INTERNATIONAL CORPORATE GOVERNANCE The United Kingdoms Corporate Law - - PDF document

Volume 16, Number 1 29 The Corporate Governance Advisor

The United Kingdom’s Corporate Law Overhaul: The Companies Act 2006

By Stuart Borrie and Anne Stojanovic

UK corporate law has been substantially rewrit- ten 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.

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 direc- tors must have regard (such as the duty to consider the interests of creditors in times of threatened insolvency). 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 con- flicts of interest and declarations of interest which will come into force on an as yet unspecified date). 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 prin- ciples developed by the courts remain relevant when considering the new provisions: the Act specifically provides that “regard shall be had to the correspond- ing 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 exer-

cising 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

• f company’s operations on the community and

the environment;

• Exercise independent judgment;
• Exercise reasonable care, skill and diligence;
• Avoid conflicts of interest;
• Not to accept benefits from third parties; and
• 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 compa- ny’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

• r 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 direc- tors referred to above. Concern has been expressed that the new deriva- tive 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.

INTERNATIONAL CORPORATE GOVERNANCE

The Corporate Governance Advisor 30 January/February 2008

address these concerns by introducing a vetting pro- cedure to be administered by the courts. This pro- cedure 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 permis-

sion, the court must have particular regard to any evidence and views of shareholders of the company who have no personal interest in the matter.

Directors’ Residential Addresses

Under new provisions, designed to protect direc- tors, it will no longer be necessary for directors to provide details of their home addresses for inclu- sion 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

• f the court. The new provisions are expected to

come into force in October 2009. 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 for- mer directors and secretaries to have their details removed where practicable.

Company Secretaries

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.

Auditors and Accounts

In provisions already in effect, private compa- nies will no longer be required to lay their annual 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). 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. Under further changes from April next year, it will be an offence for an auditor to cause an audi- tors’ report to include any matter which is mislead- ing, false or deceptive in a material particular. It will also be an offence for an auditor recklessly to

• mit 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.

Meetings and Resolutions

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 compa-

• nies. The changes for private companies include:
• Removal of the requirement to hold annual gen-

eral meetings;

• 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.

Volume 16, Number 1 31 The Corporate Governance Advisor

Changes for both public and private compa- nies 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.

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 infor-

• mation. 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 associa-

• tion. Individual shareholders will be able to “opt
• ut” 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 propor- tion of hard copy mailings will be significantly

• reduced. Considerable savings are likely to be

made by companies, particularly those with a large shareholder base.

Information Rights

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 informa- tion from the company. Changes in the Act are likely to encourage greater information flow to ben- eficial holders of shares in listed companies. These provisions came into force on October 1, 2007.

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 association (which govern the internal management

• f a company). For companies formed after the rel-

evant provisions come into force, the memorandum

• f association will be a historical document only,

recording the membership of the company on its incorporation. More importantly, a company’s objects will be unrestricted, unless any restrictions on a company’s

• bjects 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.

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

• n 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 appli- cation to court.

Shares

Under provisions not yet in force, companies will no longer have “authorized share capital”, however, shares will be required to have a nomi- nal 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

• f shares for cash without first offering them to

The Corporate Governance Advisor 32 January/February 2008

existing shareholders will be retained. As under the current law, it will be possible to remove these limits by a resolution of shareholders.

Financial Assistance

The prohibition on financial assistance prevents a UK company from giving financial assistance directly or indirectly for the purpose of an acquisi- tion of its shares. For example, a target may not assist its acquirer by securing the acquirer’s borrow- ings over the target’s assets, unless a statutory pro- cedure—designed to ensure the continued solvency

• f the target—is followed. Under provisions not yet

in force, this prohibition will be abolished so far as it applies to private companies.

Conclusion

The Act will have an effect on most areas of com- pany 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 docu- ments to take full advantage of the reforms.