UK: A Guide To The Companies Act 2006 – Part 2

As the intentions of the Act include modernising company law and saving businesses money the provisions relating to the use of electronic communications were among the first parts of the Act to come into force in January 2007.

Since 1 January 2007, the requirement for a company to clearly state its name on all its business paper has been extended to include documents in electronic as well as hard copy form. On their websites companies must show their place of registration, registered office and registered number. All business letters, order forms or invoices, whether in hard copy or electronic form, and all websites of companies in liquidation must contain a statement that the company is being wound up. Further requirements relating to trading disclosures, including lettering to be legible, where and how the company name is to be displayed, particulars required in business letters (including particulars of directors) and availability of company records, are contained in the (currently draft) Companies (Trading Disclosures) Regulations 2008 coming into force in 2008.

Also from 1 January 2007, companies are now able to file electronically all the basic company documents that they are required to file with Companies House and the Registrar must keep all documents submitted in electronic form. Any person wishing to inspect the register may make a request to Companies House electronically and the Registrar must offer electronic copies of the requested documents.

The Act extends the use of electronic and website communications to all provisions requiring documents or information to be sent or supplied to or by a company [s 1143 – 1148]. These provisions came into force on 20 January 2007. Detailed rules are set out which must be carefully followed depending on whether the documents and information are being sent or supplied:

• To a company [schedule 4]

  A document may be sent: (a) in hard copy by hand or post, using a prepaid envelope containing the document and sent to an address specified by the recipient company or (b) in electronic form if the recipient company has agreed generally (in respect of all documents) or specifically (in respect of certain documents) and not revoked the agreement, but only to an address supplied for the purpose.

• By a company [schedule 5]

  A document may be sent: (a) by hand or by post in a prepaid envelope containing the document to the address supplied, or a company’s registered office, the address in the register of members or directors or the last known address or (b) in electronic form if the recipient has agreed generally (in respect of all documents) or specifically (in respect of certain documents) and not revoked the agreement, but only to the address supplied for the purpose.

Electronic communications are not compulsory and even where a company has decided to use them, a member (and a beneficial investor with information rights) may still request that documents are sent to him in hard copy [s 1145]. Hard copies must be supplied free of charge within 21 days of the request.

Companies may also communicate via their website [schedule 5], but only if the recipient has agreed, generally or specifically, and not revoked his consent. Where the intended recipient is a member of the company his consent will be deemed if the members have resolved that the company may make information available via the website or if the articles provide for this. However it will still be necessary to ask each person individually if he agrees and for that person not to have replied within 28 days, provided that the request to use the website clearly states that failure to reply to the request will be deemed consent. A request for consent cannot be sent more than once in any 12 months.

The Disclosure and Transparency Rules (DTR), which are part of the FSA Handbook and apply to quoted companies, contain some additional rules for the use of electronic communications by quoted companies. A resolution must be passed in general meeting to use electronic communications and all persons entitled to exercise the rights of members must be contacted for their consent; under DTR 6 consent is deemed to have been given if there is no response within a "reasonable time". Quoted companies have to be able to identify all those persons with information rights.

The new provisions for giving notice of a general meeting came into force on 20 January 2007. A company may give notice of a meeting in hard copy, electronic form or via its website [s 308]. The notice must contain details of the date, time and place of the meeting, the general business and contain any other information required by the company’s articles [s 311]. Where notice is being given via the website the member must be separately notified by another means of the presence of the notice of the meeting on the website, and that notification must state that it concerns a notice of a meeting of the company and specify the date, time and place of the meeting. If it is a public company the notification must also indicate whether the meeting is an AGM. The notice of the meeting must be available on the website for the period beginning with the date of notification until the conclusion of the meeting [s 309].

Part 15 of the Act which deals with accounts, and Part 16 dealing with auditors, substantially come into force on 6 April 2008. There are only a few substantive changes to the provisions from Companies Act 1985 they replace; the main feature of these parts of the Act is the reordering and redrafting to make it easier for companies to find the rules relevant to them. Instead of the "one size fits all" style under the old legislation, with exceptions and modifications for small companies, in the Act where provisions do not apply to all companies, the requirements for small companies are set out before those relating to other companies.

