UK: Company Law Update – Electronic Communications

Article by Paul Salmon and Ruth Walker

New laws on sending statutory documents and information to shareholders, in electronic as well as hard copy form, came into force earlier this year. Companies may wish to review their Articles of Association in the light of these changes.

The new Companies Act 2006 (the Act) has introduced, for the first time, comprehensive provisions regarding communications between a company and its shareholders – the Company Communications Provisions. These provisions came into force on 20 January 2007.

The Company Communications Provisions apply to all documents or information authorised or required to be sent under the Companies Acts¹ to or from any body corporate. However, the new provisions are of particular interest because they contain detailed provisions regarding electronic communications. Whilst the previous law did contain provisions regarding electronic communications, they were limited to certain documents (namely, the report and accounts, summary financial statements and general meeting notices and proxy appointments) and specific consent of individual shareholders was required. The provisions of the new Act apply to all communications under the Companies Acts and, whilst in general individual shareholder consent is still required, there are now provisions by which a shareholder is deemed to consent to receiving communications by way of a website if a shareholder does not specifically request hard copies when asked. This deals with the problem under the old law of overcoming shareholder lethargy to obtain their specific consent.

The provisions relating to communication by website posting are particularly welcome and are expected to lead to considerable cost savings, not to mention the environmental benefit from the reduced use of paper.

A further change introduced by the Act is that if a company gives an email address in a notice calling a meeting or a proxy invitation or form or with a proposed written resolution then a shareholder can submit his proxy and any voting instructions electronically, subject to any limitations the company may specify.

The Act refers to sending documents and information in electronic form. Specific examples given in the legislation are email and fax and it also includes sending a disk in the post but the definition will cover any transmission by electronic means provided the recipient can read it and retain a copy of it. ‘Electronic means’ is defined as a document or information being (a) sent initially and received at its destination by means of electronic equipment for the processing or storage of data, and (b) entirely transmitted, conveyed and received by wire, by radio, by optical means or by other electromagnetic means. Furthermore, the Act includes additional flexibility in providing that a company and its shareholders may communicate by means other than in hard copy form or electronic form, as the parties may agree.

The main point to note is that each shareholder's consent is required to receiving documents in electronic form. This can be given generally for all communications or specifically in relation to certain communications, although from the company's point of view general consent will usually be the most practical option.

Separate consent is required for communications by means of a website and there are provisions by which such consent is deemed to be given– see below.

Companies admitted to trading on a regulated market such as the London Stock Exchange's main market (but not AIM) also have to meet additional requirements:

• In particular, they must pass a shareholders' resolution permitting the use of electronic means to communicate with shareholders under the Financial Service Authority's Disclosure Rules and Transparency Rules. Those rules also provide that:

• the use of electronic means must not depend on the location of the shareholder. This is understood to mean that a company cannot discriminate within the EEA between shareholders of the same class. The question arises, where the sending of documents to one EEA country by electronic means (eg website posting) is restricted by local law, must the company treat all shareholders alike and send hard copy documents. The FSA advises that where such restrictions exist, the FSA would not regard the principle of equality of shareholder treatment as being breached merely if the issuer does not offer to communicate by electronic means with such shareholders.

• Individual shareholder consent is required to conveying information by electronic means (with deemed consent provisions) – however these requirements are "switched off" where the Company Communications Provisions apply.

Communications By Means Of A Website

In order to take advantage of the provisions allowing a company to communicate by website a company must:

• pass a resolution or change its articles to provide that "the company may send or supply documents or information to members by making them available on a website",

• seek the individual consent of each shareholder, which, again, can be either general or specific to certain documents.

However, provided the company follows the procedure in the Act, it can rely on the deemed consent of shareholders who do not actively refuse consent. Those steps are as follows:

• each shareholder has been asked to agree to receiving documents by means of a website,

• the request clearly states what the effect of a failure to respond would be,

• the company does not receive a response within the period of 28 days from the date of the request.

However, it is important to note that there will not be any deemed consent if any such request in respect of the same or a similar class of documents or information is sent out less than 12 months after a previous request.

Companies will need to consider carefully the timing of requests sent to shareholders. Clearly there is some advantage to sending all requests in one year at the same time to avoid having to monitor multiple anniversaries. Companies may well develop the practice of sending out such requests to accept website communications with the AGM notices, but if they do they will need to be careful that the AGM is not brought forward so that it is less than a year since the last mailing.

It should be noted that the 12 month rule only apples to the website deeming provisions – a company can send out as many requests for consent to receiving documents and information in electronic form generally as it chooses.

