Introduction

The Companies Act 2006 (the ‘Act’) can no longer be ignored: the longest Act in the history of Parliament, which will have a massive impact on company law, is now a reality.  Whilst it seemed that a significant breathing space had been provided by the government when the Act received Royal Assent (the statement at the time was that the Act would be ‘fully implemented’ by October 2008, with no interim dates being given), the detailed implementation timetable released in February has scotched any such hopes.  The result is that some of the Act has already come into force, and a significant proportion of it will be coming into force this October. Remaining implementation dates are April 2008 and October 2008.

The purpose of this Article is to recap in brief on what is already in force, and look at what has actually been happening in practice as a result in one of the relevant areas, electronic communications.  The Article will then go on to examine what is scheduled to take place over the summer, in terms of consultations and so on, and then look, again in brief, at what will be coming into force this October.  The Article will finish by setting out what areas will be implemented on the remaining key dates.

What is already in force?

The areas of the Act that have already come into force can be summarised as follows:

• the provisions relating to electronic communications, electronic filings and trading disclosures;
• the provisions implementing the Transparency Directive;
• the provisions implementing the Takeovers Directive; and
• various miscellaneous repeals of the Companies Act 1985 (the ‘1985 Act’) relating to directors (for example the removal of the requirements relating to notification of share interests, the removal of the age limit and so on).

Detailed information on these areas can be found in the Companies Act section of our website and in the previous edition of Essentially Business.

What has happened in terms of electronic communications in practice?

By way of brief re-cap, companies are now able to communicate with their shareholders (and debenture-holders) electronically (and vice-versa), provided that certain conditions are met and consents obtained.  As we advised at the time, it is likely that most companies, in order to take advantage of these new flexibilities fully, would need to consider amending their articles of association (‘Articles’) in due course and/or gaining the necessary shareholder approvals.  The Institute of Chartered Secretaries and Administrators (ICSA) then published some guidance on electronic communications with shareholders – the first half of the document summarising and interpreting the provisions, with the second half of the document focusing on  guidance and points of recommended best practice. 

So what has been happening in practice?  Well it seems that many of the smaller, and in particular the private companies, haven’t yet made any changes to their Articles.  Reasons for this include: (i) the knowledge that further changes to their Articles will be required in due course when other provisions of the Act are implemented, and so taking a decision wait and do all the amendments in one go; (ii) the fact that their Articles already allow for limited use of electronic communications and this is sufficient for their purposes at present; and (iii) the fact that shareholder consent was easily obtainable (due to for example small numbers of shareholders), meaning that amendments to their Articles were thereby unnecessary.

However, for the larger companies, and certainly for the larger listed companies (which have further hoops to climb through before they can take advantage of the new provisions), the story is very different.  A survey carried out by the Practical Law Company examining a selection of listed companies whose financial years ended on 31 December 2006 and whose AGM notices have been sent to shareholders, has found that no standard approach has emerged as to whether a shareholders’ resolution or a resolution to amend the Articles is the preferred route, and in certain cases both have been used.  However, companies have been actively pursuing both, in order to take advantage of the new rules.  For the sample of companies that were examined, there appears to be a preference for the two stage approach where the resolution at the AGM (either approving communications by electronic means or to amend the articles accordingly) is passed first before the company writes to shareholders requesting their individual consent to receive electronic communications including via a website. However, a number of the companies have sent the request letter to shareholders at the same time as the notice of AGM and asked the shareholders to consent, subject to the resolution being passed.

What will be happening over the summer?

Over the summer, the DTI will be putting draft regulations on their website for comment as they become available.  These will set out the detailed rules necessary for many areas of the Act.  Consultations will be taking place on the draft model Articles that have been produced for private companies limited by shares (which will replace Table A), private companies limited by guarantee, and public companies.  Consultations will also be taking place on transitional and savings provisions.  The DTI is also preparing useful checklists for different users on the Act. The first one that has been prepared is relevant for private companies, and can be found here. Checklists for shareholders and public companies will apparently follow. Frequently asked questions on the Act have also been published, and can be found here.

What is happening in October?

As stated above, a significant proportion of the Act will be coming into force this October.  We will be looking at this in much more detail in the next edition of Essentially Business, and in our seminar on 25th September  (see below).  However, in brief, the provisions that will be coming into force are as follows:

• Part 9: Exercise of members’ rights.  Two new provisions are being introduced: (i) for all companies, members will have the right, provided the company’s articles permit, to nominate another person to enjoy or exercise their rights as a member; and  (ii) for ‘quoted’ companies, members can nominate the beneficial holder of the shares “to enjoy information rights” (i.e. to receive company documentation and information).
  
  
• Part 10: Directors.  This will include provisions relating to: (i) codification;(ii) appointment and removal; (iii) declarations of directors’ interests; (iv) transactions with directors; (v) service contracts; (vi) indemnification; (vii) definitions of director and shadow director and persons connected with them; (viii) loans to directors; (ix) directors’ compensation payments for loss of office; and (x) ratification of acts of directors.  NB: provisions relating to conflict of interests will not be coming into force until October 2008.
  
  
• Part 11: Derivative Claims – the new statutory procedure for members to bring a derivative action in the name of the company against one or more directors.
  
  
• Part 13: Resolutions and meetings.  This will include (i) the ‘elective’ regime becoming the default for private companies; (ii) the opening up of the regime for private companies to make decisions by written resolution; (iii) the short notice meeting percentage being reduced; (iv) a reduced notice period for general meetings for private companies, even if a special resolution is to be considered; (v) ‘quoted’ companies having to publish the results of any polls on their website, and shareholders in ‘quoted’ companies who hold at least 5% of voting rights or who number at least 100 shares will have the right to require an independent report; (vii) shareholders in public companies being able to require the company to circulate resolutions and statements at the company’s expense; and (viii) proxies being able to speak and vote at meetings.
  
  
• Part 14: Control of Political Donations and Expenditure. This restates and amends the regulation of political donations in the 1985 Act.
  
  
• Section 417 of Part 15: Contents of directors’ report: business review – this introduces a new requirement for quoted companies to include a forward looking statement in their business review.
  
  
• Sections 485 to 488 to Part 16: Appointment of auditors by a private company.  There are some technical changes.
  
  
• Part 29: fraudulent trading.  The offence restates section 458 of the 1985 Act but increases the maximum sentence for the offence from 7 years’ imprisonment to 10.
  
  
• Part 30: Protection of members against unfair prejudice.  This is a restatement of existing law.
  
  
• Part 32: Power of the Secretary of State to appoint inspectors to investigate a company or its shareholders.  This will change some of the rules currently set out in the 1985 Act.

Remainder of the Act

The subsequent implementation dates are April 2008 and October 2008.  Provisions coming into force in April include those on company secretaries, accounts and reports, and audit.  Of more significant impact will be October 2008, when the remaining provisions will come into force, including those on financial assistance (which will be allowed for private companies); a company’s constitution (pursuant to which the Articles will become the key document, with the memorandum of association merely providing an ‘historical snapshot’); a company’s share capital; overseas companies; and business names. 

Further information for you

© Davenport Lyons 2007 All rights reserved.
This document reflects the law and practice as at July 2007. It is general in nature, and does not purport in any way to be comprehensive or a substitute for specialist legal advice in individual circumstances.