This website uses cookies

This website uses cookies to ensure you get the best experience. By using our website, you agree to our Privacy Policy

Lexis+ AI
Jean-Yves Gilg

Editor, Solicitors Journal

Companies Act 2006 (2)

Feature
Share:
Companies Act 2006 (2)

By

In the second of three articles, Robin Hollington QC, Tim Akkouh and Emily Gillett discuss how the 2006 Act improves shareholders' rights and deregulates the legislation that applies to private companies

The Company Law Reform White Paper (CLR) stated that many of the government's proposals for reform were aimed at ensuring 'greater transparency and accountability within a company's operations' and offering 'greater opportunity for shareholders to play an informed part in company business' (CLR, p 16). To implement these aims, the 2006 Act:

  • eases the rules on proxies;
  • allows shareholders to convey various rights on third parties;
  • expands the rights of shareholders to bring derivative claims; and
  • restricts the circumstances in which information about shareholders can be obtained.

Proxies

Sections 324 to 331 of the 2006 Act deal with the ability of a member to appoint a proxy and the rights that such a proxy will have. Section 324(1) expands the rights currently conferred on proxies by s 372 of the Companies Act 1985 (the 1985 Act) by removing the rule that proxies are not allowed to vote on a show of hands and by allowing a proxy of a member of a public company the right to speak at meetings. Indeed, s 285, which overrides any inconsistent provision in a company's articles, provides that a proxy cannot have fewer votes on a show of hands than the member represented by the proxy would have if he were present. The 2006 Act contains further provisions that enhance the rights of proxies, expressly providing that proxies: will be counted in determining whether a meeting is quorate (s 318(3)(c)); and may be appointed to chair general meetings (s 328). In addition to encouraging shareholder participation, these measures are likely to go some way towards stamping out abuses of the proxy system by a company's board that wishes to see its proposed resolutions carried.

Rights that can be conferred by shareholders on third parties

Part 9 of the 2006 Act was introduced in recognition of the fact that a large proportion of quoted shares are held by intermediaries such as brokers on behalf of both institutional and private investors ('indirect investors'). In such cases, the intermediary '“ and not the indirect investor '“ has legal title to the shares and the power to exercise all rights attaching to them. This, in the government's eyes, gave intermediaries little incentive to exercise actively the rights attaching to the shares they hold (for instance, if the intermediary is an execution only broker) '“ a difficulty which the 2006 Act tackles by providing new mechanisms for enfranchising indirect investors.

There are three strands to Part 9. The first applies where there is specific provision in a company's articles to the effect that a member may nominate a third party to exercise his rights (s 145(1)). In the rare cases in which such a provision exists, and a third party is nominated by the member to enjoy specified rights, s 145(2) provides that references in the 2006 Act to a member exercising such rights shall instead be read as a reference to the nominated person (see s 145(2)).

The second strand of Part 9 is likely to have a more significant practical effect. It essentially gives a third party nominated by a member of a company traded on a regulated market the right to certain specified types of information (s 146). In particular, those who are nominated to enjoy such 'information rights' are entitled to see communications that a company sends to its members (including annual accounts and reports, see s 146(3)). Further, those holding information rights must be told, when they are sent a copy of a notice of a meeting, that they may have the right under an agreement that they have with the actual member (eg, their broker) to be appointed as that member's proxy or to give that member instructions as to how he should use his votes (s149). While these novel provisions do not oblige intermediaries to confer information or voting rights on indirect investors for whom they hold shares, the anticipation is that they will exert commercial pressure on the likes of brokers to offer such rights in their client packages.

Some indirect investors even gain a limited number of substantive governance rights under the third strand of Part 9. In particular, s 153 allows 100 or more members or indirect investors who meet the test set out in s 153(2)(c) to require: the circulation of a members' statement in support of a proposed resolution under s 314; the circulation of a resolution for a public company's AGM under s 338; an independent report on a poll under s 342; and website publication of audit concerns under s 527.

Derivative actions

Derivative actions, by which a shareholder can bring a claim in respect of a cause of action vested in a company in which he holds shares, have been placed on a statutory footing by the 2006 Act. There are two important changes. First, the circumstances in which a derivative action can be brought have been clarified and considerably expanded. Second, the procedure for bringing a derivative claim has been rationalised. These changes are aimed at providing 'modern, flexible and accessible criteria for determining whether a shareholder can pursue an action' (see the Law Commission's report, 'Shareholder Remedies', para 6.15).

