Corporate Strategy & Finance Update, July 2007

LEGAL UPDATE

Companies Act 2006 - Update on implementation

In June 2007 the DTI published some updated interpretation information in the form of FAQ's on those parts of the Companies Act 2006 (Act) due to be implemented on 1 October 2007. There were two items of particular note for those dealing with companies and their officers:

Directors' duties

One of the most widely discussed parts of the Act is Part 10 entitled "A company's directors" coming into force, with certain exceptions, on 1 October 2007. The exceptions listed in the implementation timetable included provisions relating to directors' conflict of interest duties. The DTI has now made it clear that this exception is not limited to section 175 headed the "duty to avoid conflicts of interest", but also includes section 176 the "duty not to accept benefits from third parties", section 177 the "duty to declare an interest in a proposed transaction" and sections 182 - 187 which relate to the "duty to declare an interest in an existing transaction". These "conflict of interest duties" will not come into force until 1 October 2008.

This two-part introduction of the codified directors' duties is to give companies time to consider what will constitute a conflict of interests for their directors and to amend their articles of association and directors' service contracts accordingly.

From October 2007 directors will have to discharge the statutory duties of acting within their powers, promoting the success of the company, exercising independent judgment and exercising reasonable skill, care and judgment (ss 171 - 174 CA06). In addition directors will remain subject to the existing common law and equitable duties not to make a personal profit at the expense of the company by reason of their appointment as director and not to put themselves in a position where their interests conflict with those of the company. Further, the statutory duty under section 317 Companies Act 1985 to give a full and frank disclosure at meetings of directors of any personal interest in any contract or arrangement involving the company will still also apply. Company directors should by now be familiarising themselves with the new duties and code of conduct which they will be operating under from this autumn.

Access to members' register

Not included in the original implementation timetable for October 2007, but which the DTI have said will be available to companies as they file annual returns made up to a date from 30 September 2007, are the new provisions relating to access to a company's register of members: sections 116 - 119 of the Act.

The existing obligation on companies to maintain a register of members to be available for inspection remains, but there are two key changes: the Act prescribes information that any person requesting access to the register must provide to the company, and the request must be made for a proper purpose. Company secretaries must also note that the period for responding to a request for access has been reduced to five working days from the current ten days.

Every request for access to inspect or obtain a copy of the register of members must contain the name and address of the person making the request and, where a request is made by a person on behalf of an organisation, the name and address of that organisation. The request must also indicate the purpose for which the information is to be used, whether it is to be disclosed to any other person and, if so, the name and address of that other person and the purpose for which they will use the information. Within five working days of receiving such a request the company must either supply the information or apply to the court for directions that they need not supply the information as it is not being sought for a "proper purpose".

The Act does not indicate what will constitute a proper purpose and the DTI have said that it will be for the courts to determine. However it is likely that very strict criteria will be applied before directions not to disclose the information will be issued. The Institute of Chartered Secretaries and Administrators have published "Guidance on access to the register of members: the proper purpose test" which contains some examples of what would constitute proper or improper purposes and makes some best practice recommendations. The list of proper purposes includes a shareholder checking his own details or to contact other shareholders to exercise rights, checks on ownership as part of a transaction or requests related to a takeover offer or private acquisition or by a regulatory body. Examples of improper purposes include anything unlawful or for the purposes of commercial mailings.

Linked to these new provisions relating to access to information about a company's members, but not coming into force until October 2008, is the part of the Act, Part 24, dealing with company annual returns. The Act does not specify that in future the annual return must include the member's name and address. The required particulars to be included in the annual return are to be prescribed in regulations currently being drafted but not yet published. In a Written Statement made at the end of June the Government has said that public companies traded on EU regulated markets will only have to disclose the names and addresses (but not necessarily residential addresses) of holders of more than 5% of the issued shares or any class of shares of the company. For all other public and private companies the requirements will be changed so that it will not be necessary to disclose the addresses of members. The effect of such regulations would be that it may not always be possible to circumvent the 'proper purpose' provisions of the Act by searching at Companies House for details of the members of the company.

Companies are going to need to review their systems for dealing with requests for details of their registers of members in order to ensure that they have appropriate tests of what is a 'proper purpose' for the use of their information to apply to any requests received and systems that enable them to respond to the request or make an application to the court within the new, shorter response period. Consideration will also have to be given to their obligations under the Data Protection Act 1998 to avoid making any unlawful or unfair disclosure of personal data held by the company. Any party, for example a financier, who wishes to obtain information about a company's members will need to ensure that its requests contain the prescribed information and are for a proper purpose. The Act introduces two new offences relating to requests for access to the register of members: to knowingly or recklessly provide information in connection with a request that is misleading, false or deceptive in a material particular; and to obtain information for or to permit it to be disclosed to another person knowing or reasonably suspecting that person will use it for an improper purpose.

Draft Commencement Order No 3

The draft Companies Act 2006 (Commencement No 3, Consequential Amendments, Transitional Provisions and Savings) Order 2007 has been laid before Parliament. It provides for the commencement on 1 October 2007 of some of the key parts of the...