This summary only covers some of the new provisions affecting private companies and is not intended to constitute specific legal advice.
The memorandum of association (memorandum) of a company formed under the 2006 Act looks very different from that of companies formed under the 1985 Act. The objects clause has been abolished and the memorandum now only contains a statement that the founders wish to form a company and agree to become members plus details of any subscriber shares.
For existing companies (those formed before 1 October 2009) much of their existing memoranda will now automatically be treated as part of their articles. This means the objects clause may act as a restriction on the company’s flexibility to act. Any statement of the company’s share capital in the memorandum is treated as a restriction on the allotment of shares in the articles.
Existing companies can remove these restrictions by special or ordinary resolution to amend their articles or to adopt new articles without them. As well as filing any resolutions and new articles notice of the removal or amendment of any objects clause must also be given to Companies House.
There are new model articles for private companies incorporated after 1 October 2009 which replace Table A as the default articles. These are intended to deregulate and simplify corporate procedures. For existing companies with articles based on Table A there are several advantages in adopting the new model articles:
- They are drafted in the up to date language of the 2006 Act and endorsed by statute so the courts should not question their validity.
- Table A will quickly become outdated.
- The new articles will be fully compliant with the provisions of the Act.
- The company will benefit from the relaxations in the 2006 Act.
- At group level it will be good housekeeping to establish and maintain consistency.
Companies are no longer required to have an authorised share capital so, if the articles do not already contain a restriction, shareholders wishing to restrict the number of shares that can be issued by a company will need to amend the articles to include suitable provisions.
Any provision in a company’s memorandum will continue to operate as a restriction until the statement of authorised share capital in the memorandum is amended or “revoked” by ordinary resolution or new articles are adopted by special resolution.
Shares in a limited company with a share capital must have a fixed nominal value (for example, 1p).
Companies with only one class of share no longer require shareholder authority to allot shares unless they are prohibited from doing so in the articles. This is a relaxation from the 1985 Act which only allowed directors to allot shares if they were authorised by the company’s articles or by ordinary resolution. To take advantage of this relaxation, members of existing companies need to pass an ordinary resolution giving directors the authority to allot shares.
Pre-emption rights on the issue of new shares are largely the same under the 2006 Act.
The requirement for filing copies of contracts under which shares are allotted for a non-cash consideration has been abolished although companies must file a statement at Companies House every time there is a change in share capital.
There is no longer a requirement for a company to have a secretary, although it may still decide to have one. Where a company’s articles expressly require the appointment of a secretary this will override the relaxation ?? and a company will still be required to have a secretary until it amends its articles.
There is no change to the basic position that a private company needs one director but under the 2006 Act at least one director must be a natural person (rather than a company).
The 2006 Act introduced a statutory statement of directors’ duties that replaced many common law and equitable rules. The codified duties apply to all the directors of a company, including shadow directors and, in the case of the duties in section 175 (duty to avoid conflicts of interests) and 176 (duty not to accept benefits from third parties), even former directors of the company.
Common law rules and equitable principles in interpreting and applying the statutory duties may still apply as the statement of duties does not cover all duties that a director may owe to the company – some remain uncodified such as the duty to consider creditors’ interests in times of threatened insolvency. Other duties are incorporated in the Act such as the duty to deliver accounts.
Companies may provide for more onerous duties in their articles but the articles may not dilute the duties except to the extent expressly allowed by the Act.
The statutory statement of duties comprises seven general duties (under sections 171 to 177):
- S.171 Duty to act within powers.
- S.172 Duty to promote the success of the company for the members’ benefit (this has broadly replaced the fiduciary duty to act in the company’s best interests).
- S.173 Duty to exercise independent judgment.
- S.174 Duty to exercise reasonable care, skill and diligence.
- S.175 Duty to avoid conflicts of interest.
- S.176 Duty not to accept benefits from third parties.
- S.177 Duty to declare interest in proposed transaction or arrangement with the company.
DIRECTORS’ SERVICE CONTRACTS
The 2006 Act introduced a definition of a director’s service contract.
Shareholder approval is required for directors’ service contracts in excess of 2 (as opposed to 5) years for service contracts made on or after 1 October 2007. If a long term service contract is entered into without shareholder approval the contract will be deemed to contain a term that the company may terminate it at any point on the giving of reasonable notice.
Shareholders now have a right to request a copy of a director’s service contract (on payment of a fee).
A company must keep a copy of all directors’ service contracts (or, where the contracts are not in writing, a record of their terms), including copies of service contracts of directors working overseas, at the company’s registered office or any other place notified to Companies House for a period of at least one year from the date of termination or expiry of the contract.
The prohibition on a company agreeing to pay a director’s remuneration free of income tax or agreeing to vary the director’s remuneration in line with changes to income tax has been repealed.
There is a new right for any person (not just a company) to object to a company names adjudicator if a company’s name is similar to a name in which the objector has goodwill.
REGISTER AND RECORDS
Companies must also now disclose the place for inspection of any company records (and the type of record kept there) to any person it deals with in the course of business who asks for it.
The company register can now be kept at the company’s registered office or any “single alternative inspection location” (which must be notified to Companies House).
Every company is required to keep a register of members and a separate register of directors, their private addresses and secretaries but there is no longer an obligation to keep a register of other directorships or a register of directors’ interests and dealings in the company.
All directors now have the option of their home address being kept on a separate record to which access is restricted. To benefit from this option, a director must provide a service address for the public record.
