Companies Act 2006 - Introduction of new legislation as of 1st October 2007

1st October 2007 saw a further step down the line towards full implementation of the Companies Act 2006 (the “Act”).

A summary of the most relevant provisions for directors and shareholders has been set out below:

 

Having previously been developed through case law, directors' duties have now been codified in statute under the Act (however, case law will continue to be relevant for the interpretation of these duties). Under the Act, directors must:

 

  

When shareholder approval has been obtained, it is now permitted for a loan to be made to a director of both private and public companies.  The requirement for approval covers loans to either a company's director, the directors of its holding company or to any connected persons of such directors.  Public companies or companies associated with a public company will also need shareholder approval for 'quasi-loans' to a director or his connected persons, and 'credit transactions' entered into for the benefit of a director or his connected persons.

 

The definition of connected persons is now broader under the Act.  A connected person can include a director's spouse, civil partner, children (now including adult children), parents, certain partners (and their children under the age of 18 living with the director) and certain bodies corporate, trustees and business partners.  A notable absentee from this list is the sibling of a director.

 

Exceptions to the general requirement to obtain shareholder approval include loans by non UK-registered companies or companies which are wholly-owned subsidiaries and expenditure in connection with the company business (maximum threshold now of £50,000).  The current exception for loans or quasi-loans of small amounts will be extended from £5,000 to £10,000 and for minor credit transactions from £10,000 to £15,000.  For intra-group transactions, the exception in the Act will be substantially the same as under the Companies (Northern Ireland) Order 1986 (the “1986 Order”).

 

Shareholder approval for directors' service contracts (being contracts of employment, contracts for services and letters of appointment) is required for contracts where the term is, or may be, longer than two years.  This replaces the corresponding provision in the 1986 Order, which only required shareholder ratification for any contract longer than five years.  Where this approval is not obtained, the contract is construed to contain a term that the company can terminate same upon the giving of reasonable notice.  Members have the right to inspect such contracts and these rights continue to apply until the end of one year before termination or the expiry of the contract.

 

Shareholders can now ratify a director's conduct amounting to any of negligence, default, breach of duty or breach of trust in relation to the company by ordinary resolution.  Neither the director concerned (if he is also a shareholder) nor any connected person can be allowed to vote on that issue.

 

The Act introduces a statutory regime empowering shareholders to sue directors in the name of the company for any loss suffered by the company as a result of either negligence, breach of duty or breach of trust by one or more of the directors.

 

The practical hurdles for private companies passing resolutions have been greatly simplified under the Act. Whereas unanimity for all types of written resolution was required previously, written ordinary resolutions for private companies can now be passed by a simple majority, and written special resolutions with a 75% majority, of those eligible to vote signing the written resolution.  Since 20th January 2007, it is also possible for electronic communications to be employed for written resolutions allowing shareholders to agree a written resolution by e-mail.

 

Public companies are still required to hold AGMs, but they are now optional for private companies unless specifically required by the company’s articles.  However, it is still possible for members of a private company to demand an AGM.  There is now a requirement for records of all of general meetings, resolutions etc. that are passed outside of general meeting to be kept for at least ten years.

 

Although directors should be aware of the statutory duties under the regime, most are not new concepts, and so prudent directors will find that in practice there is little change.  The relaxation of regulations surrounding directors’ conduct in retrospect may be given a cautious welcome by shareholders.  The relaxation of the written resolution approval requirements will greatly assist with the passing of shareholder resolutions in companies with multiple shareholders, and will almost entirely remove the need for shareholder meetings.  For minority shareholders, the loss of a meeting forum in which to debate issues may not be considered a good thing.  However, most companies will welcome this change from an administrative perspective.

 

Looking forward, recent government amendment has delayed the full implementation of various provisions of the Act that are not yet in force.  The next year may see further periodic introduction of sections of the Act, with the legislation now due to be in force in its entirety by 10^th October 2009.