UK: An Overview Of The Companies Bill

The Companies Bill is finally nearing the end of its lengthy gestation period. It was sent to the Commons on 24 May, and is predicted to receive Royal Assent after the summer recess and to come into force in one block in October 2007. At the end of the Standing Committee proceedings, its name was changed from the Company Law Reform Bill to the Companies Bill. The government has confirmed that it now intends to codify as much of the law as possible in one place and so it is consulting on further clauses to be added to the Bill to restate those parts of the Companies Act 1985 that were not originally incorporated.

The government’s stated objectives for the Bill are to:

• enhance shareholder engagement and a long-term investment culture;
• ensure better regulation in a "think small first" approach;
• make it easier to set up and run a company; and
• provide flexibility for the future.

Some changes have proved more controversial than others, with the codification of directors’ duties attracting the most attention and criticism. However, when the Bill comes into force it will affect every aspect of running a company, from administrative matters and decision-making to specific transactions.

One of the Bill’s stated objectives is to make it easier to set up a company. A new formation procedure is set out, which involves providing Companies House with much the same information as is required now. However, companies will be able to be formed with just one subscriber and (in the case of private companies) one director who is an individual (rather than a corporate director; public companies will still have to have two directors, including at least one individual).

In the White Paper preceding the Bill, the government had been in favour of replacing the separate memorandum and articles with a single constitutional document. This proposal has not found its way into the Bill, although the significance of the memorandum is greatly reduced: it will simply be a statement of intent by the subscriber that he intends to form a company and subscribe for a certain number of shares. Therefore, the objects clause will become a thing of the past; indeed, companies will not be required to state any objects at all. They may choose to state their objects and powers in their articles (and the Bill contains provisions for entrenching provisions into the articles), and any provisions in existing companies’ memoranda except for the basic information required in the new form will automatically be transferred into their articles. Although this change frees companies from the restrictions of their objects, it will not make much difference in practice if existing companies do not remove the restrictions from their articles, and lenders continue to insist on certain objects (e.g. the power to borrow) being included in the articles before they will lend a company money.

The articles are to be substantially revised by the Bill. Three separate sets of "model articles" for private companies limited by shares, private companies limited by guarantee and public companies will be provided in a statutory instrument, replacing Table A. The DTI is currently consulting on the proposed articles for public companies, and will consult on the others in due course. The biggest change will be for private companies, with the model articles reflecting many of the common changes currently made to Table A, and concentrating on directors’ decision-making in line with the Bill’s shift of focus away from shareholder meetings (see below). As with the Bill, the aim is to make it easier for directors and shareholders to understand the procedures and obligations involved in running a company, hence the plain English style and practical emphasis. Alterations to the articles will still be possible, and companies may choose not to apply the model at all. If existing companies want to adopt the new model articles, they must do so expressly, since the form of Table A or model articles in force at the time of incorporation applies unless a company states otherwise.

Various measures are introduced by the Bill to streamline the procedures for dealing with a company’s shares, principally:

• the removal of the need for a company to specify its authorised share capital, so that there is no longer a ceiling on the number of shares a company may issue. However, public companies will still be required to have a minimum allotted share capital of £50,000;
• the directors will not need to obtain the shareholders’ approval of certain decisions (whether in the articles or by resolution), such as making allotments (as long as the company is a private one with only one class of shares), declaring final dividends (this is a change in the new model articles for private companies only), issuing redeemable shares, purchasing their own shares and consolidating and subdividing shares;
• there is a new procedure in the Bill which allows companies to redenominate their share capital by ordinary resolution; and
• transactions involving shares will be easier. For example, private companies will be able to reduce their share capital without applying to court, and the prohibition on giving financial assistance will no longer apply to private companies.

Many of these changes reduce bureaucracy at the expense of shareholder control, although shareholders can include provisions in their companies’ articles to restrict the board’s exercise of these broad powers where necessary. On the positive side, where shareholder meetings do occur, they will not be preoccupied with "rubber-stamping" the board’s decisions, but will be able to focus on significant decisions or issues the shareholders wish to raise. There are other changes in the shareholders’ favour, such as the requirement for directors to give a transferee an explanation as to why they have refused to register his transfer.

By cutting down on much of the bureaucracy inherent in running a company, the Bill reduces the requirement for shareholder involvement in a number of decisions. In the case of many shareholders, who are simply investors, these changes will not worry them. However, they will be of concern to those shareholders who take more of an interest in management, who will want to amend their companies’ articles to ensure that they are involved in more decisions. Whilst reducing the need for directors to revert to the shareholders for approval, the Bill does ensure that the directors keep shareholders informed and consider their interests when making decisions.

