Provisions of the new Act relating to private limited companies that came into force on 1st October 2007 and that will come into force in April 2008.
The legislation governing the operation of limited companies is in the middle of an overhaul. The Companies Act 2006 (the “2006 Act”) received royal assent on 8th November 2006 and is gradually being implemented through a series of Commencement Orders. The first and second Commencement Orders of the Act, which came into force on 20th January 2007 and 6th April 2007 respectively, have already implemented a number of aspects of the 2006 Act and we have already reported on these.
The third Commencement Order, which came into force on 1st October 2007, implemented a number of the more substantive changes to the previous regime.
Changes introduced by the 2006 Act in October 2007 that may require amendments to be made to the articles of association
The following amendments have been introduced by the 2006 Act but may require amendments to be made to the articles of association before a company is able to take advantage of the changes:
Annual general meetings are now optional and an elective resolution is no longer required to opt out of the need to hold an AGM. However, any provisions in the memorandum and articles of association requiring an AGM to be held will continue to have effect.
All shareholders meetings can now be called on a 14 “clear” day notice period, rather than the 21 day period that was occasionally required by the old legislation. However, the articles of association can require a longer notice period.
A company’s articles of association may now provide for another person to be nominated to exercise some or all of the rights of a registered shareholder.
Shareholders of a company may ratify a director’s conduct amounting to negligence, default, breach of duty or breach of trust in relation to the company by ordinary resolution, unless the articles of association require a special resolution or some other higher threshold.
The default approval level for short notice of general meetings of a company is now 90% of shareholders entitled to attend and vote. However, this can be raised by the articles of association to a maximum of 95% and once again the articles of association should be checked on this point.
The statutory 48 hour cut-off point for returning forms of proxy for general meetings is now calculated by reference to working days. However, a shorter period can be set by the articles of association. Termination of the appointment must be received prior to the commencement of the general meeting but the articles of association can require termination to be received up to two working days before the start of the meeting.
Essentially, elective and extraordinary resolutions have ceased to exist leaving just ordinary and special resolutions. However, there are certain circumstances where elective and extraordinary resolutions may still be used, which will include if provided for in the articles of association.
Other changes introduced by the 2006 Act in October 2007:
Written resolutions no longer need to be signed by all of the shareholders of a company. Instead, the required majority for special resolutions will be 75% of all shareholders entitled to attend and vote at a general meeting and for ordinary resolutions will be a simple majority of all shareholders entitled to attend and vote at a general meeting. Any written resolutions that have been proposed and circulated after 1st October 2007 should be in the new form - lack of compliance could leave the directors liable to a fine.
Directors’ duties have been codified for the first time – including the duties to act within their powers, to promote the success of the company, to exercise independent judgment and to exercise reasonable care, skill and diligence. It is very important that the minutes of board meetings are carefully and accurately recorded to make certain that any possibility of breaching any of the duties is minimised. In exercising their duties directors must take into account factors such as the likely consequences of their actions, the interests of the employees of the company, the impact on the community of the company’s actions, the impact on the environment of the company’s actions and the need to act fairly between the shareholders of the company.
Private companies (except those under the small companies’ accounting regime) must produce a “business review” for any financial year beginning on or after 1st October 2007. The purpose of the business review is to inform shareholders and help them assess how the directors have performed their duty to promote the success of the company. The business review must contain a fair review of the company’s business and a description of the principal risks and uncertainties facing the company. The review should be a balanced and comprehensive analysis of the development and performance of the company’s business during the financial year and of the position of the company’s business at the end of that financial year, consistent with the size and complexity of the business. The review should use financial indicators against which the development, performance or position of the company’s business can be measured effectively.
The definition of “substantial property transactions” has been altered to transactions involving a non-cash asset which exceeds either 10% of the company’s asset value and is more than £5,000, or which exceeds £100,000. Please note that the definition of connected person for the purpose of a substantial property transaction has been extended to cover spouses, civil partners, children (including adults), parents, certain partners and certain bodies corporate, trustees and business partners.
Shareholder approval is required for service contracts guaranteeing a director’s term of employment which is for a period of more than two years. This is down from 5 years in the old legislation. In addition, shareholders have a right to inspect all directors’ service contracts without charge.
Minutes of general meetings, resolutions passed other than at general meetings and decisions of a sole shareholder must now only be kept by the company for a period of 10 years rather than indefinitely.
The 2006 Act introduces a statutory basis for derivative claims by the shareholders against a company. However, they must first pass through two preliminary stages: (1) the shareholder applicant must show a prima facie case and (2) the Court must decide on the evidence whether or not the case should proceed.
Shareholders have the right to appoint multiple proxies and this overrides your company’s constitution. However, each appointment must relate to a specific share and multiple proxies of the same shareholder will not count as more than one person when calculating the quorum of a meeting (unless the articles of association provide otherwise). Proxies now have the right to speak at general meetings and this overrides any contrary provision in the articles of association.
Where the 2006 Act specifies a particular type of resolution (such as an ordinary resolution), this overrides any conflicting provision the company’s articles of association.
Loans to directors by the company of more that £10,000 are permitted, but only with prior shareholder approval. No shareholder approval is required for loans of less than £10,000.
The common law principle of unanimous consent can now only be relied on where the approval process is simply for the benefit and protection of the shareholders and not other persons or groups.
Shareholders cannot requisition resolutions at general meetings which would be ineffective, defamatory, frivolous or vexatious.
Companies formed after 1st October 2007 can no longer have a provision in their constitution that, on an equality of votes at general meetings, the chairman has a casting vote. However, companies formed prior to 1st October 2007 that already had this provision in their articles of association will still be able to make use of it.
Changes introduced by the 2006 Act in April 2008:
In addition to the changes referred to above, a further tranche of amendments under the 2006 Act will be introduced on 6th April 2008. These changes include:
The requirement of a private limited company to have a company secretary will be abolished. However, the articles of association can still require there to be a company secretary.
The requirement for the filing of accounts will be reduced from within 10 months to within 9 months of the end of the relevant accounting reference period.
The exemption for medium sized groups from preparing consolidated accounts will be abolished and will only apply to small groups.
We advise that after April 2008 the articles of association of all private companies are reviewed to take advantage of the changes in force under the Companies Act 2006, to the extent desired.
If you wish to make use of any of the amendments introduced by the Companies Act 2006 which may require a review of your company’s constitution, or if you wish to discuss any other aspects of the changes in the legislation, please contact Mark Lewis or Paul Guyver in our corporate department.
