Minority shareholder (MS) allegations against the
majority sound in courtrooms throughout the world, with common accusations
being that the majority has excluded the minority from active participation in
the business, has mismanaged or misappropriated assets, taken excessive
remuneration or has failed to pay dividends. [1] Creating a regime, which provides effective MS
protection, has proved difficult, as it by nature clashes with the sanctity
accorded to the principle of majority rule. Between 1995 and 1997 the English
LC (Law Commission) conducted an extensive inquiry into MS remedies. Some of
these reforms were implemented by the Companies Act 2006. [2] (CA) With the challenge for those drawing up the act
to strike the right balance between managerial freedom and investor
protection. [3] The new CA has introduced a number of changes,
including the codification of directors' duties, changes to the derivative
action procedure, as well as the re-enacted rules on unfair prejudice. Key
remedies available to MSs, are the derivative action, where the shareholder
sues the company directors on behalf of the company [4] and the unfair prejudice action whereby a shareholder
sues the majority shareholder or shareholders who control the company. [5]
S14 CA 1985 (s33 CA 2006)
When disagreements occur in a
company, which cannot be resolved amicably, shareholders will usually look to
the constitutional documents of the company for a remedy. [6] MSs can enforce the terms of the articles as part of
the contract of association based on s 14(1) of the CA 1985, now s33 CA 2006. [7] It provides that the memorandum and articles, when
registered, bind the company’s members to the same extend as if they had each
signed and sealed them and they contained a covenant by him or her to observe
all provisions contained therein. The section creates a contract which forms
the basis of legal relations, between the company and it's members, and between
the members inter se [8] . Any breach is therefore in principle actionable. The
normal contractual remedy of damages for breach of contract is available and
injunctions may be obtained. [9] A member does not have a personal right to enforce all
the provisions of the articles, for example, where there are breaches of the
articles which are ratifiable he has no such right. [10] Ultimately what constitutes a personal right must
depend upon the terms of the articles and the event giving rise to the alleged
breach. [11] For the right to be personal, the court must be
satisfied that, properly construed, the right has accrued to the member
individually and not simply to him in common with other shareholders. Funding
is often a consideration for shareholders bringing a claim. Where capital
payments or unpaid dividends are sought using the statutory contract of
membership to bring a ‘direct claim’ is an attractive option, because
conditional fee agreements are available. Claims in damages for breach of
contract would likewise render such claims amenable. When the remedy sought is
an injunction or a declaration on the other hand, conditional fee agreements
are not available, which serves to make this option perhaps less attractive to
shareholders. [12]
The Derivative Action
A derivative action is
concerned with recovering damages, property or funds which belongs to the
company, for wrongs done to it. [13] Under the rule in Foss v Harbottle , the company
was the proper claimant for any wrongs done to it, and companies were not
required to act at the request of their shareholders, even to pursue the
company's rights in relation to an alleged wrong. [14] “What [a shareholder] cannot do is to recover damages
merely because the company in which he is interested has suffered damage, Prudential
Assurance v Newman ., [15] The first of two principles in the Foss v
Harbottle [16] rule is that, where a wrong has been done to a company,
only the company, not the individual member can take action, this is referred
to as the ‘proper plaintiff’ principle. [17] Allowing a third party to bring an action in relation
to wrongs done to another, could lead to multiple actions being brought against
a single defendant, in relation to a single wrong, and a defendant could face
as many actions as there are shareholders. [18] The second principle is that the will of the majority
of the members of the company should in general prevail in the running of its
business. This is known as the “majority rule” principle. The existence of the
rule is justified by the need both to prevent double recovery and to provide
protection for the company's creditors, who might be prejudiced if the
shareholder's claim were to succeed, Johnson v Gore Wood . [19] , This meant, that in order to bring a derivative
claim, a shareholder had to fit his case into one of the exceptions to the rule
in Foss v Harbottle namely: 1) that the company was controlled by the
wrongdoers causing fraud on a minority; or 2) that the actions of the majority
were ultra vires; or 3) that the personal rights of the members had been
infringed and that the breach could not be rectified by a simple majority vote.
An example of types of cases, within the boundary of the exceptions to the rule,
are cases involving fraud on the minority, as in Cook v Deeks [20] . [21]
Historically MSs faced hurdles
establishing their case, when relying on the ‘fraud on the minority exception,’
having had to show not only serious non-ratifiable breach of directors’ duties,
but also that wrongdoers still legally controlled the company. In a small
private company, this may not cause any difficulty in practice, but in a public
listed company, with a large share capital and numerous shareholders, where
shares are held by nominees and trustees, it is very difficult for an
individual shareholder to show who controls the shares. [22] Another major problem with a derivative action under
the old law, was that the ratification of the conduct of the directors, by the
majority of the members, was a bar to bringing a derivative action, thus
circumstances in which a shareholder could bring an action, to enforce a cause
of action, vested in the company, were often limited.
The rule in Foss v
Harbottle was criticised by both the Cohen and Jenkins Committees [23] , [24] . Later the extensive inquiry by the English LC, resulted in recommendations
to abolish the rule in Foss v Harbottle, and its exceptions, at least in
part, and to replace the existing derivative procedure with a new form of
derivative action. [25] , [26] From the LC’s report it is evident, that it was
conscious of the need to achieve a balance between the ability of the company
to function effectively on a day to day basis, without the unnecessary
interference of challenges from shareholders, and the need to protect MSs and
enhance shareholder confidence, by providing shareholders with a route for
redress in certain circumstances.
The new rules are
found in sections 260 to 264 of the 2006 Act. Claims can be made in respect of
acts or omissions, negligence, default or breach of duty by a director or a
third party. They may be brought by any member regardless of membership status
at the time of the alleged breach. Indeed, claims can be brought by a person in
respect of breaches alleged to have occurred before shares were purchased. [27] The act provides notable changes in that in
ratification under section 239, no vote by either the director or member, whose
conduct amounts to negligence, default, breach of duty or trust, or any member
connected with him, will count. Where the wrongdoing has been authorised or
ratified, the court can disregard it if it has been authorised or ratified by
way of the votes of the accused directors. However MSs have not been given a
carte blance to sue the majority, in that considering whether to give
permission to bring an action, the court must take into account s263(3), in
particular whether the shareholder is acting in good faith in seeking to
continue the claim. It is a two stage test, requiring the shareholder to
obtain the court’s permission to continue a claim. Firstly, the court must bring
proceedings to an end if there is no prima facie case; and secondly the court
has a discretion to refuse, or grant leave to continue a claim, taking
account of specified matters such as whether directors acting in accordance
with their new duty to promote the success of the company would not seek to
continue the claim; or the matter complained of has been authorised in advance
or has been ratified subsequently.
The new provisions appear to
offer more protection for shareholders. Part 11 of the Act gives shareholders,
for the first time, a statutory right to sue directors in a derivative action , [28] even if the directors concerned have not benefited
from their negligence. This is a significant change from the Common Law
position, Pavlides v Jensen . [29] However, concerns raised, that the changes to the derivative action regime
could lead to increased tactical litigation against directors from activist
shareholders, have been unfounded . [30] Thus, the CA 2006 does not formulate a substantive rule to replace the
rule in Foss v Harbottle as hoped by some, but rather a new procedure for
bringing actions based on the existing rules, according to the
Attorney-General, Lord Goldsmith. He said, it is a fail-safe mechanism, rather
than a weapon of first resort, and was at pains to make it clear that it is not
expected there will be a significant increase in the number of derivative
claims. Courts will continue to retain a wide discretion over whether a
derivative claim may proceed. It is important to remember that damages are paid,
not to individual shareholders, but to the company itself, and yet it is the
shareholder, who brings the action, who may be required to bear heavy legal
costs [31] thus the practicalities of financing shareholder
litigation will remain a major obstacle to MSs wishing to bring claims. [32]
A dozen years ago,
Professor Sealy predicted that, even if Parliament provided a statutory remedy,
the courts would reinvent just as effective way of saying ‘go away’. [33] , [34] In view of the CA 2006 Act, and recent case law, this
seems a remarkably accurate prediction. There is nothing in the new procedure
that will convince a rational shareholder he should be better off litigating
the case on behalf of the company, rather than selling his shares. Regrettably,
the common law position on costs of derivative claims has not changed
significantly either, and costs and fees rules need to be re-evaluated if any
real change is to occur. [35] The availability of alternative remedies for an
aggrieved shareholder is an important factor in determining whether the court
will grant permission to continue a derivative action. The court will look at
the bigger picture of what is best for the company, as well as what is best for
the member. In cases where a company is controlled by wrongdoing directors, who
are also major shareholders, it is likely that an action under S.994 will be
more appropriate. [36] This means it may only be in limited cases that the new derivative action
will be a useful tool for activist shareholders, who want to apply pressure on
directors. They will instead be directed towards an action under S.994. This
means, that any legal action will have to be personally financed by the member,
and the most likely remedy will be a buyout of shares at a fair value, which in
the case of a very small minority shareholding may not be worth pursuing. [37] Nevertheless, s459 plays an important role in
balancing the rights of the MS against those of the majority. Without it, MSs
would find their investments protected only by the magnanimity of the majority. [38]
Unfair prejudice
While derivative actions are
still proving difficult under the 2006 Act, claims by MSs for unfair prejudice
have been unaffected by the 2006 Act. Sections 994-996 largely replicate the
provisions in the 1986 Act and provide as follows: "A member of a company
may apply to the court by petition for an order under this Part on the ground..
that the company's affairs are being or have been conducted in a manner that is
unfairly prejudicial to the interests of members generally or of some part of
its members (including at least himself).." [39] Both petitioner and respondent will be shareholders,
and typical grounds for unfair prejudice will include breach of a legal bargain
between the shareholders (such as a shareholders agreement or the company's
articles of association), breach of fiduciary duty (by a director who is also a
shareholder) and breach of an equitable agreement or understanding, exclusion
of a MS from management and a misappropriation or diversion of corporate
assets. Other typical allegations include failure to provide information,
improper increases in share capital, excessive remuneration and non payment or
payment of inadequate dividends. [40] , [41]
The court has a wide
discretion in relation to remedies, and can make an order as it sees fit as it
could under s996(1) CA 2006 but the usual order will be that the respondent
purchases the petitioner's shares at a value that takes account of the unfair
prejudice suffered. Usually a plainly reasonable offer to buy out [42] the MS, at an appropriate price, will provide a
defence to a claim based on alleged unfair prejudice, precisely because
excluding a shareholder from the company's affairs is only unfair if it is
exclusion without a reasonable offer, O'Neill v Phillips [43] , [44] .
Until 1947 the only protection
that shareholders in the United Kingdom had, against oppressive behaviour by
those in control of the company, was the remedy of just and equitable winding
up.
‘The remedy under section
122(1)(g) of the Insolvency Act 1986 of winding up on just and equitable
grounds is important to the consideration of section 459, for two main reasons.
Firstly, it is common for section 122(1)(g) to be pleaded in the alternative to
section 459. Secondly, the principles developed by the courts in construing the
meaning of “just and equitable” in this context have, to a certain extent, been
imported into their consideration of the requirements of section 459’. [45]
The court may make an order to
wind up a company under section 122(1)(g) of the Insolvency Act 1986 if it “...
is of the opinion that it is just and equitable that the company should be
wound up”. Strong grounds need to be shown before the court will make a winding
up order at the instance of a MS, Ebrahimi v Westbourne Galleries. [46] It is worth noting that, section 125[2] of the Insolvency Act stipulates
that the dissolution curative will not be available if there is an availability
of another remedy other than the remedy of dissolution.
On recommendation of ‘the
Cohen Committee’ in it’s report from 1945 s.9 of the CA 1948 was introduced
offering relief to MS under the presence of oppression [47] , [48] . In 1962 ‘the Jenkins Committee’ recommended a
widening of the provision to include complaints of unfair prejudicial conduct, [49] this was subsequently to become ss.459- 461 of the CA
1985 [50] today the 994-996 CA 2006. It provides that if the
court is satisfied that a petition is well founded, it may make such order as
it thinks fit for giving relief in respect of the matters complained of. The
court may make all or any of a number of orders specified in subsection 2,
including orders regulation the future conduct of the company’s affairs,
requiring the company to do or refrain from doing some act and an order
providing for the purchase of petitioner’s shares by other members of the
company or the company itself.
The aim of the Jenkins
Committee was to afford more effective protection to MSs and they were anxious
that the section extended to cases “... in which the acts complained of fall
short of actual illegality“. In Saul D Harrison , [51] the Court of Appeal laid down guidelines as to when
conduct will be “unfairly prejudicial”. In that case, Hoffmann LJ accepted that
the test of unfairness was objective, but he considered that rather than
referring to a “reasonable bystander” it was more useful “... to examine the
factors which the law actually takes into account in setting the standard”. [52] Hoffmann LJ also held that conduct could be unlawful
but, nevertheless, might not be unfairly prejudicial, so it followed that “...
trivial or technical infringements of the articles were not intended to give
rise to petitions under section 459”. [53]
However, as opposed to New
Zealand, Australia and Canada where different criteria for determining unfair
prejudice are provided, in UK provisions a definite definition of Unfair
Prejudice has not been given by the courts. [54] The Company Law Review decided that it would not
update the unfair prejudice provisions for the CA 2006 . It had examined various proposals that the LC had
made, but was unenthusiastic. Examples of unfair prejudice are, failure to
provide information regarding the operation of the company, improper
manipulation of shareholding, breaches of director’s duties, excessive
remuneration Re a Company, Alteration of articles of association Allen v
Gold Reefs of West Africa Ltd , [55] Non-payment of dividends and mismanagement Re
Elgindata Ltd ,Warner J , [56] not to mention perhaps the most common allegations in
petitions under section 459; that the petitioner has been excluded from the
management of the company, but lack the exit strategy in the form of a market
for their shares. [57] Saul D Harrison.
Even where continued
involvement in the management of the company may be regarded as part of the
petitioner’s legitimate expectations, his exclusion will not necessarily be
unfair. The court will look at the conduct leading up to the exclusion to see
if it was justified and, more importantly, at the terms on which the exclusion
was effected to see if they were fair. [58] Exclusion will often constitute unfair prejudice where
it breaches the company constitution or where it breaches a common
understanding between members that has lead to a legitimate expectation of
participation. In O’Neill v Phillips however [59] , the House of Lords stated that the minority has no
legitimate expectation of a harmonious relationship [60] and that the majority in such a situation is under no
obligation to make a fair offer for the shares held by a minority wishing to
leave the company. [61]
Another obstacle
to the disgruntled MS seeking a remedy under 459 is the question of expense.
While the application of s994-996 certainly suffers from certain problems, O’Neill
v Phillips provided clarification as to the correct interpretation of
unfair prejudice. It did however fail to provide a solution to the labyrinthine
nature of s994-996 litigation, with its incumbent costs and expenditure of
court time. The LC in it’s report concluded that the proceedings were not only
time consuming but also complex and costly. For instance, in Re Elgindata
Ltd [62] , the court hearings prolonged for 43 days and it
resulted in an expense of Ł320,000. Further, in Re Macro [Ipswich] Ltd [63] case, the litigation lasted for 27 days and finally
the parties to the disputes claimed that they were eligible to recoup the cost
of Ł725,000. In an effort to minimize costs of prolonged litigation and of
highly realistic litigation on unfairly prejudicial conduct, the U.K LC
advocated, for the CA 2006, the employment of rebuttable assumption that a
shareholder who has been prevented from management be regarded as a casualty of
unfairly detrimental conduct to apply if the petitioner held at least 10% of
the voting rights of the company and had been bumped off from the directorship
or has otherwise been thwarted from carrying out the directorial
responsibilities. [64] This was rejected by theCompany Law Review. The court
has no jurisdiction in proceedings under section 459, unlike derivative
actions, to grant the petitioner an advance order requiring the company to
indemnify him as to costs. Petitioners under section 459, in contrast to
shareholders who bring a derivative action, are, however, eligible for legal
aid. [65] ,
[1] How should U.K. and U.S. MS remedies for unfairly
prejudicial or oppressive conduct be reformed? By Miller, Sandra, American Business Law Journal , , p. 1.
[2] Derivatives Claims inder the Companies Act 2006; Much
Ado about nothing? Arad Reisberg
[3] Ibid p 2
[4] now enacted in the CA 2006
[5] New rules but Little Action, John Sykes, Partner and
Lynne Gregory, Associate, Charles Russell, 18 May 2009, p. 1
[6] Kemp Little LLP, Andy Moseby, I’m a Minority
Shareholder get me out of here
November 2003, p.1
[7] MS’s Remedies, A.J. Boyle, p.13
[8] Ibid, p.15
[9] Ibid p 54
[10] Ibid, p.13
[11] The LC, Shareholder Remedies p. 20
[12] MS’s Remedies, A.J. Boyle, p. 59
[13] MS’s Remedies, A.J. Boyle, p.7
[14] New rules but Little Action, John Sykes, Partner and
Lynne Gregory, Associate, Charles Russell, 18 May 2009, p. 1
[15] [1982] 1 Ch 204 at 210. [1916] 1 AC 554
[16] 1843 2 Hare 996; ER 189
[17] (no 2) 1882 Ch 204,210
[18] The LC, Shareholder Remedies p. 31
[19] [2002] 2 AC
[20] [1916] 1 AC 554
[21] The Law Commisssion, Shareholder Remedies p. 31, 32
[22] Ibid p.32
[23] MS’s Remedies, A.J. Boyle, p.11
[24] . MS’s Remedies, A.J. Boyle, p.11
[25] procedure‘with more modern, flexible, and accessible
criteria for determining whether a shareholder can pursue the action
[26] The LC, Shareholder Remedies p.5
[27] New rules but Little Action, John Sykes, Partner and
Lynne Gregory, Associate, Charles Russell, 18 May 2009, p. 1
[28] on behalf of the company for negligence, default and
breach of duty or breach of trust.
[29] [1956] 1 Ch 565).
[30] There have been very few reported cases of a derivative
claim having been brought under the 2006 Act. In one of the first reported
decisions, Franbar Holdings Ltd v Patel and ors (2008), the High Court refused
an application under section 261 of the 2006 Act for permission to continuea
derivative claim. The principal reason for the court’s decision appears to have
been the availability of a remedy under S.994 of the CA 2006
[31] Derivatives Claims under the CA 2006; Much Ado about
nothing? Arad Reisberg p.14
[32] MS’s Remedies , A.J. Boyle, p. 10
[34] MS’s Remedies , A.J. Boyle, p. 10
[35] Andy Moseby, I’m a Minority Shareholder get me out of
here p.1
[36] Derivative Actions, Published by The Information
Network For Legal Professionals, Written by Ed Weeks, p.1
[37] How should U.K. and U.S. MS remedies for unfairly
prejudicial or oppressive conduct be reformed? By Miller, Sandra, American Business Law Journal , p. 10.
[37] Derivative
Actions, Published by The Information Network For Legal Professionals, Written
by Ed Weeks, p.1 [39] A criticism of the contractual approach to unfair
prejudice, Paul Paterson, The Company Lawyer Vol. 27 No 7 p. 204
[40] A number of allegations concern conduct which, prior to
the introduction of the oppression remedy, might have been the subject of a
derivative action or a personal action under section 14 of the CA 1985
[41] The LC, Shareholder Remedies p.62
[42] [1999] UKHL
[43] Keemp LLP, Andy Moseby, I’m a Minority Shareholder
get me out of here, p1
November 2003 p.3
[44] [1999] UKHL
[45] The LC, Shareholder Remedies p.73
[46] Ltd [1973] AC 360
[47] A criticism of the contractual approach to unfair
prejudice, Paul Paterson, The Company Lawyer Vol. 27 No 7 p. 204
[48] Ibid p. 204
[49] Ibid p. 204
[50] The LC, Shareholder Remedies p.62
[51] [1995] 1 BCLC 14.
Ibid p.84
[52] Ibid p.85
[53] Ibid p.85
[54] A criticism of the contractual approach to unfair
prejudice, Paul Paterson, The Company Lawyer Vol. 27 No 7 p. 205
[55] [1900] 1 Ch 656
Shareholder Remedies p.92-93
[56] The LC, Shareholder Remedies p.94
[57] A criticism of the contractual approach to unfair
prejudice, Paul Paterson, The Company Lawyer Vol. 27 No 7 p.206
[58] LC, Shareholder Remedies p.89-90
[59] A criticism of the contractual approach to unfair
prejudice, Paul Paterson, The Company Lawyer Vol. 27 No 7 p. 206
[60] Ibid p. 209
[61] Ibid p 212
[62] Re Elgindata Ltd [1991]
BCLC 959
[63] [1994] 2 BCLC 354.
