October 16, 2007
Companies law in England and Wales is undergoing reform and modernisation by way of the phased implementation of the new Companies Act 2006. Various parts of the 2006 Act became effective on 1 October 2007. This alert summarises the main changes in force from that date, drawing on separate alerts on individual topics.
The main provisions effective 1 October 2007 include:
This alert also deals with a number of more technical measures that will be of interest to those responsible for administration and compliance matters for English companies.
The 2006 Act introduces a statutory statement of duties that replaces several common law and equitable rules. The codified duties will be owed to the company and only the company will be able to enforce them (however, the 2006 Act makes changes to the law governing derivative actions by shareholders and these may now be easier for shareholders to bring).
The following general duties of directors are now in force:
The above comprise the so-called principle of "enlightened shareholder value". The list of factors which directors are required to have regard to is not exhaustive.
Impact of the 2006 Act
There has been criticism of the codification of directors’ duties and several bodies, including the General Counsel 100 Group (GC100), believe the provisions in the 2006 Act risk having the effect of increasing bureaucracy in companies, making the decision-making process more cumbersome, and increasing the potential liability to which directors are exposed.
In particular, concern has been expressed in relation to section 172 and the principle of enlightened shareholder value. It has been suggested that board minutes will have to be more detailed to show that the directors have contemplated the non-exhaustive list of factors set out in that section. A GC100 working group has published an influential paper setting out the view that the changes do not mean that directors will have to evidence in board minutes their thought processes, with regard to the stated factors or any other matter influencing their thinking. This view is consistent with the view of Government Ministers expressed during Parliamentary debate on the measures.
The GC100 nevertheless considers it best practice for directors to be made aware of the requirement to consider the factors (to the extent relevant) and for those members of the management team responsible for preparing board papers to ensure that each of the factors that may be relevant is properly considered whilst board papers are being prepared and that appropriate discussion of the same is included in board papers and/or board presentations.
Directors’ Report: business review
For financial years beginning on or after 1 October 2007 all private companies must produce a business review section of the Directors’ report, except those under the small companies accounting regime (section 417). The purpose of these reviews is "to inform members of the company and help them assess how the directors have performed their duty under section 172", the duty to promote the success of the company.
The business review must contain:
All quoted companies, including those on the Main Market of the London Stock Exchange but not those on the Alternative Investment Market (AIM), must also include in their business review:
In relation to business reviews, there is a carve out for all companies so that disclosure is not required if it would be seriously prejudicial to:
This provision is aimed at reporting significant relationships, critical to the business. In assessing what to report directors will need to exercise their judgment and may need to seek advice.
The 2006 Act extends the regulation of political donations and expenditure to cover independent election candidates (unlike the 1985 Act). A company wishing to make a donation to or incur political expenditure relating to an independent election candidate from 1 October 2008 onwards will need to pass a new members’ resolution prior to that date, as companies have had to for party candidates in the past. Even if the company has no intention of including independent election candidates in the scope of any future shareholder resolutions, it may be advisable to pass a new form resolution at the next general meeting. The new provisions will not invalidate existing resolutions.
Approval is now only required from the ultimate UK holding company and not from intermediate holding companies and one resolution can cover multiple subsidiaries. The provisions expressly covering overseas subsidiaries have not been replicated in the 2006 Act. Therefore, an English parent company does not need to seek authorisation in relation to political donations or political expenditure by an overseas subsidiary.
A new section dealing specifically with trade unions has been added and states that:
This should remove any remaining concerns regarding issues such as giving employees paid time off for trade union matters and allowing them to use company facilities for trade union purposes (for example meeting rooms).
The de minimis for political donations is still £5,000. Up to that amount no approval is required.
The 2006 Act’s reporting provisions covering political donations and expenditure take effect in directors’ reports relating to financial years beginning on or after 6 April 2008.
Miscellaneous changes
A number of other provisions came into force on 1 October. Summary details of the changes are available by clicking on the relevant links below:
The regulations making amendments to Table A articles also came into force on 1 October, but only apply to new companies formed after that date. Older companies may choose to adopt them.
