Alert

Who does this affect?

All UK public and private companies and their directors

What do you need to do?

Ensure that directors are aware of their new statutory duties and consider the impact of other changes. Review the company's articles to determine whether they need to be changed.

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Rowan Russell  
Partner
T +44 20 7778 7180

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Melbourne
Hal Bolitho  

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The UK Companies Act 2006 is being implemented in stages. Some provisions have already been implemented (including important provisions implementing the EU Transparency Directive and the EU Takeovers Directive, and other provisions about electronic communications with shareholders and statutory liability for financial reports). However, those provisions represent only a small part of the Act. The remaining provisions will be implemented in three further phases on 1 October 2007, 6 April 2008 and 1 October 2008. The provisions coming into force on 1 October 2007 include some significant changes. This Alert gives a brief description of some of those changes.

Directors’ duties

The Act introduces a statutory statement of directors’ general duties. The statutory duties replace existing general duties imposed by the common law and equity. However, the statutory duties are not a complete statement of directors’ duties in all circumstances. For example, the Act specifically preserves the duty to consider creditors’ interests when a company may be insolvent. In addition, the Act provides that existing case law relating to the common law and equitable duties can be used to interpret and apply the statutory duties.

The statutory duties are as follows:

• to act within the directors’ powers;
• to promote the company’s success for the benefit of the company’s shareholders as a whole;
• to exercise independent judgment;
• to exercise reasonable skill, care and diligence;
• to avoid conflicts of interest;
• not to accept benefits from third parties; and
• to declare interests in proposed transactions with the company.

The statutory duties largely reflect the common law and equitable duties that they replace. However, there are some changes that represent a substantial departure from the common law and equitable duties. For example, the duty to promote the company’s success for the benefit of shareholders replaces the common law duty to act in the company’s best interests. These changes are some of the most controversial aspects of the Act.

The statutory duties come into force on 1 October 2007 except the duties to avoid conflicts of interest, not to accept benefits from third parties and to declare interests in proposed transactions with the company (which come into force on 1 October 2008).

Derivative claims

The Act introduces a new statutory procedure for shareholders to bring derivative claims against a director. This statutory procedure replaces the existing common law procedure. Under the new statutory procedure shareholders will be able to bring derivative claims in a broader range of circumstances than at present.

It is difficult to predict the practical impact of the new statutory procedure. There is some concern that directors may be exposed to increased litigation risk from activist shareholders. However, the procedure does offer some protection to directors. In particular, an applicant must obtain court permission to proceed with any claim.

Other director related provisions

The Act introduces various other changes impacting directors. In particular, the Act codifies the law on ratification of directors’ conduct and makes some changes to the law on transactions between companies and their directors (such as substantial property transactions and loans).

Meetings and resolutions

The Act introduces a number of important changes to the rules on company meetings and resolutions. Perhaps the most significant change is that private companies will no longer need to hold an annual general meeting unless they choose to do so. Other changes include changes relating to private company written resolutions, notice periods for shareholders’ meetings, and the appointment and rights of proxies.

Enfranchising indirect shareholders

The Act introduces some provisions designed to assist indirect shareholders to become more involved in a company’s affairs. In particular, a shareholder in a listed company who holds shares on behalf of another person will be able to nominate that person to enjoy the right to receive information sent to shareholders.

Enhanced business review for listed companies

All companies other than small companies must prepare a business review as part of their annual directors’ report. The purpose of the business review is to enable shareholders to assess how the directors have performed their duties. The Act expands the requirements for listed companies’ business reviews.

Further information

This Alert is only a brief summary of some the provisions of the Act coming into force on 1 October 2007. For further information and advice, please contact our London office.