[64] How should U.K. and U.S. MS remedies for unfairly
prejudicial or oppressive conduct be reformed? By Miller, Sandra, American Business Law Journal , Tuesday, June 22
1999 , p. 1.
[65] The LC Report, Shareholder remedies p. 120
Having a house is necessity of people. Imagine when
you have all the appliances but you don’t have a house or your family is
growing in number but your house has no enough living accommodation. It seems
that it will become another problem not mentioning your previous unresolved
issues. Thus, you will come up in buying new house that has more living space
that can accommodate your appliances and your growing families. On the other
hand why not look for unused room or empty spaces in your house instead of
thinking buying or moving into a new house? And, convert that unused space in
your house into functional space. It will not only save you up money in buying
a house but also, will give you more comfortable. So, the best way to have comfortable
house is to convert your unused room into functional room. Hence, finding
professional loft conversion builders
can not only save your money in moving another house but also a perfect
solution for growing families. You can be sure that you cannot just save more
money but also will increase your property value without moving on other house.
(Sunday, 18 September 2011) Written by Steve Knowles
Is there a comparable power for private comanpies to require someone to sell their shares if they have less than 10% when everyone else has accepted the offer.
To all members of this forum who’s interest focuses on the functioning of corporate boards and the role of directors: Persons interested in discussion related to the functioning of corporate boards are invited to contribute and share their experience, views and ideas in this blog. Board conduct and board efficiency in respect to corporate performance constitute core subjects of my current research project. I approach board functioning from the group dynamics perspective. Moreover, much attention is devoted to the role of individual directors in relation to corporate board dynamics. I will be posting systematic updates of my study progress in this blog. Comments will be welcome. In the meantime you can contact me directly: e.m.dorenbos@uvt.nl , cc: edyta.dorenbos@dsf.nl
Hi everone,
I'm looking for some advice. I'm a 42 yr old professional engineer who works for a Japanese company (19 yrs) in north west england. We have a head office in London but our company is Japanese owned (privately).
Anyway to the point.
On wednesday23rd March 2011 I had my yearly appraisal with my senior manager (British - who is leaving at the end of this month) and my department manager (Japanese). My appraisal was in the form of a MS Excel document which was presented with all 3 parties present. The basics of it said that I had met my targets and had achieved my goals for the past 12 months.
However today (Thurs 24th Mar) I discovered, on the photocopyer, the same form - with my name titled but with somewhat different results. This 'new' appraisal sheet stated that I had not met any targets and claimed I was underachieving in all of my projects. It had been printed by my Japanese department manager according to the photocopyer/printer log. This form will now be sent to head office in London.
My qustion is 'what course of action can I take against the company (individuals) and what would be the law on this type of action (i.e. are they breaking any). Also is ther anything anyone would recommend me doing?
Many thanks
Mark
(Saturday, 12 February 2011) Written by Kevin Gray
My brother and I are 50% shareholders and directors in a company. Dont particularly get on. He arranged a board meeting to sign off accounts which i didnt attend as i wanted more information about the companies activites before going to the meeting. He had refused to give them. He adjourned the meeting and then reconvened another meeting without telling me, the nafter stating he had followed the articles of association and had the appropriate " quarate", himself, he appointed two other directors in my absence.
Question is without me knowing the meeting was taking place can he do it
second question is I havent seen the articles of association since he amended them so he might be in his rights.
Any thoughts
i registered a company through my accountant in May 2010.
the company was called Health Bureau (UK) Limited.
in October i was informed by Comapanies House there had been an objection to my company name, and that i had to change it.
the objection came from a company called The Health Bureau Limited.
they registered their company in August 2009.
so i changed my company name to HB (UK) Limited.
i still use the name Health Bureau as a trading style.
now i know the other company reg with companies house first, but i intended on setting the business up before hand. this is shown by me registering the domain name in June 2009.
because of the long time taken planning the business and its activities, i registered the comany name later.
now The Health Bureau Limited wants me to stop using Health Bureau as a trading style.
my company offer a range of treatments and services for businesses and individuals, such us physio/rehab to occupational health. they are a consulting company focussing on international health and oral health.
WHERE DO I STAND LEGALLY?
(Friday, 10 December 2010) Written by Gerry Bunten
I have to say after just over a year of the new Act being in force that in the main it turned out to be a disastrous affair. What started off as a brilliant idea to simplify much convoluted requirements actually apart from a few exceptions is now more convoluted than ever. Things that were promised were taken away and things that did actually make it through did not end up as they should have done. I would give examples but there are too many. Whoever was responsible for the final drafting should hang their heads in shame. An absolute disaster to something that could have been so good. Bring back the 1985 Act for most of the stuff, I know we have three quarters of it re-written but this 2006 Act in the whole is actually worse than its predecessor by far, sorry but its true.
GB
(Tuesday, 15 September 2009) Written by Dave Coles
Not sure if anyone can help, after a bit of advice, we have an employee who's wife also works for us part time but in addition has her own "design" company, a large sub-contract order has gone to her company for the design, supply & fit of kitchens/bathrooms on one of our larger sites, in turn she has raised an order to another company (who we have a direct account with) to supply the kitchens/bathrooms - is this legal or just immoral? as it is, she stands to gain rather a large "Slice" of the profits that, in my opinion should be the company's.
Does anybody know if this is against company law, or is it just a case of a "loophole" where individuals can make profits at the expense of others?
Thanks
As everybody admits, by its very nature, company management and the governing law will always be complicated. Company is a juristic person, it will survive irrespective of its members coming and going, it is run by professionals called directors, company needs to adhere to the strict rules pertaining to disclosure of material information to the statutory bodies, fairness is to be adhered to at any cost and as such the company management will always be complicated. Indian Companies Act, 1956 deal with the issues pertaining to incorporation, management and winding-up of companies in India. With many amendments and new concepts coming-in, a need was felt to repeal the existing companies act, 1956 and to enact a new company law. The concept paper with regard to the proposed companies bill is kept in the official websites seeking suggestions/comments from the public. Though, the ministry of corporate affairs in India very frequently highlights the new companies bill, it is yet to be passed and it still remains as a Bill.
Under the existing companies act, 1956, the central government to some extent, the Registrar of Companies, the Company Law Board, the Company Court and SEBI in case of listed companies, are conferred with certain powers like calling for information, taking action for violation of law, the prevention of mismanagement and the liquidation process etc. It is there everywhere that it is the responsibility of the state to safeguard the interests of the public and it always includes shareholders. As such, everywhere the state's authority to take appropriate action against the erring companies and erring officials is preserved though the state will very rarely exercise its power. Apart from the other authorities, the Company Law Board and Company Court are conferred with certain powers like entertaining applications from the minority who allege oppression and mismanagement, the applications seeking winding-up, sanctioning the scheme of amalgamation etc. Again, the power of Company Law Board is limited while dealing with the issue of remedial nature. Thus, the shareholder or the person concerned or the company, are normally confused as to where he should go seeking redressel in a company litigation and its a fact. Again, when the power is split among many independent forums, then, there will be confusion and administration of justice will be difficult. Addressing this, the state has proposed to set-up a tribunal called "National Company Law Tribunal" and also "Appellate Tribunal". The issue is challenged before the Constitutional Court and the issue is now pending before the Supreme Court of India.
In the proposed Companies Bill, there is a provision for establishment of National Company Law Tribunal and the issue of its Jurisdiction in entertaining all company litigation is to be further stressed and clarified.
I do strongly feel that there is no clarity under the Indian Companies Act, 1956 as to where a company issue is to be agitated and it is to be clarified in the proposed bill. It is very very vital where India attracts so much FDI and where there tend to be a rise in Economic Growth in India.
(Thursday, 27 August 2009) Written by Adrian Roche
Can someone advise me what the rules are for the minimum shareholder vote required for the approval of a resolution at an AGM. I was advised it was 75% of members thanks
I am in the process of alloting new shares in a Ltd company and the Company's Articles and Investor Agreement contain a pre emption rights clause requiring them to be offered to the existing investors in proportion to their existing share ownership.
My question is; When writing to the Company investors to offer the new shares: should I -
1. offer them at the premium rate stating that in absence of them renouncing the shares this will be interpreted as acceptance.
or,
2. offer the investors the shares, asking for express acceptance in via writing?
My preference would be the latter and not for an absence of a response to be construed as acceptance.
Would there, in this process, also be any legal protocol for whether the shares are offered at nominal or premium rates?
Any links to templates would be much appreciated.
Thanks!
Please can anyone tell me who employs the directors in this situation. Two are working and will not let the other two anywhere near the premises. The dividend paid is minute but their wages are astronomical. Must be a law against this.
Hi,
Thanks for visiting these pages. I hope to upload and comment on various issues relating to the new act and general common issues that arise within comany law.
Hopefully speak soon
Husband and wife hold shares in a Ltd Co, 99 to H and 1 to W. The husband dies intestate leaving two sons of a former marriage. The intestacy rules provide for half of the estate residue to go to the sons. However, they want half of the assets of the company (its freehold and cash) but I think they are only entitled to ownership of half of the deceased's shares. This leaves the wife as the majority shareholder. Does anyone have any thoughts, or experience of this situation?
This is an enquiry really for my brothers comany
He holds 75% shares (recently injected money into the business and revaluation give him 75%)
He and Mother are directors, Mother is Chairman
2nd brother, until recently an employee, took out a loan,circa 120K, in his own name, but managed to get the company to pay the 1st instalment. It was then discovered and stopped. He is no longer an employee as the company cannot afford either his salary, or his expenses, generally approved by the Chairmam. This is not the first time funds have been misappropriated, but it has been smoothed over in the pas by the chairman. Now with the change in shareholding, it would appear she does not understand she can neither 'smooth it over' or indeed, undertstand that the company cannot afford him or his behavior or in deed condone his behavior.
He has no money, other than that privately accepted from his mother (mainly due to gambling debts)
Does the company have grounds for legal action?
The Chairman whishes him to be re-instated. Can this be prevented?
How can the company remove the Chairman?
All advise will be welcome.
I am a shareholder 15% of a company and Md/Director. The other shareholders are 50% VC and 35% chairman. The chairman wants to make me redundant as the company can not affor to keep me as he put it. I am the only director that works full time in the company there are no other managers. Can anyone advise me on the following.
Can he make me redundant? also he wants to do this with only a months notice period, although there was verbal agreement and some initail proposed agreements to 6 moths notice. but no service agreements were ever made.
Can he remove me as a director.
can he force me to sell my shares.
(Wednesday, 18 March 2009) Written by Lamin Touray
The codification of Directors' duties is an unnessary step because the oommon law has already addressed there duties prior to Company Act 2006. Any comments?
Director/Company Secretary & shadow director/shareholder (A) wished to leave Ltd. company. The propasals they put forward were un-acceptable to the other Director & shareholder/shadow director(B). They said that they would take advice.
(A) went ahead with their proposals and formed a new company of a similar name. They started trading within the same premises as the original company. and tooking on existing customers. This was discovered by accident as (B) found an e mail asking one of the clients to make payment to a different bank account.
When challenged (A) stated that as a 50% shareholder he was entitled to 50% of the business, machinery etc. and that he would come to an arrangement regarding rent etc. (which never happened).
What I would like to know is:
1) Is the Director/Company secretary guilty of a conflict of interest between the two companies and also guilty of fraud in that the new company name implies that it is part of the original company.
2)Is the Shadow director guilty of the same offences as the director/company secretary.
How can they be removed from the board of the original company as they state that if any action is taken against them they will shut the original company down.
(Thursday, 29 January 2009) Written by Juliana Ronco
I own a flat which is part of a freehold (I think). We are 28 flats ran by a mgt company. Every other flat has a loft space and each loft is owned by everybody. One of the flats has been converted without permission and at the time, the residents were bullied into accepting it. The flat has since been sold on and I asked for permission to extend my flat but was told 'no'.... or they'd take me to court. Why doesn't the law of 'precedent' apply? Look forward to hearing from someone and possibly looking for someone to help me fight my case...
My friend and I used to be directors in a company which we had to petition for provisional liquidation due to the 2 other directors refusing to refurd a loan made by our company (No 1) of which all 4 were equal directors and shareholder to Company 2 which had our other 2 directors as the 2 directors for company no 2. Effectively they refused to repay a loan made by co no 1 to company no 2 and wrote cheques to themselves from company no 2 freely stating that this denied the repayment of the loan to company no 1. Once the liquidators were involved they paid back 10K to place co no 1 in a solvent position and my friend and I resigned as directors as we were appauled by their behaviour and had been told the company would be voluntarily wound up and we would be made redundant.
Ultimately after our directors resignations were received at the company handback from the liquidator these 2 directors then changed their minds and stated they were going to continue trading the company.
Since then the accounts and annual return are late, we have not received any invitations to meetings or an AGM despite my friend and I still holding a 50% shareholding in the company.
We have notified companies house of their non compliance however they state they will send them a letter reminding them of their statutory obligations.
Is there anything else we can do?
The 2 now directors of co no 1 also have 25% shareholding each so there appears to be no majority.
I would appreciate any help or suggestions
I have worked for this company for five years and was made a director two years ago. The company is in trouble and looks like the administrators going to be called in this week. I am owed money from last month as i had only recieved a 1/4 of my wage. I been told that I'm not owed anything because he pays two weeks infront and two weeks behind. Is this right? Also i did three weeks in hand when i became a director so will i get this, and any redundancy.
Hello,
The above discussion is an area of research that I am looking at. I am interested in getting Directors' opinions on whether or not they are following the new Companies Act (in particular the duties set out in section 170-180) or if they are simply following the common law rules they have followed previously. If anyone can provide any reply or opinion please do contact me,
Kind regards,
Josephine26
I know that AGM minutes have to be kept for 10 years and that as the Memo&Arts are under the old co's act that an AGM has to be held but...
Do I have to separately minute wholly owned subsidiaries or can the minutes be within the parent company's?
ie. Have one AGM that covers all the group (only small) and discuss parent and subsidiaries together and minute all in one?
The companies are not PLC, they are a charitable company that owns two trading subsidiaries (charity shops).
I can't find any guidance in the Companies Act ither than to say that the AGM is required as thats what the Memo&Arts require but there doesn't seem to be any legislation regarding minutes other than the fact that they have to be kept and copies given to those requesting them. I also can not find any detail in the Charities Act, other than to follow the Companies Act.
I own a share of the freehold in the block of flats that I live in. We are registered as a company with Companies House and each year have to file a return. I don't understand why we are registered as a company, is this a requirement when you own a share of a freehold??
(Tuesday, 18 November 2008) Written by adam dobson
Hi,
I am a Director of a small limited company by shares and recently our MD Passed away. He was the Majority shareholder and left them to his wife who was the beneficiary. she is also a member of the company and was the executor.
She sent notice to register his shares into her name, which i duly completed. However, another member is challenging the registration under the pre-emption rights of the articles. The articles do give pre-emption rights on transfers ( articals 10-15) to existing members on a share to share basis but it also states that "nothing contained in the provisions of clause 10 - 15 inclusive of the articles shall apply to a transfer of shares by a member to a person who is already, before the said transfer a member of the company.
So although she was already a member was she as executor able to transfer the shares as a member without offering pre-emption? is there any law on this?
Good advice greatly recieved...
AD
That is the question for the current poll on CompanyLawForum - further down the right hand side of the website.
Cast your vote and let us know the impact the credit crunch is having on your business at this turbulent time.
What in the world am I doing in England, anyway it is all common law an my ancestors are from England, so there.
I am counter suing my brother, who has absconded the family corporation. He has loss money five of the five years he has run the company. He has held no meetings, the directors resigned, and he has personally loaned the company enough money to make the oompany insolvent.
No formal notes are authorizations, just deposits.
Thanks from the U S.
Harry Callicott Griffith
(Thursday, 25 September 2008) Written by David Henley
Shareholders representing 12% of the issued shares cannot be
traced. The shares were issued to them in 1973 and despite writing to
them at their last known adddress, we have not heared from them. What
is the procedure for cancelling these shares ?
We inherited this problem when the business was recently purchased.
Really appreciate anyone's help on this.
I am a 10% shareholder of a company which has yet to trade but has been registered at companies house. Iinvested time and training in them and was the main person with the ideas originally. I have today received a letter from them saying that in August the Directors decided all share holders need to fund 22000 to the company and that all shareholders had agreed (except me). They have asked me to send this money or sign a stock transfer to relinquish my shares. Can they do this and can I request they buy them off me instead.
A stay of proceedings has been announced by the President of the Employment Tribunals (England and Wales) pending the Court of Appeal's decision in Secretary of State for BERR v Neufeld. The Court of Appeal is expected to hear this case in early December. The case will consider the circumstances in which a director and
majority shareholder can be regarded as an employee for the purposes of
Section 182 of the Employment Rights Act (1996). I have posted further information on my website (which can be found here ).
In an external investigation into Carters LTD it has been found that for the last two financial years their financial statements havent complied in numerous places with the applicaple financial reporting standards. What, of any potential civil and criminal liability could their directors face due to this -
a) if the company continues to operate? and
b) if the company is placed in liquidation? and finally
c) are there any potential defences available to them?
Parking fines are destroying our business!!!!!!!!!!
(Saturday, 13 September 2008) Written by Laura Serghe
I would be so grateful if somebody could help me out. I run a furniture company and we employ people to do our deliveries. Up until now, we have been paying for all their parking fines. However we have noticed that because they aren't liable for any fines that they may be given whilst delivering they are literally parking anywhere and are being given daily parking fines. My company is literally wasting thousands of pounds each year on parking fines and we simply can't afford to do so anymore. We would therefore like to introduce a system whereby the drivers are responsible for any fines incurred and we would take it out of their wages. As we have had a history of paying parking fines on behalf of the drivers would we legally be allowed to introduce a new system such as this one? I would be grateful for any advice. Thank you. City Mules.
I appreciate that the focus of this forum is with companies, but visitors may also be interested in the application of the law to unincorporated associations. If this is so, a recent Court of Appeal decision - R v RL & JF [2008] EWCA Crim 1970 - is likely to be of interest. The case considered the criminal liability of an unincorporated association and its members in respect of a pollution offence under the Water Resources Act (1991) . For further information (including a short summary, a link to the judgment and a link to a report provided by the ICLR) click here .
I am unclear on the duties that apply to sole directors. The explanatory notes to the CA 2006 clearly state that s.177 does not apply to sole directors, and that they don't have to disclose their interests (as there is no one to disclose the interests to). Pretty much the same is said about s.182.
Nothing is said thought about s.175. In case of a sole directorship, does the sole director have the duty to "avoid conflict of interest" (i would think it is so)? and if yes, what happens if a conflict arises? there are no directors to authorize the conflict, so must the sole director rid himself of the conflict (eventually resigning as a director), or may he be authorized by the shareholders (thus going back to the old rule)?
I'm an italian law student working on my dissertation conserning UK statutory law and any answers or comments would be of great help!
Hello everyone!
Im a bit of a disaster when it comes to understanding the stock exchange
If you had to advise a client whether or not to sell his/her shares in a company for a cash offer.
1. the identity of the bidder,
2. whether the bidder was a private company or a plc,
3. the number of shares owned,
4. the share type,
5. my clients relationship with the bidder,
affect the answer?
In particular what would the affect of this bid have on the share price assuming it is a quoted company? would the shares soar?
Can a lawyer give this sort of advice with FSA approval?
and are there any legal or other issues?
I teach company law and corporate governance at Aston Business School, Birmingham. I have developed a blog to support my teaching which may be of interest to users of the CompanyLawForum:
http://www.corporatelawandgovernance.blogspot.com
I use the blog to note important developments, news and other items that interest me within the fields of company law and corporate governance. The blog also contains a comprehensive set of company law and corporate governance links. While the focus is on the UK, developments in other jurisdictions are also noted.
Can anyone help?
As youcan see from the time I'm posting this... I'm losing
sleep over the matter.