Much of the uncertainty in the old case law as to when a member could bring a derivative claim has been swept away; there will be no need under the statute for an inquiry as to whether there has been a 'fraud on the minority' or whether a director has personally benefited from a particular action. Rather, the 2006 Act provides that the derivative claim will be available for a 'cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company' (s 260(3)). Importantly, this provision makes it clear that, for the first time, a derivative action can proceed in relation to the mere negligence of a director, and possibly also in relation to a mere breach of the strict rule against conflict of interests, without the presence of any additional element of bad faith or gain. Such causes of action can also be brought against a shadow or former director and any relevant third party, such as one who dishonestly assists a director's breach of fiduciary duty, or one who knowingly receives property transferred in breach of fiduciary duty (s 260(3) and (5)) '“ a considerable expansion of the derivative action.

The 2006 Act also provides a new statutory code for the procedural aspects of derivative claims (ss 260 to 264). The member who seeks consent to bring a derivative claim (or to continue a claim commenced by the company) must first convince the court that he has a prima facie case for the giving of permission (s 261(2)). If such a case is shown, the court may make directions for evidence to be filed by the company for the full hearing (s 261(3)).

Further, rules are laid down as to how the court should decide whether a derivative claim brought by a member should continue. The court must refuse permission if: (a) a person acting in accordance with the director's duty to promote the success of the company would not continue the claim; or (b) the act or omission over which the member complains has been ratified or authorised by the company (s 263(2)). Should the application overcome these hurdles and avoid automatic refusal, the court must assess a list of six relevant factors, including whether the applicant is acting bona fides, and whether the applicant has any claim in his own right in relation to the claim that he is attempting to bring on the company's behalf (see s 263(3)). Before granting or refusing permission, the court should pay 'particular regard to any evidence as to the views of members of the company who have no personal interest, direct or indirect in the matter', ensuring that it embarks on a broader enquiry than that presented by the protagonists (s 263(4)).

The clarity and accessibility of these procedural rules may encourage disgruntled shareholders to commence derivative actions rather than seek redress through less structured forms of relief, such as unfair prejudice actions.

Much of the uncertainty present in the old case law as to when a member could bring a derivative claim has apparently been swept away; there will be no need under the statute for an inquiry as to whether there has been a "fraud on the minority" or whether a director has personally benefited from a particular action. Whether the courts will, when exercising their discretion and when deciding whether the alleged wrong is ratifiable by the company (and if so, whether the alleged wrongdoers can vote), have regard to the old authorities on the exceptions to the rule in Foss v Harbottle, is unknown at present and will have to be tested as and when cases come before the courts.

What is known is that the 2006 Act provides that the derivative claim (when not pursued in conjunction with unfair prejudice relief) will be available in respect of a "cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company" (s 260(3)). Importantly, this provision makes it clear that, for the first time, a derivative action can proceed in relation to the mere negligence of a director, and possibly also in relation to a mere breach of the strict rule against conflict of interests, without the presence of any additional element of bad faith or gain. Such causes of action can also be brought against a shadow or former director and any relevant third party (such as one who dishonestly assists a director's breach of fiduciary duty, or one who knowingly receives property transferred in breach of fiduciary duty): see s 260(3) and (5). These provisions, then, constitute a considerable expansion of the derivative claim.

The 2006 Act also provides a new statutory code for the procedural aspects of derivative claims: ss 260 to 264. The member who seeks consent to bring a derivative claim (or continue a claim commenced by the company) must first convince the court that he has a prima facie case for the giving of permission: see s 261(2). If such a case is shown, the court will make directions for evidence to be filed by the company and for the full hearing of the member's application: see s 261(3).

Further, rules are laid down as to how the court should decide whether a derivative claim brought by a member should continue. The court is directed that it must refuse permission if (a) a person acting in accordance with the director's duty to promote the success of the company would not continue the claim, or (b) the act or omission in relation to which the member complains has been ratified or authorised by the company: s 263(2). Should the application overcome these hurdles and avoid automatic refusal, the court must turn to assess a list of six relevant factors which include whether the applicant is acting bona fide, and whether the applicant has any claim in his own right that arises in relation to the claim that he is attempting to bring on the company's behalf: see s 263(3). Before granting or refusing permission, the court shall also pay "particular regard to any evidence as to the views of members of the company who have no personal interest, direct or indirect in the matter", ensuring that the court embarks on a broader enquiry beyond that presented by the main protagonists: see s 263(4).

