Morgan Russell Solicitors

UK Company Law Reform

A SUMMARY OF UK COMPANY LAW REFORM UNDER THE COMPANIES ACT 2006

The constitution and formation of a company

For some years, the UK Government had been intending to reform UK Company Law.  This resulted in the Companies Act 2006 (“the 2006 Act”).

Why the need for reform?

The previous UK company law was drafted with large public companies in mind. However, more than 90% of UK companies are small private companies, with fewer than five shareholders. For such companies, the previous regime was unwieldy and required unnecessary, complex and often expensive administration.

The purpose of the 2006 Act, therefore, was to restructure company law to make it relevant to private companies.

The constitution and formation of a company

While broadly similar to the procedure for previously existing companies, there are also some very significant differences between the 2006 Act and previous procedures.

  • Memorandum of Association

Although companies still have a Memorandum of Association, this must be in the form prescribed by the 2006 Act.  A company will no longer have an objects clause, nor will it have to specify an authorised capital.  The new form of Memorandum of Association is therefore significantly shorter than was previously commonplace.

  • Articles of Association

A company continues to have Articles of Association.  The 2006 Act produced new model Articles, of which there will be various drafts for different types of companies.  A company may still choose to have its own bespoke Articles, which must be registered at Companies House. If no bespoke Articles are used, then one of the model Articles will apply by default.

Articles may be altered by special resolution, although the 2006 Act provides an important exception to this, allowing companies to entrench Articles so that they can never be changed in the future. 

Because it is not possible to include an objects clause in the Memorandum, a company’s objects are unrestricted, unless restrictions are contained in the Articles.  It is for this reason that there is a power to entrench the Articles against future amendment – this will be useful for charities, for example.

Company officers

There are significant changes with relation to provisions for the directors and company secretary:

  • Directors

Every private company is required to have at least one director, and public companies at least two. Every company must have at least one director who is a real person, and therefore, although corporate directors are still permitted, there must be at least one live human on the Board. 

The current maximum age of a company director (seventy years) is abolished, thus there is no maximum age beyond which a person cannot be appointed as a director, or at which an existing director must resign. However, there is a new minimum age of sixteen years. Previously, there was no minimum age below which a person may not act as a director, and indeed there have been company directors in the past as young as a few weeks old.

Directors will be able to nominate a service address, rather than their actual address, for entry on the register. This is of benefit to directors of companies which might make them a target for public protests, for example those involved in animal research. However, any address that was already registered will not be removed from the register.   Although directors still have to disclose their residential address to the Registrar, it will not appear on the public register (unless it is already available to the public). 

Directors have to provide all former names which they have used in the past. There is no exemption for a married woman's former name. 

  • Duties of directors

For the first time, the duties of directors are codified into the law.  The 2006 Act requires directors to act in accordance with their powers and at all times in compliance with the constitution of the company.  Directors are required to act in a manner which they believe, in good faith, would promote the success of the company for the benefit of the members as a whole. They are required to take into account the following:

  1. The likely consequences of their decision in the long term.
  1. The interests of the company's employees.
  1. The impact on the company's business relationships with third parties, for example suppliers and customers.
  1. The effect of the company's actions on the community and the environment.
  1. The effect on the company's reputation for high standards of business conduct.
  1. The interests of the company's creditors.
  1. The need to act fairly as between the members.

Notwithstanding the high ideals set out above, it must be remembered that the company is the only party entitled to enforce the directors’ duties. They are not enforceable by individual shareholders, creditors or any other parties.

  • The level of care, skill and diligence expected of directors

Already a principle of common law, the 2006 Act now codifies the principal that directors are required to exercise reasonable care, skill and diligence.  The standard will be different according to the individual director. In general, a director is required to exercise the care, skill and diligence that would be exercised by a reasonably diligent person with the knowledge and experience that might reasonably be expected of a person carrying out the duties of that director. In addition, the director’s actual skill, experience and knowledge is to be taken into account. For example, if a director is an experienced professional then his level of care, skill and diligence will need to take into account his experience and specialist knowledge and it would therefore be higher than an inexperienced lay director.

