The Companies Act 2006 - a summary
After much widely publicised controversy over some of its key provisions, the Companies Act (originally the Company Law Reform Bill) was finally passed by parliament on 8 November 2006. It is the longest act ever, running to 1,300 sections, introducing many reforms and consolidating virtually all existing companies legislation. It is written in simplified language, with a particular focus on small businesses. The main measures are summarised below.
The act contains a statutory statement of directors' general duties, which are currently established in case law rather than statute.
'Enlightened shareholder value'
The 'enlightened shareholder value' duty, which broadly replaces the existing fiduciary duty to act in the company's best interests, has been controversial. It imposes a duty to 'promote the success of the company for the benefit of its members as a whole' having regard to various factors including the longer term, and the interests of employees, suppliers, consumers and the environment. However, it is important to note that this is a single duty to work for the benefit of shareholders, rather than a separate set of duties in relation to the stakeholders represented in the list of factors.
Directors will only be liable to the company (or its shareholders on behalf of the company) for breach of this duty if the company can demonstrate that it has suffered loss as a result of the breach. The codified 'derivative claims' provisions make the criteria and procedure for minority shareholders to bring a claim in the name of the company clearer, but include protections to ensure that unmeritorious suits are quickly dismissed with costs falling to the person bringing the claim. The government will be issuing guidance for directors on what these duties mean, based on the government statements made in parliament.
A new statutory liability regime is introduced, effectively incorporating a safe harbour for information in directors' reports and directors' remuneration reports. The requirements for a business review in the directors' report were revised and - for quoted companies only - the content requirements extended significantly to include, for example, information on environmental impacts and the main factors likely to affect the company's future business (the 'enhanced business review').
Measures affecting all companies
In addition to these directors' duties and narrative reporting provisions:
- it will be easier for companies to communicate electronically with shareholders;
- it will be easier for indirect/beneficial shareholders to be informed and exercise governance rights in the company;
- companies can agree to a limit on the liability of their auditor;
- directors and shareholders can file service addresses rather than private addresses;
- the company names regime will be simplified and there are changes to a company's constitutional documents; and
- directors of corporate trustees of pension schemes can now be indemnified.
The act includes the following measures applicable to private companies:
- deregulatory measures, including scrapping the requirements for annual general meetings (AGMs) and company secretaries, and making it easier to pass written resolutions;
- the deadline for filing accounts will be reduced from 10 to nine months;
- removal of the specific medium-sized group exemption from preparing group accounts; and
- small and medium-sized enterprises (SMEs) will continue to be able to file abbreviated accounts, but the government intends that the regulations will require them to disclose turnover.
The government will supplement the legislation with clear guidance so that private companies will easily be able to identify the requirements placed on them. Existing companies may need to make amendments to their articles of association to take advantage of some of the deregulatory measures, and the Department of Trade and Industry (DTI) intends to issue guidance on these this spring, including checklists and draft resolutions/articles.
Other changes affecting public and quoted companies
In addition to the measures described for all companies, the act introduces some measures applicable to all public companies, including:
- shortening of the deadline for accounts to six months; and
- removal of the upper age limit for directors.
The act also introduces some measures for quoted companies:
- the directors' report must include an enhanced business review;
- accounts must be published on the website as soon as reasonably practicable;
- polls at general meetings must also be reported on the website; and
- traded companies (meaning listed companies excluding Professional Securities Market, Alternative Investment Market and OFEX) are required to allow members to nominate other persons to receive copies of communications.
There are also some deregulatory measures for unquoted public companies, for example they will no longer be subject to much of the substantial shareholdings notification regime, and the disclosure requirement in respect of directors' share dealings will be abolished for unquoted public companies.
When will the act come into effect?
All parts of the act will be in force by October 2008, but some aspects will be implemented earlier. Indeed, the provisions facilitating electronic communication between companies and shareholders were introduced last month, because the government believes they will lead to 'many millions of pounds of savings to business'. The new liability regime for narrative reporting also came into effect last month.
The DTI is consulting this month on the timing of implementation and on whether existing companies need to change their articles to take advantage of the deregulatory measures.
A link to the act is available on the DTI website (see below), where information on the changes brought in from January 2007 is available, as well as explanatory notes (and derivation and destination tables, to facilitate cross referencing with existing legislation). Further guidance on the implications, in particular for private companies, should be available shortly.;
Liz Cole is ICAEW manager, business law, with special responsibility for company law.