There are also some other provisions a company must comply with in communication via website:

Availability of document or information

Any document or information must be made available in a form and by a means that will enable the recipient to read it with the naked eye (or in the case of images, see it) and to retain a copy of it. For example a typical website page or adobe acrobat document would generally meet these criteria, provided no security provisions preventing their being printed are included.

Period of availability

Any document or information should be made available for any period specified in the Companies Acts or if no such period is applicable, the period of 28 days beginning with the date of which the notification is sent. A saving provision is included to the effect that a company will not be in breach if the failure to make the document available for the whole of the required period is attributable to circumstances which the company could not reasonably have prevented or avoided.

Notification of Availability

The company must notify the intended recipient of:

• the presence of the document or information on the website,

• the address of the website,

• the place on the website where it may be accessed, and

• how to access the document or information.

If a shareholder has not also agreed to receive communications in electronic form, then any such notification will have to be in hard copy form by post.

If the notification is in respect of a general meeting it must also:

• state that it concerns a notice of company meeting,
• specify the place, date and time of the meeting,
• in the case of a public company, state whether the meeting will be an annual general meeting,
• be available on the website throughout the period beginning with the date of the notification and ending with the conclusion of the meeting.

Right To Hard Copies

Notwithstanding that consent is given or deemed to be given, a shareholder can at any time ask the company for a hard copy of a document previously sent to him in electronic form or made available on a website and the company is obliged to comply within 21 days, free of charge, and presumably even if the document has to be sent overseas. Failure to comply is a criminal offence by the company and every officer who is in default, punishable by a fine.

In this regard it is worth noting that neither the Act nor the proposed model articles of association to be introduced by the Act (intended to replace the "Table A" regulations) contain any provision to the effect that the company is not obliged to send communications to any shareholder overseas, like those contained in the "Table A" regulations incorporated in the articles of many existing companies.

A shareholder can always withdraw his consent to receiving documents by website or in other electronic form at any time.

The Request For Consent

In addition to the shareholders, there are two new categories of person to consider in determining to whom the requests for consent to receiving documents in electronic form and/or by website should be sent:

• A person nominated to exercise a member's rights

• Where a company's articles have been amended to permit it, a member will be able to nominate someone to exercise all or any specified rights of that member (eg the right to be sent notices of meetings or written resolutions and the right to appoint a proxy).

• A person nominated to enjoy information rights

• In the case of companies admitted to trading on a regulated market such as the London Stock Exchange's main market (but not AIM), a member will be able to require the company to send certain information to another person as well as the registered member (for example a nominee shareholder could require the company to send all information, such as the report and accounts, directly to the beneficial owner).

The website deeming provisions specifically apply to these nominated persons.

There are also separate deeming provisions in relation to a person nominated to enjoy information rights. If the registered member does not state that the nominee is to receive hard copy documents or if no address is given, then the nominated person is deemed to have agreed to receive communications by means of a website.

Of course any request must be sent in accordance with the new Company Communications Provisions for documents sent in hard copy form. In brief:

• it must be handed to the recipient, or

• it must be posted in a prepaid envelope to:

• an address specified for the purpose by the intended recipient,
• a company at its registered address,
• to a member (in his capacity as such) at the address in the register of members,
• to an address to which any provision of the Companies Acts authorises it to be sent,
• if none of the above can be obtained, to the last known address.

Proof Of Delivery

Proof of delivery should be retained in the event of any dispute over delivery of any document or information. The Institute of Chartered Secretaries & Administrators makes a number of recommendations regarding communications in electronic form which it would be sensible to follow.

Fax: a comprehensive transaction report or log generated by the fax machine should be suitably certified and retained.

Email: the company should ensure that it uses a system which produces either confirmation of the total number of recipients e-mailed or, preferably, a record of each recipient to whom the message has been sent. That record and any notices of any failed transmissions and subsequent re-sending should be suitably certified and retained. They also recommend that if the company becomes aware of a failure of transmission, and subsequent attempts also do not succeed, then the company should send a hard copy by post within 48 hours of the original attempt.

Time Of Delivery

Under the Act documents or information are deemed to be delivered 48 hours after posting or sending by email (or other means), not taking into account non working days. When supplied via a website they are deemed to have been received when first made available on the website or, if later, when the recipient received (or is deemed to have received) notice of the availability of the material on the website. However it is possible to include different provisions in the company's articles and these will over-ride the statutory provisions.

Communications From Shareholders To The Company.