Anyway... We have a problem with a company director who's
gone rogue on us.
There's 4 shareholders, each with 25% shareholding, and 3 of
us making up the majority, want to dismiss the director (the 4th 25%
shareholder).
He is the sole director, as we hadn't felt the need at the
time for more than that.
He's causing huge problems right now. We've called a 21 day
shareholders meeting, informing him that we'll be voting to dismiss him at this
meeting.
Thing is, he's a bank signatory, and he's cleaned out the
account, too!
He also happened to be the person that physically signed the
office lease on behalf of the company, has instructed the building management
to lock us out of the office, and they're saying they have to oblige because he
signed the lease, despite the fact that the contracted party is the company and
not him personally, and the majority shareholders have requested they allow us
access.
We've even shown them minutes of last shareholders meeting,
signed by the director in question, which outlined his reduced role within the
company and detailed that ALL financial dealings be conducted solely by one of
the other shareholders.
I guess we should have seen this coming, hence the reason we
reduced his role in the company in the first place. But, we just didn't think
he'd be this outrageous in his behaviour.
Is there no emergency measures shareholders can take to stop
a director from destroying a company in what will probably take him less time
than the statutory 21 days it'll take to meet and dismiss him? Any advice would
be gratefully received.
Many thanks, Del.
hi,
I am planning to do a research on the case-law based company law. The purpose of this research will show the comparison between the civil-law based company and the case-law based company law. Currently, I am looking for materials covering the positive side of building company law on case-law. However, it is not easy to find any perticular book or article which has previously focused on this issue. Could anyone help me and suggest any material related to it? It would be really appriciated.
Thanks!
Ray
Costy,
The 2006 Act does not codify remedies and s178 states that consequences
of a breach are "the same as would apply" had the corresponding common
law duty applied. Therefore, you must look to the usual Common Law
remedies: equitable remedies etc...
Of note is that except for the duty of reasonable care and skill (S174), each duty is enforceable as a fiduciary duty. A director in breach is potentially liable to the company for damages, and where appropriate, to restore the company's property or account for any profits made. A transaction entered into in breach of a fiduciary duty may be voidable by the company or enforced by a third party. Breach of one fiduciary duty usually also entails breach of others so a claimant can apply for additional remedies attached to those breaches.
Finally, do note that a director's fiduciary duties cannot be enforcd by a fellow director because they are owed to the company. The company could take action againt the director in question and, in the event that the company halts or abandons the action for whatever reason, a shareholder may be able to continue or commence the action via the new statutory derivative action.
The full text of the Companies Act 2006 is available to LexisNexis Butterworths subscribers.
http://www.lexisnexis.com/uk/legal/api/version1/sr?csi=274768,282817,292143,292140,274674&sr=NORMCITE%282006_46a_Title%29&shr=t
Presentation by Vanessa Knapp, OBE at Butterworths Companies Act Conference, April 2008
Areas to consider
The previous position
What can companies agree
Things to consider
Practical points
Proportionality
Fixed caps
FRC guidance
The Pre-April Position
Auditors could not limit their liability as auditors
Company can claim all losses from auditor
even if others are also liable
Auditors can seek a contribution from others who are liable
such amount as is “just and equitable having regard to the extent of the person’s responsibility for the damage in question”
What it they are insolvent or have fled the country?
What companies can agree
Company can limit auditor’s liability
Shareholder approval
public companies – general meeting
private companies – general meeting or written resolution – can waive approval requirement
Separate agreement
for each financial year
for each UK company
Limitation only if “fair and reasonable” in all the circumstances
Fair and reasonable requirement
If limitation is not fair and reasonable, effective to the
extent it is
Have regard to
auditor’s responsibilities under Part 16
nature and purpose of auditor’s contractual obligations
professional standards expected
No account is to be taken of
matters arising after loss/damage incurred
matters (whenever arising) affecting possibility of recovering compensation from other persons liable for same loss/damage
Things to consider
Companies can limit liability
Does not affect auditor’s obligations
Shareholder approval is needed – what are their likely views?
What does auditor want? Proposed agreement and effect
Are any non-UK requirements relevant?
Final FRC guidance
Practical points
Separate agreement for each company
Separate agreement for each year
Fit with the audit engagement letter
Approval of the limitation agreement?
or of its principal terms?
Non-UK group companies
Group companies which are not wholly-owned
Disclosure in accounts
Proportionality wording
Applies where someone else
is liable to the company or
has caused/contributed to same loss/damage
Auditor’s liability is limited to
such amount as is “just and equitable”
having regard to the extent to which (i) the auditor and (ii) the other person is liable for/caused or contributed to the loss/damage
Quite complicated
how will it work in practice
how to explain it
is it acceptable to shareholders?
What if there is
a fraudulent employee or
someone else for whom no-one is vicariously liable?
Company may not be able to recover from them
Is a strict proportionate approach fair and reasonable?
Should the agreement deal with this point
explicitly (Version 1)
just by using the “just and equitable” approach (Version 2)?
Contributory fault by the company
Fixed caps
Could be a stated amount
Or a formula e.g. X times the fees payable
Whichever is less?
How does this work for groups of companies?
FRC guidance
Remit
guidance on the use of LLAs
a suggested standard form
process for effective implementation
Should the guidance
set out the options OR
identify methods most likely to be acceptable
Are different considerations for public and private companies adequately addressed?
Other procedural issues?
Comments on specimen wording?
FRC guidance - responses
ABI response
supported companies having power to modify ABI response
liability to a level that was proportionate and subject to shareholder approval
monetary caps remain anathema
NAPF response
its members should, in all but the most exceptional circumstances, only support proportionate liability limitation
fixed cap option should be dropped
would retain fair and reasonable option
IOD response
guidance should not indicate which option is likely to be most acceptable
Presentation by Kathryn Cearns at Butterworths Companies Act Conference, April 2008.
Companies Act 2006: Accounts and Reports
• Overview of when the provisions are in force
• Changes from Companies Act 1985
– Think small first
– True & Fair
– Accounting records
– Filing periods
• New disclosure requirements
– Related parties
– Off balance-sheet arrangements
– Directors’ remuneration
When the provisions are in force
8 November 06 Royal Assent
20 Jan 07 Transparency Directive, safe harbour for narrative reporting
1 Oct 07 Business Review, appointment of auditors (private companies)
06 April 08 Rest of Part 15 Accounts & Reports Secondary legislation contains detail for form and content
April 09 Additional disclosure in remuneration report
The effective date of most of the provisions are based on financial years beginning on or after
Comparison of CA 85 and CA 06
Requirement
CA 85
CA 06
Comment
Keep accounting records
Yes
Yes
Requirement reformulated: to keep “ adequate” accounting records.
Prepare accounts
Yes
Yes
Reworded requirement for annual accounts to give true and fair view – applies to both UK GAAP and IFRS
Duty to prepare group accounts
Yes
Yes
Exemptions changed: medium-sized companies will have to prepare group accounts
Thresholds for small and medium-sized companies
Yes
Yes
Increased by approximately 20%
Requirement
CA 85
CA 06
Comment
Information about off-balance sheet arrangements
No
Yes
Implements an amendment to EU 4th and 7th Directives
Lay accounts at AGM
Yes
Yes/ No
CA 06 only requires public companies to lay accounts and report before general meeting
File accounts
Yes
Yes
Reduction in time allowed to file - private companies (9 months); public companies (6 months).
Directors remuneration report:
Statement of consideration of pay of employees in company and group
No
Yes
New requirement introduced in secondary legislation. Comes into force April 2009
Think small first
– One of the aims of the Government was to make legislation easier to use
– Act structured to apply different regimes to different sized companies
– Work very well in accounts part
– Builds up from small companies up to quoted companies
– Increase in threshold, turnover limits
– Ł5.6m to Ł6.5m for small companies
– Ł22.8m to Ł25.9m for medium-sized companies
True & Fair view
• Overarching requirement for both IFRS and UK GAAP accounts to show a true and fair view
• Addressed concerns that IFRS “fairly presents” was not to the same level as UK GAAP “true and fair view”
• Subsequent impact on auditor’s report – auditor’s opinion
• FRC reviewing “true and fair” opinion (Arden 1984, updated 1993) following changes in financial reporting in UK
• Implications?
Accounting records
• What are adequate accounting records?
• Companies Act 2006 provides some guidance
• Subsequent impact on auditor’s report – auditor’s opinion
New disclosure requirements Related parties
• Detailed requirements are set out in secondary legislation (Large and medium-sized companies – SI 2008/410)
• Different disclosure requirements for companies that prepare group accounts and those that do not
• Small and medium-sized companies are exempt
• Requirement applies to UK GAAP companies; IFRS companies just follow IAS 24
• ASB is converging to IAS 24
Directors’ Remuneration – additional disclosure
• Only applies to quoted companies
• Introduced in secondary legislation specifying form and content of accounts and reports (Large and medium-sized companies – SI 2008/410)
• Statement of consideration of conditions elsewhere in company and group when determining directors’ remuneration
• Requirement is in addition to statement on company policy on directors’ remuneration and if there has been any comparison with external factors
Presentation by Frances Le Grys at Butterworths Companies Act Conference, April 2008
This is a summary of the main changes to a company's articles of association that will typically be considered by a UK incorporated public or private company to reflect the new provisions of the Companies Act 2006. It is not exhaustive and is not a substitute for seeking a full review of the articles by the company's legal adviser.
1. KEY STATUTORY CHANGES RELEVANT TO AMENDING ARTICLES (PUBLIC AND PRIVATE COMPANIES)
• Electronic and website communication (January 2007)
• Age limits on directors (April 2007)
• Shareholder meetings and resolutions (October 2007)
• Directors’ indemnities (October 2007)
• Company secretary (April 2008) (private companies only)
• Share transfers (April 2008)
• Directors’ conflict of interest (October 2008)
• Company constitution (October 2009)
• Share capital (October 2009)
2. PUBLIC COMPANIES: AMENDMENTS TO CONSIDER FOR 2008 AGM
• Electronic and website communication
• General meetings
(i) EGM notice period (14 days for a special resolution)
(ii) Proxies' rights and corporate representatives
(iii) Extraordinary resolutions replaced by special resolutions
• Directors
(i) No upper age limit
(ii) Indemnities (qualifying pension scheme indemnity provision)
(iii) Conflict of interest (authority for Board to authorise actual or potential conflicts of interest, and related provisions) 1
• Share transfers (requirement to give reasons for refusing to register a transfer)
• Variation of class rights (reflect CA 2006 provisions, eg as to quorum)
2.2 Public companies: Amendments to consider for 2009 AGM2
Adopt new articles to reflect final changes coming into force in October 2009:
• Remove provisions in Memorandum of Association which will be treated as part of articles from 1 October 2009
• Remove any limit previously imposed on company’s authorised share capital
1 Change in law effective 1.10.2008
2 These amendments could be approved in advance at 2008 AGM, but a rather uncertain process as not all transitional provisions and subsidiary legislation relating to the 2009 amendments are in place yet.
• (Possibly) grant power to Board to change company name
• (Possibly) grant power to Board to fix terms of redemption of redeemable shares
• General changes in terminology and statutory references, primarily relating to share capital
3. PRIVATE COMPANIES: AMENDMENTS TO CONSIDER FOR 2008 : :
• Electronic and website communication
• General meetings
(i) AGMs (do articles contain an express requirement to hold AGM?)
(ii) Retirement of directors by rotation (if there will be no AGMs)
(iii) General meeting notice period (14 days for a special resolution)
(iv) Short notice (agreement of 90%, down from 95%)
(v) Proxies' rights and corporate representatives
(vi) Extraordinary resolutions replaced by special resolutions
(vii) Written resolutions (remove non-statutory procedure in articles)
(viii) Company secretary (do articles contain an express requirement to have a company secretary?)
• Directors
(i) No upper age limit
(ii) Indemnities (qualifying pension scheme indemnity provision)
(iii) Conflict of interest (authority for Board to authorise actual or potential conflicts of interest, and related provisions) 3
• Share transfers (requirement to give reasons for refusing to register a transfer)
• Variation of class rights (reflect CA 2006 provisions, eg as to quorum)
4. PRIVATE COMPANIES: AMENDMENTS TO CONSIDER FOR 2009
Adopt new articles to reflect final changes coming into force in October 2009, including:
• Remove provisions in Memorandum of Association which will be treated as part of articles from 1 October 2009
• Remove any limit previously imposed on company’s authorised share capital
• (Possibly) grant power to Board to change company name
• (Possibly) grant power to Board to fix terms of redemption of redeemable shares
• General changes in terminology and statutory references, primarily relating to share capital
3 Change in law effective 1.10.2008
Presentation by Frances Le Grys at Butterworths Companies Act Conference, April 2008
This memorandum picks out those areas that we think need particular focus in this year's annual general meeting planning process. The list this year is fairly long, thanks mainly to the Companies Act 2006. We therefore give an overview of issues only here. For further information please consult our Companies Act 2006 extranet or contact us. To sign up to our Companies Act 2006 extranet, email: CompaniesActQuestions@lovells.com.
This memorandum is aimed at UK companies with shares listed on the Official List, though parts of it will be of interest to a wider constituency. The memorandum is focussed on this year's AGM, however the applicability of the Companies Act 2006 provisions depends variously on the AGM date, the date of the AGM notice and the financial years in question, so individual circumstances
need to be considered. Some of the areas dealt with may not be an issue for you for another year. Some provisions have in fact been in force for more than a year, but as many corporates will not have dealt with them last year, typically as the market was waiting for standard practice to emerge, they are included again.
We refer throughout this memorandum to the views of the Institute of Chartered Secretaries and Administrators (" ICSA "). ICSA have numerous guidance notes and best practice guides on their website: www.icsa.org.uk .
1. ELECTRONIC AND WEBSITE COMMUNICATION
1.1 Can a company send information to its shareholders relating to the forthcoming AGM by email or by making documents available on its website?
This will depend in part on what arrangements the company has already put in place. The basic position (subject to what follows) is that if the company has not already amended its articles to deal with the new Companies Act 2006 communications regime, it will only be able to send the AGM notice, proxy notice and annual report and accounts to a member by email or by making them available on its website if:
• the company has an individual agreement from that member that it may do so;
and
• in the case of a company that is traded on a regulated market (for example the
London Stock Exchange's main market, but not AIM) its shareholders have taken
a decision in general meeting to this effect.
The exception to the above position is where the company already had in place individual agreements with shareholders prior to January 2007 that allowed it to send relevant documents by email or by putting them on a website under the former Companies Act 1985 regime. If so, then it can continue to do so without the need for further shareholder approval either under the Companies Act 2006 or under the FSA's Disclosure and Transparency Rules (" DTR s"). Be aware, however, that existing arrangements may not cover all documents and communications which the company will in future wish to send to its shareholders.
Where a company has amended its articles to reflect the new Companies Act 2006 electronic communications provisions, it will not need to take a separate decision in general meeting for the purposes of DTR 6. However, remember that if a company wishes to communicate by email (as opposed to website - see below), it will still require the individual consent of a member to do so.
Of most interest to companies will be whether they can make documents available to members by posting them on their website under the new "opt out" regime of the Companies Act 2006. Whereas under the Companies Act 1985 specific individual agreement was required with the shareholder before documents could be made available on a website, the new regime allows the company to deem that a shareholder has consented if the company has written to the shareholder and he has not objected within 28 days. In order for the company to take advantage of this new procedure for the purposes of the forthcoming AGM, it must already have:
• ensured that its articles contain the necessary power to do so or that its members
have passed a shareholder resolution to that effect (ICSA best practice is to pass
a new resolution or get a new authority inserted into the articles, rather than to
rely on pre-January 2007 wording relating to websites, unless it is absolutely clear
that it was approved in anticipation of the deemed agreement provisions of the
Companies Act 2006); and
• individually asked the relevant shareholder to agree to website publication and
either have received no response or no negative response within 28 days.
1.2 Using the AGM mailing to seek consent for future website publication
Where a company already has authority in its articles or has passed a shareholder
resolution relating to website communication under the Companies Act 2006, but has not yet sent a letter to its members seeking their agreement, it could consider using the forthcoming AGM mailing to do so, so that future communications can be made available via the website for those who do not object. Where shareholders have already been approached for their consent, the company must consider the "no pester" rules in the Companies Act 2006: a person is not deemed to have agreed to website communication merely because he has failed to respond to a company's request if that request was sent less than 12 months after a previous request made to him in respect of the same type of
documents or information.
Where a company is proposing an amendment to its articles or a shareholder resolution relating to website communication under the Companies Act 2006 at the forthcoming AGM, opinion is divided as to whether it is appropriate to send the consent letter with the AGM notice (making it clear in the letter that the shareholder's choices are conditional on the relevant shareholder resolutions being passed). There seems no reason why this is not valid, but it may be preferable from a shareholder relations perspective to deal with this in a two stage process (as the majority of companies are currently doing), sending out
the consent letter later, possibly in a stand-alone mailing or with the dividend mailing.
The FSA confirmed in November 2007 (List! No.17) that a letter to a shareholder to seek agreement to receive a document electronically will be a "circular" for the purposes of the Listing Rules and so must comply with the provisions of the Listing Rules for the contents of all circulars.
1.3 Using website communication for the forthcoming AGM
Where a company is entitled to communicate with its shareholders by website for the purposes of the forthcoming AGM, then it must notify the intended recipient of the presence of the information on its website, and that notification must be in hard copy unless the company is entitled to use electronic communication for this purpose (i.e. the shareholder has positively agreed to the use of electronic communications and, where necessary, the company has passed a shareholder resolution for the purposes of DTR6).
The FSA has stated that the notification must be treated as any other letter accompanying a circular and so must contain an appropriate warning and should not recommend any action other than that shareholders read the circular.
Remember to check provisions in the company's articles on when the document is
deemed to have been received by the shareholder (the statutory provisions will apply unless the articles have made alternative provision).
Other points to be aware of when communicating with a shareholder by website are:
• Proxy form: in order to encourage greater shareholder participation (particularly at a time when people are not yet accustomed to electronic and website
communication), companies should consider sending a hard copy personalised
proxy form together with the notification of availability of documents on the
website, or if sending the website notification by electronic means, including a link to the online voting facility. Each company should liaise with its registrars in this regard. Note that it is not good practice to post blank proxy cards on the
company's website as unpersonalised cards often cause practical problems for
registrars.
• Consider the format of the documentation on the website, bearing in mind that the Companies Act 2006 requires shareholders to be able to retain a copy of the
document. It may be sensible to offer more than one format.
• A member is always entitled to receive a hard copy of a document sent
electronically or made available on a website (even if he has agreed to electronic or website communication) within 21 days of requesting it. Given the newness of the deemed consent provisions, a number of shareholders may only discover when the notice of AGM is sent out that they are no longer sent hard copy information (because they inadvertently failed to respond to their consent letters).
Therefore, companies may need to cater for extra hard copies to deal with the
subsequent requests from shareholders. Record keeping becomes important to
ensure that the 21 day period for responding to such requests is met.
Further information on recommended practice when communicating with shareholders electronically or by website can be found in the ICSA Guidance on Electronic Communications with Shareholders 2007 .
2. RIGHTS OF PROXIES AND CORPORATE REPRESENTATIVES AT THE FORTHCOMING AGM
2.1 Proxies
As a result of the change in law that took effect on 1 October 2007, notwithstanding what the company's articles may say, a member may appoint more than one proxy at the forthcoming AGM (provided each proxy is appointed in respect of different shares) and all appointed proxies can attend, speak and vote, on a show of hands as well as on a poll.
Proxies can demand or join in demanding a poll.
The new proxy rights must be set out in the notice of meeting and companies should also make sure that they update the notes to the form of proxy to reflect the new provisions.
Be aware that if a shareholder appoints multiple proxies, they will each have one vote on a show of hands, whereas if the member was there in person, he would only have one vote. Although not recommended from a practical perspective, it is possible to reduce this right in the articles (although it is not permissible to reduce the combined vote of the multiple proxies below what the member would have were he present in person), so companies should check the relevant provisions in their articles. The presence of multiple proxies can therefore lead to skewed results on a vote on a show of hands and the chairman should consider whether he should call a poll in these circumstances. It is important to brief the chairman on these matters before the meeting.
