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The new Companies Act finally received Royal Assent on 8 November. As companies all over the country assess what its impact will be on their businesses, this issue of Company Law Memo Newsletter takes a look at what the new law will really mean in terms of the day-to-day management of a company. |
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The new Companies Act is expected come into force by October 2008 at the latest, after the government has conducted consultations on related regulations and implementation plans. It will affect every single company in the land, so every company officer, manager and adviser needs to understand what the new Act will mean for his company. So, how can the average company best prepare for the new Act? It might seem premature to talk about preparing for something that will not become law for up to two years, but the impact of the new Act is so significant that it will stand companies in good stead to start the process as soon as possible. There are a number of practical issues that companies can consider at this early stage. This article focuses on these issues to help companies prepare for the new Act coming into force. Readers can refer to previous CLM Newsletters for further detail on the following aspects of the new Act: » company formation and constitution – Issue 1; » shares – Issue 1 and Issue 3; » shareholders – Issue 1 and Issue 3; » directors – Issue 1 and Issue 2; » management – Issue 1; » accounts – Issue 1; » transactions –Issue 4; and » insolvency – Issue 1. Company’s constitution See CLM: ¶367+ The new Act introduces new model articles. Table A will be replaced by three separate sets of model articles: for private companies limited by shares; private companies limited by guarantee; and public companies. Existing companies will have the choice of either retaining their current articles or adopting the relevant new model articles. The advantage of switching to the new form is that they will reflect the new law and the practical reality of running a modern company. □ Should the company adopt the new model articles? If a company adopts the new model articles, it should consider whether they meet all of the company’s needs. The new form for private companies in particular is far more basic than Table A, since it focuses almost entirely on decision-making at board level. □ Do any shareholder decision-making provisions need to be added to reflect the company’s practice and procedures, and preserve the shareholders’ rights and powers? □ Should any of the board’s actions require shareholder approval (e.g. own share purchases, issue and allotment of shares)? □ Should the articles contain the new power for shareholders to nominate another person to exercise or enjoy the rights attached to their shares? □ Should the articles expressly provide for electronic communication with shareholders (see below)? Conversely, if a company does not adopt its existing articles, it should review its existing articles to ensure that they do not conflict with the new law or prevent the company from taking advantage of it. □ Do the articles prohibit shareholder written resolutions? If so, these provisions will be void. □ Do the articles contain a shareholder written resolution procedure which conflicts with the procedure under the new law? If so, remove the current provisions from the articles or amend them so that they conform to the new procedure. □ Change any references to an extraordinary resolution to an ordinary or special resolution. □ Remove any references to the company secretary if the company chooses not to have one. □ Does the company want EGMs to be called on longer than 14 days’ notice? If so, include a specific provision to this effect. □ Do the shareholders want to retain some control over the board’s ability to deal with the company’s shares? If so, add (or retain) specific provisions regarding the allotment and purchase of the company’s own shares, for example, which will not have to have the shareholders’ consent in every case under the new Act. The new model articles for public companies are more similar to the current Table A, for example, they contain provisions regarding shareholder decision-making at meetings because the written resolution procedure will still not be available to public companies and they will still have to hold AGMs. Directors See CLM: ¶2160+ The Bill makes numerous changes to the legal requirements regarding directors, not least in its attempts to make them more directly accountable for their actions. Companies should review a number of issues in this regard. □ Ensure that the company has at least one director who is an individual. □ Train directors on their duties as codified in the new Act, and the new requirements placed on them, e.g. the changes in declaring their interests, and how to fulfil their duty to promote the success of the company. □ Amend board meeting procedures and precedent documents to reflect important changes (some of which will depend upon whether or not the new model articles are adopted), including: » the board will not have to refer to the shareholders for consent any more for many of the decisions it commonly makes, such as allotting shares and declaring dividends; » enabling more flexibility in how board meetings are held and decisions made, e.g. by telephone and electronic communication; » removing references to the company secretary, if the company chooses not to have one; and » the specific duty to promote the interests of the company means that boards will have to address this issue when making significant decisions and record their discussions in the board minutes to protect themselves from potential claims. □ Review