Strategy & Operations » Governance » Companies Act to regulate directors’ behaviour

With more than 1,300 clauses, the Companies Act 2006, which received royal
assent on 8 November, is the biggest shake-up in company law for 50 years.
According to Alistair Darling, the secretary of state for trade and industry,
“this Act will help ensure Britain remains one of the best places in the world
to set up and run a business,” adding that “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.”

The latest legislation will replace the 1985 and 1989 Companies Acts.
Designed to be deregulatory, saving companies an estimated £250m a year, the
legislation was characterised by Darling as “one-third purely restatement of
existing laws, one-third almost restatement and one-third genuinely new”.

Yet not everyone is convinced. Bruce Hanton, corporate partner at law firm
Ashursts, says: “The Act is a damp squib and pretty much puts into law existing
business practice. There is very little new content, despite the vast number of
clauses and no real threat of directors facing any new liabilities or

Into the mix
The implementation of this mix of old and new provisions will be staggered. Some
measures enforcing European requirements will come into force soon.

The Act overhauls case law governing how firms are created, run and wound
down. It contains many new responsibilities for directors touching on areas
beyond the balance sheet such as how businesses handle environmental matters,
employees, and social and community issues.

But many provisions are still subject to a draft of consultation, guidance
and new regulations and the Act will not come fully into force until October
2008. However, quoted companies, private companies, shareholders and auditors
will all be affected by the legislation.

The Act says that private companies will no longer be legally obliged to have
a company secretary and there will also no longer be a requirement to hold an
annual general meeting. Furthermore, the Act also scraps the prohibition on
providing financial assistance for the purchase of their own shares, simplifies
the rules on share capital and establishes new rules designed to make it easier
to take decision by written resolutions.

Director’s duties
For the first time, the new Act codifies directors’ duties, on which the
Department of Trade and Industry is due to issue guidance next year. However,
lawyers say that the full impact of the codification of duties by the Act
remains to be seen. Under the Act, directors have a duty to “act in accordance
with the company’s constitution” and “promote the success of the company for the
benefit of its members”. Directors must also exercise independent judgement,
exercise reasonable care, skill and diligence, avoid conflicts of interest, not
accept benefits from third parties and declare interests in proposed company

The Act also tackles fair dealing by directors with the company, which
prevents the use of company jets and so on for anything other than business.
Some shareholder and stakeholder groups have complained that the duties are not
strict enough. For example, the Act imposes restrictions on directors’ civil
liability for the content of their reports in annual statements. External
auditors will also be able to agree a limit on their liability with shareholders
of the company under the new legislation.

The Act also increases the power of investors. For example, it will be easier
for those who hold shares in ‘nominee’ accounts to exercise their voting rights,
secure perks and gain access to company information. The Act also contains a
reserve power, allowing the government to force institutional shareholders to
disclose how they use their votes.

Since the Chancellor scrapped the statutory operating and financial review
last year, the government has decided that the contents of the annual business
review will be expanded. The new requirements include the disclosure of relevant
information on the company’s supply chain and other contractual relationships.
However, the government has not issued any statutory standard to tell companies
how to report on such issues, so there will be large variations about how
detailed such disclosures need to be.