The Companies Act 2006 contains new provisions on the latest time by which a company must receive a proxy form in order for it to be valid. Where a poll is delayed for more than 48 hours after the meeting at which it is demanded, a proxy form can be validly received up to 24 hours before the time of the poll and any provision in the articles that requires it to be submitted earlier than that will be void. The Companies Act 2006 restates the position under the Companies Act 1985 that articles may not require proxies to be received earlier than 48 hours before the meeting at which they are to be used, but in calculating the 48 hour (or 24 hour in the case of a delayed poll) period, it is now possible
to disregard non-working days, such that in certain circumstances a company may validly set the deadline for receipt of proxies earlier than 24 or 48 hours before the meeting or poll. However, unless the articles build in this flexibility, the company will not be able to exclude working days in its calculations.
The Financial Reporting Council's revised Combined Code (June 2006, with effect for reporting years commencing on or after 1 November 2006) is also relevant for proxies:
• proxy forms should have a "vote withheld" option and the proxy form and any
announcement of the results should make it clear that a vote withheld will not be
counted in the calculation of the proportion of votes for and against the resolution;
and
• for each resolution voted on by a show of hands the company must publish on its website information about proxy appointments and how proxy votes were directed.
2.2 Corporate representatives
The Companies Act 2006 allows a corporate member to appoint one or more corporate representatives to attend the meeting. As a result of the provisions of section 323(4) Companies Act 2006 (which provides that where multiple corporate representatives purport to exercise their power differently, the power is treated as not exercised), there has been some well publicised speculation about the effect of appointing multiple corporate representatives.
Institutional shareholders have historically relied on appointing corporate representatives rather than proxies at least in part because of the timing constraints of appointing a proxy 48 hours before the meeting takes place. Particularly where the shares are held in different designated accounts of the same nominee company for different beneficiaries, often administered by custodians, the nominee company may wish to continue to appoint
multiple corporate representatives to attend general meetings, each of whom will vote in respect of a block of shares. It is quite possible that in these circumstances a corporate representative will vote differently from other corporate representatives for the same member and, as a result of the wording of the Companies Act 2006, there is a significant risk that a company would take the view that it is obliged to ignore all the votes cast by the corporate representatives.
The institutional shareholder bodies are lobbying for a change in the law to permit multiple corporate representatives to vote differently from each other, but pending this, ICSA has been working with institutional shareholder bodies and registrars to produce a "work around" solution to seek to ensure that votes of multiple corporate representatives are counted. The work around is sometimes referred to as the designated corporate representative (" DCR ") method. A guidance paper from ICSA describing the DCR
method was published in January 2008 ( http://www.icsa.org.uk/index.php?option=com_content&task=view&id=61 ). The DCR method involves only one individual acting as the designated corporate representative on a poll with all of the other corporate representatives for that same member giving voting directions to the DCR by completing a voting directions card. Thus only the DCR actually "votes" by submitting a poll card but when he does so, the voting directions of all of the other corporate representatives are given effect as votes cast (or withheld) by him on behalf of the underlying corporate member. The preference of the large institutional investors and their representative bodies is that the chairman of the meeting should be appointed as the designated corporate representative, although in order for this method to work each corporate representative's letter of representation must specify that.
Where the representation letter does not appoint the chairman, another method must to be used to determine who the designated corporate representative should be. ICSA's suggestion is that if the corporate member has not appointed a DCR (either the chairman or anyone else) the first corporate representative who registers his attendance at the meeting will be treated as the DCR. Depending on whether the chairman or the first corporate representative to register is the DCR, there will be a difference in the documentation given to them when they register.
Further details of the DCR method is set out in the ICSA guidance and companies are recommended to discuss this with their registrars well in advance of the meetings. A company will not know whether it needs to apply the DCR method (and, if so, who will be the DCR) until on or shortly before the time of the meeting when the corporate representatives arrive with their representation letters. Companies should therefore prepare for the eventuality that they will need to use the DCR method.
The ICSA guidance contains recommended wording to be included in the notice of meeting and in the poll cards to deal with the DCR method, as well as a form of wording for the voting directions cards to be made available to the "non-voting" corporate representatives. ABI has indicated that it will want to see confirmation in the notice of meeting that the company will be making the DCR method available. If a company indicates that it is not prepared to make the DCR method available, it may face censorship from the institutional shareholder bodies.
The registrars have confirmed that it will be possible to apply the DCR method (with certain variations) where electronic voting is to be used for polls. Again companies are advised to liaise with their registrars.
Companies should also review the registration arrangements for the AGM with their registrars to ensure that there is enough time for the registrars to deal with multiple corporate representatives and multiple proxies.
3. GETTING ORGANISED FOR THE MEETING
3.1 Electronic voting
Even amongst listed companies of comparable size, the nature of the AGM can vary enormously. Electronic voting (the use of handheld voting key pads) is currently in use by those with widely attended showcase meetings, but it is also a very simple and accurate method of conducting polls. The ability to scrutinise a poll is a hot topic at the moment and therefore electronic voting should be considered as an alternative method of conducting the poll.
3.2 Independent assessors on polls?
The Companies Act 2006 includes provisions which allow the members of a quoted company to require the directors to obtain an independent report on any poll to be taken at an AGM (sections 342 to 354). The sections came into force on 1 October 2007 for meetings called on or after 1 October 2007.
There is no particular reason to think that significant use will be made of these provisions for the majority of companies – our impression is that there is a high degree of confidence in the systems operated by the major registrars to conduct polls. However, the provisions can also be viewed as another tool in the armoury of the activist/ disruptive shareholder.
A member's request to require an independent report on a poll may be made up to a week after the relevant poll is taken and the independent assessor must then be appointed within one week. Failure to appoint a suitably independent person is a criminal o ffence (committed by the directors of the company). The possibility of a retrospective request and the need to then act fairly quickly may mean some preliminary consideration of potential responses is worth undertaking now for those perceived to be more at risk of receiving a request.
The person acting as assessor needs to be independent. The registrar conducting the poll or collecting proxies is not independent. An auditor is not necessarily debarred from being independent, but may not be an appropriate choice, particularly if the poll on which the scrutiny is requested relates to their engagement or fees. More likely candidates are other registrars or independent organisations such as the Electoral Reform Society.
Once a request has been received and an independent assessor appointed the issuer must publish details, and subsequently his report, on the company's website. The Companies Act 2006 provisions about publication apply only after the assessor has been appointed. Consideration should also be given as to whether to announce that information – and possibly the earlier receipt of a request – through an RIS to comply with the DTRs.
An independent assessor has a right to question a wide range of persons including directors, secretary, any employee of the company, anyone holding or accountable for the company's books, a member or an agent (including the company's solicitors, bankers or auditors). It is a criminal offence for those persons not to provide the required information or explanation without delay, unless it is not reasonably practicable to do so. It will probably be good practice to inform those persons likely to be questioned that a request has been made and an independent assessor appointed.
3.3 Website publication of poll results
The Companies Act 2006 requires the website publication of information (most notably the votes cast for and against) when a poll is taken at an AGM. The relevant provision applies to meetings for which notice was given after 1 October 2007. This will represent current practice for a lot of companies as it stems from a recommendation made back in the final report of the Company Law Review in 2001. The Listing Rules (paragraph 9.6.18) already require announcement of all resolutions passed at an AGM (other than ordinary business).
Many companies will take polls on all resolutions as a matter of course. For example PIRC say (in their 2007 Shareholder Voting Guidelines) – 'PIRC considers poll voting to be the most appropriate way for listed companies to undertake business at general meeting'. PIRC state that they may consider negative voting recommendations for companies that do not use polls for all business. ICSA produced a guidance note in 2003 ( http://www.icsa.org.uk/images/pdf/Guidence/031219.pdf ) which continues to provide assistance on voting at general meetings and, in particular, using polls without causing smaller shareholders to feel disenfranchised. A helpful recommendation is to include a note in the notice of meeting explaining that votes will be taken on a poll.
The revised Combined Code (effective for years beginning on or after 1 November 2006) requires detail of proxies lodged to be given at the meeting and on the company's website where votes are taken on a show of hands (see paragraph 2.1).
3.4 Chairman's proxies and DTRs
The FSA regime on major shareholder notification has been in force since 20 January 2007, so is not a new issue this year. DTR 5.2.1 and 5.8.4 set out the requirements on both shareholders and proxy holders for the notification of proxy holdings. The effect of the rule was clarified by the FSA in their List! Newsletter (December 2006/ April 2007) as follows. Where a proxy is granted (entitling a proxy holder to decide with discretion how the votes are cast) a proxy holder will be required to disclose his total holdings at the proxy deadline (or as soon as practicable following the deadline) if these holdings reach or exceed 3% of the total voting rights. When calculating this position the proxy holder must include his own holdings as well as the proxies he has received. The List!
Newsletter includes further information on filling out the major shareholding notification form (form TR1). We understand that where the proxy given is in a standard form and does not give the chairman discretion (other than in a minor capacity such as to vote on an adjournment) then no notification should be required.
3.5 Shareholder resolutions
The Companies Act 2006 has changed the position on resolutions requisitioned by shareholders at AGMs in two respects:
• Members no longer need to pay the company's expenses in circulating the
resolution and statement if certain provisions are complied with: most notably if
the request is received before the end of the financial year preceding the AGM.
• The requirement for the shareholders requesting the resolution to represent 5% of the total voting rights or 100 shareholders (with an average of Ł100 paid up on
their shares) is relaxed because the 100 persons now include underlying
beneficial owners (with additional authentication requirements).
The new provisions (sections 338 to 340) apply to requests after 1 October 2007.
3.6 Information in AGM notice
There are several changes this year:
• The IPRV notice for indirect holders referred to below (in paragraph 4.2).
• The information requirements in DTR 6.1.12 which include a new requirement to state the total number of shares and voting rights.
• Information on proxy rights (see 2.1).
• Wording to explain the designated corporate representative method of allowing
multiple corporate representative voting (see 2.2).
• Conversely, companies need to continue to exercise caution over the inclusion of emails or website addresses, telephone or fax numbers in notices or proxy cards
in order to avoid deemed acceptance of electronic communications to those
addresses/numbers.
3.7 Document availability at AGM
Certain documents are required to be on display at the meeting:
• The Combined Code requires the terms and conditions of non-executive directors to be available at the AGM. They should also be available on the company's website. (There is no longer any requirement in the Listing Rules to have the executive's contracts available at the meeting, though they frequently are and in any case will be open to inspection at the company's registered office and shareholders may request copies.)
• If the articles are being amended, then unless the full text of amendments is given in the circular, they should be on display at the AGM (for 15 minutes before and during the meeting).
4. INDIRECT SHAREHOLDERS
The Companies Act 2006 requires companies with shares admitted to trading on a regulated market (that is, the London Stock Exchange's main market but not AIM) who have members who hold shares on behalf of other persons (indirect shareholders) and who wish to extend information rights to indirect shareholders to do so. That information would normally be made available by website publication, but the member may notify the company that information should be provided in hard copy if the indirect shareholder so requests in advance of the nomination (sections 146 and 147). Since 1 October 2007, nominee investment operators have been able to send indirect investors' requests to
companies to entitle indirect investors to enjoy information rights from 31 December 2007.
Many companies offered a mailing list through their registrars, enabling exactly this effect to be achieved and of course these documents are generally freely available on the company's website. There are however some practical points to note, particularly in the first year of the new regime.
4.1 Increase in print runs
We have not seen any reliable statistics on the volume of indirect shareholders likely to exercise their information rights and, of those, the number who will require hard copies rather than accept website communication. There is no cut off for submitting requests for information rights (other than the usual record date for sending the notice of meeting – which will not be more than 21 days before the day the notices are sent). Usually this is not an issue. There is no need to settle too far in advance exactly who the shareholders who will receive the AGM notice and report and accounts are – but the order of the size of the print run is known. The addition of indirect shareholders this year means that there
may be a fairly significant change in the size of the mailing list and that might need to be monitored.
4.2 Wording on rights for AGM notice
When a company sends a notice of meeting to an indirect shareholder under a section 146 election it must be accompanied by information as to possible rights in relation to voting (an IPRV notice). The IPRV notice must state that:
• The indirect holder may have a right under an agreement between himself and the member by whom he was nominated to be appointed, or to have someone else appointed, as a proxy for the meeting.
• If the indirect holder has no such right or does not wish to exercise it, he may have a right under such an agreement to give instructions to the member as to the exercise of voting rights.
The usual statement in the notice of meeting regarding the right to appoint a proxy must either be removed from notices going to indirect shareholders or qualified. Our view is that most companies will continue to produce only one notice with alternative wording for registered and indirect shareholders.
4.3 Helpline issues
As a practical matter the requirement for the indirect shareholder to revert to the direct shareholder to exercise rights may cause confusion for smaller indirect shareholders.
Companies may want access to a sub-register or similar so they can check who the
registered shareholder is and refer the indirect shareholder on.
5. POLITICAL DONATIONS
The Companies Act 2006 broadly restates the provisions on political donations and expenditure in the Companies Act 1985. The concerns that existed over the possible breadth of the Companies Act 1985 provisions remain in respect of the Companies Act 2006, and a significant number of companies which have no intention of making any payment to a political party are continuing to pass precautionary resolutions to approve the making of political donations or the incurring of political expenditure in respect of a political party, political organisation or independent election candidate to prevent an inadvertent breaching of the statutory prohibitions. Activities which typically cause
concern to companies are the funding of seminars to which politicians are invited, matching employee contributions to certain charities and supporting certain bodies involved in policy review.
This year's authorising resolution will look slightly different from that of previous years:
• the resolution should track the new headings of the Companies Act 2006, and
companies should consider extending the authorisation to catch political donations to, and expenditure incurred in relation to, independent election candidates. The provisions regarding independent election candidates are new and come into force in October 2008, so this year's AGM should be used to authorise such activities if there is a concern that, after October 2008, the statutory provisions might otherwise be breached; and
• the resolution can now cover subsidiary companies - under the Companies Act
1985 there was technically a requirement that donations or expenditure by
subsidiary companies should be the subject of a separate authorising resolution
(although this was sometimes ignored).
In view of institutional shareholder preferences, authorising resolutions will typically have effect until the next AGM, although the statute allows a period of validity of up to four years.
Note two new exceptions to the prohibition on making political donations and incurring political expenditure introduced by the Companies Act 2006:
• A donation to a trade union (other than to its political fund) is not a political
donation and a trade union is not a political organisation for the purpose of the
definition of "political expenditure". This provides clarity that activities such as
making available rooms for union meetings or giving paid time off to union officials are not caught.
• The Companies (Political Expenditure) Exemption Order 2007 exempts
companies whose ordinary business includes the publication of news from having
to seek shareholder authorisation in order to prepare, publish or disseminate
material of a political nature.
6. AMENDING THE COMPANY'S ARTICLES OF ASSOCIATION - WHAT, WHEN?
6.1 The effect of delayed implementation of the Act
Before it was announced in November 2007 that full implementation of the Companies Act 2006 would be delayed, public companies were gearing up to make one set of amendments to their articles of association at their 2008 AGM which would attempt to deal with all Companies Act 2006 changes, with an effective date for the new articles of 1 October 2008.
We now know that final implementation will not now take place until October 2009 so public companies must consider the extent to which they should deal with the Companies Act 2006 amendments to their articles of association at this year's AGM.
Implementation of the Companies Act 2006 has been underway since January 2007, and a number of measures which impact on articles of association are already in force, most significantly the changes relating to shareholder meetings and resolutions that took effect in October 2007. We now know that the change on directors' conflict of interest duties will come into force in October 2008, and this will have major significance for public company articles. Finally, Companies Act 2006 changes to the constitution of companies (particularly the role of the memorandum of association) and share capital will come into force in October 2009.
6.2 What statutory changes require amendment of the articles?
Most of the statutory changes that are relevant to articles of association do not strictly require corresponding amendments to be made to a company's articles with any urgency.
Statutory changes fall broadly into two categories:
• where the new statutory provision overrides any provision in the articles, so that
notwithstanding what the articles say, regard must be had to the Companies Act
2006 in deciding how a company may act. There is no obligation to change the
articles to bring them in line with statute, but clearly until the articles are amended, they will cease to be such a useful "handbook" for the company and its members and greater caution must be taken in interpreting them;
• where, unless the articles are amended, the company will not be able to take
advantage of the new freedoms and flexibilities permitted by the Companies Act
2006. It is clearly this second category which companies should concentrate on in
deciding when to make changes to their articles of association.
The key driver to changing the articles at the 2008 AGM is likely to be the inclusion of provisions dealing with board authorisation of directors' conflict of interest, where companies really should include the necessary new power before October 2008. Other key changes a company should seriously consider, which will allow it to take advantage of the new freedoms offered by the Companies Act 2006 include new electronic communications provisions (in particular if the company wants to use website communication with its shareholders), reducing the notice period for general meetings, other than AGMs, from 21 days to 14 days, even where the business of the meeting includes a special resolution, and expanding the possibilities for giving indemnities to directors.
Having decided that it should change its articles to deal with one or more of the matters described above, it makes sense for a company to adopt other changes to its articles so that its new articles reflect all the Companies Act 2006 provisions already in force, although this is not obligatory and clearly each company will want advice on what approach is best for it. As the changes affect a number of provisions, it will be simplest to adopt a new set of articles rather than making piecemeal changes. Paragraph 6.4 below looks in more detail at some of the changes that companies might consider making to their articles at this year's AGM.
6.3 Timing of changing the articles
The changes dealing with directors' conflict of interest authorisation are only relevant from 1 October 2008, and until then the existing law on directors' interests will continue to apply. There are different ways of approaching this amendment to the articles. Either an amendment may be made with immediate effect which includes forward looking language which covers the legal position both before and after the October 2008 change; or the company can adopt two sets of articles at their AGM, the first set to take immediate effect which makes all the changes to deal with the legal position as it is at the date of the AGM, and the second set, to take effect on 1 October 2008, in which the only additional change is the inclusion of a conflict of interest provision. So far, most companies seem to have taken this second approach, but indications are that market practice may be developing in favour of the first, simpler approach.
In future, companies will wish to amend their articles again, probably at the 2009 AGM, to deal with, among other things:
• removing provisions of the company's memorandum of association which will be
treated as part of the company's articles from 1 October 2009;
• removing any limit previously imposed on a company's authorised share capital;
• (possibly) granting power to the board to change the company's name;
• (possibly) granting power to the board to determine the terms and manner of
redemption of redeemable shares; and
• general changes in terminology and statutory references, primarily relating to
share capital.
A minority of companies so far are dealing with the 2009 changes at the 2008 AGM (by approving three separate sets of articles, the third set to have effect on 1 October 2009).
The aim is to avoid having to make further changes to the articles at the 2009 AGM, but this is a rather uncertain route, given that not all of the transitional provisions and secondary legislation relating the 2009 amendments are available yet.
6.4 Overview of some of the key changes to consider making this year
(a) Electronic communications
Apply the statutory regime to all company communications and reflect the new
statutory terminology. In particular, if a company wants to take advantage of the
new provisions on website communication, it must pass a shareholder resolution
or its articles of association must permit this (see paragraph 1.1 above). It is also
sensible to consider overriding the statutory provisions on deemed delivery in the
articles of association.
(b) General meetings
(i) Notice
Reduce the notice period for extraordinary general meetings 1 to 14 days
(even where a special resolution is to be proposed). If articles provide for
21 days, then the company will be bound to continue to give 21 days
notice, unless they are changed to take advantage of the new statutory
provisions.
(ii) Proxies
Notwithstanding what the current articles may say, a proxy may now vote
on a show of hands and speak at a general meeting. Multiple proxies may
also be appointed. Although it is not obligatory to do so, it would seem
sensible to update the articles to reflect the new position. In setting the
deadline for receipt of proxy forms, a company is entitled to provide in its
articles that it can exclude non-working days, so that the time before a
meeting by which a proxy form must be received may, in certain cases, be
greater than 48 hours (see paragraph 2.1 above).
(iii) Corporate representatives
A member which is a corporation may appoint multiple representatives to
act at a meeting of the company (subject to the provisions of the
Companies Act 2006). It is advisable not to go into detail in the articles
about what happens if multiple corporate representatives do not vote in
the same way. It is unnecessary and the ABI does not like it. It may also
mean that the articles need to be amended if the law is changed in the
way that the institutional shareholders bodies want.
