COMPANY LAW EASIER TO UNDERSTAND
OVERVIEW
The Companies Act 2006, which received Royal Assent on 8 November 2006, will bring major benefits to business by modernising and simplifying company law. As part of the implementation of the Act, some provisions are being commenced early in 2007.
Provisions commenced in January 2007
First Company Law Directive
The First Company Law Directive requires that basic company documents be disclosed via filing with a company registry, and by publication in the national gazette either of the full or partial text of the document or by reference to the document deposited in the company registry. It also requires that those documents be available for inspection. In addition, the First Company Law Directive specifies minimum information that companies must include on their letters and order forms. The Directive assumes the use of paper documents. It has now been amended (the First Company Law Amendment Directive) to reflect the use of information technology and electronic communications. The key changes are:
- Company registries are required to allow companies to file all the "basic documents" (specified in Article 2 of the First Company Law Directive) electronically;
- Company registries are required to allow requests for inspection of these documents to be made electronically;
- Company registries are required to offer electronic copies of these documents to those inspecting the register;
- Company registries have to keep all these documents in electronic form, whether submitted electronically or in paper form;
- Member states are able to use an electronic alternative to the publication of documents in the national gazette; and
- The information requirements for letters and order forms apply equally to electronic letters and order forms, with additional, less onerous requirements for websites.
From 1 January 2007, the Companies Act 1985 as amended requires the company's name to appear legibly in:
- all its business letters,
- all its notices and other official publications,
- on all its websites,
- all bills of exchange, promissory notes, endorsements, cheques, orders for money or goods purporting to be
- signed by or on behalf of the company, and
- all bills of parcels, invoices, receipts, letters of credit.
- the company's place of registration and the number with which it is registered,
- the address of its registered office,
- in the case of an investment company , the fact that it is such a company, and
The Companies Act 1985 (E-Communications Order 2000) facilitated the use of e-communications in certain contexts – namely, the circulation of the annual report & accounts (section 238), summary financial statement (section 251) and AGM notice (section 369) and the appointment of proxies (section 372). However, there was uncertainty whether other requirements to communicate information “in writing” required the use of paper. The general principle of the Companies Act 2006 is that companies should, subject to shareholder approval, be able to default to using e-communications. Individuals however will retain the right to receive information in paper if they wish. The company communications provisions set out in the Act apply to all companies, public and private.
We already use website communications with shareholders who want it. Can we just continue as we are?
Yes. If a company already has an individual shareholder’s agreement to circulate the annual report and accounts, summary financial statement or AGM notice to the shareholder by website under the terms required by sections 238, 251 or 369 of the 1985 Act, the company will be able to continue to do this under paragraph 9 of Schedule 5 to the new Act. As under existing law, paragraph 13 of Schedule 5 requires the company to notify the shareholder each time information is posted on the website.
We already use website communications with shareholders who want it. Can we just continue as we are?
Yes. If a company already has an individual shareholder’s agreement to circulate the annual report and accounts, summary financial statement or AGM notice to the shareholder by website under the terms required by sections 238, 251 or 369 of the 1985 Act, the company will be able to continue to do this under paragraph 9 of Schedule 5 to the new Act. As under existing law, paragraph 13 of Schedule 5 requires the company to notify the shareholder each time information is posted on the website.
Our articles already make provision for e-communications with our shareholders. Will we still have to pass a resolution?
No. Under paragraph 10(2)(b) of Schedule 5, where the articles already contain provisions to the effect that the company may send or supply documents or information to members by website, no resolution is required. However, where a company wishes to go further than the terms of the articles, for example where the articles only cover certain documents, then a new resolution will be required to provide general cover for other documents that the issuer wishes to communicate by website.
Companies traded on a regulated market are subject to the FSA rules, which will include a transitional provision to ensure that where a company could already lawfully use electronic means to communication to shareholders (or holders of debt securities) under existing law, the company will be able to continue doing so [see transitional provision 12 to DTR 6.1.8R(1) of the FSA rules implementing the Transparency Obligations Directive].
We want to start using email communication only with our shareholders. What do we need to do?
Part 3 of Schedule 5 deals with communications by in electronic form. Under paragraph 6, the company needs to seek individual agreement of each intended recipient to receive information by email. Where an individual does not agree or fails to provide an email address, the company will need to send information in hard copy.
We want to default to using website communications. What do we need to do?
