back to news index

COMPANIES ACT 2006

The Companies Act 2006 has now received Royal Assent and will be brought into force with staggered implementations up until October 2008.

The following are some of the key changes in the Act of particular relevance to private companies with indication of when these changes will come into force.

Shorter time period for filing accounts

The time period for filing private companies' annual reports and accounts is to be reduced from 10 months to 9 months after the year end, with effect from 6 April 2008 (for reports and accounts relating to financial years commencing after that date).

AGMs will no longer be required

Private companies will no longer need to hold AGMs after 1 October 2007 unless they positively elect to do so. However, the transitional provisions are expected to preserve any specific requirement in a company's articles for an AGM, so any such requirement will need to be removed by special resolution before a company can dispense with the AGM.

Private companies will no longer have to have a company secretary

The requirement for a private company to have a company secretary is to be abolished with effect from 6 April 2008, although private companies can retain a company secretary if they wish (provided they continue to file details of the secretary at Companies House), and many larger private companies are expected to do so. The duties currently carried out by the company secretary will not fall away, so directors of private companies choosing to do without a secretary will need to ensure these are taken care of, and check their articles and key contractual arrangements for references to the company secretary.

New statutory duties for Directors

The Act contains new statutory duties for directors which will apply to executive and non- executive directors alike, and in some cases, to former directors. Guidance on directors' duties will be provided by the DTI for the first time. The new statutory regime includes familiar concepts such as duties to exercise reasonable skill and care and not to accept benefits from third parties. Some of the new duties go beyond the common law equivalent, however. For example, there is a new core duty of directors to promote the success of the company for the benefit of its members and in doing so, directors must have regard to the interests of the company's employees, its business relationships with its customers and suppliers and others, and the impact of its operations on the wider community and environment. This is a controversial new concept and until the new law has bedded down, there may be uncertainty as to how the courts will interpret it.

There are also new rules on directors' conflicts of interest. A conflict or potential conflict of interest involving a director (other than in relation to a transaction with the company) can be authorised by the non-interested directors unless the company's articles prohibit them from doing so. Directors must also still declare interests in transactions with the company, but the declaration may be made in writing rather than in person at a board meeting. The new statutory duties will apply from 1 October 2007, apart from the new rules on conflicts, which will not come into force until October 2008 (to give companies more time to change their articles to accommodate the new conflicts regime).

Claims against directors

The Act also provides for shareholders to bring a claim on behalf of a company against directors who are in breach of duty or have been negligent. Shareholders will need the consent of a court to bring a claim, and damages will be owed to the company, rather than to the shareholders themselves. These limitations should ensure that only deserving claims are pursued, but the statutory procedure may make it easier for shareholders to bring actions against directors. The new procedure will be available from 1 October 2007, at the same time as the new statutory duties for directors come into force, making it all the more important for directors to be fully up to speed on their new statutory duties and to review board procedures before October 2007.

Directors' home addresses

The rules which currently allow directors who are considered to be at risk of violence or intimidation to keep their home addresses off the public register will be extended to apply to all directors from 1 October 2008, whatever the nature of the company's activities. All directors will file a service address (which can be the company's registered office) and their home addresses will be kept on a separate, protected register by both the company and Companies House. However, details of existing directors' home addresses on the register at Companies House will not be removed automatically. Directors who can show they are at risk of violence or intimidation will be able to apply to the registrar to remove such details, under regulations which have yet to be published.

Companies' memorandum and articles are to be simplified

The new model articles for private companies, which will be effective from 1 October 2008, are shorter and simpler than the current Table A. Table A will remain in force, so existing companies with Table A-based articles will not be forced to adopt new articles, but many are expected to amend their articles to reflect the new model articles and to take advantage of other new freedoms in the Act itself. Also, the memorandum of association will be much simplified, and will no longer restrict the scope of the company's activities unless it has a restricted objects clause in its articles.

Board decision-making easier

Under the new model articles, directors will be able to take decisions on a more informal basis than at present and the company's articles may specify which decisions require unanimity and which require only a specified majority to vote in favour, either with or without a meeting. Companies will need to change their articles to take advantage of these new procedures, which will come into effect on 1 October 2008.

No statutory prohibition on financial assistance for private companies

The statutory prohibition on financial assistance is to be abolished with effect from 1 October 2008 for acquisitions of shares in private companies, and the "whitewash" procedure in the 1985 Act will become redundant. This should make acquisition finance and structuring easier from October next year.

Written resolutions will no longer require unanimity

Under the Act, from 1 October 2007, private companies will be able to pass written resolutions without needing the consent of all shareholders. It will be possible for any resolution to be approved by shareholders in writing with a simple majority for an ordinary resolution and a 75% majority for a special resolution.

Authorised share capital is to be abolished

Companies will no longer be required to have an authorised share capital (i.e. a limit on the maximum amount of share capital which can be allotted) after 1 October 2008. Shareholder approval for share issues will also cease to be a statutory requirement unless the company has more than one class of shares (or is a public company). This will mean that, from October 2008, the directors of a private company with only one class of shares will be free to allot shares up to an unlimited amount (subject to statutory pre-emption rights on cash issues), unless the company introduces restrictions in its articles or elsewhere on share issues taking place without shareholder approval. However, the transitional provisions are expected to treat an existing authorised share capital clause in a company's memorandum as a restriction in the articles on the number of shares the directors can allot, so this deemed "restriction" will need to be removed from the articles before new share issues exceeding the authorised share capital can be made.

Reductions of capital permitted without court approval

Private companies will be able to reduce share capital or cancel all or part of their share premium account without having to go through the lengthy court process which is currently required. The reduction will be based on a solvency statement made by the board and approved by shareholders. The new non-court-based procedure will be available from 1 October 2008.

Electronic communication
The Act facilitates greater use of electronic communications between companies and their shareholders. The relevant provisions came into force on 20 January 2007 and many listed companies are taking advantage of the new regime to send meeting notices and annual reports and accounts to shareholders by e-mail or by publishing them on the company's website.

Private companies with a large shareholder base may wish to do the same. To use e-mail, shareholders must provide an e-mail address for this purpose. To use the website, shareholders must be asked individually if they wish to receive information in this way, but if they fail to respond within 28 days, they may be deemed to have agreed provided the shareholders as a body have passed a resolution approving the use of website communications, or the articles authorise website communications.

If you would like more information on any of the topics discussed here, or on what you should do to prepare for the changes, please contact your usual contact at the firm. We would also recommend that you speak to your solicitors in connection with changes to the company’s Memorandum and Articles that may result from the new Act.