(c) Directors
(i) Age limit
The provisions relating to the 70 year age limit for directors in the
Companies Act 1985 were repealed in April 2007. Depending on a
company's existing articles, any provision in the articles will either be
unnecessary or at risk of falling foul of the Employment Equality (Age)
Regulations 2006. Either way such provisions can be removed.
(ii) Indemnities
The Companies Act 2006 has in some respects widened the scope of the
powers of a company to indemnify its directors. In particular, a director of
a pension trustee company may be indemnified against liability incurred in
connection with that company's activities as trustee of the scheme, either
by the pension trustee company itself or by an associated company. (The
indemnity cannot extend to liabilities to pay criminal or regulatory fines or
to defending criminal proceedings in which the director is convicted.)
Companies should check their indemnity provisions to see if they are wide
enough to cover what is now permitted under statute, or if they need to be
amended in order to take advantage of the new possibilities.
1 The term 'extraordinary general meeting' is no longer used in the Companies Act 2006. However, we expect that many public companies will continue to use that terminology to distinguish such a meeting from an annual general
meeting.
(iii) Conflicts of interest
Under the Companies Act 2006, from 1 October 2008 a director must
avoid a situation where he has or can have a direct or indirect interest that
conflicts, or possibly may conflict, with the company's interests. There are
a number of situations which put a director in a potential position of conflict
with the company, for example, where he is a director of another company
which becomes a competitor of or a major supplier to his company.
However, under the new Companies Act 2006, there will be no breach of
duty if the relevant matter has been authorised by the non-interested
directors, and for a public company the directors can only authorise the
matter if they have power to do so in their articles. Therefore it is
important to ensure that this power is included in the public company's
articles prior to 1 October 2008 so that situations of actual or potential
conflict can be considered for authorisation.
The Companies Act 2006 (section 180(4)) allows the company's articles to
contain provisions for dealing with conflicts of interest and provides that
the general duties on directors will not be infringed by anything done or
omitted by the directors in accordance with those provisions. It is
therefore recommended for articles to include provisions which permit
directors (whose potential conflict has been authorised) to absent
themselves from meetings and not to be obliged to pass on any
confidential information received by the director other than in his capacity
as a director of the company without falling foul of directors' general
duties.
Articles should generally continue to contain provisions permitting
directors to hold positions within the company and other companies in
which the company holds an interest in the same way as they currently do.
It is also likely that company's articles will continue to provide the directors
may not vote on decisions considering transactions with the company in
which they are interested, subject to certain specified exceptions.
(d) Other miscellaneous changes
(i) Share transfers
From 6 April 2008, the Companies Act 2006 will provide that if a company
refuses to register a share transfer, it must give reasons and notify the
transferee as soon as practicable and in any event within two months. In
preparation for this change, a company may wish to amend its articles to
reflect these requirements (often a company does not have to provide
reasons if it exercises its right to refuse to transfer a certificated share).
(ii) Variation of class rights
Certain requirements for a meeting to vary class rights (including the
quorum requirements) are laid down in the Companies Act 2006 and it
would make sense to amend the relevant provisions in the articles in order
to reflect those requirements.
7. THIS IS NOT THE END…
Further provisions of the Companies Act 2006 will need to be addressed in next year's AGM and there are other changes on the horizon emanating from Europe, most notably the Shareholder Rights Directive. The common view is that to try and anticipate those changes this year is not sensible, however those with AGM's later in the year may wish to re-evaluate that view.
Presentation by Frances Le Grys, Partner - Lovells at Butterworths Companies Act Conference, April 2008.
Overview
• In addition to conceptual changes, a raft of practical issues to contend with which will require behavioural and procedural change
• Meetings: what do you need to know?
• AGMs: do you need one? what should it cover?
Overview
• Resolutions – the new written resolution regime;
• Shareholder representation:
– proxies;
– corporate representatives;
– indirect shareholder rights
• Knock-on impact on Articles: what to change; when to change
Meetings – Private companies
• Calling meetings: 90% rather than 95% of members for meeting on short notice (unless articles of association specify otherwise)
• No requirement for AGM for private companies (although many companies are opting to keep an annual meeting)
• The business of an AGM has been negated: no need for private companies to lay accounts before a meeting; no need to appoint auditors annually
• EGMS have been abolished...but in name only (now "general meetings")
Private companies: written resolutions
• Do you need a meeting anyway?
• Written resolutions intended to be default position: much of the business of a private company can and will be carried out by written resolutions
• Written resolutions no longer need to be passed unanimously
– ordinary resolutions by simple majority of those eligible to vote
– special resolutions by 75 per cent. majority of those eligible to vote
Private companies: written resolutions
• 28 days from date of circulation of written resolution for members to agree or resolution lapses
• "Agree" by "providing the company with an authenticated document which identifies the resolution to which it relates and indicates agreement to the resolution"
• Single member private companies can take decisions by holding a meeting; by passing a written resolution; or by taking a decision and then "notifying" details of the decision to the company
Private companies: written resolutions
• Written resolutions still need to be sent to the auditors
• Written resolutions which are special resolutions will still need to be sent to Companies House
• Right of directors or members to propose a written resolution
Private companies: written resolutions
• Action: prepare pro forma written resolution
• Key is to state:
– how shareholders signify their agreement;
– the timing issues;
– noting that once given their agreement is not revocable; and
– what to do if you do not agree (nothing).
Notice of meetings
• Take advantage of the electronic communications regime
• Notice periods for special resolutions changed from 21 days to 14 days (unless articles of association specify otherwise)
• Only need 90% in nominal value to agree to short notice provisions
General meetings
• Do you need a meeting anyway?
• Cannot remove a director or remove an auditor before the end of his term of office by written resolution (plus some transitional arrangements)
• Shareholders holding at least 10% can demand one
Meetings – Public companies
• Still required to have an AGM
• Quoted companies: accounts to be made available on website
• Right of members to propose a resolution and to raise audit concerns
• Disclosure of poll results on website
Public companies: AGM
• Business to be carried out at 2008 AGM – see attached handout.
Meetings – Proxies
• Shareholders can appoint more than one proxy, up to a maximum of one proxy per share
• Right overrides conflicting provisions in articles of association
• Articles may permit multiple proxies
Meetings – Proxies
• Proxies permitted to speak as well as attend and vote on a show of hands as well as on a poll
• Quoted companies to show on a website the number of shares in respect of which proxy appointments have been made
Meetings – Corporate Representatives
• "Popularity" of corporate representatives;
• Section 323(1) of the Act permits the appointment of more than one corporate representative
• Issue in relation to the statutory provisions – if multiple corporate representatives vote in conflicting ways, corporate shareholder deemed to have abstained
Meetings – Corporate Representatives
• ICSA guidance note published in January 2008
• Recommendations:
– appoint proxy;
– appoint single corporate representative
• "Designated Corporate Representative" solution
Indirect shareholder rights
• Effective disenfranchisement of shareholders using nominee accounts
• Indirect shareholder do not currently receive reports or notices from the company
• Indirect shareholders are not currently able to appoint proxies or attend and vote at meetings
Indirect shareholder rights
• 2006 Act:
– enables all companies to allow shareholders to nominate another person to exercise shareholder rights and receive notices and documentation;
– requires traded companies to extend information rights to indirect shareholders
– enables indirect shareholders to count for purposes of requisitions
Shareholder identity issues
• Any person may require a copy of the register
• However, request has to state the purpose for which the information will be used, and whether it is to be disclosed to anyone else
• Company may apply to court to reject request if not for "proper purpose"
Articles of Association
• New forms of model articles of association to replace Tables A-E
• If articles of association chosen by company are unamended model articles of association, do not need to be registered
• Articles of association to be the main constitutional document containing restrictions (if any) on the Company’s objects – memorandum will be of no relevance after formation
Articles of Association – when to change; what to change
• For existing companies no change unless they choose to adopt new model articles of association
• Should a company change its articles?
• When to change – see handout
Corporate Administration
• Have the simplification ideals been achieved?
• Bedding down period for transitional arrangements
•
•
Very short, simple survey on the contents of the Blue Book
Please help us better understand your needs so that we can reduce the size of the Handbook.
Many thanks for your feedback. The closing date is 15 May.
http://www.surveymonkey.com/s.aspx?sm=dcgpWF2FC0J7mx_2b6VjBnPA_3d_3d
Quote from Lord Hodgson of Astley Abbots in Hansard (Lords) 18 March 2008
(Wednesday, 26 March 2008) Written by Jane Pallant
'When we finally finished the Companies Act, the Minister’s predecessor, the noble Lord, Lord Sainsbury, kindly threw us a party, which we had in the offices of what was then the DTI and is now DBERR in Victoria Street.
It was a jolly affair. There was one man there who I thought looked rather down at the mouth about life. I went to talk to him because I thought that this was an occasion for an hour’s release from prison. It turned out that he was the parliamentary draftsman. I thought he was down at the mouth because we had extended the Bill from 600 to 1,200 clauses or, alternatively, because parliamentary draftsmen are by their very nature gloomy souls. It was not that. He said that it was all very well for us because we had finished with the Bill but he had to pick up the consequential amendments. I asked how many there were and he said that there were between 2,000 and 3,000. I had some sympathy with him, and this afternoon, faced with 73 pages of closely packed type, I have even more sympathy with his predicament that October evening.' Lord Hodgson of Astley Abbotts, in Hansard (Lords), 18 March 2008, Cols GC 32-33. Debate in the Lords on the Companies Act 2006 (Consequential Amendments etc.) Order 2008.
6 A pril 2008 commencement
In connection with the commencement of most of the provisions of Part 15 (accounts: CA 2006, ss 380–474) and Part 16 (audit: CA 2006, ss 475–539) on 6 April 2008, a number of statutory instruments have been made, as follows (# indicates that the SI (or part of the SI, where shown) applies to companies financial years’ beginning on or after 6 April 2008, so that any provisions revoked or repealed continue to apply for earlier financial years):
Companies (Revision of Defective Accounts and Reports) Regulations 2008 (SI 2008 No 373) #, which set out how the provisions of the CA 2006 are to apply to revised annual accounts, directors’ reports, directors’ remuneration reports and summary financial statements (SFSs) prepared under CA 2006, s 454;
Companies (Summary Financial Statement) Regulations 2008 (SI 2008 No 374 )#, which regulate SFSs;
Companies Act 2006 (Amendment) (Accounts and Reports) Regulations 2008 (SI 2008 No 393) #, which implement in part Directive 2006/46/EC;
Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 (SI 2008 No 409) #, which specify the form and content of the accounts and directors’ report of companies subject to the small companies regime under Part 15 of the CA 2006;
Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008 No 410 )#, which specify the form and content of the accounts and reports of companies under Part 15 of the CA 2006, other than those subject to the small companies regime;
Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) Regulations 2008 (SI 2008 No 489 ; # applies in relation to auditor remuneration);
Statutory Auditors (Delegation of Functions etc.) Order 2008 (SI 2008 No 496) #, which transfers most of the functions of the Secretary of State under Part 42 of the CA 2006 (statutory auditors) to the Professional Oversight Board; and
Companies (Late Filing Penalties) and Limited Liability Partnerships (Filing Periods and Late Filing Penalties) Regulations 2008 (SI 2008 No 497) , which determine the penalties which companies (and LLPs) must pay to the Registrar of Companies if they file their annual accounts and reports late (and which broadly increase late filing penalties from 1 February 2009, for all financial years).
1 October 2008 commencement
The Fifth Commencement Order brings further provisions of the CA 2006 into force on 1 October 2008; the Companies (Trading Disclosures) Regulations 2008 (SI 2008 No 495) have been made, which come into force on that date.
The following questions have been asked on Company Law Forum and are looking for answers. This community would be grateful if you could provide answers where you feel comfortable:
-Registered Office...
-Fines for not showing Company’s details?
-CompanyLawForum – What do you think?
-Shareholder entitlement to Insolvency information...
Richard Susskind on the future of law and technology at Halsbury's Centenary
(Thursday, 24 January 2008) Written by Cara Annett
100 years of Halsbury's Laws was celebrated at the Inner Temple Hall in
London on 15 November 07.
An account of the past and future of the provision of legal information was led by Halsbury's Editor-in-Chief, Lord Mackay of Clashfern and Professor
Richard Susskind, commentator on law and technology.
Lord Mackay recounted how Stanley Bond persuaded then Lord Chancellor, Lord Halsbury, to take on the role of general editor. Professor Susskind presented some stimulating visions of the lawyer of the future. To watch the vodcast click here .
(Thursday, 24 January 2008) Written by Stephen Barc
In November 2007, the Department for Business, Enterprise and Regulatory Reform (DBERR) issued a consultation document on specific policy proposals for the application of the Companies Act 2006 (CA 2006) to limited liability partnerships (LLPs).
Proposed legislative approach
Subject to further views in response to the consultation, the Government proposes to apply the CA 2006 provisions to LLPs, as far as possible to replace those provisions of the Companies Act 1985 (CA 1985) that are currently applied to LLPs.
The document outlines the approach that the Government proposes to take in drafting regulations to apply the CA 2006 provisions to LLPs:
make consequential amendments to the Limited Liability Partnerships Act 2000 (LLPA 2000) resulting from CA 2006, using the power for the purpose in CA 2006, s 1294;
apply specified CA 2006 provisions to LLPs by setting out those provisions in full, as modified to take account of the particular characteristics of LLPs; and
use the powers in Part 15 of CA 2006 (ss 380–474), as applied to LLPs, to make two separate sets of regulations relating to LLP accounts: one relating to the accounts of small LLPs, and one relating to the accounts of medium-sized and large LLPs (thus following the approach being taken for companies).
Proposed amendments
Incorporation
Government policy on the structure and incorporation of LLPs remains unchanged. Therefore, no change is proposed to the incorporation of LLPs, other than to apply the changes relating to members’ residential addresses (see below), and to make consequential amendments to the relevant provisions of LLPA 2000.
Execution of deeds
CA 2006, s 46, on the execution of deeds, restates section 36AA of CA 1985, which was inserted by the Regulatory Reform (Execution of Deeds and Documents) Order 2005 (SI 2005/1906). CA 1985, ss 36 and 36A are applied to LLPs. However, due to an oversight, when section 36AA was inserted it was not applied consequentially to LLPs. The Government proposes to rectify this to ensure clarity and equality with company law as currently applied to companies.
Names
To ensure consistency and clarity, the Government proposes to amend Part 1 of the Schedule to LLPA 2000 to be consistent with Part 5 of CA 2006 (a company’s name), and to apply Part 5 to LLPs to the extent that it is not reflected in the amended Schedule. In the Government’s view, any other approach would create confusion for LLPs and for the public accessing company information.
There could be potential anomalies where a name not accepted under the companies provisions could be allowed under the LLP provisions. Companies House would also encounter difficulties in handling two different regimes.
Members’ residential addresses
The document outlines the significant changes to be introduced by CA 2006 in relation to the public availability of directors’ residential addresses. Information on the LLP members’ addresses is open to abuse in the same way as those of directors.
The Government therefore proposes to apply the provisions of CA 2006 relating to directors’ addresses to LLP members.
Not doing so would lead to inconsistency in the treatment of essentially the same type of information that appears on the register. There may also be an anomaly where a company director is also an LLP member, so that information protected under one requirement would be available to the public under another.
Accounts
As outlined in the February 2007 consultation on the general approach to applying CA 2006 to LLPs (as part of the consultation on implementation of CA 2006 generally), to avoid Companies House operating different systems for companies and LLPs, the Government proposes to proceed to implement the CA 2006 provisions on filing periods and late filing penalties for LLPs (see CA 2006, ss 442(2)(a), 443 and 453) at the same time as for companies in April 2008. The new rules and penalties should apply to all late filings on or after 1 February 2009 .
So far as the other accounts provisions in CA 2006, Pt 15 are concerned, the Government proposes to continue the existing approach of applying to LLPs the rules as they apply to a private company. The proposal is that these changes will be implemented in October 2008 .
Auditors
As stated in the February consultation document, the changes in CA 2006, Pt 16 will be implemented in October 2008 .
The Government proposes to take the same approach as in the current LLP regulations, of applying to LLPs the rules as they apply to a private company, with adaptations to take into account the different internal arrangements of an LLP. In terms of the major changes in Part 16 compared with the corresponding CA 1985 provisions, this means applying the following provisions to LLPs:
signature by senior statutory auditor (CA 2006, ss 503–506);
new offence in connection with audit report (CA 2006, ss 507–509); and
strengthened rules on statements by those ceasing to be auditor (CA 2006, ss 519–525, as they apply to unquoted companies).
On the other hand, the document states that the new power for members of a quoted company to raise audit concerns (CA 2006, ss 527–531) has no application to LLPs. Also, the new provisions on auditors’ liability (CA 2006, ss 532–538) will not be applied, as the general rule making void any limitation (currently in CA 1985, s 310) has never been applied to LLPs.
Statutory auditors
The document points out that the provisions in Part 2 of the Companies Act 1989 (CA 1989) concerning who may act as a company auditor are currently applied to auditors of LLPs. The Government therefore proposes that Part 42 of CA 2006 (which replaces Part 2 of CA 1989) should also apply to those who act as auditors of LLPs.
Dissolution and restoration to the register
Section 1013 of CA 2006 changes the time limits for executing a disclaimer in relation to property that passes to the Crown on dissolution of a company. As such time limits in CA 1985, s 656 are currently applied to LLPs, the Government proposes to apply the changes made by CA 2006 to LLPs.
Chapter 3 of Part 31 of CA 2006 concerns restoration to the register for a company which has been struck off. Most of the sections in CA 1985 on striking off are applied to LLPs. CA 2006, ss 1024–1028 provide a new system of administrative restoration to the register. CA 2006, ss 1029–1032 provide a new single procedure for court restoration replacing the two procedures in CA 1985, ss 651 and 653. The Government proposes to apply the provisions in CA 2006 on restoration to the register to LLPs.
Registrar of Companies (Companies House)
Part 35 of CA 2006 largely replaces Part 24 of CA 1985 setting out the basic functions of Companies House.
As the document states, many of the sections in Part 35 have no equivalent in CA 1985. Of those that do, CA 1985, ss 704–711 and 713–715A have been applied to LLPs. A number of the new provisions in CA 2006, Pt 35 already apply to LLPs and many of those that do not could be applied with only minor modifications. Only a few would require substantive modification.
Many of the Registrar’s functions apply to LLPs in the same way as they apply to companies. The Government proposes that where in practice the functions of the Registrar are common or similar to those for LLPs, those sections that are not automatically applied to LLPs should be applied with any necessary modification.
Service of documents by LLPs
Section 1139 of CA 2006 replaces section 725 of CA 1985; it ensures there is a place at which a document may be served on companies registered under the Act. CA 2006, ss 1140–1142 contain new provisions on the service of documents on directors, secretaries, and others, define “service address”, and qualify requirements elsewhere to give an address. As CA 1985, s 725 applies to LLPs, the Government proposes to apply CA 2006, ss 1139–1142 to LLPs.
Company communications
The document seeks views as to whether the “company communications provisions” (CA 2006, ss 1143–1148, and Schs 4 and 5) should apply to LLPs. If so, would LLPs want to be able to contract out of the new statutory provisions, i.e. make them subject to contrary agreement by the members so that, for example, the members could forfeit their rights to receive hard copies.
If this was supported, the Government would propose to apply these provisions to LLPs in October 2008.
Overseas LLPs
Part 23 of CA 1985 places certain requirements on companies incorporated outside the UK with a place of business or a branch in Great Britain, in relation to registration and disclosure. Parallel provisions exist for Northern Ireland.
Part 34 of CA 2006 contains power to make similar provision by regulations, covering places of business (including a branch) in all parts of the UK.
The document goes on to point out that the current requirements for overseas LLPs with branches in the UK are less onerous than for overseas companies. It asks for views as to whether the application of Part 34 of CA 2006 (and any regulations made under it) should extend to LLPs. One of the principal issues would be how to identify an overseas LLP.
One option would be to extend the provisions to any overseas body that has a legal personality and limited liability but is not a company.
Cross-Border Mergers Directive
The Government proposes to apply the Directive to LLPs from October 2008 .