Whilst the qualification thresholds for "small companies" are not changed in the Act [s 382] there is provision in some of the related secondary legislation (currently draft) Companies Act 2006 (Accounts and Reports) (Amendment) Regulations 2008 to implement changes from EU accounting and auditing directives including increases in the turnover threshold for small companies (to £6.5m) and balance sheet threshold (to £3.26m) from April 2008.

The requirement for all companies to produce a directors’ report is not new. For all companies other than "small companies" this report must contain a business review [s 417]; failure to do so is an offence committed by all persons who were a director at the end of the relevant filing period. The existing requirements as to the content of the business review are substantially restated by the Act, with two additional provisions that come into force on 1 October 2007 and apply to directors’ reports prepared after that date:

• The statutory purpose: the purpose of the business review in the Act is to provide information to the members of the company to help them assess how the directors have performed their duty under s 172 of the Act [duty to promote the success of the company].
• Quoted companies: additional content must be provided by quoted companies relating to the future development, performance and position of the company, information about environmental matters, employees, social and community issues and information about persons with whom the company has contractual arrangements that are essential to the company. The only exceptions to the disclosure of this information are where in the directors’ opinion it would be seriously prejudicial to the interests of the company or the person concerned or contrary to public interests.

A new liability for directors for the statements made in a directors’ report (including the business review), directors’ remuneration report or any summary financial report derived from them [s 463] came into force on 20 January 2007. This liability is only owed to the company and is limited to the loss suffered by the company as a result of any untrue or misleading statement in a report or an omission from a report of anything that should be included. A director will only be liable if the untrue or misleading statement was made deliberately or recklessly or if the omission amounts to a dishonest concealment of a material fact.

The divergence in the level of regulation for different types of companies is most clearly seen in the area of financial reporting.

All companies must continue to keep accounting records [s 386], prepare annual reports and accounts [s 394] and circulate copies to members and those persons with information rights or entitled to receive notice of general meetings [s 423]. The obligation to circulate copies of the reports and accounts has been modified so companies will only have to send these documents to those persons for whom they have a current address. Subject to compliance with the requirements for electronic communication, these documents may be sent by electronic means.

There are different rules for the distribution of accounts:

• Private companies: The requirement for private companies to lay their accounts in general meeting will no longer apply after 6 April 2008; private companies will only be required to send accounts to members no later than the earlier of the actual date of delivery to the Registrar of Companies or the statutory deadline for delivery [s 424].
• Public companies: Public companies must still present their accounts at the annual general meeting and circulate copies at least 21 days in advance [s 424].
• Quoted companies: There is an additional requirement for quoted companies to make their accounts and reports available on their website until the accounts and reports for the next financial year are available [s 430].

The periods in which companies must file their accounts at Companies House have been reduced by one month [s 442]. This means that for private companies the deadline is nine months from the end of the financial year and for public companies six months from the end of the financial year. These new deadlines will apply to financial years commencing on or after 6 April 2008.

Penalties for late filing are to be increased. The proposals for increase were put out for consultation in September 2007 (currently draft) Companies (Late Filing Penalties) Regulations 2007 and include: (1) an increase of all penalties to take account of inflation from 1992 to 2007 (this would mean a 50% increase on current rates), (2) a faster rate of increase in penalties for companies who file more than one month late (reduced from the present 3 months), the penalties to be imposed on public companies being substantially greater than for private companies and (3) a doubling of the penalty for any company that files late that also filed late the previous year. It is currently proposed that the first two changes would apply from 1 February 2009 to all accounts filed after that date with the last proposal only applying to accounts filed under the Act.

Part 16 of the Act is largely a restatement of the current law relating to auditors and will come fully into force on 6 April 2008.

The rules relating to the appointment of auditors of private companies [s 485 – 488] have been altered slightly with effect from 1 October 2007: the auditor’s term of office is one year from the end of a 28 day period following the circulation of the accounts and there will be a deemed reappointment unless the company determines otherwise, for example if the articles of association require a reappointment or there has been a resolution not to appoint that auditor. There are separate rules for the appointment of auditors for a public company.

