You may have heard the Companies Bill is making its way through the law-making process. When enacted, it will cause the biggest shake-up of company law since the Companies Act 1985 (most of which will be repealed).
The best guess as to when the Bill will become law is October 2007, although certain parts are likely to be in force before then.
Its original aims were to make it easier to set up and run companies, to reduce the administrative burden – by considering the needs of smaller businesses before those of larger ones – and to provide fl exibility for the future.
It looks as if some of these aims will be achieved although, as always, critics say that more could be done. At more than 500 pages, it’s hardly light reading, so here are the proposals that are likely to have the biggest impact on your business:
1) FINANCE AND INVESTMENT
The rule that a company cannot ‘fi nancially assist’ anyone in respect of the acquisition of its own shares is a bane of everyone involved in buying, selling or investing in companies. For example, if you wanted to buy the shares of a company that complemented your existing business, and wanted to raise some of the fi nance by way of a bank loan, under the rule, you could not secure that loan on the assets of the company you are buying. That’s because it would be seen as that company giving unlawful fi nancial help in connection with the acquisition of its shares.
The current Companies Act does provide for a procedure (known as a ‘whitewash’) which enables a private company to give fi nancial assistance, but this is only available where the target company has a positive balance sheet. The whitewash procedure is also convoluted and expensive, involving the auditors of the company reporting on its affairs, so as to make sure the company should be solvent for the year after the assistance is given.
WHAT’S NEW?
If the current provisions of the Bill are enacted, the prohibition against private (but not public) companies giving fi nancial assistance for the acquisition of their own shares will be abolished. This will mean that fi nancing investments and mergers will be easier to achieve in the future. This can only be a good thing.
2) GROUP REORGANISATIONS
Intra-group reorganisations (often done as a precursor to fundraisings) will also be made easier. A decision made in the courts back in 1989 (Aveling Barford) has raised concerns that, if a company transfers assets to a company within the same group at their book value, and their book value is less than their market value, the difference between the book and the market value would be treated as if the transferring company had paid a dividend.
The transfer would only then be lawful if the company had distributable profi ts equal to the ‘dividend element’ which it could use for the purpose.
WHAT’S NEW?
Under the Bill, a new regime will allow intra-group transfers of assets to be made at book value, without the difference between this and the market value being seen as a dividend, provided the transferor has positive resources (even of £1).
3) ADMINISTRATION
The day-to-day running of companies should also be simplifi ed thanks to the new Bill. Currently, if a company wishes to pass a written resolution of its shareholders (rather than holding a general meeting at which the resolution would be voted on), all of the shareholders of the company have to sign it.
WHAT’S NEW?
The Bill provides that if the written resolution is an ordinary resolution (one that only requires a majority vote in favour at a general meeting), a written resolution will be effective if shareholders who hold a majority of the voting rights sign it. Equally, a special resolution (one requiring a 75% majority) will be effective as a written resolution if shareholders who hold 75% of the voting rights sign it.
In addition, companies will also, subject to shareholder consent, be able to use electronic and website communications, rather than having to post all communications to shareholders.
Private companies will no longer need to have a company secretary. Because of this, and to accommodate private companies with a sole director, the rules governing how companies will execute documents will change.
4) DIRECTORS’ DUTIES
The Bill will, for the first time, put the duties and obligations of directors on a statutory footing, with sections of the Bill forming a ‘code of conduct’ for directors. A director’s statutory duties will include the following:
● To act within his or her powers
● To promote the success of the company
● To exercise independent judgement
● To exercise reasonable care, skill and diligence
● To avoid confl icts of interest
● Not to accept benefits from third parties
● To declare interests in proposed transactions or arrangements The statutory duties are broadly similar to the duties existing at present. However, codifying these duties will mean that there will be, at first, uncertainty as to how the courts will apply them.
When exercising their duty of “promoting the success of the company” it is currently proposed that directors will have to take into consideration the effect of their actions on a wider group of stakeholders, including not just shareholders, but also employees, consumers, suppliers and the environment.
A number of commentators feel these statutory duties go too far. Their view is that the changes will discourage people from becoming directors, restrict effective delegation to committees and make board meetings tortuously long ‘back-covering’ exercises. We will just have to wait and see how this pans out.
Being lawyers, we remind you that the Bill is not yet in force and that the provisions highlighted above may change. There may also be administrative requirements that will need to be met before companies can take the benefi t of some of the Bill’s new provisions. It is, therefore, crucial that you take proper advice on the effect and requirements of the Bill when it fi nally makes it onto the statute books.
Jai Bal is a partner in Farrer & Co’s Corporate Team. He advises on mergers and acquisitions, AIM fl otations, public company takeovers, joint ventures and shareholder agreements, private equity investments and fundraisings, and LLP issues. For more information, visit www.farrer.co.uk