company paperwork and filing obligations, particularly where the position of secretary will not be retained and these duties have to be reassigned. □ Are the directors concerned that having their address on the public register at Companies House exposes them to intimidation, harassment or junk mail? They will be able to register addresses for service at Companies House instead of their residential addresses. Whether or not directors choose to do so, all companies will have to keep a new register of their directors’ residential addresses. Shareholder decision-making See CLM: ¶3513+ One of the most significant changes introduced by new Act from a practical point of view is to make it easier for companies and shareholders to communicate with each other electronically. As long as companies have the proper systems and procedures in place, this should bring costs savings as well as improved communication between companies and shareholders. Since shareholder meetings will become rarer and shareholders will be stripped of many of their current powers to have a say in certain decisions, it will be important to many shareholders to feel that they are still “in touch” with their companies. □ Does the company want to communicate with its shareholders electronically? □ Does the company want to set up a website where shareholder notices and other communications will be posted? If this option is chosen, the company will still have to inform each shareholder when important new information is available on the website, e.g. when notice of a meeting is posted. □ In either case, obtain the shareholders’ consent, whether by resolution or changing the articles. Permission to communicate via a website will also have to be given individually by each shareholder. Collect the relevant addresses and ensure that the records are kept up-to-date. □ Put a back-up procedure in place so that a hard copy is dispatched instead if the electronic communication fails for whatever reason. Monitor electronic communications from shareholders regularly, particularly where a deadline is imposed, e.g. on responses to written resolutions. □ Does the company want shareholders to communicate with it electronically? If so, it will have to include its address for such communications on notices, letters etc. The new law makes it easier to make decisions made by written resolution, so much so that shareholder meetings are likely to be held only where the shareholders themselves feel the need to meet. The Bill sets out the written resolution procedure in some detail (ss 295-307 CA 2006). □ Does the company want to make decisions by written resolution? □ Review and adjust procedures accordingly. The statutory written resolution procedure will not be available to public companies. Where a meeting is called, the procedures for doing so will be simpler. Private companies will not have to call AGMs (and therefore will no longer have to pass an elective resolution to opt out of holding AGMs), so EGMs can be held as and when necessary instead. □ Remove references to AGMs from articles of association and precedent documents such as notices and resolutions. □ Adjust procedures for calling and holding EGMs and precedent documents, particularly: » only 14 days’ notice required (unless articles state otherwise); » only ordinary and special resolutions will be available; and » meeting minutes will have to be kept for at least 10 years. Public companies will still have to hold AGMs within 6 months of each accounting reference date on 21 days’ notice (ss 314, 343 CA 2006). Company secretary See CLM: ¶4115+ Private companies will not have to have a secretary under the new law. □ Does the company need to retain its secretary? □ If not, ensure that the company’s filing obligations are still met and the secretary’s other functions are fulfilled. □ Review company paperwork to remove references to the secretary. □ Whether or not the secretary is removed, change the company’s signature clauses. The signature of two “authorised signatories” or one authorised signatory and a witness will be required. Authorised signatories can be directors or any other person appointed (including current company secretaries). This change will apply to public companies as well, although their secretaries will automatically be authorised signatories. □ Set up and maintain a new register of authorised signatories. The government is consulting on transitional arrangement to enable current private company secretaries to retain their power to sign documents when the new Act comes into force. Public companies will still have to have an appropriately qualified company secretary (ss 271, 273). At the time of writing, the government had not yet published the final text of the new Companies Act. The references given in this article therefore refer to the latest published draft (20 July 2006) and the details of some of its provisions will change (and the section numbers will be different) when the final text is published. There is also still a lengthy consultation process ahead on supplementary regulations and implementation plans, so companies have ample time to prepare themselves for the implementation of the new law. Company Law Memo will keep readers up to date on the new Act’s implementation. This article simply highlights the issues that every company needs to think about in advance of the new law coming into force. Although private companies will bear the brunt of most of the changes introduced by the new law, they will also reap the most benefit as these changes will simplify their general management and remove the need for many unnecessary procedures and requirements. |
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PREPARING FOR THE COMPANIES ACT 2006 |