The Companies Act 2006 - a breath of fresh air in the corporate jungle

The Companies Act 2006 comprises 1,264 Sections and 16 Schedules and largely replaces the Companies Act 1985. Major changes are heralded in all areas of company law and practice, generally making it easier to set up and run a company.

Most provisions of the Act will come into force in October 2007, but some are already in force (in order to implement the EU Transparency Obligations Directive).

The changes affect directors’ duties, companies’ constitutions, share capital, shareholder communications, accounts and audits and the registration of directors at Companies House.

PRINCIPAL CHANGES

• There is a new duty for directors to promote the company’s success, for the benefit of its members as a whole. A director must “act in the way he considers, in good faith, would be most likely to promote the success of the company, for the benefit of its members as a whole.” He must have regard to the principle of “enlightened shareholder value”.

• Shareholders are given a new statutory right, to sue directors in a derivative action on behalf of the company, for negligence, default, breach of duty or breach of trust, subject to the court allowing any action to proceed.

• The directors of a pension trustee company may now be indemnified by the company or by an associated company.

• Private companies are no longer required to have a company secretary, but may still choose to have one. Directors and secretaries of public companies are automatically authorised signatories.

• New provisions permit auditors to limit liability. They may agree with corporate clients to limit liability in respect of an audit, subject to annual shareholder approval and to the limit being “fair and reasonable”. The government has the power to require that companies disclose liability limitation agreements.

• The Operating and Financial Review is abolished, but most of its provisions have been re-introduced as a Business Review. All (except small companies) must continue to publish a Directors’ Report, containing a Business Review in respect of each financial year. All are exempt from disclosing information, if seriously prejudicial to the company’s interests.

• Directors are given ‘safe harbour’ from civil liability, in respect of statements in and omissions from the Directors’ Report.

• Directors’ home addresses may now be kept private, as a service address may be registered. Home addresses may be kept on a separate register (with restricted access) but addresses already on the register will not be removed.

• Shareholders’ addresses are now to be subject to restricted access. Anyone wishing to inspect the register must submit a request to the company and provide their details.

• Beneficial shareholders are given enhanced rights. For example, a registered member may nominate another person to enjoy or exercise his or her rights.

Small businesses should benefit from the creation of a separate default constitution for private companies, abolition of the requirement for private companies to have private secretaries and simplification of private companies’ decision-making procedures.

Larger companies will benefit from deregulation, on registration, of present and past members of the company and clarification of rules on the transfer of assets between companies in the same group.