Companies Act 2006: First Stages of Implementation

LEGAL BRIEFING FROM THE CORPORATE GROUP

22 JANUARY 2007

The Companies Act 2006 (the Act) received Royal Assent on 8 November 2006. As part of the implementation of the Act, some provisions came into force earlier this month.

Company trading disclosures

Provisions in the Act which implement two recent amendments to the First Company Law Directive took effect on 1 January 2007 . These included new rules on the information a company must disclose about itself in business letters, order forms and on its website. The rules are contained in Schedule 1 of The Companies (Registrar, Languages and Trading Disclosures) Regulations 2006. The Regulations amend the Companies Act 1985.

Section 349 of the Companies Act 1985 imposed a requirement that a company's business letters, notices, invoices and certain other documents must display the company's name (as it appears in its Memorandum of Association) in legible lettering. If a company fails to comply with this section it is liable to a fine, as is any officer of the company who issues or authorises such documents in which the company's name is not mentioned. The new rules extend this requirement to include corporate websites and order forms.

Section 351 of the 1985 Act imposed a requirement that all business letters and orders forms must show in legible lettering: the company's place of registration; the number with which it is registered and the address of its registered office. Companies that fail to comply with section 351 or officers of the company who issue or authorise the issue of any business letters or order forms in contravention of section 351 are liable to a fine. The new rules now require this information to be included on all corporate websites.

In addition, both sections have been clarified by stating that the obligation to disclose the information applies to documents in hard copy, electronic or other form. Accordingly, if order forms are sent by email, the electronic order form must have the relevant information on it.

Uncertainty still surrounds what correspondence constitutes business letters for the purposes of sections 349 and 351 particularly in relation to email correspondence. The prudent approach would be for companies to amend their standard email disclaimers to include the information required under the rules. Companies should take the necessary steps to comply with the new rules, including amending their stationery and websites in accordance with the new provisions, since a breach of the rules may result in criminal sanctions for the company and its officers.

Electronic communications

The main problem with electronic communications under the 1985 Act regime was that it was only possible to communicate electronically with shareholders if they expressly consented (and provided email or fax details). Communications by email with shareholders who have expressly consented continues to be permissible. The key feature of the new regime, which came into force on 20 January 2007 , concerns communication by way of posting documents onto the company's website: provided the new statutory procedures are correctly followed, shareholders will have to deliberately 'opt out' of website communications rather than 'opt in' , as before. If they do not opt out, shareholders will be deemed to have agreed to the company communicating via the company's website.

To take advantage of this new regime, a shareholders' resolution or provision in the company's Articles is necessary authorising the company to communicate with shareholders by posting documents on its website. Companies will also need to ask shareholders individually for their consent to website communications (unless such consent is already in place), making sure that this request clearly explains that shareholders who do not respond within 28 days will be deemed to have consented to non-receipt of hard copies of documents if the company posts them on its website. A request for consent may only be sent to a shareholder once every 12 months; companies will need to request consent from new shareholders as a matter of course. Annual updating of company records is therefore likely.

A company must notify shareholders who have consented (or who are deemed to consent) to website communications when it posts new shareholder documents on its website. Such notifications will need to be sent in hard copy, unless the shareholder has also consented to electronic communications and has provided relevant details (e.g. an email address). The notification must explain how to access the document on the website and, in the case of a notice of meeting, must include details of the date, time and place of the meeting. Also wherever the website is used for posting company documents, a shareholder can still require the company to send him a hard copy version of the documents within 21 days, even if he has consented or is deemed to have consented to the posting of documents on the website. Hard copies must be provided free of charge and it will be an offence to fail to provide them. Even so, companies with large shareholder bases should make considerable savings of cost and time.

Companies wishing to take advantage of the new regime will need to obtain shareholder approval in general meeting and should do so at their 2007 AGM so that they can use their website to communicate notice of their 2008 AGM, with the costs savings that will follow. Companies should, at the same time, seek consent to website communications from those shareholders who have not consented, and should encourage shareholders to provide email addresses.

Disclosure about major shareholdings

These provisions, which came into effect on 20 January 2007 , implement the EU Transparency Directive. The Directive's provisions on the disclosure of major shareholdings have been implemented by changes to the FSA's Disclosure Rules, renamed the Disclosure and Transparency Rules (DTR), and by the repeal of the disclosure of interests in shares provisions contained in the Companies Act 1985, so that there is now no disclosure requirement for UK public companies, whose shares are not quoted.

The basic obligation is for a shareholder to notify the company of the proportion of voting rights that he holds if he acquires or disposes of shares in the company to which voting rights are attached and, as a result of such acquisition or disposal, the proportion of the voting rights that he holds reaches, exceeds or falls below certain thresholds. For UK incorporated quoted companies the threshold is three per cent, with the obligation to notify at each higher whole percentage point. The obligation extends to the situation where a person has the right, pursuant to a formal agreement, to acquire shares (e.g. under an option, but not under a contract for difference). In the case of nominee shareholdings, the person who controls the voting rights will be required to comply with the notification requirement. Also, where the chairman of a meeting holds discretionary proxies representing more than three per cent of the voting rights, he will have a notification obligation. The FSA has produced a specimen notification form.

The DTR require the shareholder in a UK incorporated company to notify the company within two days of the event, and an officially listed company must notify an RIS as soon as possible, and not later than the end of the trading day following notification to it. AIM companies will now be subject to a dual regime, under the DTR and AIM Rules. Compliance with the DTR should ensure compliance with the AIM Rules save that the company is obliged by the AIM Rules to make its notification 'without delay'.

Information about interests in shares

Section 212 of the Companies Act 1985 allowed a public company to investigate who had an interest in its shares. This has proved particularly useful now that so many shares are held in nominee accounts through CREST. Where a person failed to give the company the required information in response to a section 212 notice, the company could apply for a court order imposing restrictions on the shares in question. The relevant provisions of the Act, which came into force on 20 January 2007 , essentially restate section 212. The only substantive change to note is that the company may now serve the notice electronically (provided the recipient has consented to communications in electronic form). The other point to note is that the disclosure requirement applies to an 'interest in shares' : contrast this with the changes to the disclosure obligations, which, in order to implement the Transparency Directive, are now triggered by the acquisition or disposal of voting rights in shares. This means that shareholders will have to comply with different disclosure regimes, depending on the type of disclosure sought. This could make life more complicated for shareholders.

Reporting requirements

The DTR introduces ( with effect from 20 January 2007 ) new reporting requirements for companies with an official listing (although not AIM or Plus Markets' companies). UK officially listed companies will have to publish annual and half yearly financial reports, along with interim management statements during each half year (unless the company issues quarterly financial statements). The contents requirement of the interim management statement is still a little uncertain, and therefore a matter of some concern, although there is negative guidance available from the FSA. The annual and half yearly reports must be accompanied by responsibility statements. The new reporting regime applies for financial years commencing on or after 20 January 2007 ; accordingly, companies with a 31 December year end do not have to start issuing interim management statements until the first quarter of 2008.

Officially listed companies will no longer be obliged to publish a preliminary statement of their annual results. Although institutional investors have expressed concern at this, in practice, such information will normally be subject to the DTR and will require early disclosure.

The other significant development surrounds directors' liability in relation to the reporting requirements highlighted above (including the interim management statements). Under the new regime a shareholder who buys securities in a company with an official listing, and who suffers loss as a result of untrue or misleading statements in (or omissions from) the financial reports and accounts, will be able to claim damages from the company where management acted with knowledge or recklessly. The directors may in turn be liable to the company. This is a potentially important widening of the scope of corporate and directors' liability.