Companies Act 2006
The most significant changes to company law in the last 20 years

The Companies Act 2006 is one of the most significant changes to company law in the last 20 years. The Government’s aim is to simplify company law and make it easier to understand, especially for small businesses. It has been eight years in the making, the Act runs to 1,300 sections and 701 pages. It affects virtually every aspect of how a company is run by introducing wide-ranging reforms with hundreds of changes in the Act.

A number of parts of the Act are already in force. They were put on the statute book on November 8, 2006, it is being introduced in stages over two years. The Government intends that it will be fully in force by October 2008. Among the parts of the Act that are already in place are:

Companies being able to communicate more easily with shareholders by email and the internet (came into force in January).

Transparency obligations requiring listed companies to disclose periodic financial information (January).

The repeal of the obligation on directors and their families to disclose their dealings in the company’s shares, which means that directors of private and public companies need no longer disclose but quoted companies must continue to do so under the regulatory rules to which they are subject (April).

Takeovers provisions, which apply to bids for public companies, putting the

Takeovers Panel on a statutory footing (April).

The Act introduces a statutory statement of directors’ general duties.

Currently, there is no definitive single statement of directors' general duties. Instead, their duties are set out in case law, much of which dates back to the 19th century. That makes it difficult for first time directors or those from overseas to know what their legal obligations are. In future, directors will, in theory, simply be able to refer to the Act to know what they can and cannot do under company law.

One of the Act's key changes is to set out in one place the seven general duties with which directors must comply:

• act within their powers;
• promote the success of the company;
• exercise independent judgment;
• exercise reasonable care, skill and diligence;
• avoid conflicts of interest;
• not accept benefits from third parties;
• declare interests in proposed transactions or arrangements;

The Government has replaced the obligation to act in the best interests of the company with a new duty to promote the success of the company for the benefit of shareholders. This new duty requires directors to act in the interests of the company’s shareholders but to also have regard to a wide range of specified factors when making decisions, including the likely long-term consequences of a decision, its impact on the environment, the community, employees, customers and suppliers and so on.

It will be easier for shareholders to claim against directors for negligence and breach of directors’ duties. The Act extends shareholders’ current rights to sue directors for wrongs done to the company. Shareholders will be able to sue directors for negligence even where the director concerned has not benefited from his negligence. They will, however, need the court’s permission to do so, and the courts have the power to speedily dismiss unmeritorious claims.

Private companies will no longer need to appoint company secretaries. Instead from April 2008, a sole director of a private company will also be able to act as secretary or to outsource the secretary’s duties to a third party.

Auditors will be able to limit their liability. From April 2008, provided that the company’s shareholders consent, auditors will be able to sign an agreement with the company limiting their liability. Coupled with the introduction of limited liability, there are also two new offences of knowingly or recklessly including materially misleading information in an audit report or failing to include required information in the audit report.

Investors who are not the registered shareholders but who hold shares through nominee accounts such as ISAs and PEPs will have greater rights, including the right to receive information available to registered shareholders.

Extended rights for indirect investors to participate in company business by, for instance, requiring the directors to call a meeting or appointing a proxy to attend a meeting, will only apply if a company’s articles of association allow for it, and if the registered shareholder nominates the indirect investor to enjoy these rights. It is an opt-in provision for companies.

Indirect investors in listed companies will have greater rights to receive information, such as the company’s annual report and accounts and shareholder notices, irrespective of the relevant company’s articles. The right does, however, depend on the indirect investor having been nominated by the registered shareholder. Indirect investors in listed companies wishing to enjoy such rights should therefore contact their nominee broker to ensure that it will nominate them.

The Act will mean deregulation for small businesses. Private companies can take decisions more easily and quickly, without holding formal meetings.

Instead, they will be able to take almost all decisions in writing. The only decisions that will still require a meeting to be held are those to remove a director or the company’s auditors. They will also no longer need to hold annual general meetings.

From April next year, there will be a separate code of accounting and reporting requirements for private companies.

From October next year, they will have a special constitutional document, the articles of association, tailored to their needs rather than having to adapt something designed with public companies in mind. It will also be quicker and easier to form a company than currently. And they will be able to give financial assistance for the purchase of their own shares and to reduce their share capital more easily without having to go to court.

Companies are able to use electronic means, including email and the internet, to communicate more easily with shareholders. This came into force in January and should result in considerable cost savings for businesses.

Provided that shareholders consent, the use of the Internet will be the default position. Individual shareholders can, however, ask that information is sent to them by post.

Shareholders’ addresses will only be available on request to the company, rather than freely available. The Act requires anyone who wishes to inspect a company’s shareholder register, including shareholders themselves to obtain the company’s permission and disclose the reason for requesting the information. Companies will have to go to court if they want to refuse a request.

Although this provision came into force in October, commencement is being staggered according to individual companies’ annual return dates. A company will be subject to the provisions once it has filed its annual return made up to a date after 30 September 2007, in order to avoid putting a company in the situation where it is ordered by a court to refuse an access request and then has to file an annual return disclosing full shareholder information.

From October 2008, to ensure that the access requirements cannot be circumvented by obtaining shareholder details from a company's annual return, companies will only need to disclose limited shareholder information in their annual return, with the obligations on private and most public companies being limited to disclosure of shareholder names and shareholdings only.

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