  • Directors’ interests

Directors are now required to declare their interests at Board meetings.  While this has always been the case, failure to do so will become a criminal offence.  The company constitution will still be able to permit directors to vote on matters in which they have an interest, as currently.

  • Service contracts

Directors' service contracts, contracts of services and letters of appointment are now required to be available for inspection by the shareholders. There are no exceptions to this.

  • Sole shareholder/director

There is now a new provision that if a company has only one shareholder, who is also the only director, then any contract with that director must be recorded in writing.  This is to help maintain the distinction between the individual acting in his personal capacity and acting on behalf of the company.

  • Derivative actions

Individual shareholders now have the power to bring actions on behalf of the company against individual directors for breach of duty.

This has raised concerns of nuisance actions by pressure groups or protester-shareholders (for example, environmental activists holding shares in public companies with interests in polluting industries). Derivative actions will therefore only be allowed with the permission of the Companies Court, and the Court must refuse permission in certain circumstances, the most significant of which is where the action would be unlikely to promote the success of the company.

  • Indemnities by companies in favour of directors

Any indemnity given by a company in favour of a director, which absolves the director for any liability for breach of duty to the company is void.  A company may also not indemnify directors of associated companies.  This will be of particular significance to nominee directors, whose indemnities from the company will be of little value.  However, it is still possible for the company to provide insurance for the benefit of the directors in such circumstances. 

  • The company secretary

The official post of company secretary for private companies is abolished. Although public companies are still required to have a secretary, for a private company this is now optional. 

With regard to public companies, although there is no specific requirement that the secretary be a natural person, there are various qualifications, one or more of which the secretary must hold, which are all matters one would associate with individuals.  It is therefore hard to see how many corporate secretaries could continue their functions.

All of the duties and obligations currently carried out by the company secretary in a private company will be able to be carried out by a director.

One area which required consequential change was with regard to the execution of documents. A document executed by a deed previously required a signature of two directors or one director and the company secretary.  As it is now possible for a company to have one director and no secretary, it will be possible to execute a document by the signature of two directors, or one director where that signature is witnessed. 

Company resolutions and meetings

Private companies are no longer required to hold annual general meetings. In addition, the previous regime which allowed shareholder resolutions to be taken in general meetings is replaced by the ability to make written resolutions.

  • Resolutions

Private companies are able to pass resolutions either in writing or at general meetings. An ordinary resolution still requires a simple majority of the total votes of eligible members who choose to vote, and can be done in writing. A special resolution requires a 75 % majority and can be passed in the same way as an ordinary resolution. 

Written resolutions will not require a hard copy and can be passed by email.  The directors are required to circulate those resolutions to all shareholders eligible to vote, along with a statement indicating how and when they must vote. The eligibility for voting is determined according to the date of circulation of the resolution, not the date of the vote, so if there is a change of shareholders between circulation and vote, those who are shareholders at the date the resolution was circulated will retain the right to vote on the resolution.

There is a time limit of twenty-eight days for the passing of a written resolution. If it has not received sufficient votes within twenty-eight days after it has been circulated, a resolution cannot be passed. The Articles may set out a different time period.

  • Resolutions proposed by shareholders

Shareholders with more than 5% of the total voting rights in the company (or a lower percentage if specified in the company's Articles) now have the power to require the directors to circulate a written resolution, along with a statement of up to one thousand words.  Under certain circumstances the company may apply to the Companies Court for permission not to circulate a resolution requested by the members. 

  • Proxies and voting rights

Proxies can still be used.  Generally, a shareholder’s number of votes will depend on the number of shares he holds, the default position being one vote per share held.  However, it is now possible to have varied voting rights specified in the Articles.