Other issues raised
The document states that in the Government’s view, the following provisions should not be applied to LLPs (or members of LLPs), and asks whether consultees agree with the Government’s views in each case:
the statutory duties of directors (CA 2006, Pt 10);
derivative actions (CA 2006, Pt 11);
narrative reporting (CA 2006, s 417).
The document states that in forming its response on these issues, the Government took into account the views of respondents to the February 2007 document, the constraints of the regulation- making powers under LLPA 2000, and the policy of applying company law only to the external facing aspects of an LLP and not to the relationship between its members.
Next steps
Comments are requested on the policy proposals in the document by no later than 6 February 2008. The document can be accessed on the DBERR website .
As mentioned above, the Government is proposing to apply the provisions on accounts and audit, cross-border mergers, and possibly e-communications from October 2008 . The plan is to publish draft regulations on these subjects as soon as practicable after 6 February 2008 .
For the main implementation of CA 2006 for LLPs in October 2009 , the aim is to publish draft regulations for consultation in the middle part of 2008 to give LLPs time to adjust to the changes.
From Company Secretary's Review, Issue 19
To What Extent Have the Companies Actâs Objectives Been Met?
The DTI had four key objectives that were to be delivered by the Companies Act 2006:
To enhance shareholder engagement and a long term investment culture;
To ensure better regulation and a ‘Think Small First’ approach;
To make it easier to set up and run a company; and
To provide flexibility for the future.
The hardest questions, but ones that I received regularly during the course of the Companies Bill’s progress through Parliament (when I led for the opposition team on the Bill Committee), were will this Act work and will it be good for business? To me these questions encapsulate the objectives of the Act. If they can be answered in the affirmative then the Act will have achieved its objectives.
At 1,300 clauses long, covering a huge number of subject matters of varying novelty and complexity - the temptation is just to say - for the most part – yes, the Act does work and yes it is good for business. I do think it is an improvement on the 85 Act - although there are various issues where the jury is still probably out.
The Bill was designed to separate the private and public regimes and present the Act in a more user friendly way. The general feedback that I receive is that this has been accomplished - although, again, more comments are likely to come through following the recent October partial implementation.
I am sure that today’s conference will shed light on this issue – but I think it is fair to say that on some of the new areas, we need to wait and see, particularly where implementation is not until later.
Furthermore, despite the implementation SIs being amongst the most technically challenging that I have ever seen, it would be fair to say that I have not been receiving many complaints - which would seem to point to either an effective DBERR consultation or not many understanding the SIs.
That was of course until Stephen Timms MP announced on 7 November that most of the 1 October 2008 provisions will be put back to 1 October 2009. This has been poorly received by the business community.
Of course, other than facilitating home grown enterprise, the UK is undeniably now the location of choice for many international businesses. So, how is the new Act likely to affect our hard-won success?
If the Act does manage to have a positive effect on our competitiveness then it will be good for business and thus, at least partly, have achieved what I feel to be a key objective.
So I shall highlight some of the main issues that have arisen and some pointers for where the main pressure points are likely to be on the potential of the Act to be good for business.
Bureaucracy and Red Tape
The first point is that we will have to be very careful that the Act does not create more unnecessary red tape and bureaucracy. One feared outcome is the increase in the volume of paper which may need to be generated in relation to board minutes, for instance, evidencing that directors have properly promoted the “success of the company”.
These measures could make compliance with the law into more of a time-wasting tick-box approach not least because the Act does not give clarity as to how to evidence such decision making processes. Such moves would, I believe, not be well received by business.
Corporate Governance and regulation
With regard to the regulatory environment, it is important for the UK to recognise our strengths and work at maintaining them. For example, the UK’s “light-touch” regulatory approach was recognised during the course of the Act as key not only to attracting international businesses to Britain but also to stopping British businesses relocating offshore.
Britain is now generally seen by international investors as a more welcoming regulatory environment than the United States. During the lead up to the Companies Bill, the US passed the Sarbanes-Oxley and Patriot Acts. The wide criticisms of Sarbanes-Oxley coming out of the U.S. were helpful from our point of view in dispelling moves from the Unions and the Left to adopt a more prescriptive or “pluralist” approach to directors’ duties and corporate governance in the Act.
The UK is consistently the clear leader in global corporate governance rankings and our regulatory standards are ones to which many foreign companies apply - but we need to keep in mind - that this position needs to be worked at.
We need to be watchful that further regulation coming from pressures within Parliament or Brussels does not strangle or stifle innovation. There is still some cause for concern here as we wait and see how effectively the new duties of directors and the provisions relating to the Business Review work.
But, for the most part, the Act recognises that the right place for corporate governance is the Combined Code for main list companies - operating on its comply or explain principles. I therefore believe that in this regard the Act is good for business but that the position may require some rigorous defence in the future.
The Companies Act originally included provisions for the now defunct Operating and Financial Review which instituted a mandatory non-financial reporting regime for listed companies.
The Government proposed it, then they pulled it and then they half proposed it again and then finally amended the Business Review provisions in clause 417 only two days before the Bill’s final reading and then with hardly any consultation.
This I could see was no way to move ahead on promoting corporate responsibility in any sense of the term - let alone on a consensual basis. What ended up in the Act is a political fudge and requires clearer thought and policy.
I was therefore delighted when David Cameron asked me to form a Conservative Responsible Business Working Party to review this important area. And one of the basic things that this initiative is questioning is whether legislation and regulation are necessarily the best ways to institute improvements in responsible business practice? We hope to produce our report before the year end.
One of the lessons which I learnt from the shenanigans of the OFR review, was that while it was obvious that Government could retain the role of co-ordinator - promoting responsible business much more could productively come from business itself.
This issue is likely to form one of the key ongoing areas of political discussion in relation to the Act as there were many on the Labour benches who wanted a more prescriptive mandatory reporting approach. We supported a more measured and voluntary approach - looking to encourage best practice rather than drive standards down to the lowest common denominator and the tick box mentality implicit in mandatory reporting.
However, the Minister did announce that Government will review this issue in two years time - so it is very much a live issue. To that extent, I would hope that as voluntary corporate responsibility initiatives become increasingly widespread and more publicised, the culture of corporate responsibility, which would include voluntary reporting, will spread.
Corporations and professional practices that involve themselves in best practice CR now – will be ahead of the game – and I predict that this will become much more of an issue demanded from customers and clients in years to come. So if I leave you with a message today - can I suggest understanding and acting on CR now rather than waiting for Government imposed mandatory reporting.
In practice, many elements of CR will currently be carried out, even if not articulated, by your firms and your client companies. This is because good CR is invariably linked with good business and this approach should be complimentary to the basic premise, which is under attack from the left, that a company’s first duty remains to shareholders.
As I believe that to achieve its objectives the Act must be good for business I will now analyse some important themes relating to company members.
Shareholder’s rights
The Act represents a significant improvement in simplifying the process of general meetings and enhancing shareholder democratic rights, for instance in relation to proxies and written resolutions. There are certain new aspects though which are yet to be tried and tested, for instance the provisions relating to the practicalities of shareholders’ rights to require directors to obtain an independent report on any poll taken at a general meeting .
The question of shareholder security was not addressed in the Bill, until the Lords stages following opposition pressure, and then significant amendments were introduced mainly as a result of the activities of animal rights activists and so-called illegal share selling boiler rooms, which some of you may unfortunately have experience of.
It was however decided by Parliament not to go down the route of restricting access to companies’ registers of members, in an attempt to maintain the good traditions we have of shareholder transparency.
The new provisions, in clauses 113-121 which came into effect in October 2007, therefore have a presumption of access - with companies then having the right to ask the court to restrict access. However, the complimentary provisions which will provide that companies will only have to notify significant shareholders in their annual return have not yet come into effect.
However, under transitional arrangements, the 85 Act provisions continue to apply to requests for a copy of or to inspect a company’s register of members until the company has submitted an annual return made up to a date after 30 September 2007. How these provisions will work in practice will be interesting and perhaps today’s conference will provide some insight into how they are being dealt with.
I understand that this impracticality is due to Companies House needing what I calculate to be some 27 months to reset its systems. This, by the way was the same reason given as to why directors’ historic home addresses could not be deleted - despite the director being allowed on to the private register.
And this again is the reason for most of the delayed October 2008 implementation to 2009. Frankly, I do not see this as good enough. I return here to the key objectives – in order to meet those objectives the Act does, of course, have to work in practice.
The Government also conceded to pressure from investors and opposition parties introducing what is now Part 9 of the Act to give voting and information rights to beneficial owners of fully listed shares who are not on the shareholder register because their shares are held in the name of a nominee.
We calculated at the time that over 50 per cent. of all private shareholdings were administered by nominees which corresponded to an estimated Ł100 billion worth of share capital. That meant, in our age of PEPs, ISAs and CREST, that individuals had increasingly lost their rights in the companies in which they had chosen to invest their money. We strongly believed that the law should reflect the modern status of beneficial holders.
However, the details of how these provisions will work do involve a degree of complexity and I think we will need to keep an eye on whether further regulations will be required to achieve the desired effect here.
Myners SVWG Group Report
Whilst supporting shareholder rights Clause 1277, providing enabling legislation for institutions to declare how they vote their shares, was opposed by us in the House and whilst we fully support and encourage institutions being transparent and see this as a way of promoting shareholder democracy - a voluntary approach is preferable to our minds.
I was therefore pleased to see Paul Myners’ fourth report to the Shareholder Voting Working Group (SVWG) of this July concluding that considerable progress was being made by participants in the voting chain.
He noted that more votes are being cast - voting levels now exceed 60% in PLCs - and that more consideration is given to voting at Company meetings. He recommended companies should carry out tracing exercises in relation to their 2007 AGMs to determine where votes were lost.
I can say that promoting share ownership, shareholder participation and voting transparency are important issues for the Conservatives and so between us and the Government, I would say that you should expect what is in the Act to be a step rather than a destination. The Act is a step in the right direction but it remains to be seen to what extent this objective will be achieved.
Private equity
So information going to private investors and information coming from institutions were covered in the Act - but are likely to be revisited. But what about information from private companies?
For those of you that still might be thinking that the Act is going to put corporate legal policy issues on the back burner for a while - let me briefly touch on private equity. In recent months, this industry has faced the full glare of the media spotlight, and much of this has been unsympathetic.
The press has often compounded the negative image originally propagated by trade unions and now generally picked up by the left by repeating inaccurate assertions about the so-called special beneficial tax treatment that private equity receives, the lack of transparency and concerns about regulation.
It is surely right that private equity firms should look to adapt their new business models in ways that emphasise their positive potential as a good force in society with greater transparency. But the negativity and thoughtless nature of the attacks in the US as much as the UK have been staggering.
From the Companies Act standpoint - there are challenges here because the premise behind the Act is that the higher levels of non-financial reporting and disclosure are predominantly allocated to companies that are public, rather than large.
This implies that private companies - no matter how big can essentially keep their affairs private. But companies in today’s world would in practice be ill advised not to listen to and inform stakeholders other than shareholders - not least with the Act’s Part 10 changes.
From a UK viewpoint, I think that any further changes by Government or legislation, should be made with great care so as not to send this or any other business sector overseas. The recent spate of very large buyouts is a relatively new phenomenon in the UK – and this has significantly increased the profile of private equity in terms of its association with popular brands – but also with large unionised work forces and much higher levels of debt.
I have no doubt that solving the carried interest tax issue will not in itself lessen the political attacks on the private equity industry and that a more public focused, transparent, corporate governance type model will be required. It does now seem that the private equity industry realises this and, via the Walker review, is proposing changes to the way it operates - we shall see how this develops and its future implications for the Act.
Director’s Duties
Within Part 10 of the Act, the seven codified directors’ duties are set out in sections 171-177. The duties are expressed to be based on common law rules and equitable principles. But regard still also has to be had to the corresponding common law rules and equitable principles when interpreting and applying the new duties.
The aim was to make the duties simpler but the effect could be confusion, especially where the codified duties conflict with equivalent or complementary common law duties. The key duty, as set out in section 172, is promoting the success of the company for the benefit of the members as a whole and when directors comply with this duty, they must have regard to a number of stakeholder factors.
Fears about the new procedural burden are weighing on numerous directors and company secretaries’ minds. The concern is the uncertainty over how to make decisions on key issues without recourse to longer board papers, minutes and records or a box ticking approach of making reference to the consideration of all the factors in the board minutes.
It rather reminds me of Margaret Hodge MP, the DTI minister at the time, who repeatedly commented during the Parliamentary passage of the Act that new director’s duties were simply a codification process rather than any marked change and then later announced, in relation to section 172 (2), that “enlightened shareholder value” marks a “radical, historic and vital cultural change in the way in which companies conduct their business.” So please take your pick of interpretations.
As I said in a speech on the matter to the Minister: “A flexible system is to be replaced by an inflexible one… On the one hand, the Government have said that there will be no change in the common-law position; yet on the other hand, they have introduced the concept of enlightened shareholder value, which all legal experts agree will alter the common-law position of acting in the best interests of the company.”
I believe that there is a fundamental gap in the Government’s train of thought: either they are introducing a new concept—enlightened shareholder value — which is an extension of the common law, or they are simply codifying the existing common law.
My understanding is that most corporate lawyers are advising that board minutes do not need to be fundamentally changed – whilst many banking lawyers are saying that each duty heading should be addressed and minuted. Ultimately, it will be for the courts to determine how far the new duties extend as there is scope for interpretation and differing applications in practice.
But any settled case law will take time to develop - so watch this space. Whether this is an area which may lead to the Act not achieving its objectives I can not yet be sure. However, it is certainly the case that such confusion can not be good for business.
Derivative claims
One aspect that may link to this could be the new derivative claims regime.
Under Part 11 of the Act, brought into force in October 2007, there is a new regime for derivative claims. That is where a shareholder brings a claim on behalf of the company against a director or auditor.
The new regime is more extensive and easier to use than the common law exceptions to the rule in Foss v Harbottle. I believe that a later speaker will discuss the technicalities of Part 11.
However, as a politician, I would note that you should not assume that only significant shareholders will wish to use this process to recoup company funds for the company. That may be the case - but just as likely it may be a single share owning activist who may wish to use the deep pockets of his or her cause to promote that cause publicly in court even in relation to matters arising before he became a member - and the pre-hearing, which is meant to protect the company, could be used as another bite of the cherry of publicity or as a means of applying pressure to management.
It does seem likely to me that more derivative claims will be brought to test the new regime, particularly in the context of large listed companies who were rarely exposed to such actions in the past. We must hope that the courts, when they do consider the first test cases, apply a sensible approach. But, clearly, this will be an area requiring continued review and it remains to be seen whether it is good for business.
To conclude, I am afraid that I am unable to give you a definitive answer as to whether I believe that the Companies Act has yet achieved its objectives in all respects. For the most part it is an improvement on the 85 Act but there are outstanding issues – where we shall have to wait and see. This is not only in relation to the Act itself but also how the Act responds to what is still a rapidly changing political climate in terms of corporate policy.
Jonathan Djanogly MP
Shadow Minister - Corporate Governance
Article on revised implementation timetable - December 07
(Thursday, 20 December 2007) Written by Stephen Barc
Minister’s statement
On 13 December 2007, the Minister for Competitiveness at the DBERR, Stephen Timms MP, made a further Written Statement to Parliament regarding the commencement of the Companies Act 2006 (CA 2006). This followed his earlier Written Statement on 7 November 2007.
In the December Statement, the Minister stated that, following discussions and meetings with key stakeholders, the Government has decided that most of the provisions listed in the November Statement as subject to consultation, should be commenced with effect from 1 October 2008.
However, one set of provisions subject to consultation will instead be commenced from 6 April 2008, namely sections 811(4) , 812 and 814 (inspection of register of interests in a company’s shares). In addition, sections 121 and 128 (register of members: removal of entries relating to former members) will also be commenced from 6 April 2008; these provisions are in Part 8 (a company’s members: CA 2006, ss 112 to 144 ), the remainder of which is scheduled for commencement on 1 October 2009.
The Minister also announced that, in view of the strength of business representations and of further advice from the Registrar of Companies, the Government has decided in addition to commence, with effect from 1 October 2008, some provisions not listed in the November statement as subject to consultation. These provisions (sections 544 , 641(1)(a) and (2)– (6) , 642 , 643 , 652 and 654 ) relate mainly to the new procedure for private companies to make capital reductions supported by a solvency statement instead of by a court order; they are in Part 17 (a company’s share capital: CA 2006, ss 540 to 657 ), the remainder of which is again scheduled for commencement on 1 October 2009.
The December Statement comments that stakeholders highlighted the major benefit to business of implementing this new procedure in 2008. The Government had originally not proposed this, because it would require some changes to Companies House systems and processes. However, the Government have looked at this again in the light of the points made by business, and the Registrar of Companies believes that the necessary changes can be made by October 2008.
Commencement Order No 5. Subsequently, as promised by the December Statement, on 17 December 2007 a commencement order (the Companies Act 2006 (Commencement No 5, Transitional Provisions and Savings) Order 2007 (SI 2007 No 3495) ) as made in respect of all
provisions to be commenced in 2008, other than those relating to
capital reduction supported by a solvency statement and the removal of
special provisions about accounts and audit for charitable companies.
The capital reduction provisions (including section 654 o n distributions of reserves
arising from a capital reduction) will be commenced through a separate
commencement order to be laid in draft in 2008. There will also be a
separate commencement order on the audit of small charitable companies.
The remainder of this article sets out the provisions commencing in April 2008 and October 2008.
Provisions commencing on 6 April 2008
CA 2006, s 44 (execution of documents);
CA 2006, ss 121 and 128 (register of members: removal of entries belonging to former members);
Part 12 (CA 2006, ss 270 to 280 — company secretaries), other than s 270(3)(b)(ii) and 275 to 279 ;
Part 15 (CA 2006, ss 380 to 474 — accounts and reports), other than ss 417 and 463 ;
Part 16 (CA 2006, ss 475 to 539 — audit), other than sections 485 to 488 ;
Part 19 (CA 2006, ss 738 to 754 — debentures);
Part 20 (CA 2006, ss 755 to 767 — private and public companies);
Part 21 (CA 2006, ss 768 to 790 — certification and transfer of securities);
CA 2006, ss 811(4) , 812 and 814 (inspection of register of interests in a company’s shares);
Part 23 (CA 2006, ss 829 to 853 — distributions);
Part 26 (CA 2006, ss 895 to 901 — arrangements and reconstructions);
Part 27 (CA 2006, ss 902 to 941 — mergers and divisions of public companies)
CA 2006, s 1172 (references to requirements of CA 2006);
Part 42 (CA 2006, ss 1209 to 1264 — statutory auditors);
CA 2006, s 1282 (payment of expenses of winding up, in effect reversing Re Leyland Daf ).
Provisions commencing on 1 October 2008
CA 2006, ss 69 to 74 (objection to company names);
CA 2006, ss 82 to 85 (trading disclosures);
CA 2006, ss 155 to 159 (provisions relating to corporate directors and under-age directors);
CA 2006, ss 175 to 177 , 180(1), (2) (in part) and 4(b), and 181(2) and (3) (general duties of directors in respect of conflicts of interest, and supplementary provisions);
CA 2006, ss 182 to 187 (declaration by a director of an interest in an existing transaction or arrangement);
control of political donations and expenditure: provisions relating to independent election candidates;
CA 2006, ss 544, 641(1)(a) and (2)–(6), 642, 643, 652 and 654 (share capital provisions; see above);
CA 2006, s 1157 (power of court to grant relief in certain cases);
CA 2006, ss 1277 to 1280 (information as to exercise of voting rights by insitutional investors);
repeal of the restrictions under the Companies Act 1985 on financial assistance for acquisition of shares in private companies, including the ‘whitewash’ procedure.
