Introduction of the Companies Act 2006
The Companies Act 2006 is the largest piece of legislation to ever reach the statute book, comprising of 1,300 sections.
It began consolidating the majority of existing companies' legislation on November 8 2006 and it will all be implemented on October 1 2008.
The new legislation affects all companies registered in the UK, including over two million private companies.
1. Directors duties
These will be codified for the first time and will have statutory effect. Currently, director's duties have been built up over time by existing common law and equitable principles being applied to the position of a director.The Companies Act amendments are based on the existing general duties owed under the common law rules and equitable principles, and these will be interpreted as such with "regard being given to the corresponding common law rules and equitable principles in interpreting and applying the general duties."
As is presently the case, director's duties are only owed to fellow board members, company shareholders (collectively) and to liquidators in the event of insolvency. Director's duties aren't specifically owed to a company creditor, individual employee or any other interested party.
In total seven duties will be codified, but only four are coming into force on October 1 2007. They are:
Duty 1
Directors must exercise their powers for a proper purpose meaning they must act within their powers and in accordance with the company's constitution. For the first time, directors will be obligated to be aware of the contents of memorandums and articles, in particular any limitations upon their powers contained in these documents.
Directors of smaller companies who have purchased an off-the-shelf company via a company formation agent or whose accountant or solicitor has dealt with this for them, may not have looked at their constitutional documents since the company was formed, and so not be aware of their contents.
Duty 2
Directors have a duty to promote the success of the company by acting in a way they consider, in good faith, would be more likely to promote the success of the company for the benefit of its members as a whole. The Act states they must take into account:
the likely consequences of decisions in the long-term;
the interests of the company's employees;
the need to foster the company's relationships with suppliers, customers and others;
the impact of the company's operations on the community and environment;
the desirability of the company maintaining a reputation for high standards of business conduct; and
the need to act fairly between members of the company.
Directors must also consider the interests of the company's creditors if insolvency is looming. However, only the company itself, via the board or shareholders, can bring an action to enforce the above duties. It remains to be seen how directors will approach this duty and whether we will simply see standardised board minutes confirming all of the above have been considered before a particular decision has been made.
Duty 3
Directors must exercise independent judgement without subordinating their powers to the will of others. The duty won't be infringed if a director acts in accordance with an agreement duty entered into by the company that restricts the future exercise of discretion by its directors or in a way authorised by the company's constitution.
If directors have agreements as to how votes will be taken in certain instances which aren't set down in the company's Articles of Association or a Shareholder Agreement, they can demonstrate their powers have been exercised independently without subordinating their powers to the will of others.
Duty 4 - the duty to exercise reasonable care, skill and diligence
Most common law principles only refer to directors exercising reasonable skill and care, so the use of the word diligence is new and its impact unknown. Directors must show the level of skill they posses or that which might reasonably be expected of such a director (whichever is higher). So a professionally qualified director must show the skill, care and diligence of such a professional person, but this won't allow directors with a collective lack of knowledge to rely upon that as in such a case, the test would be an objective one: what own would expect such a director to have done.
2. General meetings
Private limited companies will no longer be required to have general meetings and there will be no requirement for private companies to have AGMs. All corresponding rights such as accounts to be formally laid at the AGM, for directors to retire by rotation at the AGM, and for chairmen and auditors to be reappointed will be abolished.
Decisions in private limited companies will be taken by way of written resolution. The Companies Act 1985 requires written resolutions to be passed by 100 per cent of the company's members, but this will now be reduced to the relevant majority.
Additionally, all forms of electronic communication will be allowed in relation to resolutions, so resolutions may be passed by email or text message as long as a record of who has voted for what can be kept.
3. Derivative actions
It will become easier for minority shareholders in private companies to bring derivative actions (i.e. actions in the company's name against the board or individual director for breach of duties). Ten per cent of members collectively will be able to bring a derivative action governed by a simpler and cheaper court procedure. Additionally the way in which an unfair prejudice action can be brought by a minority shareholder will be widened.
In companies where the shareholding and directorship differ, more shareholders may take a proactive stance and hold the board accountable for decisions that impact upon them and the value of their shares.
Summary
Before the introduction of the next Companies Act regulations, directors of private limited companies who aren't aware of the content of the Companies constitution should seek advice on updating their constitution.
Minority shareholders in private companies without director's representation on the board should revise the articles of association, look at entering into a shareholders agreement with fellow shareholders, or look at the company's director's service agreements.
For further information on the impacts of the Companies Act, contact Debbie King on 01254 229 807, or Contact Us.
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