The Act introduces "liability limitation agreements" [s 534] which permit an auditor to limit his liability to the company for negligence, default, breach of duty or breach of trust in respect of the accounts as an exception to the general prohibition against companies indemnifying their auditors for negligence and default. This is subject to the agreement complying with the provisions of ss 535 to 537, including being limited to one year’s duration, approved by members’ resolution and fair and reasonable. The company must disclose any liability limitation agreement in its annual accounts or directors’ report.

Part 28 of the Act [s 942 – 992] sets out a new framework for company takeovers that came into force on 6 April 2007. It brings all of the Takeover Panel’s activities within a single statute-based regime.

The purpose of the EC Thirteenth Company Law Directive on Takeovers [Directive 2004/ 25] was to harmonise the framework for takeovers within the EU and to introduce minimum standards to be applied in all member states.

The Act extends the implementation of the Takeovers Directive which became part of national law on 20 May 2006 through the operation of the Takeovers Directive (Interim Implementation) Regulations 2006; these regulations, which extensively amended the Takeover Code (the Code) with effect from 2006, have now been repealed. As the main changes to the Code had already been made, only minor further changes have been made to the Code as a result of the implementation of this part of the Act.

The Takeover Panel is now recognised as the competent authority for regulating takeovers within the UK [s 942]. It has enhanced powers (including powers to require information and documentation [s 947] and for compensation to be paid to shareholders in certain circumstances) and new ability to impose sanctions and enforce rulings or restrain possible breaches of the Code through the court.

The amendments to the Code make it clear that it is intended to ensure shareholders are treated fairly and to give shareholders of a target company the opportunity to decide on the merits of an offer.

An important change to note is that the provisions of the Act apply to takeovers for all UK companies, whether or not listed on a regulated market and includes transactions other than traditional takeovers, such as mergers by scheme of arrangement under the Act or which have as an objective the obtaining or consolidating of control of a company.

The Act removes the two separate procedures that previously applied to "squeeze outs" and "sell outs" depending on whether or not the target company is listed on a regulated market [s 974 – 991]. The Act also introduces new threshold tests and timetable for compulsory squeeze outs and sell outs. Some issues unclear in the Companies Act 1985 relating to compulsory sweep up are clarified in the Act.

For companies listed on regulated markets the Act includes requirements to include in the directors’ year end reports: references to the share structure of the company; voting rights attaching to shares; any restrictions on those rights; restrictions on share transfers and agreements relating to rights connected to shares or any other significant agreements; agreements for compensation to target company board members triggered by a takeover; rules governing the appointment or removal of board members and changes to the articles of association.

There is criminal liability for parties to takeovers (and their directors) if any takeover offer or response document fails to comply with the information requirements contained in Appendix 6 to the Code [s 953].

Included in the Act is the implementation of the EU Transparency Directive [Directive 2004/109/ EU] which all Member States were required to implement in their national laws by 20 January 2007.

The Transparency Directive deals with periodic financial reporting, major shareholder disclosures and the provision of information to investors by issuers of securities traded on UK regulated markets. Part 43 of the Act provides for the amendment, by inclusion of the "transparency obligations" in section 89, of the Financial Services and Markets Act 2000 (FSMA). The Financial Services Authority (FSA) is appointed the competent authority under the Act responsible for the major shareholding notification regime and to make and enforce the revised Disclosure and Transparency Rules.

The Disclosure Rules of the FSA have been revised to reflect the changes made by the implementation of the Transparency Directive by the Act and renamed the Disclosure and Transparency Rules (DTR). The DTR retain the scope of application to issuers, the reporting thresholds and the deadlines contained in the Act but have the important distinction that the notification obligations are triggered by "control over the exercise of the voting rights" rather than the concept of interests in shares used in the Act. The DTR came into force on 20 January 2007.

The major shareholder disclosure regime under the Companies Act 1985 has been repealed and replaced by the requirements set out in DTR 5. The aim is to improve market transparency.

