UK: Articles Of Association: Time For Change?

Last Updated: 6 February 2008
Article by Andrew Pike

We review the situation in light of the deferred implementation of the Companies Act 2006

Introduction

A number of provisions of the Companies Act 2006 (the Act) are now in force and, under the original time-table, the Act would have been fully operational by 1 October this year. However, in a surprise move, the Government announced last November that it had decided to delay final implementation of the Act until October 2009.The reason for the delay is to ensure that Companies House will have enough time to prepare the necessary changes to its systems.

The remainder of the Act will now be implemented in several further stages during the course of this year(principally in April and October) with the last remaining provisions being brought into force on 1 October 2009.News of postponement of the final implementation of the Act has caused a dilemma for those companies that had planned to up-date their articles at this year's annual general meeting (AGM) to include all changes necessary to reflect the new law. Many companies now query whether the changes already in force are significant enough to justify making any amendments to their articles at this stage.

For reasons we discuss below, we recommend that companies should, in fact, go ahead and up-date their articles at the next AGM in order to take account of provisions of the Act already in force as well as those due to be implemented later this year (even though further changes to the articles may still be needed at a later date).

We suggest that companies with an AGM in the early part of the year adopt revised articles with effect from1 October 2008 so that all these changes can be dealt with at the one general meeting.

Which changes already introduced by the Act substantially affect a company's articles?

The new regime introduced on 1 October 2007 by Part 13 of the Act, governing shareholder resolutions, company meetings and voting rights, significantly changes the law in this area, with a considerable impact on company articles. For example, the Act:

  • removes the statutory requirement for private companies to hold an AGM although they may still choose to do so
  • reduces the statutory notice period for shareholder meetings to 14 days, except in the case of AGMs of public companies where the notice period required by the Act is 21 days
  • greatly enhances the rights of proxies
  • provides a new statutory procedure for written shareholder resolutions for private companies. The Act abolishes the requirement for unanimity: a majority of 75% of the eligible votes is needed to pass a special resolution while a simple majority of the eligible votes will be enough to pass an ordinary resolution.

(Public companies, however, remain unable to use any form of written shareholder resolution procedure.)

What changes should be made to articles in light of Part 13 of the Act?

Given the approach taken in Part 13, it is not strictly necessary to change the company's articles to reflect its introduction. In some cases, the provisions of Part 13over-ride those of a company's articles (for example, the provisions relating to proxy rights). In other cases, the articles over-ride the provisions of Part 13 (for example, where the notice periods for general meetings specified in the articles are longer than those contained in the Act, they will continue to apply).

However, we recommend that companies up-date their articles at this year's AGM in response to Part 13 for the following reasons:

  • to bring the articles into line with the terms of the Act (for example, to reflect the new statutory rights for proxies and the new regime governing written resolutions)
  • to take advantage of the deregulatory provisions contained in the Act (for example, the reduced notice periods for general meetings and the abolition of the requirement for private companies to hold an AGM)n to exclude certain provisions of Part 13 where permitted (for example, the right of a proxy to be appointed chairman of a general meeting)
  • to confer more extensive rights on members or proxies than those set out in the Act if required.

Up-dating the articles will help streamline the administration of company meetings and also help shareholders become familiar with the new rules.

Companies which decide not to amend their articles at this stage will need to take extra care to comply both with the provisions of Part 13 as well as with their articles to ensure meetings are properly held and resolutions duly passed.

Are there any other provisions of the Act already in force that could be reflected in up-dated articles?

Yes: other provisions of note include those relating to:

  • electronic and web communications: provisions allowing companies to communicate with shareholders in electronic form and by means of a web-site came into force on 20 January 2007.The new regime extends the rules relating to electronic communications with shareholder which were first introduced in 2000. We recommend that articles be amended to allow companies that wish to do so to take advantage of the new provisions governing web-based communications, with consequent potential savings of time and money
  • indemnities for directors: the new rules which came into effect on 1 October 2007 did not materially change the existing position except in the case of pension trustee companies. Such companies are now able to offer their directors wider indemnities than other types of company: a company that is a trustee of an occupational pension scheme may, for example, indemnify a director against liabilities owed to the company itself for breach of duty (subject to certain conditions).

What about the changes coming into force later this year?

One of the major changes coming into force in October2008 which companies will wish to consider in relation to their articles concerns directors.

On 1 October 2008, new rules relating to directors' conflicts of interest will be implemented. The Act imposes a new statutory duty on directors to avoid situations of actual or potential conflict with the interests of the company. The requirement is very widely drafted and may cause problems, especially for directors who hold more than one directorship. The situation will be particularly acute if those companies operate in the same industry sector or are parties to a commercial arrangement.

The Act does, however, contain a mechanism for dealing with situations of conflict: a director will not be in breach of the duty if the matter in question has been authorised by the other directors of the company. The authorisation will only be valid if:

  • it is given by independent board members who must also be able to constitute a quorum; and
  • the articles allow for this procedure to be used. Public company articles must contain a specific provision to this effect. Private companies incorporated on or after 1 October 2008 may us the authorisation procedure provided nothing in the company's constitution invalidates this. Transitional arrangements mean that for existing private companies, however, specific authorisation for the use of the new board approval process must be given by way of shareholder resolution.

It is likely that most public companies will wish to amend their articles (and most existing private companies will wish to pass the necessary resolution) to allow use of the new board approval process in cases of conflict of interest with effect from 1 October 2008.

The Act also provides that the articles of both public and private companies may contain provisions, not dependent on the board authorisation process, to deal with situations of conflict of interest that might otherwise result in a breach of duty. Many companies will also wish to take advantage of this provision.

Are there any other changes to the articles we should consider this year?

Yes: we have highlighted only some of the main areas of change. There are a number of other amendments to the articles that could usefully be considered at thisstage. These include, for example, amendments:

  • to bring the articles into line with the Act's requirements (in force on 1 October 2007) relating to meetings convened to vary class rights
  • to remove references which require the company to have a company secretary after April this year(private companies only).

What about up-dating the articles after 2008?

Changes to the articles will need to be considered in light of the final provisions of the Act to be implemented in October 2009. They should reflect, for example, the new rules which will govern a company's constitution

This will also provide a useful opportunity to review and, perhaps, fine-tune changes already made, to deal with any developments in market practice.

How can Hammonds help?

We would be pleased to discuss with you in more detail any of the issues raised in this Alert and would be pleased also:

  • to review the specific terms of your articles and advise on changes needed in response to the Act
  • to prepare an up-dated set of articles in line with your instructions
  • to assist in the preparations for your next AGM.

If you would like any further information whatsoever, please contact your usual contact at Hammonds or alternatively

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.

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