Article

Key impacts on private companies from changes in the new Companies Act 2006

The first phase of significant changes impacting on the day-to-day running of new and existing companies came into effect under the new Companies Act 2006 ("the Act") on 1 October 2007. The Government's objectives under the Act are ambitious: to reconcile the simplification of administrative duties with the promotion and culture of "corporate responsibility".

Directors' new duties and liabilities

Codification of duties

Much attention has been paid to the new codification of directors' duties, and how those duties compare to the duties which have evolved from case law.

The Act sets out seven general duties which directors must take into account when exercising their functions.

The duties which became effective on 1 October 2007 require directors to act in accordance with the company's constitution and for proper purposes; exercise independent judgment; show reasonable care skill and diligence in their decision making; and "promote the success" of the company.

The Act sets out various criteria that directors should consider in deciding whether a course of action will "promote the success" of the company. These include the interests of shareholders, the interests of employees and the impact on the community and environment. These often conflicting interests must be carefully assessed by directors in their decision making.

The codification of the existing duties requiring directors to avoid conflicts of interest with the company, not to receive personal benefits from third parties and to declare personal interests in transactions are due to come into force as part of the final phase of implementation of the Act, in October 2008.

Directors' personal liability

The Act significantly enhances the rights of shareholders to bring a "derivative claim" for damages against a director or directors where they have breached their duties and/or acted negligently. This exposes directors to a significantly higher risk of personal liability from aggrieved shareholders. 

However, derivative claims can only be brought in the name of the company and it should be possible for directors to minimise the prospects of successful claims being brought if they are able to demonstrate that their decisions were taken in accordance with the proper exercise of their statutory duties.

Best practice

The nature of the new duties would, at first sight, seem incidental to a conscientious director's day-to-day management of a well-managed company, and significant changes are unlikely to be required to ensure compliance.

To fulfil their duties and minimise the risk of incurring personal liability, directors must ensure that significant decisions are given due consideration in light of the criteria laid down by the new duties, and keep proportionate records to demonstrate that they have done so.

An overly defensive "paper trailing" of decisions would undoubtedly be at odds with the purpose of the reforms and the essence of the duties.

The substance of the new duties appear to be largely in line with the principles developed by the courts over the years, and will be welcomed by many directors as an apparently succinct clarification of their duties. It remains to be seen how robustly and predictably the new duties will be interpreted by the courts.

Simplification of administrative procedures

Shareholders' involvement

Of the variety of measures introduced by the Act which attempt to ease the rigidity and administrative burden of shareholders' involvement in the company, perhaps the most significant are those simplifying the formalities for calling shareholder meetings and dispensing with the requirement that written resolutions can only be passed if approved with unanimous consent.

Shareholders' voting

The new rules contemplate that the majority of shareholder decisions will be effected by way of written resolutions, thus avoiding the need to call and physically gather the shareholders to vote.

Whereas previously, decision-making by way of a written resolution required all the shareholders to vote in favour of a proposal, decisions may now be reached by a simple majority for most matters, or 75% for certain matters (unless the company's constitution stipulates that a different majority is required).

This change will significantly increase the practical application of the written resolution procedure, and is expected to reduce the administrative and logistical burden of gathering the shareholders to vote in person.

Shareholders' meetings

The reforms also considerably simplify the procedure for calling and holding shareholder meetings where these are required.

Shareholders now have the ability to send up to one "proxy" (or nominee) per share in their place to meetings to attend, speak and vote.

The reduced culture of shareholder meetings is illustrated by the decision to make the holding of an AGM an "opt in" rather than an "opt out" requirement (unless specifically required in a company's constitution), in recognition of the fact that they are overly formal for many private companies.

General administration

The reforms generally aim to reduce the burdensome nature and rigidity of administrative processes for private companies. They also seek to recognise modern business practices, such as promoting the use of electronic communications between the company and its shareholders.

New companies in particular will benefit from changes to come into force next year, including a simplified procedure for forming new companies and the removal of the requirement to have a company secretary (which will also apply to existing companies).

Ethos of administrative reforms

Such pragmatic changes accord with the "Think Small First" ethos of the reforms, which recognise that some 95% of companies are "small businesses", for whom many of the existing requirements are unnecessarily burdensome and often (quite innocently) improperly observed.

"Less is more"

Ultimately, the perceived success of the Act will be the extent to which the simplification of key duties and procedures actually eases the burden of administering a company.

If it enables more understanding, actual compliance and transparency, it will have succeeded; if its attempts at brevity provoke more uncertainty, bureaucracy and complexity, it will have failed.

The Act is often cited as the largest piece of legislation in UK history. Whilst inevitably companies will need to take time to familiarise themselves with reforms of this magnitude, proportionate adjustments to the directors' procedures and companies' administrative functions should ultimately allow private companies to benefit from the simplified procedures and operate more effectively in the future.

For further enquiries please contact James Partridge (view full profile) on 01892 701280 or email james.partridge@ts-p.co.uk.

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