Shareholder details

Under s 365(1) of the 1985 Act, anyone has a right to inspect and make copies of a company's share register. The ability to access member information is important to various entities that might wish to communicate with members, such as other members or potential takeover bidders. However, the right to open access was sometimes abused, for instance, to intimidate shareholders in an attempt to force a company to withdraw from a contract or industry sector. The absolute right to inspect and copy the register is therefore confined by
s 116 of the 2006 Act. A person seeking information must now make a 'request' to the company,

providing their name and address, the purpose for which the requested information will be used, and similar details in relation to any other person to whom the applicant will disclose the requested information (see
s 116(3) and (4)). The company receiving the request must, within five working days of receipt, either comply with it or make an inter partes application to court on the ground that the information is not requested for a 'proper purpose' (s 117(1)). Needless to say, companies must be alive to this strict time limit.

In order to make these provisions effective, power is reserved to make regulations altering the content of companies' annual returns, which currently include information about shareholders. The 2006 Act also creates two criminal offences for making misleading requests and misusing the information obtained under the s 116 procedure (s 119).

Deregulation

The CLR endorsed a 'think small first' approach, which underpins several provisions in the 2006 Act aimed at simplifying the law applicable to small companies (CLR p 29).

Changes to a company's constitution

The CLR described Table A as 'a product of the mid-19th century both in terms of the language that it uses and in substance' (CLR, p 33). The 2006 Act therefore paves the way for new model articles for private companies limited by shares, private companies limited by guarantee, and public companies. These model articles will apply where no other articles are registered for a company, or where other articles are registered, to the extent that they do not exclude or modify the model articles applicable to the relevant class of company (s 20). The model articles for private companies limited by shares are not yet published, but will, the government promises, be streamlined, written in plain English, and will not reproduce matters that are dealt with in the 2006 Act (a draft is annexed to the CLR).

Company secretaries

Private companies are no longer required to have a company secretary (s 270), on the basis that such a role is 'almost certainly unnecessary' in the vast majority of private companies (CLR p 37). The requirement still applies to public companies (s 271).

Written resolutions

Under s 381A of the 1985 Act, members of private companies could, if they acted unanimously, make written resolutions on virtually any matter within their competence. The only two restrictions on this power related to resolutions to remove directors and auditors prior to the expiry of their respective periods of office, both of which required a substantive meeting. The 2006 Act retains these provisions for resolutions to remove directors and auditors (s 288(2)), but does away with the unanimity requirement in all other resolutions.

After the 2006 Act comes into force, written resolutions will require the same ordinary or special majority as would have been required for a resolution to be passed at a meeting of members (ss 282(2) and 283(2)). However, the majority must be of the total voting rights of eligible members (s 289(1)). The process of passing written resolutions is further streamlined by provisions permitting the electronic dissemination of proposed resolutions (ss 291(3)(a), 298 and 299) and by the abolition of requirement imposed by s 381B of the 1985 Act to send such resolutions to company auditors.

AGMs

The 2006 Act also abolishes the requirement to appoint auditors or lay accounts at the AGM of a private company (ss 414 and 485). Indeed, private companies are relieved of the requirement to hold an AGM altogether; contrast the rules for public companies, which will have to hold AGMs within six months of the end of their accounting period (s 336).

Capital maintenance

The capital maintenance rules contained in the 1985 Act were castigated in the CLR as being overly technical and mostly irrelevant (CLR, p 40). As such, the capital maintenance rules for private companies are significantly relaxed by two separate sets of provisions contained in the 2006 Act. Firstly, the rules prohibiting a private company from giving financial assistance for the purchase of its own shares are abolished (ss 677 to 682). Secondly, a new out-of-court procedure is created by ss 709 to 723 for the purchase or redemption of a private company's shares out of capital if formalities relating to directors' and auditors' statements and publication of notice regarding the proposed payment are complied with, and a special resolution of members who are not interested in the distribution is obtained.

  • Next week's article will look at changes made to auditors' liability, electronic communications and reporting obligations, and the new statutory status of the Panel on Takeovers and Mergers.

Lexis+ AI