INTERNATIONAL CORPORATE GOVERNANCE
The United Kingdom’s Corporate Law Overhaul:
The Companies Act 2006
By Stuart Borrie and Anne Stojanovic
UK corporate law has been substantially rewritten for the first time in a generation. The Companies
Act 2006 (the Act) is being implemented in stages,
with approximately one third already in force.
The remaining provisions will be implemented in
tranches. The last implementation date is expected
to be October 1, 2009, when all the provisions
will be in force. Whilst the Act is, in many cases, a
consolidation of existing law, there are substantial
changes.
provides that “regard shall be had to the corresponding common law rules and equitable principles in
interpreting and applying the general duties.”
The codified duties are as follows:
• Act within powers;
• Promote the success of the company and, in exercising this duty, the directors must have regard
to a number of factors including the long term
consequences of the decision, the interests of
the company’s employees, the need to foster the
company’s business relationships and the impact
of company’s operations on the community and
the environment;
Codification of Directors’ Duties
The duties owed by a director have developed by
application of fiduciary principles by the courts.
The Act has introduced a series of statutory duties
which largely correspond to those duties already in
existence, however, there are many other duties—
both statutory and non-statutory—to which directors must have regard (such as the duty to consider
the interests of creditors in times of threatened
insolvency).
• Exercise independent judgment;
• Exercise reasonable care, skill and diligence;
• Avoid conflicts of interest;
• Not to accept benefits from third parties; and
The intention of the Government in codifying
the law relating to directors’ duties was to provide
greater clarity on what is expected of directors and
to make the law in this area more accessible. In
addition, the UK Government wished to embed
in statute the concept of “enlightened shareholder
value”—which has influenced the drafting of the
duty “to promote the success of the company.” The
codification of directors’ duties came into effect on
October 1, 2007 (other than the rules regarding conflicts of interest and declarations of interest which
will come into force on an as yet unspecified date).
• Declare any interest in a proposed transaction or
arrangement.
Derivative Claims
The Act has introduced a new statutory regime
for “derivative claims”—claims made in the company’s name. This replaces very limited common law
rights. It is now possible for a claim to be made by a
shareholder in respect of any actual or proposed act
or omission involving negligence, default, breach of
duty or breach of trust on the part of a director. As
a result, a claim may be brought in respect of an
alleged breach of any of the general duties of directors referred to above.
In common with the duties developed by the
courts, the codified duties are owed by the directors
to the company. The common law and equitable principles developed by the courts remain relevant when
considering the new provisions: the Act specifically
Concern has been expressed that the new derivative claims procedure—alongside the new statutory
statement of general duties—will expose directors
to significantly greater risks of shareholder-driven
litigation. The UK Government has attempted to
Stuart Borrie is a Partner, and Anne Stojanovic is a Professional
Support Lawyer, in the London Office Company Department of
Kirkpatrick & Lockhart Preston Gates Ellis LLP.
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accounts before a general meeting. Such companies,
however, will continue to be required to send the
accounts to shareholders when the accounts are
filed with the Registrar of Companies or not later
than nine months following the end of the financial
year (whichever is earlier).
address these concerns by introducing a vetting procedure to be administered by the courts. This procedure requires the shareholder making the claim
to apply to the court for permission to continue the
claim. The Act sets out a number of factors which
the court must consider in making its decision,
including whether the shareholder is acting in good
faith and the likelihood of ratification of the act in
question. In considering whether to give permission, the court must have particular regard to any
evidence and views of shareholders of the company
who have no personal interest in the matter.
In provisions expected to come into force in April
2008, it will be possible for a company to limit the
liability of its auditors, if the company so resolves.
As would be expected, there will be limitations—for
example, no agreement can reduce the auditor’s
liability to less than an amount, which is fair and
reasonable in all the circumstances.
Directors’ Residential Addresses
Under further changes from April next year, it
will be an offence for an auditor to cause an auditors’ report to include any matter which is misleading, false or deceptive in a material particular. It
will also be an offence for an auditor recklessly to
omit certain statements required by the Act such
as a statement that a company’s accounts do not
agree with the company’s accounting records and
returns.
Under new provisions, designed to protect directors, it will no longer be necessary for directors to
provide details of their home addresses for inclusion on the public register. Instead, directors will be
able to give a service address. Another register, only
accessible in limited circumstances, will contain
their residential addresses. Under the current law,
directors’ addresses can be withheld only by order
of the court. The new provisions are expected to
come into force in October 2009.
Meetings and Resolutions
Unfortunately, this change will have no effect on
information already on the public record so, unless
they move house, directors whose home addresses
have already been filed will have no protection. A
UK Government statement has indicated, though,
that regulations will be introduced allowing former directors and secretaries to have their details
removed where practicable.