  • Company meetings

Provisions regarding company meetings remained largely unchanged. Directors may call general meetings, as may members with at least 10% of the voting rights. Members are now able to require that the text of any resolution they wish to be proposed at the meeting be included in the notice of the meeting.  If the directors fail to call a meeting as requested by shareholders holding sufficient voting rights, then the shareholders themselves may call a meeting. In such circumstances, the company is required to meet the relevant shareholders' reasonable expenses, and the company is entitled to recover such sums by withholding these from the fees or remuneration due to the directors.

A general meeting of a private company requires fourteen days notice, and of a public company, twenty one days.  In private companies the percentage of shareholders required to consent to short notice has been reduced from 95% to 90%, but it remains at 95% for private companies.

  • Failure to give notice of meetings

Under the previous law, if one single shareholder is not notified of the meeting, then the entire meeting and any business conducted at it was invalid.  The 2006 Act permits the accidental failure of service of a notice, in which case the meeting will still be valid.  However, it must be a genuine accident. 

  • Electronic publication of notices

Notices of meetings for both private and public companies may now be given in electronic form or via the company's website. If it is to appear on a website, then the shareholders must be informed of the presence of the notice on the website.

Accounting requirements

Private companies have to file their accounts within nine months of their year end, and public companies within six months.  Listed companies are required to publish their accounts on their website.

Auditors

A private company's auditor (if required) is automatically reappointed every year, unless the company decides otherwise.   In public companies the auditor must be appointed every financial year. 

  • Identification of the auditor

The name of the individual auditor (in addition to the firm) must now appear on the audited accounts.

  • Limiting the auditor’s liability

Any attempt to exempt an auditor from liability to the company is void.  However, auditors may enter into "Liability Limitation Agreements", the effect of which is to limit the auditors liability to the company. 

The company is required to disclose that it has entered into a Liability Limitation Agreement with the auditor.

  • Criminal liability of auditors

For the first time, the 2006 Act provides for the criminal liability of auditors who knowingly or recklessly cause or permit the auditor’s report to contain anything that is misleading, false or deceptive, or to omit a statement that there is something wrong. This is intended to prevent auditors from turning a blind eye to problems. For example, an auditor who, feeling that if he were to undertake further investigation into a particular area, then he would be likely to uncover a problem, therefore decides not to undertake that investigation, is likely to be guilty of an offence.

  • Auditors ceasing to hold office

When an auditor ceases to hold office, for whatever reason, whether by resignation or removal from office, he has to deposit at the company’s registered office a statement setting out the circumstances in connection with his ceasing to hold office.

The statement may simply state that there are no circumstances in connection with the auditor’s ceasing to hold office that should be brought to the attention of the shareholders or creditors of the company.

Private companies and public share offers

Private companies are no longer be prohibited from offering their shares to the public.  However, if a company does so, then it may be required to re-register as a public company, on application to the Court by a shareholder or creditor.

The share capital

Directors of private companies no longer require authorisation from the shareholders before they can issue shares, unless the directors are restricted from doing so by the terms of the Articles.

Although shares continue to have a nominal value, a company no longer has an authorised share capital.  The nominal value may be in any currency, or indeed in more than one currency.

All private companies now have the power to reduce their share capital, even if the power is not expressly contained in the Articles (as was the previous requirement). However, if a company wishes to reduce its share capital, all of the directors are now required to make a statement to the effect that the company is not then insolvent, and that in their opinion any winding up within the twelve months following the reduction of capital will be a solvent liquidation. 

Private companies are no longer restricted from giving financial assistance for the acquisition of their own shares. Public companies, however, retain a general prohibition against the provision of financial assistance. 

Private companies are able to issue redeemable shares without the Articles giving the specific power to do so.  The terms and conditions attached to redeemable shares, and the manner by which they are to be redeemed will be determined by the directors, although these must be authorised by the shareholders in advance.  The company will only be able to pay for the redemption out of distributable profits, or through the proceeds of a share issue made for that specific purpose.  A private company is able to redeem or purchase its own shares out of capital, although in those circumstances the directors will have to make a statement of solvency.  

Further Information

If you have any questions regarding the above or require additional information or assistance, please contact Paul Morgan on +44 (0)1372 461411.

The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.
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