Company administration: reform of the written resolution procedure
The basic position under the regime in force from 1 October 2007 is that the members of a private company must vote on resolutions either (i) at a meeting of members or, (ii) by way of a written resolution (each in accordance with the provisions set out in the Act). There is no written resolution procedure for members of a public company, who must vote on resolutions at a meeting held in accordance with the Act.
In contrast to the old regime, private companies wishing to take advantage of the written resolution procedure must do so in accordance with the statute. Consequently, private companies are no longer able to pass a written resolution in accordance with a power contained in their articles of association. This rule does not however displace the common law rule that provides for ‘unanimous consent’ of shareholders to be effective in certain cases.
Written Resolutions
The written resolution becomes the default position for private companies. Further, as a result of the blanket application to private companies of the 1985 Act "elective regime", no private company will be required to hold annual general meetings. With the exception of the removal of directors and auditors from office, it will be possible for members of private companies to vote on all decisions requiring their consent by way of written resolution.
A written resolution can be initiated by the directors of the company or by the members, provided those members satisfy certain conditions. The members will only be able to request circulation of a written resolution if (i) they hold 5% or more of the total voting rights (or a lower percentage if set out in the articles), and (ii) the resolution would be effective if passed and is not defamatory, frivolous or vexatious.
Company administration: shareholder meetings
Meetings of shareholders can be convened by the directors or at the request of members holding 10% of the company’s paid up capital who are entitled to vote (this can be reduced to 5% for private companies whose members have not requisitioned a meeting in the previous 12 months). Shareholder meetings can also be convened by the company’s auditors or by the court.
Where a meeting is requested by the members, the directors must call a meeting within 21 days. The meeting must then be held within 28 days of the notice. If the directors default, the members can convene a meeting at the directors’ expense.
A key change for shareholder meetings is that the notice period for all meetings is reduced to 14 days. This stands in contrast to the 1985 Act, where 21 days’ notice was required in respect of "special resolutions". The main exception to this new rule is for public company annual general meetings, which still require 21 days’ notice (although note that 28 days’ notice is required for the removal of a director, or the company’s auditors, from office).
The notice for a general meeting of shareholders can now take the form of hard copy, electronic copy or a notice published on the company’s website.
There are a number of new rules relating to the appointment of proxies and the procedures for shareholder meetings. There are additional changes in the law relating to meetings of public companies and quoted companies.
Private companies may have one director and private unlimited companies are permitted to have only one member (section 154). A public company limited by shares must have two directors (section 154). The minimum number of directors required has not changed from those in the 1985 Act.
Members still have a statutory right to remove a director by ordinary resolution (sections 168-169). Special notice is still required and a director removed by a resolution under section 168 retains the right to compensation or damages. A director has the right to be heard at the meeting considering his removal and to make written representations. Directors may be removed by other means (for example under a procedure set out in the company’s articles).
Exercise of Members’ Rights
Companies may have provisions in their articles allowing registered members to nominate another person to enjoy all or any specified rights, including the right to receive notice of general meetings, to receive the annual report and accounts and to appoint a proxy (section 145).
It is mandatory for traded companies, whose shares are admitted to a regulated market in the European Economic Area (which includes the Main Market of the London Stock Exchange, but not AIM), to allow members to nominate another person to enjoy information rights. Members may nominate beneficial holders to have information rights. Persons nominated must be nominated to enjoy information rights in their entirety. The company may enquire once a year whether these rights are to continue.
The key changes in relation to proxies include that:
Articles of a company cannot require the appointment of a proxy to be lodged more than 48 hours before the meeting (excluding non-working days).
In relation to polls there is generally no change in that a poll can be demanded by five members entitled to vote or members representing 10% of total voting rights of all members entitled to vote (or 10% of the total sum paid-up). There are additional requirements for quoted companies to keep the results of polls on their website for two years (sections 351 and 353). There are additional requirements in relation to the request of an independent report by members and the appointment of an independent assessor, whose report must also be published on the website for two years (sections 342, 344, 351 and 353).
Transactions with directors requiring the approval of members
The 2006 Act contains new rules relating to the following four categories of transactions with directors:
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. For further details please contact the Gibson Dunn attorney with whom you work or James Barabas (+44 (0)20 7071 4253, jbarabas@gibsondunn.com) in the firm’s London office.
© 2007 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.