The Act contains separate provision for communications from shareholders who are individuals to the company and from shareholders which are companies however there is little difference in practice. In either case the company must agree to receiving communications in electronic form.

That said there are provisions in the Act by which a company is deemed to have agreed to accept electronic communications. In particular, where a company gives an electronic address in a notice calling a shareholders meeting, a proxy in relation to a meeting or any document containing or accompanying a proposed written resolution, such company is deemed to have agreed that any document or information relating to any of the foregoing may be sent by electronic means to that address, subject to any conditions or limitations set by the company in the relevant document. For example, many companies are permitting shareholders to vote or submit their proxies online using, by way of authentication, a combination of personal identification numbers and shareholder reference numbers posted to the shareholder with the notice of meeting.

In this regard the definition of electronic address is any address or number used for the purposes of sending or receiving documents or information by electronic means. Unlike the general provisions for communicating in electronic form, there is no requirement for the recipient to be able to read it or retain a copy of it. Therefore the definition extends beyond faxes and emails to include transmitting information by telephone so a company should exercise care in what address details are included in these documents or clearly state the proposed use or limitations of any electronic address included.

Transitional Provisions

Existing arrangements relating to electronic communications under the Companies Act 1985 will still be valid and treated as if they were made under the Act and accordingly no action need be taken by a company. Similarly, for companies trading on a regulated market such as the London Stock Exchange's main market who are subject to the Disclosure Rules and the Transparency Rules, the Financial Services Authority has confirmed that a company can continue to communicate by website where it would have been lawful to do so before 20 January 2007 (when the Company Communications Provisions came into force) without having to take any further steps.

However, the old law permitting website and other electronic communications was limited to certain documents and did not contain the convenient deeming provisions for acceptance of website communication. Companies may therefore prefer to take advantage of the wider scope of the new provisions which apply to all communications under the Companies Acts and the deemed consent procedure for website communications.

There is no requirement for a company to change it Articles as a result of the introduction of the Company Communications Provisions. The provisions in the Act will apply regardless of what a company's Articles say, however the Company Communications Provisions only apply for the purposes of any provision of the Companies Acts that authorises or requires documents or information to be sent or supplied by or to a company. If different provisions are included in a company's articles, a company could have a two tier system of communication, one for communications pursuant to the Companies Acts and one for other communications pursuant to the Articles. Companies may therefore wish to apply the Company Communications Provision to all communication with members by incorporating them in the Articles with appropriate wording to extend the scope. This is the approach taken in the proposed new model articles to be introduced by the Act which will apply to new companies formed after 1 October 2008 or which existing companies can, if they wish, adopt in place of their existing articles after that date.

Some of the Company Communications Provisions are expressly subject to any contrary provision in the Articles and for this reason alone it is worth considering changing the Articles. These are:

Joint Holders

The Company Communications Provisions provide that consent to receiving documents in electronic form must be obtained from both joint holders. The articles could provide that consent need only be obtained from the first named holder.

Death or bankruptcy of shareholders

The act provides that in the event of the death or bankruptcy of a shareholder documents and information can be sent to the personal representatives (or equivalent) by name or title but until such representatives have supplied their details, documents can be sent to the member as if the death of bankruptcy had not occurred. However, any contrary provisions in the Articles will override these provisions.

Deemed delivery

As noted above, the Company Communications Provisions deems documents delivered within 48 hours, but only taking into account working days. However communications from a company to its members are subject to any contrary provisions in the Articles, which typically have shorter periods.

Authentication

The Articles could deal with authentication of communications sent to a company in electronic form. Where a provision of the Act requires information sent to a company to be authenticated (chiefly the case in the context of written resolutions and requests for meetings), the Act provides that a company can specify any method of confirming the identity of the sender but if it does not do so then, if the communication contains or is accompanied by a statement of the identity of the sender and the company has no reason to doubt the truth of that statement, the communication will be regarded as authenticated. The default position under the Act does give the company discretion to issue its requirements from time to time so it is quite feasible to say nothing beyond the statutory wording. Perhaps the safest method of authentication is to require a digital signature using public key encryption but this does require both parties to a communication to have compatible encryption software and, generally, to have their public "keys" verified in some way, such as by a certification authority. It remains to be seen how widely this system will be used.

The Company Communications Provisions are contained in sections 1143-1145 and schedules 4 and 5 of the Companies Act 2006, a copy of which is available in adobe acrobat (pdf) format here: http://www.opsi.gov.uk/acts/acts2006/ukpga_20060046_en.pdf

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.