All issuers with shares traded on regulated markets, including issuers and shareholders of UK public companies traded on prescribed markets such as AIM and PLUS, must comply with the notification requirements. Direct or indirect shareholders of UK issuers must inform the issuer and the FSA if:

• They have a notifiable interest (direct interests in shares with voting rights attached or indirect interests with access to voting rights and financial instruments that give the holder formal rights to acquire shares with voting rights attached) in holdings of 3% or above of the issuer’s total voting rights and capital in issue.
• Their holdings change to reach, exceed or fall below every 1% above 3% of the issuer’s total voting rights and capital.

The notification of changes in the total number of voting rights and capital in respect of each class of shares must be made by the issuer electronically at the end of each calendar month there is a change [DTR 5.6.1R]. An issuer must notify the FSA by the end of the next trading day of each notification it receives from shareholders [DTR 5.8.12R].

An issuer of shares must make public the percentage of voting rights in respect of its own shares that it acquires or disposes of, where the acquisition or disposal reaches, exceeds or falls below 5% or 10% of the voting rights [DTR 5.5.1R] within four days of the transaction.

The Transparency Directive aims to improve the quality, quantity and timeliness of periodic financial information produced by the issuers of securities on regulated markets and used by their investors. It sets out the extended content and stricter timing of the financial information to be supplied.

The DTR require that issuers provide:

• The annual report (containing audited financial statements prepared to international accounting standards, a management report and statement of assurance that the accounts give a true and fair view of the financial position of the issuer) within four months of financial year end [DTR 4.1.4].
• Half yearly reports (being a condensed set of financial reports prepared to international accounting standards) within two months [DTR 4.2.2(2)].
• Interim management statements (including performance reports, trading statements and explanations of material events and transactions) between ten weeks after the beginning and six weeks before the end of the relevant six-month period [DTR 4.3.2 and 4.3.3].

Preliminary statements of annual results have become optional.

For issuers with accounting years commencing before 20 January 2007 the new regime will apply to accounting years commencing in 2008; for issuers with accounting years commencing after 20 January 2007, the new reporting cycle commenced on the start of that accounting year.

An issuer must have the consent of its shareholders or debt security holders in general meeting to be able to communicate with them by electronic means [DTR 6.1.8(1)] and obtain their consent in writing to be communicated with electronically [DTR 6.1.8(4)]. No further action is required of companies that were using their website to communicate with shareholders under the provisions of the Companies Act 1985. There are some minor discrepancies between the DTR and the Act relating to electronic communications, but the guidance from the Listing Authority is that where a company complies with the Act there will be no further obligations under the DTR. Where the Act provides that an issuer can presume consent to electronic communications from a shareholder who does not reply within 28 days, this period is taken as being a "reasonable time" for deemed consent under the DTR.

The DTR also requires issuers to put in place arrangements to identify those indirect shareholders and persons controlling voting rights in the company that the issuer must provide with information about the company to be supplied under the transparency obligations [DTR 6.1.8(3)].

The constitution of a company is a contract, the terms of which are binding upon the members and the company and govern its internal affairs. There is a new definition of a company’s constitution in the Act: it is the articles of association and any resolutions or agreements affecting the articles [s 17].

From 1 October 2009 the memorandum of association, which previously set out the objects of a company, will only be a document of record evidencing the intention of the members to form a company and to hold a minimum of one share [s 8]. All other internal rules relating to the company will be contained in the articles of association.

For all companies incorporated before 1 October 2009 and, from that date, all constitutional information and rules currently contained in the memorandum will be deemed to form part of the articles of association [s 28]. Any provision for entrenchment in the old memorandum will become a provision for entrenchment in the articles, subject to the new provisions in the Act for entrenchment [s 22], which will permit companies to provide that certain articles may be amended or repealed if conditions more restrictive than for a special resolution are complied with. Companies formed under the Act will not be able to provide that an entrenched article can never be altered, as is currently the case. A new requirement is for companies to notify the Registrar of Companies of any restriction on amendments to the articles [s 23].

The existing requirement for companies to have objects that are stated in the memorandum is to be replaced from 1 October 2009. All companies incorporated under the Act will have unlimited objects unless the objects are specifically restricted in the articles [s 31]. Existing companies’ objects will form part of their articles and will operate as restrictions on what the company can do; an object to carry on a business as a general commercial company does not provide the same scope as the new unrestricted objects. This change will mean that the duty on directors to act in accordance with the company’s constitution [s 171] will have little effect outside the internal regulations of the company.

