UK: Companies Act 2006 – Some Potential Pitfalls

1.

Filing amendments to Articles of Association for a company incorporated pre-1 October 2009

If a company is planning to amend its articles, it will need to pass a special resolution (under s.21 CA 2006) approving those amendments and then file the amended articles (along with the special resolution) with the registrar of Companies House (s.26 CA 2006).

The potential difficulties arise in relation to what needs to be filed with Companies House, particularly if the company was incorporated pre-1 October 2009 and has retained its long form memorandum of association. Under s.28 CA 2006, certain provisions of the memorandum of association are now deemed to be included in the articles of association and s.18 CA 2006 requires that a company's articles must be contained in a single document. The amended articles to be filed at Companies House must therefore contain those provisions of the memorandum of association (and any others that a company wants to retain) either in long-form in the body of the articles, or appended to the back of the articles with a clear and express note stating that such provisions now form part of the articles. A company must ensure that any provisions of its memorandum that it wishes to retain are included in its articles or the filing may be rejected.

One additional issue relates to the provisions of the memorandum which are deemed to be included in the articles. If, as some companies have chosen to do when amending their articles, a special resolution is passed deleting the provisions of the memorandum that are deemed to form part of the articles (due to their apparent obsolescence), a company should ensure that none of these provisions are required. A common mistake has been to delete the provision in the memorandum relating to limited liability that would automatically transfer to the articles (under s.28 CA 2006), only to find that the existing articles do not contain such a provision and the Company appears to have inadvertently changed its status. Fortunately, there is a saving provision at paragraph 10 to CA 2006 (Commencement No. 8, Transitional Provisions and Savings) Order 2008 which prevents a company from changing its status in this manner, but a prudent practitioner would probably do better than to rely on this.

2.

Written Resolution Lapse Date

Under the Companies Act 1985, written resolutions were deemed passed once the last member had signed the resolution. This led to resolutions being circulated indefinitely and the potential for membership to change during the period of circulation. Changes made under the CA 2006 mean that written resolutions now lapse if they are not agreed within 28 days of the circulation date (s.297 CA 2006). Shareholders should be made aware of this point in the notes to any written resolution circulated.

3.

Derivative Actions

The basic rule from Foss v Harbottle is that in any action in which a wrong is alleged to have been done to a company, the proper claimant is the company itself and not the individual shareholders. A shareholder therefore cannot generally bring a claim to recover a diminution in the value of his shares in circumstances where the diminution arises because the company has suffered an actionable loss. The proper course is for the company to bring the action and recoup the loss with the consequence that the value of the shares will be restored. Further, a director owes his fiduciary duties (as are now codified in CA 2006) to the Company not to the shareholder.

Under s.260 CA 2006, however, shareholders can now bring derivative claims which allow them to sue on behalf of the company, following court permission. The shareholder will need to pass through two initial stages where (i) he will have to show a prima facie case and (ii) the court decides, on evidence from the applicant and the respondent whether the case should proceed. A claim can only be made if it is based on actual or proposed acts or omissions which involve negligence default, breach of duty or breach of trust by a director.

In light of this, Directors should be aware of their codified duties in advance and be kept up to date. They should also ensure that under their D&O insurance and directors' indemnities (if applicable) they are covered for the cost of dealing with and defending derivative claims. It may also be prudent to update the board procedure in relation to meetings, minutes and board packs and to revise document retention policies to ensure that important decisions are properly evidenced.

4.

Environmental Reporting requirements

All companies must prepare a directors' report for each financial year (s.417 CA 2006) and all directors' reports (other than those for small companies) must include a business review (s.417(1) CA 2006). Certain types of companies must now include environmental information in their business reviews.

To the extent that it is necessary for an understanding of the development, performance or position of the company's business, the business review of quoted companies (as defined by s.385(7) CA 2006) must also include, among other things, information about environmental matters (including the impact of the company's business on the environment) and information about any policies of the company in relation to such matters and the effectiveness of those policies (s.417(5)(b)(i) CA 2006). Where directors of quoted companies have nothing to report on environmental matters, the business review must confirm that it does not contain such information.

Furthermore, s.417 (6) CA 2006 requires all companies (other than small and medium sized companies as defined by CA 2006), to include in their business reviews, where necessary, an additional analysis using non-financial key performance indicators which include information relating to environmental matters (s.417(6)(b) CA 2006).