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Getting in on the Act

19 November 07

Much of the Companies Act 2006 has now come into force, but it appears that existing companies have to take action if they wish to benefit from its streamlined procedures

by David Gilchrist

The Companies Act 2006 received Royal Assent in November 2006. A number of provisions are already in force and all provisions are expected to be in force by 1 October 2008.

Some of the key provisions that are now in force relate to:

  • codification of directors’ duties;
  • transactions with directors;
  • written resolutions and changes to the law on meetings;
  • electronic communications with shareholders; and
  • increased rights for proxies.

The Department for Business, Enterprise and Regulatory Reform (“BERR”, formerly the DTI) stated that one of the key objectives of the Act was to simplify setting up and running a company. BERR’s stated approach to transitional arrangements for companies incorporated under the Companies Act 1985 (or earlier legislation) is “to ensure so far as possible that existing bargains are not overridden”. In many cases it will be therefore be necessary for existing companies to take steps to amend their articles of association before they will be able to take advantage of the relaxed regime under the 2006 Act.

With a number of provisions of the Act now in force, what do companies need to do to take advantage of the relaxed regime, and what issues have arisen so far as a result of the new Act?

Codification of directors’ duties

One of the most publicised aspects of the 2006 Act has been the introduction of a statutory basis for directors’ duties.

There are seven statutory duties imposed on directors, four of which came into force on 1 October 2007:

  • duty to act within powers;
  • duty to promote the success of the company;
  • duty to exercise independent judgment; and
  • duty to exercise reasonable care, skill and diligence.

The remaining three duties (which relate to situations where the director has a conflict of interest) come into force in October 2008.

In considering what is most likely to promote the success of the company, directors must have regard to a non-exhaustive list of matters which are set out in s 172 of the 2006 Act.

BERR stated that the codification of directors’ duties would make the law more accessible to directors. However, the statutory duties cannot (and do not) replace the common law interpretation of how those duties should be carried out in specific circumstances.

As some of the terminology used in framing the statutory duties is slightly different from the common law terminology, it remains to be seen what impact that shift in emphasis will have on a practical level. It is likely that board papers will now cover the subsidiary matters listed above, even if this is only to dismiss them as not relevant to the decision. In the short term the important thing for directors to do is familiarise themselves with the statutory provisions.

Along with the new provisions on directors’ duties, the provisions allowing shareholders to pursue claims against directors on behalf of the company, known as derivative claims, also came into force. It has been commented that the new procedure, taken together with the statutory statement of duties, will lead to more claims against directors for breach of their fiduciary duties. The pursuit of such a claim will still require the leave of the court, which will only be given if the member can show a prima facie case.

Transactions with directors

On 1 October 2007 the requirement to have directors’ service contracts approved by members was extended to cover contracts for over two years, rather than five years as previously. Those directors’ service contracts required to be on display also now cover a wider range of contracts than previously, for example letters of appointment of non-executive directors, and contracts for directors who work outside the UK. Members will also be entitled to ask for copies of these.

The provisions requiring the approval of substantial property transactions between a company and its directors now extend to a wider group of “connected persons” of a director. Loans by a company to its directors or their connected persons are also permitted, subject to shareholder approval.

Electronic communications

The electronic communication provisions of the 2006 Act came into force on 20 January 2007.

Under the Companies Act 1985, companies were permitted to send notices of meetings and copies of their annual accounts and directors’ reports by means of electronic communication, provided that the company and the recipient agreed. Under the 2006 Act, shareholders will be able to communicate with the company by electronic means and vice versa. The categories and means of communicating electronically have also been broadened.

Documents and information sent to a company

Where a company has given an electronic address in a notice calling a meeting, the company is deemed to have agreed that any document or information from a shareholder relating to proceedings at that meeting could be sent to the company by electronic means to that address. This is subject to any limitation specified in the notice.

Similarly where the company has given an electronic address in a proxy instrument, proxy appointments for the meeting can be sent by electronic means to that address.

Documents and information sent by a company

Documents or information may only be sent by a company to a shareholder in electronic form, or via a website, where that shareholder has agreed to electronic communication. A shareholder is deemed to have agreed to this if either:

  • the company has passed a resolution that the company may supply documents or information via a website, or
  • the company’s articles provide for this, and the shareholder has been asked by the company to agree to that method of communication. In the case of website communication, if a company receives no response within 28 days of making a request to shareholders to agree to website communication, the shareholder is deemed to have agreed.

Where a company uses website communication it must notify the intended recipients of the presence of the information on the website. This notification must be sent in hard copy, or by means of electronic communication if the member has agreed to electronic communication.

The new regime allows for faster, easier and more cost effective communication between companies and their shareholders. Primarily aimed at reducing the administrative burden on public companies, the provisions are also useful to private companies. Companies taking advantage of the provisions need to put in place systems:

  • to record the method by which each shareholder will accept communications;
  • to receive electronic communications; and
  • to ensure that electronic communications are properly monitored, stored and passed to the appropriate person upon receipt.

Resolutions and meetings

Since 1 October 2007, companies are able to pass an ordinary resolution or a special resolution by the written resolution procedure with only the requisite majority (over 50% or 75%) of eligible members signing the resolution, rather than the signature of all members being required. This procedure, when taken together with electronic communications, can significantly simplify corporate administration, and no additional steps need to be taken to amend articles of association. This relaxation is clearly one which will be regularly adopted by clients, particularly as shareholders can now signify their agreement to resolutions electronically.

Private companies are no longer required to hold an AGM. For existing companies, the government’s view is that if articles of association specifically require an AGM, this will continue to apply, but if the AGM is only referred to indirectly, such as requiring directors to be re-elected at an AGM, this will not of itself mean a company must hold an AGM. All private companies will need to check their articles of association to see whether they still need to hold an AGM and, if appropriate, amend those provisions to take advantage of the new regime.

Private companies are no longer obliged to lay accounts before a general meeting, although accounts must still be sent to members.

The 2006 Act now requires 14 days’ notice for general meetings even if a special resolution is proposed. The exceptions to this are public company AGMs (which continue to require 21 days’ notice), and resolutions requiring special notice (for example removal of a director).

Proxies

New provisions relating to the rights of proxies came into force on 1 October. A member may appoint a proxy to exercise all his rights to attend, vote and speak at a meeting. A proxy attending a public company meeting will now have the right to speak at the meeting. This previously depended on the company’s articles of association or the discretion of the chairman of the meeting.

A further important change is that proxies will be able to vote on a show of hands whereas previously they could only vote on a poll. On a show of hands a person who has been duly appointed a proxy member has one vote. The third important change is the right to appoint more than one proxy up to a maximum of one per share.

The effect of these changes is that proxies may significantly affect the conduct and voting at general meetings. With the appointment of multiple proxies, each with a vote on a show of hands, poll voting may become more common. Care will be needed on the management of proxy voting at meetings.

An emerging picture

Whilst the aim of the 2006 Act was to ease the regulatory burden of running a company, it remains to be seen whether that has been achieved in practice. Although transitional arrangements for existing companies have still to be published, it would appear that they will have to adapt in order to take advantage of the relaxed regime. It is still too early to be able to assess the full impact of the 2006 Act.

David Gilchrist, associate, Biggart Baillie, Glasgow