This is where the cost-savings for business will be greatest and procedures for taking advantage of this facility are dealt with under Part 4 of Schedule 5. The company will need both to seek individual agreement of each intended recipient (paragraph 9) and to pass a resolution for the company to use website communications as the default. Where an individual fails to respond within 28 days, the company may consider this as the individual’s deemed agreement to website communications. Where an individual does not agree to website communications, the company cannot ask again for his or her agreement within less than 12 months. The company must notify the individual each time information is published on the website.
What if an email bounces back with an undelivered message?
The 1985 Act continues to apply to the substantive requirement to give notice and those to whom it must be given, and there have been no changes to that as a result of the First Commencement Order. By virtue of section 310(4) this provision does not prevent a company making provision in its articles not to send notice of a general meeting to members for whom the company no longer has a valid address. Section 423(2) makes similar provision for the annual report and accounts.
What does "specifically" or "generally" mean, for example, in paragraphs 6(a) and 7(a) in Schedule 4 and paragraphs 6(a) and 9(a) of Schedule 5?
Where the company or an individual has agreed “generally” that a document may be sent in a particular form, it means that the company or individual has agreed that all documents or information may be sent in that manner. Where a company or an individual has agreed “specifically”, this means agreement for a specific document or piece of information to be sent in a particular form.
Under paragraph 10(3)(b), someone who responds to the company’s request to agree to website communication is deemed not to have agreed. What if he or she does want to agree?
The intention behind paragraph 10(3)(b) is to require only those who do not agree to website communication to inform the company, while those who do agree should remain silent as a nil return within 28 days will be taken as deemed agreement. Companies will need to consider a form of wording in their requests to shareholders and others to ensure that it is clear that any other response is not a response to the invitation “to agree”.
We are concerned that wider use of e-communications will discourage shareholders, who are not willing to go on-line to cast their proxy instructions. What can we do?
When a company defaults to website communications, it must notify - either by email or in hard copy - each shareholder that information has been posted on the website. One option would be to ensure that such notification – whether an email or a postcard or letter - includes, for example, the time and date of the AGM, a list of the resolutions and instructions on how to vote or give proxy voting instructions. This would enable those, who are not able or not willing to communicate with the company electronically, to 'post' their proxy voting instructions back to the company.
Can we communicate by other means, such as text message?
Yes. Part 4 of Schedule 4 and Part 5 of Schedule 5 allow an individual and a company to communicate by means other than in hard copy or electronic form. Clearly, the individual and the company will wish to consider what form of documentary evidence they might wish to keep to record that information has been sent.
What do the provisions do?
Section 1143 specifies that "the company communications provisions" apply for the purposes of communications to or from the company authorised or required under the Companies Acts. However, the provisions are subject to anything in or under any other enactment, such as the FSA rules for companies traded on a regulated market. In addition, communications between a company and the Registrar (Companies House) are subject to Part 35.
Section 1144 requires documents to be sent in accordance with the provisions of Schedules 4 and 5.
Section 1145 ensures the right for an individual shareholder to require information in paper copy. This must be done by the company within 21 days of receiving the request and at no charge to the individual.
Section 1146 sets out the requirements for authentication of communications. Communications in hard copy require, as under existing law, the sender's signature. For e-communications, the company may specify the means of authentication. Where the company does not specify and has no reason to doubt the identity of the sender, then the company may consider the communication authenticated.
Section 1147 sets out when communications from the company are deemed to have been delivered. This is 48 hours when hard copy communications are sent by post to an address in the UK or when email communications are sent. For material posted on the website, it is deemed to have been delivered either immediately if the recipient has been notified in advance, or later when the recipient is deemed to have received notification of information being posted on the website.
Section 1148 defines the terms used in the "company communications provisions". See also section 1168 for the meaning of "hard copy", "electronic form" and related expressions.
Schedule 4 deals with communications to a company. Part 2 covers hard copy communications, which are similar to the present position. Part 3 covers communications in electronic form, where the sender needs to ensure that the company has agreed (generally or specifically). Part 4 allows the company and sender to agree other means of communications.
Schedule 5 deals with communications by a company. Part 2 covers hard copy communications. Part 3 covers communications in electronic form, essentially email, whereby the company must have obtained the individual’s agreement (generally or specifically). Part 4 covers website communications. Paragraph 10 of Part 4 allows the company, by resolution or the articles, to default to website communications if it has sought each individual’s agreement. Paragraph 13 requires the company to notify the shareholders or others each time information has been posted on the website.