Manupatra has come up with the new journal on Intellectual property reports. Manupatra Intellectual Property Reports MIPR details available at http://www.manupatralawreports.in/
Implementation of the Companies Act 2006: Centrica
(Wednesday, 28 November 2007) Written by Grant Dawson
Centrica plc
Energy and related services (UK, NA and Europe)
FTSE100 listed company (no.30)
Market Cap of Ł13.5bn
Ten person board (chairman, four executives and five independent non-executive directors)
900,000 shareholders:
80,000 held within the corporate nominee ‘FlexiShare’
Companies Act 2006
Electronic communications with shareholders
Directors’ duties
Articles of association
Conflicts of interest
Electronic Communications
Prior to new legislation:
gentle encouragement to take SFS or web-based information
welcome letter encouraged SFS
‘tired of all this paper’ campaign
Full annual report - 20,000 shareholders
Summary financial statement - 840,000
Web-based (with email alert) - 37,000
2006 annual report and SFS accompanied by letter from the Chairman explaining the benefits of web-based communications
Continued with ‘tired of all this paper’ campaign
Conducted election for paper/web-based communications
Enabling resolution passed at the AGM
Web-communication Benefits
Wealth of information on the web-site:
current share price
up to date news and information about the company’s activities
annual report and summary financial statements
financial results and trading updates
results presentations and webcasts
on-line corporate responsibility report
historic dividend and share price details
Electronic voting via Shareview with immediate confirmation of receipt
Shareholder Elections
Paper communications:
4,500 full annual report and accounts
70,000 summary financial statement
Web-based communications (active):
48,000 (an increase of 11,000)
Web-based communications (deemed):
770,000
Web-based Communications Deemed Consent
Those shareholders that did not respond to paper/e-comms election are deemed to have consented to web-based communications
Legal requirement to advise in writing the availability of shareholder information on website
ICSA best practice guidance - to send personal proxy card in the early years
Chairman’s caution - disenfranchisement of shareholders?
Web-based Communications Deemed Consent - Shareholders
Phased approach:
In 2008, we intend to issue a six page document to deemed consent shareholders:
Chairman’s letter
financial highlights (inc dividend)
list of proposed resolutions, time and venue of AGM (but not full notice)
information about how to access the website and the benefits of web-based communications
Proxy card
We will consider feedback from shareholders
We will analyse the proxy responses (any correlation between active elections for paper/e-comms and proxy returns?)
Mid/late 2008 - decision on whether we continue with phased approach for a further year or move to advisory letter only
Web-based Communications – The Future
Continue to promote the benefits of web-based communications
Investment in the website: new technology; updated design; improved content and dedication of internal resource to ensure it is managed and up to date
Overall, there are cost savings and significantly increased access to a wealth of information about the company in which our shareholders have chosen to invest
Engaged shareholders (direct and indirect)
Directors’ Duties
Programme of directors’ training on the new Act
Paper on directors’ duties and derivative actions taken to the September 07 board meeting, ahead of the October 08 implementation of first four duties
Directors’ conflicts being reviewed as part of development of new articles
Training on directors’ interests, conflicts and benefits to be given ahead of October 08 implementation
Directors’ Duties – Approach Taken
Briefings given to plc and subsidiary boards, senior executives and other managers responsible for preparing board papers and/or taking decisions
Part of new directors’ induction (and terms of appointment will make reference to duties)
Directors’ Duties - Impact
Guidance issued by GC100
Factors listed that directors should have regard to not exhaustive
Not planning on reciting them in board papers or minutes
Should consider all relevant factors when making decisions
No major impact on a well managed company
Articles of Association
Opportunity for wholesale review of articles e.g. are borrowing limits appropriate for the future needs of the business?
Objects clause deemed to form part of articles:
required?
or should you rely on unlimited objects?
Removal of matters covered by the Act (avoid duplication) e.g. form of shareholder resolutions, notice periods, variation of class rights, requirement to keep accounting records
Removal of articles relating to matters that now only need shareholder approval e.g. purchase of own shares, consolidation and subdivision of shares and reduction of capital
To bring into line with new provisions e.g. web-based communications, time limits for the appointment of proxies, the process for authorising directors’ conflicts of interest, authorisation for the directors to change the company name - contentious?
Process:
outline paper to the November board meeting
detailed proposals to the December board meeting
final draft of articles and notice of meeting to the February board meeting
final approval delegated to a committee
May AGM
new articles to be in force from 1 October 2008 - to coincide with final implementation of the Act
Conflicts of Interest
Articles may include provision enabling directors to authorise a conflict or possible conflict
Directors’ general duties not infringed by authorising in accordance with articles (S.180(4))
Major law firms liaising with ABI and institutional investors regarding governance around authorisation process
Conflicts of Interest - Governance
S.175(6) only non-conflicted directors to count towards quorum and vote on conflict in question
Notwithstanding S.180(4) directors to act in way that promotes the company’s success
Limits or conditions to be attached to authorisation, e.g. availability of board papers and attendance at meetings
Development of best practice
Board’s annual review of conflicts over which current authorisation in place
Disclosure of authorisation and review processes in the governance report
ABI currently developing principles in respect of conflicts to be followed by boards - publication date not yet known
Over the past 12 months we have been listening to our customers’ worries about the effects of the Companies Act on their businesses. In response, we’ve developed a unique website to help business leaders and their advisers grapple with the reforms and reach a better understanding of how the changes impact in practice.
We are proud of the fact that we were able to launch Company Law Forum just one week after the announcement that many of the Act’s October 2008 commencements are to be delayed until late 2009 – and this is one of the many subjects users will be discussing.
What Company Law Forum gives you:
Company Law Forum provides an environment for the legal and business community to share thoughts, useful links, and have discussions and network on company law related issues. This site is free to access will include:
- Share ideas, publish opinions and thoughts and discuss issues
and topics that are current in company law
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members privately
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- External current awareness brought into the site to add further
value and context to the site
The content on the site is free. To contribute you must register to but this is just a simple sign-in.
The idea of the forum is that it runs and polices itself, generating new ideas, new groups and all the content. Therefore, please help us facilitate the site by reporting any abuse you see and sending us your ideas and feedback.
LexisNexis sponsors this site and provides basic moderation, basic technical support and some free content.
Company Law Forum will, with your contributions, become a vigorous, independent and constantly evolving place for everyone with an interest in company law to meet and exchange views and ideas.
Avoiding conflicts of interest: best practice for directors
Duty to avoid conflicts of interest
A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company (s.175(1)).
Some points to note:
There is no definition of “interest” or “conflict of interest”, although a reference to a conflict of interest includes a conflict of interest and duty and a conflict of duties (s.175(7)).
The conflicting interest can be direct or indirect.
The duty applies in particular to the exploitation of any property, information or opportunity, whether or not the company could itself take advantage of it (s.175(2)).
The prohibition refers to a “situation” in which the director has or can have an interest that conflicts or possibly may conflict with the interests of the company. However, the duty is not infringed if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest (s.175(4)(a)).
It appears that it is not necessary for a director to have any influence over a particular situation for a conflict to arise.
The duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company (s.175(3)). Conflicts arising in these circumstances are covered by two separate provisions of the Act:
under s.177, a director has a duty to declare an interest in a proposed transaction or arrangement with the company; and
under s.182, a director must declare an interest in an existing transaction or arrangement with the company – in this case, failure to comply is a criminal offence.
This duty is not infringed if the matter has been authorised by the directors (s.175(4)(b)). Authorisation may be given by the directors:
where the company is a private company and nothing in the company’s constitution invalidates such authorisation, by the matter being proposed to and authorised by the directors; or
where the company is a public company and its constitution includes provision enabling the directors to authorise the matter, by the matter being proposed to and authorised by them in accordance with the constitution (s.175(5)).
The prohibition applies to a “situation” whereas it is a “matter” that can be authorised. It appears from statements made during the Bill’s passage through Parliament that the words should be construed similarly (see for example, the remarks of Lord Goldsmith on 6 February 2006, Hansard GC290)
The authorisation is effective only if:
any requirements as to the quorum at the meeting at which the matter is considered is met without counting the director in question or any other interested director, and
the matter was agreed to without their voting or would have been agreed to if their votes had not been counted (s.175(6)).
Some possible examples of situations which might fall within s.175:
If a director of Company A is a competitor in some respects of Company A.
If a director of Company A is a major shareholder in Company A.
If a director of Company A owns property adjacent to Company A’s property, the value of which could be affected by the activities of Company A.
If, in each of the above situations, the director is a director of another company which has the relevant relationship with Company A.
If a director of Company A is a director of an investment bank which may have a relationship with Company A, or a competitor.
If a director of Company A is also a director of Company A’s pension trust company
Is this a change in the law?
“The clause reflects current law and is derived from the expression of the rule by Lord Cranworth …” (Solicitor General, Hansard 20 May 2006 col. 613)
No fiduciary “shall be allowed to enter into engagements in which he has or can have a personal interest conflicting or which possibly may conflict with the interests of those whom he is bound to protect” per Cranworth LC in Aberdeen Railway & Blaikie Brothers (1854) 1 Mac 461 at 471-472.
“This section imposes a positive duty to avoid conflicts of interests and departs from the common law which merely imposed a “disability” in a situation of conflict, but did not impose a duty to avoid a conflict”. (Hannigan and Prentice, The Companies Act 2006 – A Commentary p.34).
It is clear that the director’s authorisation process is a change in the law.
Authorisation of conflicts – power to do so
Section 175 comes into force October 2008.
Public companies will require provisions in their articles if directors are to be able to authorise conflicts.
So will private companies incorporated before 1 October 2008.
Consider including a provision in the articles that any authorisation may exempt a director from disclosing confidential information to the company which he has received otherwise than through his position as director.
What assurances, if any, will shareholders wish to see before agreeing to provisions in articles?
Boards will need to have procedures in place to:
Identify existing conflicts or potential conflicts as at October 2008.
Ensure that any conflict is properly presented to the board.
Consider the extent to which those conflicts should be authorised.
Clarify the circumstances when authorisation can be withdrawn.
Ensure that all future conflicts are reviewed:
on appointment
on a regular basis (say, as part of the annual board review)
when circumstances change
Decide which body is to conduct reviews, e.g.
whole board
Nominations committee
Chairman
Decide which body should be authorised to amend or withdraw authorisations.
Agree how to ensure that provisions relating to third party confidential information are mutual.
Possibly, to identify how to give shareholders assurance that the powers of authorisation are being used appropriately, e.g.
through explaining policy and procedures in Corporate Governance report (likely to become the norm?)
disclosing authorisations (cumbersome, confidentiality issues?)
Two points to note on section 175 authorisation:
authorisation cannot be retrospective; and
authorisation does not apply to other breaches of duty, e.g. s.172.
Some particular examples:
Scenario 1
Company A wishes to appoint X as a non-executive director. X is a director of an investment bank, B.
Some issues to consider:
Could the mere situation of the cross-directorship leadto an interest that conflicts, or possibly may conflict, withthe interests of the company?
If so, should the situation be authorised now?
What should be the extent of that authorisation?
Should it be clear that information which X receives through his position as a director of Bank B should not have to be disclosed to Company A?
Should the authorisation recognise that Bank B could act in a way which conflicts with the interests of Company A (for example in acting for a bidder for Company A)?
In such situation, what limitations should be put on the conduct of X – for example, should he be prevented from being involved in the team acting for the bidder and/or be exempted from taking part in defence discussions?
Should his duties of confidentiality to Company A be clarified?
How should the authorisation be recorded?
Scenario 2
Company A wishes to appoint X as a non-executive director. X is a director of Company B, a major shareholder in Company A.
Some issues to consider:
Could the mere situation of the cross-directorship lead to an interest that conflicts, or possibly may conflict, with the interests of the company?
What limitation, if any, should be imposed on X relating to the use of information confidential to Company A?
What should happen if Company B received an approach from a potential bidder for Company A?
Scenario 3
Company A wishes to propose X, one of its directors, to be appointed to the board of its pension trustee company.
Some issues to consider:
Could the mere situation of the cross-directorship lead to an interest that conflicts, or possibly may conflict, with the interests of the company?
If so, should the situation be authorised now?
What should be the extent of that authorisation?
Should it be clear that information which X receives through his position as a director of the Trustee should not have to be disclosed to Company A
Should his duties of confidentiality to Company A be clarified?
How should the director act when pension funding is being discussed?
How should the authorisation be recorded?
Duties not to accept benefits from third parties
A director must not accept a benefit from a third party conferred by reason of his being a director (s.176(1)).
The duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest (s.176(4)).
Some points to note:
The exemption applies an objective test – there is no provision for authorisation in the articles.
Companies should, however, review their policies on receipt of gifts, hospitality, etc.
Duty to declare interest in proposed transaction or arrangement
If a director is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors (s.177(1)).
The declaration can be made at a meeting or by notice.
A director can give a general notice to the effect that, because of his interest or connection with a third party, he should be regarded as interested in any transaction or arrangement with that third party (s.177(2) and s.185).
Declarations which become inaccurate or incomplete must be updated (s.177(4).
A director does not have to declare an interest:
which cannot reasonably be regarded as likely to give rise to a conflict of interest;
if the other directors are already aware of it; or
if it concerns the terms of his service contract which have been or are to be considered by the board or a committee (s.177(6)).
Duty of interest in existing transaction or arrangement
Where a director is in any way, directly or indirectly, interested in a transaction or arrangement that has been entered into by the company, he must declare the nature and extent of the interest to the other directors (s.182).
Broadly similar principles apply as applied to s.177.
In this instance, failure to comply is a criminal offence.
The impact of the Transparency Directive
Overview of the Directive
Part of the EU Financial Services Action Pl
an
Deals with the production of periodic financial information, its dissemination and its storage
Companies with securities traded on a regulated market
Accounting periods beginning on or after 20 January 2007
Requires the existence of a liability regime for issuers in relation to periodic financial information
Overview of the Disclosure and Transparency Rules
The structure of the DTRs
DTR1 and 1A are introductory
DTR2: disclosure and control of inside information by issuers
DTR3: transactions by persons discharging management responsibility and their connected persons
DTR4: periodic financial reporting
DTR5: vote holder and issuer notification rules
DTR6: continuing obligations and access to information
DTR4: periodic financial reporting
DTR4.1: annual financial report
DTR4.2: half-yearly financial report
DTR4.3: interim management statements (IMSs)
DTR4.4: exemptions
Note that some of the Listing Rules remain
DTR4.1: annual financial report
Transferable securities/UK Home Member State
Four months after the year end
Contents
Audited financial statements
Management report
Responsibility statements
Consolidated accounts under IFRS, parent accounts as required by law
Auditing must be according to the Directives
Content of management report
Fair review
Principal risks and uncertainties
It is required to be forward looking
Responsibility statements
Made by “persons responsible within the issuer”
The board of directors for UK purposes
State name and function of person making statement
Statements are:
Accounts true and fair
Fair review in management report
DTR4.2: half-yearly financial report
Shares or debt securities/UK home Member State
Two months after the period end for first six months
Contents
Condensed financial statements
Interim management report
Responsibility statements
Consolidated accounts under IAS 34
Consistency of lines reported, accounting policies, etc
No requirement for audit, but any audit/review must be disclosed (or statement that there has been no review)
Content of interim management report
Important events in first 6 months
Principal risks and uncertainties for last 6 months
Responsibility statements
Made by “persons responsible within the issuer”
The board of directors for UK purposes
State name and function of person making statement
Statements are:
Accounts true and fair (NB sufficient to say comply with IAS 34)
Fair review in management report
DTR4.3: interim management statement
Shares/UK Home Member State
In the first and second 6 month periods, made between
10 weeks after beginning of period, and
6 weeks before the end of period
Contents
Cover period from start of 6 months to date of publication
Explanation of material events and transactions
General description of financial position/performance of issuer
Exempt if company is a quarterly reporter already
The new liability regime
S 90A FSMA: Compensation for statements in certain publications: scope
Applies to
Any reports issued under Articles 4, 5 and 6, and
Voluntary prelims
Articles 4, 5 and 6 refer to the annual financial report, half-yearly financial report and IMS respectively
Securities must be
Traded on a regulated market in the UK, and
Traded on a regulated market outside the UK and UK is home MS
S 90A FSMA: Compensation for statements in certain publications: liability (also see Section 463 CA 2006)
Issuer liable to pay compensation to a person who has
Bought the securities, and
Suffered loss as a result of the untrue or misleading statement or omission of any matter required to be included in the publication
Issuer is liable if a person discharging managerial responsibilities
Knew the statement was untrue/misleading or reckless, or
Knew the omission to be dishonest concealment of a material fact
Loss is not suffered unless the investor relied on the information and it was reasonable for him to do so
S 90A FSMA: Compensation for statements in certain publications: limit on liability
There is no further liability
For issuer to any other loss suffered as a result of reliance
No person other than the issuer is liable other than to the issuer
Limitation does not affect
Powers of court/Authority to require restitution
Liability for a civil penalty
Liability for a criminal offence
“Persons discharging management responsibilities” is defined and will usually be directors
How to be compliant
Governance and procedures
Responsibility statement
Can be signed by one board member on behalf of board
Named person’s liability no greater than that of other board members
Cautionary wording over forward looking statements
Time line of new reporting deadlines, particularly in transition
Holistic approach, particularly to narrative reporting
Corporate governance issues
Systems and controls, clear reporting lines up to the board
Finance function up to strength
Right expertise on the board and audit committee
Time and attention of board members
The Davies review
Possible changes to the liability regime
Extend to cover “ad hoc” disclosures
Extend to cover AIM and PLUS markets (i.e. non-regulated)
Apply to all RIS announcements
Extend to encompass liability for dishonest delay
Extend to both buyers and sellers of shares, but exclude holders
Summary
Will anything change under the new liability regime?
Shorter timetable for reporting, more reporting
Clearer liability regime, but investors now have rights to take action
High hurdle for investors to claim compensation
Impact of derivative actions?
Possible future changes to the regime?
Consultation Paper - Proposals for the application of the Companies Act 2006 to LLPs
(Wednesday, 14 November 2007) Written by Lexis Nexis
In February 2007 the Government consulted on the implementation of the
Companies Act 2006 (2006 Act). In the consultation document the
Government asked for views on the broad approach to applying the 2006
Act to Limited Liability Partnerships (LLPs). This consultation seeks
views on the Governments proposals for the application of the 2006 Act
to LLPs.
In February 2007 the Government consulted on the implementation of the Companies Act 2006 (2006 Act). In the consultation document the Government asked for views on the broad approach to applying the 2006 Act to Limited Liability Partnerships (LLPs). This consultation seeks views on the Governments proposals for the application of the 2006 Act to LLPs.
In applying the 2006 Act we want to ensure that LLPs remain an attractive corporate vehicle for businesses; that they maintain an identity distinct from companies; and that the LLP Regulations are up to date, coherent and strike the right balance between the interests of those who want to become LLPs and those who will do business with them.
In particular, we are consulting on:
• The possibility of simplifying the LLP Regulations, to make them easier to access and more coherent.
• The application of the provisions of the 2006 Act where there are corresponding provisions in the Companies Act 1985 applied to LLPs and where the Government proposes to apply these again (with modification for some) to LLPs.
• New provisions of the 2006 Act which the Government proposes to apply to LLPs following the existing approach of applying provisions the 1985 Act which concern LLPs relations with third parties.
• Provisions of the 2006 Act which are new, but which the Government does not propose to apply to LLPs as they relate to the internal management of companies.
We are proposing to apply the provisions on accounts and auditors, cross-border mergers directive, and (subject to consultation responses) e-communications from October 2008. We propose to publish draft regulations on these provisions as soon as practicable after the close of the consultation. For the main implementation of the 2006 Act for LLPs in October 2009 we aim to publish draft regulations for consultation in the middle part of 2008. The consultation is available through our reports and publications page and also through the related documents which are on the left hand side of this page.
The consultation starts: 14 November 2007
Responses to the consultation paper should be posted here by 28th January 2008. An edited version of all comments posted on this site will then be submitted to BERR as the response from the members of the Company Law Forum
To read the full paper please go the web address below
http://www.dti.gov.uk/bbf/llp/page39897.html
Why a statutory statement of directors’ duties?
