these issues, and do not simply engage in a box-ticking exercise. However, directors should not be under any increased record-keeping obligation (these are the sort of factors they should have been considering anyway) because they do not have to note their conclusions on all of these matters for each and every decision they make, although it would be good practice to do so for significant decisions.
Directors must exercise independent judgment, meaning that they must not allow others to influence their decision making. However, they are allowed to follow any agreement entered into that restricts their decision making powers (e.g. a joint venture agreement), they can act in any way that is authorised by the company’s constitution (e.g. most directors will be allowed to delegate their powers to others), and they can follow the advice of professionals as long as they do not do so blindly.
Directors are still under common law duties to avoid conflicts of interest and duty, account for profits and not to misuse company property and/or information because the codified versions of these duties are not due to come into force until 1 October 2008 (see ¶2390+, ¶2398+, ¶2405+).
Directors must exercise reasonable care, skill and diligence when managing their companies. Like its common law predecessor, this codified version is a tortious duty, meaning that breach gives rise to a claim in negligence against a director. The new Act has made this duty easier to understand, since it sets out the test by which a director’s actions must be judged rather than relying on case law. A director is expected to exercise the same care, skill and diligence as a reasonably diligent person who has: » the general knowledge, skill and experience which may reasonably be expected of a director in his position (an objective benchmark); and » the general knowledge, skill and experience which that director actually possesses (a subjective benchmark). This will enable the courts to assess a director’s conduct according to how he should have performed in the light of his position as well as his actual experience. For example, a non-executive director will not be expected to be as involved in company management as an executive director, and a director who is an accountant as well will be expected to perform to a higher standard than other directors when it comes to the company’s finances.
The consequences of breaches of directors’ general duties remain the same (see ¶2434+): breach of the duty to exercise reasonable care, skill and diligence gives rise to an action in negligence, and breach of the other codified duties in force gives rise to an action for breach of fiduciary duties. An action for breach of contract will still be relevant where a director has breached his service contract or failed to comply with another contract (such as a shareholders’ agreement).
Shareholders can still authorise directors to act in a way which would otherwise breach their duties, or ratify a breach after the event. Directors can obtain relief from liability for the codified general duties in the same way as for the common law duties.
The new Act now also governs directors’ indemnity and insurance. There is little change in this area, except that shareholders are entitled to request copies of qualifying third party indemnities and these indemnities must be retained for at least 1 year after they have expired. Indemnities must also be disclosed in the directors’ report to the accounts. Companies which are trustees of their occupational pension schemes can now also indemnify their directors in respect of any related liability, provided the indemnity meets the relevant requirements.
Directors’ liability for defrauding creditors is now set out in the new Act. The offence remains the same, although note that the maximum penalty was increased earlier this year to 10 years to bring it into line with other dishonesty offences (this applies to offences committed on or after 15 January 2007, s 10 Fraud Act 2006).
Provisions in force: ss 170-174, 178-181, 232-239, 993, 1157 CA 2006 CLM: ¶2317+, ¶2577, ¶8633, ¶8907
Shareholder approval for contracts and transactions
Shareholder approval is required for the following contracts or transactions, and can be given by ordinary resolution. Failure to obtain approval in most cases renders the directors liable to indemnify the company for its loss and/or account for their gain, and may mean that the transaction is voidable at the instance of the shareholders. In the c |