Section 463: liability for false or misleading statements in reports
This section deals with the extent of directors’ liability in relation to the statutory narrative reporting requirements. It specifies that the liability provision applies to statements made in (or omissions from) the directors’ report (which includes the business review under section 417), the directors’ remuneration report (under section 420) or summary financial statements derived from them. It limits the directors’ liability to the company only in respect of loss suffered by it as a result of any untrue or misleading statement in a report, or the omission from a report of anything required to be included. A director will only be liable in certain circumstances – that is, if an untrue or misleading statement is made deliberately or recklessly, or an omission amounts to dishonest concealment of a material fact. Third parties, such as auditors, will remain liable only to the company for negligence in preparing their own report. These liability provisions do not affect any liability for a civil penalty or for a criminal offence.
Part 22: information about interests in company's shares
The provisions of Part 22, most of which is commenced by this order, concern a public company’s right to investigate who has an interest in its shares. They replace equivalent provisions in Part 6 (sections 212-219) of the 1985 Act. The provisions will be brought into force on 20 January 2007, to coincide with introduction of rules by the Financial Services Authority relating to the Transparency Obligations Directive. These rules will replace the obligations about disclosure of shareholdings currently contained in sections 198 to 211 of Part 6 of the 1985 Act, which will be repealed from 20 January 2007. In the new rules, a different concept of "interest in voting rights" will be adopted in order to implement the Transparency Obligations Directive.
The provisions being commenced are sections 791-810, 811 (1) to (3), 813 and 815-828. Sections 811(4), 812 and 814 are not being commenced yet. These provide that the company must only allow the inspection of the register or the copy requested if satisfied that it is for a proper purpose, and provide a right for the person concerned to apply to the court for it to allow the inspection. These provisions will be brought into force at a later date with equivalent provisions elsewhere in the Act on access to registers.
What are the main changes to the 1985 Act provisions (known as "section 212 notices")?
The main changes to section 212 of the 1985 Act and related provisions are:
- To make clear that notices are not required to be in hard copy, and therefore can be given in electronic form, (section 793 read in conjunction with the provisions in Part 37, which is also being commenced, on the sending or supplying of documents or information);
- providing for how information is to be entered on the register when the name of the present holder of the shares is not known or there is no present holder (section 808);
- removing the requirement for a company to keep information on the register in relation to notices issued more than 6 years previously (section 816), and
- removing the requirement on the company to verify third party information supplied in response to a section 793 notice before putting it on the register (section 817).
What companies do these provisions apply to?
Part 22 only applies to public companies, just as the equivalent provisions of the 1985 Act do.
What do the provisions allow public companies to do?
The provisions allow a public company to issue a notice requiring a person who it knows, or has reasonable cause to believe, has an interest in its shares (or to have had an interest in the previous 3 years) to confirm or deny the fact, and, if the former, to disclose certain information about the interest, including information about any other person with an interest in the shares.
The provisions allow the company to pursue information through a chain of nominees by requiring each in the chain to disclose the person for whom they are acting.
They enable public companies to discover the identity of those with voting rights (direct or indirect) that fall below the thresholds for automatic disclosure, and it also enables companies (and their members) to ascertain the underlying beneficial owners of shares.
What needs to be kept in the register?
The register required to be kept by section 211 of the 1985 Act covers all interests notified, whether under the automatic disclosure rules or in response to a notice served under section 212 of that Act (company investigations). The latter are kept as a separate part of the register of interests in shares. In future it will be for regulations made under the Financial Services and Markets Act 2000 (as amended by Part 43 of this Act) to make provision as to how interests notified under the automatic disclosure rules will be made public.
Section 808 provides that if, as a result of a section 793 inquiry, the company receives information relating to interests held by any person in relevant shares, it must within three days enter in a register of interests disclosed:
- the fact that the requirement (to disclose information under the notice) was imposed and the date on which it was imposed; and
- the information received in response to the notice under section 793.
The register of interests disclosed must be kept available for inspection at the company’s registered office or, if regulations are made in the future under section 1136, at a place specified in such regulations. The company must advise the registrar where the register is kept (unless it has always been kept at the registered office).
Who can inspect and require copy of entries?
As now, any person will be able to inspect the register, and for a prescribed fee obtain a copy of any entry on the register. New provisions in section 811(4), 812, and 814, restricting this right of inspection will be commenced when the equivalent provisions for other company registers are commenced.
Provisions coming into effect in April 2007
Section 1063: Fees payable to the Registrar of Companies
This section gives the Secretary of State a power to set fees by regulations in relation to any function of the registrar of companies and in relation to the provision of services and facilities incidental to her functions. It replaces section 708 of the 1985 Companies Act, but is more specific about the types of things for which fees may be charged, although the list is not exhaustive.
