The Companies Act 2006 for Cooperatives

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The Companies Act 2006for Co-operatives

• Tom Wainwright

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Content

• Introduction
• Summary of Timetable
• Changes already in force
• Changes coming in on 1 October 2009
• Discussion/Questions

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Introduction

• Received Royal Assent on 8 November 2006
• Longest act to pass through Parliament
• Consolidating statute
• Staged implementation all in force by October
  2009

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Main aims of the Act

• To enhance shareholder engagement and long term
  investment culture
• To ensure better regulation and think small
  first approach
• To make it easier to set up and run a company
• To provide flexibility for the future

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Summary of Timetable

• January 2007
• 1 October 2007
• 6 April 2008

• Electronic Communications
• Directors Duties
• Derivative Claims
• Resolutions and Meetings
• Company Secretaries
• Accounts and Reports
• Distributions
• Auditors

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• 1 October 2008
• 1 October 2009

• Directors Duties
• Appointment of Directors
• Financial Assistance
• Reduction of Share Capital (solvency statement)
• Company Formation
• Company Constitutions
• Purchase of Own Shares
• Reduction of Share Capital

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Changes already in force
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Directors DutiesThe Law

• Statutory code of general duties codification of
  common law duties with some changes
• Common law rules and equitable principles still
  have relevance
• Duties still owed to and enforceable by company
  BUT note derivative claims

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Directors DutiesThe Duties

• Seven general duties (Sections 171 177)
• Act within powers
• Promote success of company for members benefit
  (enlightened shareholder value)
• Exercise independent judgment
• Exercise reasonable care, skill and diligence
• Objective test establishes base line
• Subjective test can increase duty

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• Avoid conflicts of interest (1/10/08)
• Not to accept benefits from third parties
  (1/10/08)
• Duty to declare interest in proposed transaction
  or arrangement with company (1/10/08)
• Also duty to declare interest in existing
  transactions or arrangements (1/10/08)

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Directors DutiesEnlightened Shareholder Value

• Section 172 Replaces existing fiduciary duty to
  act in companys best interest
• Act in the way he considers, in good faith, would
  be most likely to promote the success of the
  company for the benefit of its members as a whole
• Subject to any enactment or rule of law requiring
  directors to consider interests of creditors eg
  in the event of insolvency

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• Have regard to following factors
• Likely consequences of decision in long term
• Interests of companys employees
• Need to foster business relationships with
  suppliers, customers and others
• Impact of companys operations on community and
  environment
• Desirability of the company maintaining a
  reputation for high standards of business conduct
• Need to act fairly as between the members
• NOT EXHAUSTIVE

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• Compliance with this section
• sufficient for board minutes to state that the
  directors have taken their duties (including the
  Factors) into account when reaching their
  decision
• if any matter is particularly relevant (whether
  or not it is a Factor), the board minutes should
  reflect relevant points made during discussions
  but otherwise discussion of each Factor need not
  be minuted and
• for significant or potentially controversial
  decisions, briefing papers prepared by management
  should address each Factor, unless clearly
  irrelevant, along with other relevant matters.

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Directors DutiesConflict of Interest

• Duty to avoid a situation in which he has, or can
  have, a direct or indirect interest that
  conflicts or possibly may conflict, with the
  interests of the company
• Applies in particular to exploitation of
  property, information or opportunity regardless
  of whether company could take advantage of it
• Does not apply to a conflict arising out of a
  transaction or arrangement with the company

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• Exceptions
• Duty not breached if
• situation cannot reasonably be regarded as likely
  to give rise to a conflict of interest or
• authorised by the other directors
• Amendment to articles may be required to give
  directors power to authorise
• Directors must consider their other duties when
  authorising
• Compare with duty not to accept benefits from
  third parties (can only be authorised by members
  of the company)

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Directors DutiesPractical Application

• Ensure all directors are aware of and understand
  their duties
• Ensure minutes refer to duties having been
  considered and make specific note where any of
  the enlightened shareholder value factors is
  relevant
• Review existing policies eg HR and Corporate
  Responsibility Policies
• Consider whether the directors should have power
  to authorise conflicts

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Derivative ClaimsThe Law

• Proceedings brought by a member in respect of a
  cause of action vested in the company, seeking
  relief on behalf of the company
• Wider range of circumstances in which claim can
  be brought
• Dont need to have been member at relevant time

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Derivative ClaimsCauses of Action

• Causes of action arising from
• negligence
• default
• breach of duty
• breach of trust
• by a director
• Action may be against a director and/or another
  person
• Director need not have benefited personally nor
  is it necessary for him to be the majority
  shareholder

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Derivative ClaimsProcedure

• Two stage procedure
• Stage 1 - Permission of court to continue
• Evidence from company not required
• Avoid spurious claims (in theory)
• Stage 2 Evidence from company
• Evidence can be required by court

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Derivative ClaimsPractical Application

• Increased tactical litigation?
• Class actions?
• Check directors and officers liability insurance

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Electronic CommunicationsThe Law

• New more extensive provisions on electronic
  communications introduced
• Recipient must agree (either generally or
  specifically) to receive the document or
  information in question by electronic means but
  agreement may be deemed

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Electronic CommunicationsPractical Application