The Act provides that from 1 October 2009 the articles of association will be the main constitutional document governing all aspects of the company’s internal rules and the respective powers of members and directors.

All companies must have articles [s 18] and have the freedom to make such rules about their internal affairs as they see fit, subject to them not being contrary to any provisions of the Act. The Act restates the principle that any terms in the articles inconsistent with the Act will have no effect. If a company formed under the Act does not register its own articles then it will be prescribed Model Articles [s 20]. The Act replaces Table A of the Companies Act 1985 with three versions of the Model Articles: for private companies limited by shares, for private companies limited by guarantee and for public companies. Revised drafts of all the Model Articles have been published for consultation. A company may modify or exclude the Model Articles by its own registered articles. Existing companies may choose to adopt all or part of the relevant Model Articles, but equally may retain their current articles. It remains the case that companies will be able to amend their articles by special resolution [s 21] and copies of the amended resolutions must be sent to the Registrar of Companies within 15 days [s 26].

With effect from 1 October 2007 an amended version of Table A will apply to companies incorporated after that date under the Companies Act 1985. The amendments that have been made are to reflect the new provisions under the Act relating to meetings and resolutions that came into force on that date and the earlier implemented provisions relating to electronic communications. The changes to Table A will not apply to existing companies with those articles unless the company chooses to adopt them. There may be further amendments in April 2008 to reflect those parts of the Act that are coming into force on that date.

There have been some changes to the procedure and documentation required to form a company; one of the aims of the Act is to make it easier to form a company.

New companies will not be incorporated under the terms of the Act [Part 2] until after 1 October 2009. The new documents to be filed are: statement of capital and initial shareholdings [s 10] or statement of guarantee [s 11], statement of proposed officers [s 12] and statement of compliance, which will replace the current statutory declaration by an officer of the company [s 13]. It will be possible to file the documents electronically. Until that date the old rules and forms will apply.

After 6 April 2008 a private company will no longer be required to appoint a company secretary [s 270], but it may do so if it wishes. It will remain mandatory for public companies to appoint a person with the prescribed qualifications as company secretary [s 271]. The remainder of Part 12 of the Act is a restatement of the current rules relating to secretaries, with the addition that the provisions of the (currently draft) Companies (Particulars of Usual Residential Address) Regulations 2008 will also apply to company secretaries who wish to apply to have their residential address made unavailable for public inspection.

The Act substantially restates the rules under the Companies Act 1985 relating to the execution of documents [s 44] and deeds [s 46] by a company. However to reflect the fact that a private company may only have a single director and no company secretary, there is an amendment to the effect that a document will be validly executed by a company if it is executed by two "authorised" signatories (defined in the Act as every director and any company secretary) or a director in the presence of a witness who attests the signature [s 44(2)]. The Act also clarifies the execution of documents by an attorney of the company: the attorney must be appointed by a deed and a company may appoint attorneys to execute deeds on behalf of the company in the UK or abroad which will have the effect of deeds executed by the company itself [s 47]. These provisions of the Act come into force on 1 October 2009.

The changes contained in the Act relating to how a company makes its decisions reflect the aim of modernising company law, improving shareholder communications and involvement in the company and reducing the administrative burden for smaller businesses. Most of the provisions relating to meetings and resolutions [Part 13] come into force on 1 October 2007.

It is no longer necessary for private companies to hold annual general meetings. Private companies that elect not to hold AGMs will need to review their articles of association to see what business of the company the articles require to be conducted at an AGM and make the necessary amendments. Public companies must continue to hold annual general meetings, and within a stricter timeframe of six months from the financial year-end [s 336].

The period of notice required for the AGM of a public company remains 21 days [s 307]. For all general meetings of private and public companies the period of notice is reduced to 14 days; the articles may require a longer notice period. It is no longer necessary to give 21 days notice of any general meeting where a special resolution is proposed. The majority required to agree to short notice is reduced to 90% in the case of private companies only, unless the articles require a higher majority, but this cannot exceed 95% [s 207]. There are no changes to the rules for short notice for public companies: they must still have 95% agreement and cannot agree to short notice for an AGM.

