A giant statute

The Companies Act 1985 has governed UK firms for 22 years. The government, despite describing it as “bulky and complex”, has now replaced it with the Companies Act 2006, which is twice the size. In fact, it contains 1,300 sections, which makes it the longest UK statute ever.

So, does size really matter?

Despite the length of the 2006 act only one third of it is “new law”. Another third is a restatement of provisions in the 1985 act and one third is a better phrased restatement.

There has been a real effort to simplify the rules that every company is bound by and move away from the “one size fits all” mentality of the 1985 act.

The 2006 law gives private companies the ability to streamline administration allowing a greater focus on core business activities.

Here is a summary of the principal changes affecting public and private companies that are in force. Most will only be open to companies whose constitutional documents allow them to take advantage of the flexibility of the 2006 act. Additional provisions will be brought into force next year.

• Certain company information must be disclosed on websites, business letters, order forms and emails. In addition there is a new electronic communication regime that allows companies to communicate with their shareholders by email or postings on the company website, provided that members have opted-in.

• Directors now have statutory duties to do the following: act within their powers and only exercise those powers for the purposes for which they are conferred; act in good faith to promote the success of the company for the benefit of its members; exercise independent judgment subject to any restrictions contained in the company’s constitutional documents; and exercise care, skill and diligence.

A duty to promote the success of the company requires
directors to give proper regard to the employees and the firm’s impact on the community

The duty to promote the success of the company requires directors to give proper consideration to the interests of the employees and the impact of operations on the community and the environment.

• Disgruntled shareholders may bring a “derivative claim” on behalf of their companies against a director for negligence, default or breach of duty or trust. There is a fear that directors may have increased exposure to claims from the “double whammy” of the new statutory duties and the derivative claims procedure. Companies should check directors’ liability indemnity arrangements in the light of the increased risk of litigation.

• Shareholder approval is now needed for: directors’ service contracts lasting more than two years; payments to directors for loss of employment as a director (not just loss of office) exceeding existing contractual entitlements; substantial property transactions with directors (or their connected persons) in relation to non-cash assets with a value exceeding the lower of 10% of the company’s asset value and £100,000 with a de minimis threshold of £5,000 (previously £2,000); loans of more than £10,000 to a director (previously directors’ loans were prohibited save for certain loans of less than £5,000).

• Companies now have the option to give shareholders the right to nominate another person, such as the beneficiary of a trust, to exercise members’ rights.

• Proxies will have a right to speak at general meetings and vote on a show of hands.

• There is no need to hold annual general meetings (subject to constitutional documents).

• Notice periods for all shareholder meetings are reduced to 14 days (subject to constitutional documents); and it is easier to pass written resolutions as unanimity is no longer required).

The 2006 act may be the largest UK statute, it may introduce provisions to ease the administrative burdens of companies, but unless you ensure your constitutional documents are up to date you will not be able to take advantage. It’s how you choose to use the 2006 Act that is the key.