A significant change as far as shareholders are concerned is the codification of their right to bring a derivative action. Shareholders will be able to seek relief on the company’s behalf in respect of its director’s negligence, default, breach of statutory duty or breach of trust. A two-stage procedure is set out in the Bill, whereby the shareholder must apply to court for permission to continue with his claim once it has been issued. There is much speculation as to whether this codification will "open the floodgates" to shareholder claims, particularly since they will not necessarily have the opportunity to air grievances at meetings.

The Bill makes a number of changes which will affect directors, many of which are designed to clarify their duties and make them more accountable. In one of the most discussed changes in the Bill, directors’ duties are to be codified. Briefly, these codified duties are:

• to act within their powers;
• to promote the success of the company;
• to exercise independent judgment;
• to exercise reasonable care, skill and diligence;
• to avoid conflicts of interest;
• not to accept benefits from third parties; and
• to declare interests in proposed transactions and arrangements (complemented by a separate obligation to declare interests in existing transactions and arrangements).

Shareholders are given control over whether to ratify a director’s negligence, default, breach of duty or breach of trust, as this will require an ordinary resolution. In terms of breaches of statutory provisions, a company’s officers will be liable rather than the company itself, in a move to make officers more accountable for compliance. The Bill also introduces a new offence of giving misleading, false or deceptive information to Companies House.

Other changes concerning directors follow the same pattern of making them more accountable to shareholders, such as necessitating shareholder approval of service contracts for a period of 2 years or more, rather than the current 5 years or more. Some rules are relaxed, with the prohibition on giving loans to directors and its complex exceptions being replaced with a need for shareholder approval, and the need for prior shareholder approval of substantial property transactions becoming more flexible to allow retrospective approval to be given.

The Bill aims to make shareholder decision-making more straightforward and realistic, for instance, by providing for only two types of shareholder resolution – ordinary and special – and making it easier for companies and shareholders to communicate electronically.

The Bill recognises that many small, private companies do not hold shareholder meetings unless they are absolutely necessary – they pass an elective resolution to opt out of the requirement to hold AGMs and consult shareholders by written resolution where necessary. Therefore, it makes it easier for private companies to make decisions by written resolution (e.g. by allowing a resolution to be carried by the majority relevant to the resolution, and providing that it will lapse after a certain period if not passed). They will not have to hold AGMs, but where a shareholder meeting is held, private companies will only have to give 14 days’ notice, and 90% of the shareholders will be able to consent to short notice.

Since greater accountability is required of public companies, their meeting procedures remain more rigid. For example, they will have to hold AGMs on 21 days’ notice and the statutory written resolution procedure will not be available to them.

In a major change, private companies will not be required to have a company secretary any more, with the director(s) taking on the secretarial functions instead. This recognises that the need to have a secretary imposes an unnecessary financial burden on very small companies (who often engage an external adviser to take on the role), but the Bill still makes an identifiable individual responsible for the company by ensuring that at least one director is a real person (as opposed to a corporate director). As a result of this change, companies will have to change the way in which they execute documents, which will either have to be signed by two directors, or by one director and a witness (who must be present and may or may not be the company secretary). Public companies will still have to have an appropriately qualified person in the role of company secretary.

The Bill attempts to combat the use of information stored on the public record for improper purposes, by protecting directors’ residential addresses from public disclosure and by restricting inspection of the register of members to "proper purposes".

Companies will still be required to circulate their accounts and reports to shareholders and others, but only public companies will be required to lay them before the shareholders at an AGM. The filing deadlines will be reduced to 9 months from the end of the relevant accounting period for private companies and 6 months for public companies. The Bill requires directors’ reports to contain a "business review" for all companies, except small ones, which must include an analysis of the company’s development and performance for the financial year, and a description of the main risks and uncertainties it faces. The purpose of the review is to enable shareholders to ascertain how the directors have performed their duty to promote the company’s success. This requirement is not significantly different from the current position for medium and large companies.

The Bill creates a new offence rendering an auditor liable if he knowingly or recklessly causes an auditor’s report to include false, misleading or deceptive information. On the other hand, it allows auditors to enter into "liability limitation agreements" in respect of any negligence, default, breach of duty or breach of trust during an audit. These agreements will be subject to a time limit of one financial year and will need shareholder approval.

The Bill is not concerned with insolvency law, and so there are only two changes to mention:

• it amends the Insolvency Act 1986 so that if a company in liquidation’s assets are insufficient to pay all of the expenses of liquidation, they must be met out of the property comprised in or subject to any floating charges, in priority to any other claims to that property. This reverses the decision in Re Leyland Daf Ltd, Buchler v Talbot ([2004] 1 All ER 1289); and

• the restrictions relating to substantial property transactions will no longer apply to transactions entered into by administrators, bringing them into line with those entered into by liquidators.

The original version of this article was published on 30 June 2006.

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