The Companies Act 2006

The Companies Act 2006 - the result of nine years of consultations and proposals and the longest Act in the history of the UK parliament - was enacted in November 2006.

Objectives

The objectives of the Act are to:

• enhance shareholder engagement in their companies and a long-term investment culture;
• make it easier to set up and run a company;
• provide flexibility for the future;
• provide for better regulation; and
• take a 'think small first' approach, ie concentrate on the needs of the majority of companies - the small and medium-sized companies - rather than the relatively few larger corporations.

The composition of the Act

About 1/3rd of the new Act restates provisions previously in the Companies Acts 1985 and 1989. A further 1/3rd of the new Act makes piecemeal amendments to existing law. Only around a 1/3rd of the Act is new law.

Types of change

Parts of the new Act introduce significant changes, such as new, codified (statutory) directors' duties and the fact that the company secretary has become optional for private companies.

There are also many technical changes, such as the abolition of the complex 'financial assistance' rules that complicated many company disposals and acquisitions, which will reduce the legal work required to carry out many of these transactions.

Other changes affect the day-to-day administration of private companies, such as the abolition of the requirement that every voting member of a company has to sign a resolution in writing in lieu of a meeting for it to be effective.

The main message for private companies is 'don't panic'. Many of the changes are of practical concern only to the lawyers, or require only a slight variation in existing practices. For those that require action, there is time to plan.

Provisions already in force

Significant parts of the Act affecting private companies are already in force. They include:

• Statutory rules for electronic communications between companies and members - particularly, the power to use websites and emails to publish notices, accounts and any other document required to be sent or supplied to members.
• Rules requiring companies to include statutory details (name, registered number, etc) on electronic documents, including their websites, in the same way as they do on their letterheading and other official documents.
• Abolition of the requirement to keep a register of directors' interests in shares or debentures.
• Seven new, statutory directors' duties - although these are based on pre-existing duties established by the courts over the last 200 or so years, and therefore familiar in many respects.
• New rules regarding calling and holding of shareholder meetings, and passing of written resolutions in lieu of a shareholders' meeting.
• The abolition of the need for a private company to hold an annual general meeting ('agm').
• A new rule requiring companies to prevent third parties from inspecting their register of shareholders unless the inspection is for a 'proper purpose'.
• A reduction in the time allowed for filing annual accounts at Companies House - from ten months to nine months after the year end for private companies and seven to six months for public companies.
• A requirement for directors to give reasons if they refuse to register a transfer of shares.
• Appointment of a company secretary to be optional for private companies.
• A requirement for directors to be aged at least 16.
• A requirement for at least one director on every board to be a natural peson (as opposed to, for example, a corporate director.

Implementation

All but one tranche of the Act is now in force. The final implementation date for the remainder of the Act is October 2009. Click here to see the implementation dates for the main parts of the Act affecting private companies.

Existing companies

The way in which the new rules are being applied to existing companies is sometimes complex - particularly where transitional provisions apply.

Some new provisions only apply if there is a provision in the company's Articles, such as the power for a shareholder to nominate another person to enjoy or exercise certain benefits and rights attaching to membership, without actually being a member himself (in force now), or for directors to change the name of the company themselves, without the need for a shareholder resolution (not yet in force).

Other new rules apply irrespective of a company's existing articles of association - for example, the provisions allowing shareholders to remove a director by ordinary resolution apply notwithstanding anything in the company's article.

In yet other circumstances, whether they apply or not depends on what the existing articles say. For example, the Act says that all shareholder meetings can be held on 14 clear days' notice, unless a company's Articles say otherwise. The Articles of many existing companies will require 21 days' notice of a shareholders' meeting called to pass a special resolution, and will need to be changed to take advantage of the new rule.

Another more complex example is that the new Act provides that a private company need not hold an agm unless its Articles specifically say that it must do so. This provision is in force now. Private companies whose Articles specifically say they must hold agm's will therefore have to continue to hold them unless they change their articles.

However, if a company's Articles merely refer to the agm - for example, they provide for retirement of a proportion of the directors at each agm - the rules say that this does not amount to a specific requirement to hold an agm and therefore such companies do not have to hold one. Any such provision in their articles can be ignored. However, many companies are considering 'tidying up' their Articles to remove these indirect references to the agm.

Many of the usual rules governing, eg calling of shareholders' meetings, that used to appear in companies' Articles of Association, have now been made statutory - they appear in the 2006 Act. This means the Articles of many existing companies will have provisions that simply repeat the new statutory rules, and are therefore redundant.

In other areas, the Act does away with the previous need for authorisation in a company's Articles before it can carry out a transaction - for example, for a private company to buy back its own shares from a shareholder (not yet in force). Such authorities in a company's Articles are therefore redundant and many companies will wish to alter their Articles to remove them.

You are therefore strongly recommended to take legal advice in relation to the implementation of the new Act, and its effect on your Articles of Association.

More information

The full 2006 Act is available free online, or for £60.50 in hard copy format from HM Stationery Office. The Government has also published explanatory notes on the Act, a table of origins showing where consolidated provisions came from, and a table of destinations showing where the provisions of the 1985 and other pre-2006 Acts reappear in the 2006 Act. These, and more information, are on the BERR website. In the future the Government also plans to provide (non-statutory) guidance on the new directors' duties.

In any event, companies should consider:

• training for directors, particularly in relation to conflicts;
• reviewing your board procedures to ensure compliance with the codified duties; and
• directors' and officers' liability insurance, and indemnities for directors, in the event of breach of their duties.

Contact us for advice

Please contact us if you need advice on any aspect of the proposed changes, want us to keep you up-to-date with developments, or would like us to review your company's constitution.