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.
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
– £5.6m to £6.5m for small companies
– £22.8m to £25.9m 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 £100 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
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Opinion