“There are two ways of looking at the statutory statement of directors’ duties: on the one hand it simply codifies the existing common law obligations of company directors; on the other […] it marks a radical departure in articulating the connection between what is good for a company and what is good for society at large.” Rt. Hon Margaret Hodge MP MBE
“[…] the main purpose in codifying the general duties of directors is to make what is expected of directors clearer and to make the law more accessible to them and to others.” Lord Goldsmith
Directors' duties: overview
Duties owed to the company: only the company can enforce them, or members acting on behalf of the company
Duties owed by every person who is a director of a company
Statutory statement provides a code of conduct on how directors are expected to behave, not a list of things to do
Where duties overlap, cannot rely on one duty to act in breach of another: must comply with every duty that applies in any given case
Not an exhaustive list of responsibilities of a director: other laws and regulations must also be followed
Consequences of breach are same as those that would apply had the corresponding common law duty applied
Directors' duties: initial considerations
No hierarchy of duties
No distinction between FTSE 100, substantial private groups orowner/managed
No distinction between executive and non-executive directors
Company by company
Parent/subsidiary relationship
Directors' duties: the seven general duties
to act within powers
to promote the success of the company
to exercise independent judgement
to exercise reasonable care, skill and diligence
to avoid conflicts of interest
not to accept benefits from third parties
to declare interest in proposed transaction or arrangement Directors’ duties: promoting the success of the company
Duty to promote the success of the company (s.172)
“act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole”
and in doing so have regard (amongst other matters) to:
the likely consequences of any decision i n the long term
the interests of the company’s employees
the need to foster the company’s business relationships with suppliers , customers and others
the impact of the company’s operations on the community and the environment
the desirability of the company maintaining a reputation for high standards of business conduct
the need to act fairly as between members of the company
Directors’ duties: key practical implications
Board to carry out risk assessment
interpretation of the duties
review of articles
D&O review
The Business Review and other external communications
consistency between external messages and internal decision making
Managing conflicts of interests in group situations
duties owed to which companies?
who needs to know of the changes?
what steps need to be taken?
policies/processes/training/delegated powers
Evidencing board decisions
changes in terms of reference
board papers
minute taking
Directors’ duties: GC100 - best practice guidelines
“The GC100 is of the view that directors are not currently, and should not be, as a result of this legislative codification, forced to evidence their thought processes whether that is with regard to the stated factors or any other matter influencing their thinking” (para 4)
No “one size fits all” solution
Awareness of duties under CA 2006
Board papers, rather than minutes, are the appropriate medium
“We should remind ourselves that being a company director is a wonderful thing for the person who is a company director. But it is a position of great responsibility which involves running the affairs of a company for the benefit of other people. It is a heavy responsibility we should not water down.” Lord Goldsmith
CA 2006, s 170(4) requires us to interpret the new law by reference to pre-existing common law and equitable principles. In the case of the duty to promote the success of the company (s 172) its origins can be found in the established principle that a director must act bona fide in the best interests of the company and utilise his powers for the purposes for which they were conferred1. In reality these are two duties and they are now split between two sections ie the duty to act in accordance with the company’s constitution and only exercise powers for intended purposes (s 171) and the duty to promote its success (s 172). We discuss abuse of powers in Ch 5 and need only say a few further words about “best interests” and “bona fide” here. The test is a largely subjective one. The Court does not attempt to gainsay the opinion of the directors on commercial matters if they have genuinely decided on a course of action. However, it is not “in the interests of the company” to use its conferred powers irregularly, whatever the intention may be. In Bamford v Bamford2 the directors issued shares to frustrate a takeover bid which was a misuse of their powers. The fact that they were honest and well-intended did not prevent this being a breach of the duty of good faith, since they were mistaken as to the interests of the company as a whole (shareholders are entitled to receive bids), but the transaction being voidable was nevertheless capable of being ratified by the company as the injured party, in the absence of any director’s personal gains.
What provisions are made for double compliance for conflicts of interest?
(Wednesday, 14 November 2007) Written by
Under the provisions of CA 2006, Part 10, Ch 4, (ss 188–226), the directors must normally obtain prior shareholder approval for the following types of transaction involving a director (or, in certain cases, a person connected to a director) – long-term service contracts; substantial property transactions; loans, quasi-loans and credit transactions; and payments for loss of office (see also CH 6 below).
Section 180 provides that:
(a) compliance with the general duties does not remove the need for member approval of such transactions (sub-s 3);
(b) subject to the exceptions set out in (c) below, the general rules apply even if the transaction also falls within Part 10, Ch 4 (because it is a long term service contract etc). So, for example, the directors should only approve a loan to a director if they consider it would promote the success of the company. This is so, even if the loan does not require the approval of members under Part 10, Ch 4 because it falls within a relevant exemption, such as the exception for expenditure on company business in section 204;
(c) if the transaction is a long-term service contract etc and approval of members is duly obtained, or an exception applies, then the director does not need to comply separately with the duty to avoid conflicts of interest (s 175) or the duty not to accept benefits from third parties (s 176).
All other applicable duties would still apply. For example, a director would not be acting in breach of duty to avoid conflicts of interests if he failed to obtain authorisation from the directors or members for a loan from the company in respect of legal defence costs.
Relation to the Company Directors Disqualification Act 1986
The CDDA 1986 has had an important impact on the development of the law relating to directors’ duties. Many of the leading cases on the duties in recent years have been in the context of disqualification proceedings under the CDDA. In determining whether a person is unfit to be concerned in the management of a company and therefore should be disqualified under Section 6, the court has regard to the matters set out in Part 1 of Schedule 1, one of which is: “any misfeasance or breach of any fiduciary or other duty by the director in relation to the company”. The disqualification cases provide a rich harvest of instances of wrongful conduct, ostensibly in the context of a failed enterprise, which are useful in helping a director decide what he should or should not do in respect to a company which is still a going concern. A discussion on disqualification, with a recitation of a good spread of the more recent authorities, has therefore been included at the end of this narrative (Ch 12). There remains the question of the interrelationship between the new statutory rules and the types of conduct which courts find relevant in considering whether a director should be disqualified from office. For instance, will the reference to “any misfeasance or breach of fiduciary or any other duty” require an examination on a CDDA application of the new general statutory duties, or can the courts look at other circumstances or the pre-existing law? Conversely, can the disqualification cases continue to be an indirect “source” of ascertaining corporate wrongdoing, ie of interpretative value for the purposes of CA 2006, s 170? Because of the open nature of these questions it remains pertinent to examine the case law both before and after the adoption of the new code.
Also, s 172(3) (discussed below) recognises that the duty to promote the success of the company is displaced when the company becomes insolvent. Section 214 of the Insolvency Act 1986 provides a mechanism under which the liquidator can require the directors to contribute personally towards the funds available to creditors in an insolvent winding-up, where they ought to have recognised that the company had no reasonable prospect of avoiding insolvent liquidation and then failed to take all steps to minimise the loss to creditors. it has been suggested that the duty to promote the success of the company may need to be modified by an obligation to have regard to the interests of creditors as the company nears insolvency. The Government intends to allow the law to develop in the area.
Are then all duties of directors fiduciary in character? No, and the test for ascertaining this is to consider the type of remedy that normally follows the breach. In the case of a fiduciary duty such as not to make a secret profit from the office of director, the company’s remedy is a full account of profits or losses and a restitution of value from the director or other constructive trustee. In the case of certain agency duties, for example to exercise skill, care and diligence, the consequence of breach is an action for damages for negligence, or for negligent breach of contract if the director is employed under a service contract and it is more convenient or beneficial for the company to sue in contract1. This is not a fiduciary claim, compensation is not awarded on a restitutionary basis, and the company has to satisfy normal common law thresholds of foreseeability, remoteness of damage etc. Confusingly, there are certain other obligations which derive from neither strand, but are nevertheless termed “equitable”, such as the “no conflict” rule, because they were originally enforced in courts of equity, and give rise to claims to account for profits. In the writer’s view this is an unnecessary refinement and such duties should simply be considered “fiduciary” as they operate on the conscience of the director by virtue of his quasi-trusteeship. Directors can also assume liabilities based not on any pre-existing status but on an ordinary assumption of responsibility for their words or actions, such as misrepresentation
The core duties that have developed over time as a result of factual situations presented for interpretation by the courts are few in number, but have escaped precise definition. High on any list would be a duty to act bona fide in the company’s best interests3 although there has always been difficulty in determining whether the company’s interests are reckoned to be represented by its members, creditors, or indeed employees. But different academic formulations would undoubtedly not produce identical outcomes, and a criticism of the existing law until 2006 has been that it is not found in any convenient, user-friendly place. Now it is, and there are seven elements to it which need to be committed to memory:
1. Duty to act within powers.
2. Duty to promote the success of the company.
3. Duty to exercise independent judgment.
4. Duty to exercise reasonable care, skill and diligence.
5. Duty to avoid conflicts of interest.
6. Duty not to accept benefit from third parties.
7. Duty to declare interest in proposed transaction or arrangement.
The formulation (actually only section headings) is contained in Part 10 of the Companies Act 2006 and is mostly in force from 1st October 2007 except for the conflict of interest rules (April 2008) (see timetable shown in APPENDIX 2). The detailed provisions which underpin these headings are contained ss 170 to 181 of the Act and are considered further in this and the next two following chapters. The question that is immediately to be raised, however, is whether the rules as presented are truly a distillation of current law or whether the Government has imposed a new agenda. There is now no reference, for example, to the “best interests” test, but instead an obligation “to promote the success” of the company as if it were a continuous marketing exercise. What has happened? For this we need to make a brief excursion into the ideas of stakeholders and “pluralism”.
What are the key elements of a fiduciary relationship?
The law would impede the development of modern business practice if it continued to insist that directors were trustees by any other name. Trustees are usually required to act unanimously, whereas a simple majority decision of a board of directors will suffice. Again, trustees must exercise a high degree of restraint and conservatism in their investment judgments, complying with what the Trustee Act 2000 allows, whereas directors will be expected to display entrepreneurial flair and accept commercial risks to satisfy shareholders that a sufficient return is being produced on capital. It is generally upon trust principles that directors are made accountable for their handling of the company’s property and, like trust property, assets wrongfully disposed of by them may be traced into the hands of third parties who have knowingly received it1. However, individual directors, unlike individual trustees, do not normally receive property directly into their hands, and their control over company assets arises from the delegation under the articles of association which the shareholders have willingly conferred upon them, not from any strict liabilities imposed by the trust instrument or beneficiaries under disability. In any event, the idea of “fiduciary obligation” as applied to directors has required redefinition.
In British and West Building Society v Mathew2 a fiduciary was characterised as a person who undertakes to act for another in circumstances that give rise to a relation of trust and confidence. This is altogether a more flexible approach than previously, because it fixes directors with the notion of accountable stewardship with respect to a company’s property without imposing the formal duties of a trustee. At the same time it allows a trust based remedy to be applied if the directors are found to have breached the particular fiduciary duties that apply to them by virtue of their own office eg loyalty and the duty to act bona fide in the interests of the company. This enables greater loss recovery from the directors concerned than if a common law damages claim is brought against them3. Reference to directors as “trustees” needs to be understood in this more limited sense4. Directors are constructive trustees of misapplied assets and must account strictly for losses which the company suffers.
In Re Duckwari Plc (No 2)5—
The company acquired a property asset in circumstances where one of its directors was in breach of the fiduciary obligations (expressed in statutory form as CA (1985, s 320 now CA 2006, s 190) to obtain shareholders’ consent for the transaction in which he was an interested party. The property subsequently fell in value while in the company’s ownership.
Held: the director was personally accountable for the loss, pound for pound, as a fiduciary was obliged to restore assets, or their equivalent value, as if trust funds had been misapplied.
The same principle applies if the asset increases in value.
By imposing a person-to-person fiduciary responsibility on a corporate officer it becomes possible to follow assets into the hands of others who are “fixed” with the breach of trust he is treated as having committed. The issue here is the degree of awareness of the breach that is required to make the third party a constructive trustee. Liability with the benefit of hindsight is a wonderful thing, but a workable distinction has to be drawn between persons who dishonestly receive assets knowing them to be derived from wrongdoing and those who deal with directors in good faith and are not put on enquiry by any suspicious circumstances7. More recently, courts have moved away from the “knowing receipt” test to assess simply whether it is unethical or unconscionable for the third party, in all the circumstances including the business context, to be allowed to retain, at the company’s expense, what has become vested in him: BCCI (Overseas) Ltd v Akindele
Directors are in control of substantial assets belonging to another, the company they manage. Although a majority of shareholders may dismiss them at will1 great damage could be done to the company’s interests, including misappropriation of its property, in the time it takes to bring about their removal. While some fetter on indiscretion is provided by there being a board exercising powers, and undertaking surveillance, collectively, many companies now have a sole director who is also the only shareholder, over whom no obvious control exists. Indeed, one of the hardest lessons for the small company proprietor to learn (usually from his professional advisers) is that the company’s assets are not his assets, and that he cannot extract them for his own benefit as he pleases2. Almost as hard to grasp, judging by the recent plethora of cases, is the notion that exploitation by a director (whether or not he is the proprietor) of a corporate opportunity for his own purposes is just as much a misapplication of property as if funds had been taken from the till.
Faced with this catalogue of mischief the law has needed to evolve rules which compel directors to act in a way which puts the company’s interests before theirs. Since corporate law is a Johnny-come-lately into our jurisprudence, principles have needed to be borrowed or adapted from other areas of law. The chief of these is the law of agency, as mercantile transactions in which an agent is empowered to create binding relations between his principal and a third party are of ancient origin and have at their root the agent’s obligations of obedience (or loyalty), care and skill, personal performance and good faith. But agency itself shares a further set of principles, based around the law of trusts. As was argued as early as 179516:
“The office of a common agent has already been described in this case, and it is needless to enter into refinements or niceties as to the nature of trusts or the specific name of trusts. There is no magic in the term: he is a trustee (in technical style) who is vested with property in trust for others: but every man has a trust to whom a business is committed by another, or the charge and care of any concern is confided or delegated.”
And so for company directors such obligations are termed “fiduciary”, because they derive from trusteeship; and in early law the duties of directors and trustees were considered the same.
However, a company director is not a trustee in a strict sense, and the suggestion that he might be is an historical quirk. In the nineteenth century most companies other than chartered or statutory corporations were not distinct legal entities as we now recognise them, but operated under deeds of settlement with property and powers actually vested in trustees. The managers or directors of the companies equated with the trustees, and were treated as custodians, and it was not until the adoption of the limited liability company with separate boards that the roles became distinct. A vestige of the old form is seen in the modern unit trust where the underlying property is vested in the trustees (who owe obligations as such to unit holders) but the funds are controlled by managers, who exercise much greater discretion but are still to be regarded as “fiduciaries”.
It is perhaps no co-incidence that the rules of company law have been worked out in the Courts of Chancery which administered rules of equity as opposed to common law, and enforced trusts, and there has been a natural tendency for judges of those courts to emphasise the equitable aspects of a company director’s position. This influence also accounts for the fact that the fiduciary obligations of directors, which entail strict personal accountability, are generally of a higher standard than those formulated at common law, such as care and skill.
What does the Act Say?
S 116-119 now make inspection or requesting a copy of a share register (by members or others) subject to a “proper purpose” test.
S 116, anyone requesting access to a share register needs to provide details of their name, address and organisation and the purpose for which they require the register, as well as contact details of anyone to whom the information will be disclosed.
S 117, companies required to provide a copy or allow inspection within 5 days of receipt of the request or else they must apply to the Court on the grounds that the request is not for a proper purpose.
No definition given of “proper purpose” although ICSA Guidelines do give some examples of proper and improper purposes.
This is effective from the date of submission of the company’s annual return following 30 September 2007.
P roper Purposes
Checking own personal details or that of a deceased shareholder
Contacting fellow shareholders about company related maters eg. exercise of rights, requisitioning meetings
Regulatory or statutory requests
Takeovers / bidder having access to register before bid announced
Register analysis for statistical research
Improper Purposes
Identity Fraud
Threaten harass or intimidate members
Credit or identity checks
Commercial mailings
The Practicalities
5 day turn around is very tight window for companies to comply
Need to take care not to infringe member’s data protection rights
Recommend that conditions are imposed when register provided for research purposes for example that information not passed on to third parties or shareholders contacted directly.
Who is going to admit they require the information for an improper purpose?
Which company will be the first to oppose a request in the Courts?
What Prudential is Doing
Wait and see when we start to receive requests.
Preparing response letter setting out conditions for granting access to the share register
Will exercise rights under S 116 to request details of all individuals to whom the information might be passed
Unlikely to go to Court unless there is a very clear “improper purpose”
Information Rights - What does the Act say?
New rights given to underlying beneficial shareholders under s145 and 146
Registered shareholder may nominate another to receive information rights (ie to receive a copy of all communications the Company sends to its members generally, including Annual Report and Accounts)
Person being nominated must first request the shareholder to make the nomination and provide an address. Otherwise company can supply documents by means of website.
S 148 gives company right to enquire on an annual basis if nominated person wishes to continue the receive information rights.
These sections came into effect on 1 October 2007 and nominees are being given until the end of the year to develop their lists of nominated persons, presumably in time for next year’s AGM season.
THE PRACTICAL IMPLICATIONS
How many copies will be required for “nominated persons” in future?
Companies need sufficient notice from nominee shareholders in order to print enough copies and organise distribution. How long is reasonable notice?
Will nominees send multiple nomination to companies or will they send one notification in a convenient spreadsheet covering all the underlying beneficiaries requiring copy documents?
Need a mechanism for maintaining “list” of “nominated persons” presumably via the registrars.
Need to consider timing and logistics for managing this list and removing those who no longer require shareholder information
What Prudential is Doing
S 150 (4) states that if a company’s articles specifies an entitlement date to receive documents or information, (eg a record date) then the company needs not send documents or information to persons whose nomination is received after that date. We shall take advantage of this section.
We are working with our registrars to specify the format in which we expect to receive nominations from our nominees. The registrars are working together to develop a consistent format across the industry.
We shall work with nominees to determine in advance of printing how many additional copies might be needed. Preliminary indications are that relatively few nominees and their underlying beneficiaries will take advantage of these sections, but it is still an “unknown”.
We will develop a process to ensure that these lists are actively managed and cleansed on a regular basis, so that we only send hard copies to those who really want them.
E-Communications - What does the Act say?
Companies may now send documentation and information to shareholders electronically. The default method of communication is via the company’s website with a positive opt-in for hard copies subject to certain shareholder consents.
Section 308 and 309 cover the publications of meeting notices in electronic form or via a website.
Sections 1143 to 1148 covers provisions relating to communication with shareholders.
Schedule 5 covers communications by a company.
Schedule 5, part 4 sets out the relevant conditions
CHOICES AND ACTIONS
Change articles or pass a resolution?
When to obtain shareholder consent?
Which documents and information should be included?
How easy should it be to elect for a hard copy?
How many copies of documents should you print in future years? Remember shareholders can always opt in at any time.
What will you send to shareholders in future years?
Can you use E-Communications to communicate other things to shareholders who sign up for electronic notifications?
How to capture the wishes of new shareholders and set up a system for recording deemed agreements
ICSA Guidance on Electronic Communications with Shareholders
E-COMMUNICATIONS - WHAT HAVE WE DONE AT PRUDENTIAL?
Held our AGM in May, when we changed our articles to enable us to use website communications as the default method of communicating with our shareholders.
Chose to use AGM mailing also to ask shareholders to consent to receiving notification of documents being available on website. Explanation included in Chairman’s AGM letter with the card requesting hard copies attached to the proxy card.
Out of 70,000 shareholders, 6,200 requested hard copy communications, by completing and returning the card within the 28 day period, whilst over 5,000 requested that we communicate via email in future.
Interim mailing in August. Much reduced hard copy run with only 400 requesting hard copies after mailing.
Sent shareholders letter of notification, including key financial highlights and dividend timetable.
2008 mailing will be in similar format in a letter to shareholders probably with no Summary Financial Statements.
E-COMMUNICATIONS - USEFUL TIPS
Change your articles and seek shareholder consent at the same time (saves two sets of explanations)
Choose the order on your request card carefully – provide email address, then default consent, then hard copy request (more likely to get favourable take up)
Emphasise shareholder choice rather than just cost savings (they can’t argue against that)
Make your first mailing under new regime a short document like an interim rather than full AGM pack (easier if you need reprints)
Consider including more than bare minimum in future mailings (avoids additional requests for hard copies). In our interim mailing, we sent shareholders an explanatory letter, which contained the key financial figures and the dividend timetable.
This is going to cause a lot of trouble in practice. The situation is that we've got sub-sections not coming into force until 2009 where the rest of the section is already commenced. Directors provisions are now very confusing as to what's in force and what isn't. Transitional provisions proving hard to deal with anyway. Generall everyone much more confused.
Opinion