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Corporate Law Newsflash January 2007
NEW YEAR’S RESOLUTIONS: COMPANIES ACT 2006
English company law is to about to undergo major changes from the New Year, as The Companies Bill, which received royal assent on 8 November 2006, will begin to come into force.
With 1,300 separate sections and running to 760 pages, the Companies Act 2006 (the New Act) is a significant piece of new legislation and the longest piece of legislation ever passed by parliament.
Almost a third of the New Act is new law, a further third of the New Act is reckoned to be a restatement of existing provisions using simpler and clearer language and the final third is simply consolidation and replacement of existing company law found in the following acts, which will be replaced:
· Companies Act 1985
· Companies Act 1989
· Companies (Audit, Investigations and Communities Enterprise) Act 2004
Why introduce a new act?
Secretary of State, Alistair Darling, has said that, “this Act will ensure Britain remains one of the best places in the world to set up and run a business. It makes sure the regulatory burden on business is ‘light-touch’, promotes shareholder engagement and will help encourage a long-term investment culture in the UK.”
Department of Trade and Industry (DTI) estimates place the financial savings for businesses from the New Act at £250 million a year, including £100 million for small businesses.
How will it affect your company?
Despite much of the New Act being taken up by restatement of existing law, there is still a huge amount of new law for companies and directors to digest. Many of the changes, such as those relating to electronic communications, will be beneficial to companies; some will perhaps increase the burden of red tape, for example, the extension of shareholders’ rights to sue directors for negligence and to bring claims on behalf of the company in certain circumstances.
Directors’ duties, such as the duty to act in good faith towards the company and not to make a secret profit, have been developed by judge-decided case law over the last hundred years or so. These duties are now set out in the New Act in an attempt to simplify and make the position clearer for directors. Owing to the way in which this part of the New Act has been drafted, these cases will still be relevant in determining directors’ duties, thus eroding much of the benefit of setting them out in the New Act.
Some of the key benefits for all companies are outlined below along with those that only apply to private companies:
Key Benefits - for all companies
· Ability for companies to make greater use of electronic communications with shareholders will save businesses over £50million
· Statutory statement of directors’ general duties to codify the existing law in this area for directors most of which is currently in case law
· Directors will have the option of providing a service address for the public record as opposed to their private home address
Key Benefits - Private companies
· No longer required to have a company secretary
· New form of standard articles of association reflecting the way in which private companies tend to operate
· No longer required to hold an annual general meeting
· Streamlining of decision-making procedures using written resolutions
· No longer prohibited from giving financial assistance for the purchase of their own shares
· Simpler procedures for effecting a reduction in share capital
When will it come into force?
Mr Darling has stated that all parts of the New Act will be in force by October 2008. With the first parts to come into force from 1 January 2007, including provisions relating to electronic communications with shareholders.
Presently there is no indication if all parts of the New Act not brought into force on 1 January 2007 will be introduced in one go in October 2008 or whether their introduction will be staggered during this period. Companies hoping to benefit from certain provisions of the New Act may have to wait some time before they are able to do so.
Notwithstanding the staged introduction, directors and shareholders need to start now to think about how the New Act will affect their company and what policy and procedural changes will be necessary.
Will the New Act make it easier to do business?
The new Act is certainly an ambitious piece of legislation, but has it achieved its original objectives and, more importantly, ensured, “that Britain is one of the best places to set up and run a business”?
Despite endeavouring to reduce the burden of red tape on small and medium sized companies, the New Act would appear to increase it ever further. Private companies will, it seems, find real benefits to be gained from the New Act. Notably, mergers and acquisitions will be somewhat simplified for private companies by the abolition of the prohibition on financial assistance.
SGH would be happy to help you and your company in understanding the New Act and ensuring your organisation complies with, and benefits from its provisions.
General
Please contact your usual Sprecher Grier Halberstam LLP
contact in order to discuss the above. Details of the partners in this firm’s
Corporate Law department are as follows:-
For more
information please contact any of the Corporate Law Partners.
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