As part of the UK Government’s policy to
“think small first” and to simplify the law relating
to private companies, the Act has introduced a new
approach to meetings and resolutions which should
simplify the administration of private companies.
Changes have also been made to the law relating
to the meetings and resolutions of public companies. The changes for private companies include:
Company Secretaries
• Removal of the requirement to hold annual general meetings;
The requirement that a UK private company has
a company secretary will be removed in provisions
expected to come into force in April 2008. If they
so wish, private companies will be able to retain the
post of company secretary. Public companies will
continue to be required to have an appropriately
qualified company secretary.
• A new written resolution procedure; and
• A reduction in the notice period for all meetings
to 14 days.
Public companies are still required to hold an
annual general meeting and must do so within seven
months after the end of the financial year. This
period will be shortened to six months following
a transitional period. A failure to hold a meeting
within the specified period is an offence.
Auditors and Accounts
In provisions already in effect, private companies will no longer be required to lay their annual
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association (which govern the internal management
of a company). For companies formed after the relevant provisions come into force, the memorandum
of association will be a historical document only,
recording the membership of the company on its
incorporation.
Changes for both public and private companies include giving greater rights to proxy holders
(including the right to speak at all meetings and to
vote on a show of hands) and the introduction of
a procedure allowing shareholders of companies
listed on a recognised stock exchange (including
the New York Stock Exchange and NASDAQ) to
demand an independent report on the result of any
vote taken by poll (as opposed to a vote taken by a
show of hands) at a general meeting.
More importantly, a company’s objects will be
unrestricted, unless any restrictions on a company’s
objects are specifically set out in the company’s
articles. For an existing company, its objects will
continue to be restricted by what is contained in its
memorandum. As is the case under the current law,
those restrictions may be altered by a resolution of
shareholders.
Electronic Communications
In an effort to help companies to lower costs,
provisions have been implemented which allow
companies to make greater use of electronic media
in communications with shareholders, particularly
allowing the use of websites to disseminate information. A company may take advantage of the
new regime if shareholder consent to this method
has been obtained, either by resolution or by a
provision in the company’s articles of association. Individual shareholders will be able to “opt
out” of such communications (rather than “opt
in,” which was the previous position). It will still
be necessary for a communication to be sent to
shareholders notifying them of the availability of
the information, but it is hoped that the proportion of hard copy mailings will be significantly
reduced. Considerable savings are likely to be
made by companies, particularly those with a large
shareholder base.
Inspection of the Shareholder Register
Until recently, any person could inspect and
demand a copy of the register of shareholders of a
UK company. Since October 1, 2007, that right has
been curtailed by the introduction of an obligation
on the part of the person requesting access to give
details of his identity (and that of any person to
whom he intends to disclose the information) and
the purpose for which the information is to be used.
The company then has five working days in which
to comply with the request or to apply to the court.
The court will then determine whether the stated
purpose is a “proper purpose” and may order the
company not to comply with the request. The court
can also, if appropriate, require the person making
the request to pay the costs of the company’s application to court.
Information Rights
Shares
The use of nominee companies to hold interests
in shares is widespread. Legislation until now has
not fully catered for this and beneficial owners have
had few direct rights to obtain important information from the company. Changes in the Act are
likely to encourage greater information flow to beneficial holders of shares in listed companies. These
provisions came into force on October 1, 2007.
Under provisions not yet in force, companies
will no longer have “authorized share capital”,
however, shares will be required to have a nominal value. The articles of association may include
provisions which limit the number of shares which
may be issued.
Directors will be free to issue shares in private
companies provided that there is only one class of
shares. Under the current law, the directors must
be authorized, either generally or specifically, to
issue shares. However, rules which limit the issue
of shares for cash without first offering them to
Constitution
The constitutional documents of a UK company
consist of a memorandum of association (which
sets out the objects of a company) and its articles of
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existing shareholders will be retained. As under the
current law, it will be possible to remove these limits
by a resolution of shareholders.
of the target—is followed. Under provisions not yet
in force, this prohibition will be abolished so far as
it applies to private companies.
Financial Assistance
Conclusion
The prohibition on financial assistance prevents
a UK company from giving financial assistance
directly or indirectly for the purpose of an acquisition of its shares. For example, a target may not
assist its acquirer by securing the acquirer’s borrowings over the target’s assets, unless a statutory procedure—designed to ensure the continued solvency
The Act will have an effect on most areas of company law and—in line with the UK Government’s
aim to “think small first”—the reforms are likely to
simplify the administration of private companies,
although in many instances those companies will
need to make changes to their constitutional documents to take full advantage of the reforms.
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