As now, fees relating to the normal statutory filing obligations of companies under companies legislation will be set by regulations made by the Secretary of State. It will also be possible for fees to be charged for any ad hoc and bespoke discretionary services which Companies House wishes to provide. The 1985 Act (section 708(5)) provides that the registrar can herself determine fees for services for which there is no direct legal obligation. Subsection (5) of the clause replaces this with a more general power for the registrar to determine fees where no fee has been set in regulations by the Secretary of State. Such fees might relate for example to the introduction of new services (e.g. those made possible by new technologies) which could not have been anticipated when the Secretary of State last made fees regulations; or for services such as seminars and road shows which Companies House arranges.
Repeals of sections of the Companies Act 1985 coming into effect in April 2007
Repeal of section 41: authentication of documents
Section 41 of the 1985 Act has the requirement to have a document or proceeding requiring authentication by a company to be authenticated by the signature of a director, secretary or other authorised officer. This is now no longer needed as this requirement has been overtaken by common law developments and scope to use a company’s own articles to provide for this.
Repeal of section 293 and 294: age of directors
Section 293 and 294 of the 1985 Act make provision about directors aged 70 and over in public companies or in private companies which are subsidiaries of public companies, and provision requiring a director to disclose his age. These are no longer regarded as necessary.
Repeal of section 311: prohibition on tax-free payments to directors
Section 311 of the 1985 Act prohibits a company from paying a director remuneration free of income tax. The Law Commissions recommended its repeal in their 1998 report, Company Directors: Regulating Conflicts of Interest and Formulating a Statement of Duties, on the grounds that the tax which the company agreed to pay is itself taxed as part of the emoluments of a director and that the company is required to disclose in its annual accounts an estimate of the tax which it has undertaken to pay.
Repeal of section 311: prohibition on tax-free payments to directors
Section 323 of the 1985 Act prohibits directors (including shadow directors) from buying "put" and "call" options in listed shares or debentures in the company or another in the same group. This prohibition is extended to spouses and minor children of directors by section 327 of the 1985 Act. The repeal of these sections was recommended by the Law Commissions in their 1998 report, Company Directors: Regulating Conflicts of Interest and Formulating a Statement of Duties.
Repeal of sections 324-326 and 328-329, and Parts 2 to 4 of Schedule 13: share dealings by directors and their families
Sections 324 to 326, 328 to 329 and Schedule 13 of the 1985 Act impose requirements relating to a director’s interests in shareholdings in his company:
- directors and shadow directors are required to disclose to the company their interest in shares in and debentures of the company or any holding or subsidiary company within a group structure, including interest held by the directors’ infant children or spouse;
- the company has a corresponding duty to keep a Register of Directors’ Interests in which to record information notified by directors;
- listed companies must also notify the relevant investment exchange by the end of the next day following receipt of notification from a director of his interest.
Repeal of sections 343 and 344: special provision for banking companies etc in respect of loans to directors
Sections 343 and 344 of the 1985 Act make special provision for banking companies and the holding companies of credit institutions, allowing them to disclose in their annual accounts abbreviated particulars of loans, quasi-loans and credit transactions with directors or their connected persons. Section 413 of the 2006 Act, which replaces the annual accounts disclosure requirements of the 1985 Act in respect of loans, quasi-loans and credit transactions, makes its own special provision for banking companies and the holding companies of credit institutions. Sections 343 and 344 of the 1985 Act are therefore no longer needed.
Repeal of section 358: power to close register
Section 358 of the 1985 Act allows a company to give notice in a newspaper in the district where the company’s registered office is situated to close the register of members for up to 30 days a year. The Company Law Review recommended repealing this provision and the Government agrees it is now outdated.
Repeal of section 438: Power of the Secretary of State to bring civil proceedings on a company’s behalf
Section 438 gives the Secretary of State the power to bring civil proceedings on behalf of a company. It is repealed as it is no longer needed. This repeal does not affect any proceedings begun before this section comes into force.
- in the case of a limited company exempt from the obligation to use the word "limited" as part of its name , the fact that it is a limited company.
Section 720: Repeal of requirement that certain companies publish a periodical statement
Section 720 of and the related Schedule 23 to the 1985 Act required certain insurers and deposit, provident or benefit societies to publish a periodical statement in the form set out in the Schedule. The statement contains basic information about certain liabilities and assets and, in the case of a company with shares, basic information about its share capital and issued shares. This general disclosure requirement has been superseded by specialised regulatory developments in particular fields of financial services.
