The Companies Act 2006

INTRODUCTION

The Companies Act 2006 (the "2006 Act") brought about the most significant changes to company law in over 20 years. Implementation of the 2006 Act took place in phases with certain provisions coming into force on 1 October 2007, on 6 April 2008 and on 1 October 2008, with final implementation on 10 October 2009.

This briefing summarises some of the major changes which came about at each phase of implementation.

PROVISIONS WHICH CAME INTO EFFECT ON 1 OCTOBER 2007

This section of the briefing note highlights the key provisions which came into effect on 1 October 2007.

Statutory Statement of Directors' Duties

A new statutory statement of directors' duties replaced the old common law and equitable principles. The statutory duties are owed to the company and only the company is able to enforce them (although see the section on "Derivative actions by shareholders" below.)

There are 7 general duties in the new statutory statement:

A duty to act in accordance with the powers set out in the company's constitution. A duty to promote the success of the company for the benefit of its members. (This replaced the common law duty to act in good faith in the company's interests and proved the most controversial new duty. In deciding how to promote the success of the company, the directors are required to have regard to a wide number of factors including: the likely long term consequences of their decisions; the interests of the company's employees; the need to foster the company's business relationships with suppliers, customers and others; the impact of the company's operations on the community and the environment; the desirability of maintaining a reputation for high standards of business conduct; and the need to act fairly as between members of the company.) A duty to exercise independent judgement. A duty to exercise reasonable care, skill and diligence. A duty to avoid conflicts of interest. A duty not to accept benefits from third parties. A duty to declare to the company's other directors any interest a director has in an existing or proposed transaction or arrangement with the company. All of the duties came into force on 1 October 2007 apart from the duty to avoid conflicts of interest, the duty not to accept benefits from third parties and the duty to declare interests in existing/proposed transactions or arrangements with the company, which did not come into effect until 1 October 2008 (see below).

The duties are not mutually exclusive meaning that more than one of them may apply to any given situation.

Derivative Actions by Shareholders

A new statutory derivative claim procedure enabling shareholders to sue directors in the name of, and for the benefit of, the company replaced the old common law action. Under the new procedure, shareholders may sue in respect of an actual or proposed act or omission of a director involving negligence, default, breach of duty (including the new statutory directors' duties highlighted above) or breach of trust. Notably, directors can be sued for negligence even where they have not personally profited by it. This means that there are a wider range of circumstances than currently in which a derivative action may be brought against a director.

Once derivative proceedings are issued, the claimant member must apply to court for permission to continue the claim. The claim will be dismissed unless the application and evidence filed by the member establish a genuine case.

Resolutions and Meetings

The part of the 2006 Act that deals with the procedure for meetings and resolutions came into force on 1 October 2007. Generally, it relaxed the law for private companies. Changes included:

Private companies no longer being required to hold an AGM although they can choose to do so. Any provision in the company's articles of association requiring the company to hold an AGM must still be adhered to, unless altered. Only 14 days' notice is needed to call a general meeting (subject to anything contrary in the articles of association and with the exception of a public company's AGM which still requires 21 days). It was made easier for private companies to pass written resolutions (a simple majority is now required for written ordinary resolutions and a 75% majority for written special resolutions). Proxies – a member is now able to appoint more than one proxy to attend a meeting on his behalf and proxies have the same right to attend, vote and speak at public company meetings as they have at private company meetings. Quoted companies – are now required to publish results of polls taken at general meetings on their websites. In addition, shareholders of a quoted company (being 100 in number or with 5% or more of the voting rights entitled to vote on the matter in question) can require the directors to obtain an independent report on any poll taken at a general meeting. Again, the report must be published on the company's website. Indirect Investor Rights

The 2006 Act introduced two new provisions to allow indirect investors to exercise certain rights:

Firstly, companies may have a provision in their articles allowing members to nominate another person or persons to enjoy or exercise their rights as a member (for example, a trustee shareholder could nominate a beneficiary under the trust). Such rights may include being sent notices of meetings and being entitled to vote. Secondly, registered members of quoted companies can nominate indirect investors to enjoy "information rights" (principally the right to receive copies of company communications). Director's Reports – Business Reviews

There are new provisions detailing the information that is to be included in the business review section of directors' reports. The stated purpose of the business review is to inform members and help them to assess how the directors have performed their new statutory duty to promote the company's success. There are more stringent disclosure requirements for quoted companies in relation to the business review which include the need for...