INTERNATIONAL CORPORATE GOVERNANCE The United Kingdom’s Corporate Law Overhaul: The Companies Act 2006 By Stuart Borrie and Anne Stojanovic UK corporate law has been substantially rewrit- provides that “regard shall be had to the correspond- ten for the first time in a generation. The Companies ing common law rules and equitable principles in Act 2006 (the Act) is being implemented in stages, interpreting and applying the general duties.” with approximately one third already in force. The remaining provisions will be implemented in The codified duties are as follows: tranches. The last implementation date is expected to be October 1, 2009, when all the provisions • Act within powers; will be in force. Whilst the Act is, in many cases, a consolidation of existing law, there are substantial • Promote the success of the company and, in exer- changes. cising this duty, the directors must have regard to a number of factors including the long term consequences of the decision, the interests of Codification of Directors’ Duties the company’s employees, the need to foster the company’s business relationships and the impact The duties owed by a director have developed by of company’s operations on the community and application of fiduciary principles by the courts. the environment; The Act has introduced a series of statutory duties which largely correspond to those duties already in • Exercise independent judgment; existence, however, there are many other duties— both statutory and non-statutory—to which direc- • Exercise reasonable care, skill and diligence; tors must have regard (such as the duty to consider the interests of creditors in times of threatened • Avoid conflicts of interest; insolvency). • Not to accept benefits from third parties; and The intention of the Government in codifying the law relating to directors’ duties was to provide • Declare any interest in a proposed transaction or greater clarity on what is expected of directors and arrangement. to make the law in this area more accessible. In addition, the UK Government wished to embed Derivative Claims in statute the concept of “enlightened shareholder value”—which has influenced the drafting of the duty “to promote the success of the company.” The The Act has introduced a new statutory regime codification of directors’ duties came into effect on for “derivative claims”—claims made in the compa- October 1, 2007 (other than the rules regarding con- ny’s name. This replaces very limited common law flicts of interest and declarations of interest which rights. It is now possible for a claim to be made by a will come into force on an as yet unspecified date). shareholder in respect of any actual or proposed act or omission involving negligence, default, breach of In common with the duties developed by the duty or breach of trust on the part of a director. As courts, the codified duties are owed by the directors a result, a claim may be brought in respect of an to the company. The common law and equitable prin- alleged breach of any of the general duties of direc- ciples developed by the courts remain relevant when tors referred to above. considering the new provisions: the Act specifically Concern has been expressed that the new deriva- tive claims procedure—alongside the new statutory statement of general duties—will expose directors Stuart Borrie is a Partner, and Anne Stojanovic is a Professional to significantly greater risks of shareholder-driven Support Lawyer, in the London Office Company Department of litigation. The UK Government has attempted to Kirkpatrick & Lockhart Preston Gates Ellis LLP. Volume 16, Number 1 29 The Corporate Governance Advisor
address these concerns by introducing a vetting pro- accounts before a general meeting. Such companies, cedure to be administered by the courts. This pro- however, will continue to be required to send the cedure requires the shareholder making the claim accounts to shareholders when the accounts are to apply to the court for permission to continue the filed with the Registrar of Companies or not later claim. The Act sets out a number of factors which than nine months following the end of the financial the court must consider in making its decision, year (whichever is earlier). including whether the shareholder is acting in good faith and the likelihood of ratification of the act in In provisions expected to come into force in April question. In considering whether to give permis- 2008, it will be possible for a company to limit the sion, the court must have particular regard to any liability of its auditors, if the company so resolves. evidence and views of shareholders of the company As would be expected, there will be limitations—for who have no personal interest in the matter. example, no agreement can reduce the auditor’s liability to less than an amount, which is fair and reasonable in all the circumstances. Directors’ Residential Addresses Under further changes from April next year, it Under new provisions, designed to protect direc- will be an offence for an auditor to cause an audi- tors, it will no longer be necessary for directors to tors’ report to include any matter which is mislead- provide details of their home addresses for inclu- ing, false or deceptive in a material particular. It sion on the public register. Instead, directors will be will also be an offence for an auditor recklessly to able to give a service address. Another register, only omit certain statements required by the Act such accessible in limited circumstances, will contain as a statement that a company’s accounts do not their residential addresses. Under the current law, agree with the company’s accounting records and directors’ addresses can be withheld only by order returns. of the court. The new provisions are expected to come into force in October 2009. Meetings and Resolutions Unfortunately, this change will have no effect on information already on the public record so, unless As part of the UK Government’s policy to they move house, directors whose home addresses “think small first” and to simplify the law relating have already been filed will have no protection. A to private companies, the Act has introduced a new UK Government statement has indicated, though, approach to meetings and resolutions which should that regulations will be introduced allowing for- simplify the administration of private companies. mer directors and secretaries to have their details removed where practicable. Changes have also been made to the law relating to the meetings and resolutions of public compa- nies. The changes for private companies include: Company Secretaries • Removal of the requirement to hold annual gen- The requirement that a UK private company has eral meetings; a company secretary will be removed in provisions expected to come into force in April 2008. If they • A new written resolution procedure; and so wish, private companies will be able to retain the post of company secretary. Public companies will • A reduction in the notice period for all meetings continue to be required to have an appropriately to 14 days. qualified company secretary. Public companies are still required to hold an annual general meeting and must do so within seven Auditors and Accounts months after the end of the financial year. This period will be shortened to six months following In provisions already in effect, private compa- a transitional period. A failure to hold a meeting nies will no longer be required to lay their annual within the specified period is an offence. The Corporate Governance Advisor 30 January/February 2008
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