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The new Companies Act 2006 will come fully into force in October 2008. However, a number of significant provisions of the Act come into force on 1 October 2007.
The overall objective of the new Act has been to simplify the administrative burden on smaller private companies, increase shareholder engagement and facilitate “enlightened shareholder value” by making it clear that directors must promote the success of companies for the benefit of shareholders.
Key changes
The key changes coming into force on 1 October 2007 include:
- Codification of directors' duties (ss. 171-174): The general common law duties are now codified by statute. The new Act also includes the most controversial duty requiring directors “to act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole ..”. This duty replaces the common law duty to act “in the bests interests of the company” and, importantly, requires directors, as a matter of statute, to consider a number of factors when taking decisions including the likely consequences of the decision in the long term and wider factors such as the interests of employees and the effect on the environment, the community and the company’s business relationships.
- Derivative claims and proceedings by members (ss. 260-269): Derivative claims are those brought by a shareholder, acting on behalf of a company, against directors for default. The new Act makes it easier for shareholders to bring derivative actions and for a broader range of conduct than currently possible. Significantly it will now be possible for a minority shareholder (i.e. any person holding just one share or more) to bring a derivative action in the name of the company against a director for "an actual or proposed act or omission" involving negligence, default, breach of trust and for breach of directors’ duties. Leave of the Court is required in order to make a derivative claim but there are concerns that the new Act may lead to increased and tactical litigation against directors from “activist shareholders”, particularly when coupled with the changes in the law relating to directors’ duties described above.
These changes highlight the need for all current directors and anyone considering being appointed as a director to understand their duties so that they can avoid possible breaches and for companies to review their directors’ and officers’ liability insurance policies.
Some other changes
Some other changes (focusing on changes applicable to private as opposed to public companies) coming into force on 1 October 2007 include:
- Directors’ fixed term contracts (s. 188): As part of the Act’s drive for greater transparency, shareholder approval is now required for directors’ service contracts in excess of 2 years as opposed to 5 years.
- Loans to directors (s. 197): The new Act makes a significant deregulatory change to the regime that applies to loans made by a company to its directors. The general prohibition for private limited companies making loans to directors is replaced with a requirement to obtain shareholder approval.
- Shareholder resolutions and meetings (ss. 281-361): Private companies will no longer have to hold an annual general meeting (unless their articles of association require them to). In addition, written resolutions can be passed by a simple majority of those entitled to vote for ordinary resolutions and by 75% for special resolutions – they will not need to be signed by all members. The percentage consent to hold meetings on short notice goes down from 95% to 90%.
- Default Articles (or Table A): The current version of Table A will be amended from 1 October 2007 to reflect the changes to resolutions and meetings. The latest draft of Table A is available on the Companies House website.
Please contact us if you would like further information or advice on the changes introduced by the new Companies Act 2006. You can also access our Implementation Timetable, which summarises when the relevant parts of the new Companies Act 2006 are coming into force, by going to our website.
Caroline Copeland
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Simkins' early warning bulletins are for general guidance only. Legal advice should be sought before taking action in relation to specific matters. Where reference is made to Court decisions facts referred to are those reported as found by the Court. Please note that past bulletins included in the Archive have not been updated by any subsequent changes in statute or case law.
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