Changes to Company Law

The Companies Act 2006 is now fully in force and has brought about significant changes for UK companies - especially private companies.

The Companies Act 2006 is the biggest Act ever, and will particularly affect private limited companies.

The first changes, brought into force in January 2007, included statutory rules for electronic communications between companies and shareholders - particularly, the power to use websites and emails to publish notices and other communications. Companies that already communicate electronically should consider reviewing their practices to take advantage of the new rules, and those who don’t should consider changing their Articles to allow for electronic communications.

Other changes include the following:

• Companies no longer have to state what they are set up to do in an ‘objects clause’ in their Memorandum of Association. Instead, they are able to carry on any lawful activity – unless they include specific restrictions on their activities in their Articles of Association.
• The objects clauses of existing companies will be treated as if they were restrictions set out in their articles. But it is uncertain how the courts will deal with such clauses in a dispute – they will have to construe clauses written to empower the company to act, as restrictions.
• Private company shareholder decisions made in writing (without holding a meeting), no longer need to be signed by every voting shareholder, but may be passed by majority votes, according to the type of decision. Consider whether you wish to retain unanimity or use the new rules.
• The requirements to hold an annual general meeting, and to present accounts to the shareholders at a shareholders’ meeting every year, are abolished. A company that wishes to hold an annual shareholders’ meeting must specifically provide for one in its Articles of Association.
• Directors must be over 16, and can serve even when over 70, without the need for shareholder approval. A company may not have corporate directors only – at least one director must be a natural person. Directors may keep their residential addresses confidential by notifying a service address to Companies House, and for the Company’s Register of Directors. They must also supply a residential address, but this will not be available to the public. The company must maintain a confidential Register of Directors’ Residential Addresses. Review the composition of your board, and any subsidiaries in light of these new rules.
• Directors’ duties are now ‘codified’, ie set out in the Act, rather than gleaned from decisions in court cases. The overriding duty is to act in the way the director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. In general, directors’ behaviour will be unchanged, although there are specific new rules governing directors whose personal interests conflict with their company’s. This could particularly affect those with multiple business interests or directorships. Consider training for directors, particularly in relation to conflicts; review your board procedures to ensure compliance with the codified duties; and consider directors’ and officers’ liability insurance, and indemnities for directors, in the event of breach of their duties.
• Private companies will no longer need to appoint a company secretary. Consider whether to retain your company secretary.
• A person wishing to inspect your company’s Register of Members must give his name and address, and the purpose to which he will put the information.
• It will be easier for minority shareholders to take legal action against directors on behalf of the company if they think the directors have breached their duties - to bring what lawyers call ‘derivative actions’.
• Share transactions will be easier. Companies will not need to maintain an authorised share capital, and directors of private companies with only one class of share will be able to issue shares without needing an authority to do so from the shareholders. It will be easier to reduce issued share capital, and the rules for issuing redeemable shares and buying shares back from shareholders are made simpler.
• Directors who refuse to register a transfer of shares to a new shareholder will have to give reasons.

In view of the number of changes brought into force by the Companies Act 2006 we advise companies to undertake a thorough review and update of their Articles of Association, to ensure they can take full advantage of the new rules.

If you would like to discuss how the changes under the Companies Act affect your please contact Troy Warner or telephone 01908 692769.