FILING OF DOCUMENTS AT COMPANIES HOUSE
Companies must file accounts within 9 months of the end of the relevant period (reduced from 10 months).
There is no longer a requirement that the annual return be signed by a director or secretary of the company.
Members’ addresses are no longer required to be included in the annual return of a company unless it is a public company that is traded on an EU regulated market and only then in respect of shareholders who hold 5% or more of any class of shares at any time during the year in question.
Exceptions from the information requirements for annual returns can also be made in certain circumstances.
Companies are now required to disclose the location of all their records and registers (rather than just the location of the register of members) in their annual return.
Auditors of companies do not need to be reappointed each year provided they are appointed by shareholder resolution (rather than just by the directors). There is a new requirement to notify the appropriate audit authority if the auditor ceases to hold office before the end of its term of office giving reasons for the auditor ceasing to hold office.
DISTRIBUTION OF PROFITS AND ASSETS
The major changes in the 2006 Act relate to the treatment of distributions in kind. There are new provisions confirming that, where the transferring company has positive distributable reserves, the amount of any distribution arising from the sale, transfer or other disposition by a company of a non-cash asset to a shareholder should be calculated by reference to the asset’s book value:
- A company that has distributable profits and makes a relevant transfer of an asset at book value where the market value is higher than book value does make a distribution, but the value of the distribution is zero and the distribution is lawful.
- If the asset is transferred for less than its book value, the amount of the distribution is equal to the difference between its book value and the actual consideration given for it, and must be covered by the company’s distributable profits.
Specific authorisation in a company’s articles for it to purchase its own shares is no longer required under the 2006 Act although a company may not purchase its own shares if it is prevented from doing so by its articles.
The procedure for the purchase of a company’s own shares remains the same with the introduction of a simpler procedure for the reduction of share capital using a solvency statement.
The requirement for directors to make a statutory declaration about their company’s financial position for a purchase of own shares out of capital has been replaced with a requirement for a director’s statement which does not need to be sworn before a solicitor or Commissioner of Oaths.
The liabilities that the directors must take into account when making their statement in relation to a purchase of own shares out of capital are a potentially wider category of liabilities than for the statutory declaration under the 1985 Act.
When the Registrar at Companies House is notified of a purchase of own shares by a company, the return to the Registrar must be accompanied by a statement of capital containing certain information about the company’s share capital immediately following the cancellation.
EXECUTION OF DOCUMENTS
Authorised signatories are the company’s directors. Any secretary retained by a private company continues to have power to execute documents on behalf of the company.
A company may execute a document either by affixing its common seal or, if the document is signed on behalf of the company, by the signature of two authorised signatories or by a single director in the presence of a witness.
The 2006 Act makes it easier for companies to communicate with shareholders electronically.
Companies wishing to use email or their website to communicate with members should review their articles and existing resolutions in force to ensure the necessary powers are in place to use such communications (and that the provisions are wide enough to catch all electronic documents).
Companies still need agreement from individual shareholders to receive information by email or by the posting of information on the company website. A company which wants to post material on its website must notify individual shareholders that the notice has been posted (either by email or hard copy).
Shareholders are entitled to hard copies on request even if they have consented to being notified by email.
Generally only public companies now need to hold an Annual General Meeting (AGM) under the 2006 Act. A small minority of private companies (called traded companies) still need to hold an AGM. If the articles contain an obligation to hold an AGM the articles will need to be amended to take advantage of this relaxation.
If a private (non-traded) company decides to continue to hold an AGM only 14 days’ notice is now required. Existing articles calling for 21 days’ notice will need to be amended to take advantage of this relaxation.
Shareholders can now appoint a proxy to attend, speak and vote at general meetings even if this is not permitted under the existing articles.
For financial years ending on or after 1 October 2007 there is no longer a requirement for the annual accounts to be presented or approved by shareholders at a general meeting, unless this is required by the articles (shareholders must still be sent the annual accounts).
If the articles specifically require the annual accounts to be presented at an AGM or EGM (most will), companies must amend their articles to remove this provision if they wish to take advantage of the change.
Private companies can now pass written ordinary resolutions by a simple majority of those eligible to vote and written special resolutions with a 75% majority of those eligible to vote. (Previously the unanimous consent of all members was required to pass a written resolution.)
Written resolutions cannot be used for the dismissal of a director or the auditors.
If the 2006 Act requires a resolution of the company or its members and does not specify what kind of resolution is required, an ordinary resolution will be required unless the company’s articles require a higher majority or unanimity. When a provision specifies that an ordinary resolution is required, the articles will not be able to specify a higher majority.
COMPANIES (SHAREHOLDERS’ RIGHTS) REGULATIONS 2009 WHICH IMPLEMENT THE SHAREHOLDERS’ RIGHTS DIRECTIVE
This Directive deals with notices of meetings and documents available before meetings, shareholders’ rights to add items to the meeting agenda and to ask questions and vote at meetings and rules concerning proxies and publication of voting results. The Regulations implementing the Directive apply for all meetings for which notice is given on or after 3 August 2009.
The following changes to the 2006 Act apply to all companies:
- Shareholders with 5% of voting shares can require the directors to call a general meeting (previously a 10% holding was required).
- New rules apply to proxies appointed by multiple shareholders when voting on a show of hands.
- Corporate representatives can vote in different ways from one another in respect of different blocks of shares owned by the same shareholder.
- Proxies must vote in accordance with their appointor’s instructions.
- Shareholders can vote in advance of a meeting if permitted by a company’s articles of association.
- Electronic meetings and voting are expressly permitted.