Big bill for business

The Companies Bill is currently working its way through the parliamentary process and is expected to come into force in October 2007. With over 900 sections it will be the largest bill ever passed.

Why do we need all this new law? Our existing company law was drafted very much with the needs of large corporates in mind where ownership and day-to-day control of the company are split. In fact over 90% of companies operating in the UK are small companies where directors and shareholders are one and the same. In addition, the current law takes no account of modern working practices and has, over time, created obstacles to running an efficient business in the 21st century.

The new bill therefore attempts to provide a simple and cost-efficient framework for modern British business. The big question is, does it achieve it?

The key proposals include:

•     a codified statement of directors’ duties, including the duty to promote the success of the company;
•     the ability for auditors to agree with companies to limit their liability in respect of their audit;
•     simpler rules for running private companies;
•     new rights for indirect investors; and
•     encouraging electronic communications.

Private companies: a simpler regime

The bill provides that one person will be able to form a company and that its constitution will be contained entirely in the company’s articles of association. The ultra vires doctrine will be abolished and a company will be able to do anything not prohibited in its articles. The memorandum of association will be considerably shorter than is currently the case, setting out only the desire of the member to form a company, and a new Table A, much shorter and more easily understood, replaces the existing Table A as the default set of articles applying to every private company. Having all the key constitutional rules affecting a company contained within one document should simplify matters for shareholders.

Once the bill is passed, private companies will find it much easier to conduct their business by written resolution than currently is the case. The proposals reflect how a number of private companies operate in practice, and are intended to make it easier and cheaper to administer companies by avoiding the need for meetings. In future, a 75% majority of all the eligible votes (not just those cast) would be required to pass a special resolution, and a simple majority of eligible votes will be required for a written ordinary resolution. Unanimity will no longer be required and a resolution will no longer need to be sent to the auditor. In addition, the resolution can be circulated to members electronically, for example by email or by publication on a website. This should allow most small companies to make decisions quickly and effectively without the need to have general meetings, except where the business to be transacted concerns the removal of a director or an auditor, when a meeting will still be required. In addition, private companies will no longer have to hold an annual general meeting. Consequently, private companies will no longer have to lay accounts before an AGM although shareholders will still be entitled to receive these.

Private companies will no longer be required to have an authorised share capital, and the requirement for shareholders to approve allotments of shares has been removed except in the case where there will be more than one class of share capital in issue after an allotment. It will also be simpler for companies to reduce their share capital should they choose to do so. Rather than the current court process, reduction will be possible by passing a special resolution based on a solvency statement by directors. The directors would require to confirm that the company is currently solvent and would be able to pay its debts when due for one year. Making a declaration without reasonable grounds will become a criminal offence.

Restrictions on financial assistance for private companies will be abolished at last, which should allow substantial savings in transaction costs. Finally, private companies will no longer be required to have a company secretary although they may choose to do so.

The directors’ code

The bill provides a codified statement of directors’ duties to replace those duties contained in the common law which have been built up over the years. These include a new duty to act in a way which directors consider in good faith would be most likely to “promote the success of the company for the benefit of its members as a whole”. In doing so, directors have to balance a number of interests. The bill requires them to consider the long term consequences of their decisions, looking at employee interests, relationships with the company’s trading partners, the effect of the company’s operations on the community and the environment, the desirability of maintaining the company’s reputation for high standards of business conduct and the need to act fairly between members.

It is not clear what “success” actually means and how it will be judged, and there is no indication as to how directors are expected to balance the different factors they are required to consider. There is concern amongst the business community that this will trigger litigation in this area as people test out the limits of these new duties, and that it may discourage people from becoming directors. In addition, administration will increase as directors require to document their consideration of all relevant factors.

The bill also sets out further general duties, all broadly based on existing case law, which require directors to act within their powers, to exercise independent judgment, to exercise reasonable skill and care, to avoid conflicts of interests, not to accept benefits from third parties and to declare their interest in proposed transactions. The duties are cumulative and the directors must comply with each one that applies in any particular case. Case law will remain important in interpreting and applying the new duties, and has not therefore become completely irrelevant. The government’s intention here is to make the law widely known by both directors and shareholders; however the benefits of codification have been reduced somewhat by the need to look at the common law when interpreting these duties.

The provisions regulating transactions between directors and the company are being reformed. In particular, the bill permits companies, with shareholder consent, to make loans, give guarantees or provide securities in connection with loans to directors, reversing the current prohibition on such transactions. Any such loan must however still be compliant with the overall directors’ duties and provisions.

Companies will continue to be allowed to have corporate directors, but at least one director will require to be a natural person. In addition the restriction on directors over 70 years old remaining as directors of public companies without specific shareholder approval is removed, and 16 has been set as the minimum age for directors.

Engaging shareholders

The government feels that shareholders are not sufficiently actively engaged in corporate life. The bill attempts to address this by allowing better communication with shareholders and increasing their ability to participate.

The bill will make it easier for shareholders who hold their shareholding through nominees to exercise their rights. Shares in large companies are increasingly held through nominee accounts, with the result that the beneficial holder is effectively disenfranchised. The company’s articles of association will now be permitted to allow registered members to nominate another person as entitled to enjoy the rights of the registered member. For example, they could be given the right to receive all documentation, to vote at meetings and to appoint proxies. The only right which must continue to be exercised by the registered holder is the right to transfer the share.

The bill also improves the position of proxies, allowing them to speak and vote at meetings on a show of hands and to demand a poll. In addition, registered shareholders will be able to appoint more than one proxy, provided each proxy is appointed to exercise the rights to a different share.

Auditors and accounts

There are a number of reforms in this area, most notably allowing members to limit the liability of the company’s auditors. Auditors will be able to agree contractually with companies to limit their liability in relation to an audit. Such agreements will require to have a limit which is fair and reasonable in all the circumstances of the case. If the cap included in the agreement is not determined to be fair and reasonable, the court will substitute a figure it feels is appropriate. Liability limitation agreements have to be approved by way of ordinary resolution and can be for a maximum period of one year.

Audit reports will in future require to be signed by a named individual, the senior statutory auditor, and there will be a new criminal offence for an auditor knowingly or recklessly to include in an audit report anything that is materially misleading, false or deceptive. Personal liability will attach to the responsible auditor.

The time limit for filing annual accounts at Companies House will be reduced to nine months for private companies and six months for public companies.

Impact on practice

The bill has been largely welcomed by the business community given its aim of simplifying operations for the vast majority of small businesses. The principles behind company law remain untouched. However, the bill will have considerable impact on the day-to-day practice of company law in the UK, and practitioners should now be planning how to address these.

    Catherine Feechan is a partner at Biggart Baillie who specialises in corporate law