One of the notable changes in the Act for private companies is the move away from the traditional decision making process by the members in general meeting. The Act provides that, with two exceptions, all the decisions of a private company can be made by written resolution, removing almost entirely the need for private companies to hold general meetings. The only resolutions that cannot be passed by written resolution are: to remove a director before the expiry of his term of office [s 168] or to remove an auditor before the expiry of his term of office [s 510], these resolutions require a general meeting with special notice of 28 days to be given.

A detailed new procedure is set out in the Act for the use of written resolutions [s 288 – 300]. One key change is the removal of the need for written resolutions to be passed unanimously. Ordinary resolutions still require a 50% majority [s 282] and special resolutions still require a 75% majority [s 283], but all resolutions of a private company may be passed in general meeting or by written resolution [s 281]. A written resolution will include a resolution circulated in electronic form and companies cannot exclude the use of written resolutions in their articles [s 300].

Any written resolution may be proposed by the directors or members [s 288] and must be sent to all eligible members in hard copy or electronic form or by website [s 291 or 293]. Where the resolution is to be passed as a special

resolution, this must be stated in the text and then can only be passed as a special resolution [s 283]. The members may require that a 1000 word statement on the subject of the resolution accompany the resolution [s 292] and there must be included a statement of the procedure for agreeing and a date by which the resolution must be passed. A resolution will lapse if not passed by that date; if no date is specified this period is 28 days from the circulation date [s 297]. Agreement may be sent in hard copy or electronic form using the form of authentication specified by the company. Once sent the agreement cannot be revoked and the resolution is passed when the required majority of eligible members have signified their agreement [s 296].

The Act abolished extraordinary resolutions. In the consequential amendments to other legislation following this change on 1 October 2007, references to "extraordinary resolutions" are substituted by "special resolutions". Companies whose articles contain requirements for extraordinary resolutions will need to consider similar amendments.

The Act imposes some additional requirements on quoted companies in relation to general meetings [s 341 – 354] from 1 October 2007. Quoted companies must display on their websites the results of polls (including the date of the meeting, the text of the resolution and the votes cast for and against) at all general meetings, including AGMs and to obtain an independent report on any poll if required by a sufficient number of members.

The Act introduces new requirements for companies to keep all records of written resolutions, minutes of general meetings and decisions of sole members [s 355] and all minutes of meetings of directors [s 248] for a minimum of 10 years.

Since 6 April 2007, companies are able to use electronic storage for all records provided that there can be paper print outs of them [s 1134 – 1135] and the company takes proper precautions against falsification [s 1138].

1. Statutory duties for directors
2. Relaxation of rules relating to transactions involving directors
3. Enhanced rights for shareholders to bring actions against directors for breach of duties
4. Full use of electronic communications between companies and members
5. New rights for indirect investors to receive information about the company
6. Extended rights for proxies
7. Table A to be replace by Model Articles
8. Limitation of auditor liability
9. Confidentiality for residential addresses of directors and secretaries and new procedure for access to register of members

1. No longer mandatory to hold AGM or appoint a company secretary
2. No longer required to lay reports and accounts before members, but only nine months to file accounts at Companies House
3. New written resolution procedure, written resolutions do not require unanimity to be binding
4. Majority required to agree short notice to general meeting reduced to 90%
5. Abolition of prohibition against giving financial assistance in connection with the acquisition of shares

1. AGM must be held within six months of financial year end, quoted companies must publish results of all polls at general meetings on website and provide an independent report on polls where requested
2. Only six months to file accounts at Companies House
3. Quoted companies to publish full accounts and reports on website
4. Expanded content of business review
5. New shareholding notification and financial reporting obligations for issuers of traded securities
6. Full implementation of the Takeovers Directive

The Act is being implemented in stages giving us time to accommodate the many changes; some are substantial, whilst others affect smaller details. With the lengthy transitional stage that this phased implementation brings, care will be needed to navigate the areas where the Act and the Companies Act 1985 overlap. In addition, it should be noted that although the implementation timetable lists the parts of the Act coming into force on certain dates, in nearly every case some provisions of a part come into force separately from the bulk of the part.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.