• Take advice as likely to involve
• Review of best practice guidance
• Review of Articles
• Resolutions
• Individual member consent

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MeetingsThe Law

• AGMs
• Private companies no longer required to hold AGM
  (subject to Articles)
• PLCs must hold one within 6 months of accounting
  reference date (7 months for financial years
  starting before 6/4/08)

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• Notice Period
• At least 14 days for all general meetings
  (other than AGMs of public company) regardless of
  type of resolution (but NB special notice)
• At least 21 days for AGM of public companies
• Short Notice
• Reduced to 90 (or such higher percentage as set
  out in Articles (but not higher than 95))

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• Proxies
• Member can appoint multiple proxies (max one per
  share)
• Right to vote on show of hands

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Meetings Practical Application

• Table A amended
• Chairmans casting vote at general meetings
• May need to change Articles to take advantage
  some of the new provisions

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Written ResolutionsThe Law

• New more detailed requirements
• Statement to be circulated with each resolution
  informing members how to signify agreement to
  resolution
• Lapse Date
• Private company can pass written resolutions by
• Simple majority of total voting rights for
  ordinary resolution
• Majority of not less than 75 of total voting
  rights for special resolution

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• Resolution passed as soon as approved by
  requisite number of members
• Only available to private companies
• Special resolution must be stated to be a special
  resolution

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Written ResolutionsPractical Application

• Take advice
• New provisions very prescriptive
• Old precedents inadequate
• Criminal offence if fail to comply

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Other Provisions in Force

• Directors service contracts
• Member approval for contract for a fixed term in
  excess of 2
• years
• Directors loans
• All companies can now make loans to directors
  with member
• approval

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• Substantial Property Transactions (old s.320)
• May enter into arrangements conditional on member
  approval
• De minimis threshold raised from 2,000 to 5,000
• Exemption for companies in winding up or
  administration (s193)
• Definition of connected persons changed

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• Natural person
• Companies must have at least one natural person
  as a director (but grace period until October
  2010 for companies who did not have a natural
  person as a director on 8 November 2006)
• Minimum age
• 16 becomes the minimum age for directors

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Company SecretariesThe Law

• Private companies no longer required to have a
  company secretary BUT subject to Articles
• PLCs still required to have a company secretary
• Provisions regarding execution of documents
  changed
• Documents can be executed by
• two directors or a director and the secretary or
• a director in the presence of a witness

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Company SecretariesPractical Application

• To dispense with company secretary
• Review and possibly amend Articles
• Obtain resignation of company secretary (consider
  employment issues)
• Review and possibly amend bank mandates etc..
• File Form 288b
• Update company books

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Accounts and ReportsThe Law

• Private companies no longer required to lay their
  accounts before a general meeting
• Private companies must send out accounts to
  members no later than the date they file the
  accounts or the deadline for filing (whichever is
  earlier)
• Period for private companies to file accounts
  reduced from 10 to 9 months
• Period for PLCs to file accounts reduced from 7
  to 6 months

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AuditorsThe Law

• Auditors and companies allowed to enter into
  "liability limitation agreements" to limit
  auditors liability to a company for negligence,
  default, or breach of duty or trust in relation
  to the audit of the accounts
• New criminal offence, punishable by fine, in
  relation to inaccurate auditors' reports - A
  person commits an offence if he knowingly or
  recklessly causes an auditor's report to include
  any matter that is misleading, false or deceptive
  in a material particular or if he omits a
  statement required by the Act
• Where the auditor is a firm a senior statutory
  auditor must sign the report in his own name on
  behalf of the firm

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Annual Returns

• Shareholders addresses limited requirement for
  shareholders addresses to be included in annual
  return
• New form

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Changes coming in on 1 October 2009
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Company FormationThe Law

• Documents to be delivered
• Memorandum of Association (new style)
• Articles of Association (if not filed new style
  model articles apply)
• Application for registration
• Statement of initial share capital and initial
  shareholdings (if company to have a share
  capital)
• Statement of proposed officers
• Statement of registered office
• Statement of compliance (replaces Form 12)
• Statement of guarantee (if company limited by
  guarantee)

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• Any type of company can be formed by just one
  shareholder (PLCs must still have two directors)
• Directors to provide service address and usual
  residential address. Kept on separate registers
  at Companies House and by the company. Limited
  access to residential addresses.

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Company FormationPractical Application

• New style forms yet to be published
• Directors will be able to use the companys
  registered office as their service address BUT if
  already a director residential address likely to
  already be a part of public record

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Company ConstitutionsThe Law

• Memorandum of Association
• Old style Memorandum scrapped
• New style will
• have no objects clause
• only contain details of subscribers
• will only be relevant at the time of formation
• Provisions of an old style Memorandum deemed to
  form part of Articles

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• Articles of Association
• Table A scrapped
• If company does not file Articles relevant
  version of new model Articles will apply 3
  types
• Private companies limited by shares
• Public companies
• Private companies limited by guarantee
• Name of company can be changed by any means set
  out in the Articles eg by board resolution

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Company ConstitutionsPractical Application

• Existing companies do not need to do anything
  unless they want to take advantage of new
  provisions existing constitution will continue
  to apply to extent it is not inconsistent with
  the Act
• May be better to wait until October to make any
  changes, in order to take in all changes at once

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Discussion/Questions