Commercial Review - September 2008
Companies Act 2006.
We are now at the penultimate stage of the phased implementation of the 2006 Act. Previous stages brought in changes relating to the administration of companies and put in place a statutory set of directors‘ duties for the first time.What are the main changes coming into force on 1 October 2008?Directors - conflicts of interest
Interests in transactions or arrangements
Benefits from third parties
Natural person as a director and minimum age
Financial Assistance
Directors - conflicts of interest
Directors have always had a duty not to place themselves in a position where they have an actual or potential conflict between their personal interests and the interests of their company. On 1 October 2008, section 175 of the 2006 Act comes into force. This changes the duty slightly but also, and more importantly, specifies the action that is necessary to deal with a director‘s conflicted position.
From 1 October, a director must ‘avoid a situation‘, in which he has, or may have, a direct or indirect interest that does or may conflict with the interests of the company. If a situation does arise in a private company, and the company was formed after 1 October, the conflict can be authorised by the board.
For private companies formed before 1 October, the shareholders must pass a resolution to enable the board to give that authorisation. For PLCs, the articles of association must specifically allow the board to authorise the conflict. The situation will not fall under these new rules, however, if it cannot reasonably be regarded as likely to give rise to a conflict.
There is no guidance on what a conflict ‘situation‘ could be, only that it could include a director making personal use of information, property or opportunities belonging to the company eg where a director makes a personal profit relating to the company‘s activities without the company knowing about it or consenting to it.
Interests in transactions or arrangements
Directors must declare any direct or indirect (eg through a ‘connected person‘) interest that they have or may have in an existing or proposed transaction or arrangement with the company. The declaration must be made at a board meeting or by written notice to the board. No declaration is necessary, however, if the interest is not likely to give rise to a conflict of interest.
Directors have an ongoing duty to update any changes in their notified interests.
We are a private company - what should we be doing about all this?
If you were formed before 1 October 2008, you should pass a resolution to allow your board of directors to authorise any of your directors‘ conflicts of interest.
We are a PLC - what should we be doing about all this?
You should amend your articles of association to permit your board to authorise any of your directors‘ conflicts of interest.
It would be a good idea too for both private and public company directors to write a list of any actual or potential conflict situations for them and their connected persons (eg spouse) that may need to be authorised, or you could draw up a questionnaire for directors to complete.
What if we do not do anything?
Your directors will not have the authority to approve any directors‘ conflict of interest that may arise and, if such a situation arises, the relevant director will be in breach of this Companies Act duty.
We can prepare the necessary paperwork for private companies to pass the resolution for a fixed fee of £100 plus VAT. For public companies, we can review your articles and will discuss with you what changes are necessary to them.
Please contact Sarah Martin on 0845 634 9809 or sarah.martin@freethcartwright.co.uk.
From 1 October, directors will be under a statutory duty not to accept any benefits from third parties eg gifts, but there would not be a breach of the duty if the benefit would not result in a conflict of interest for the director.
Natural person as a director and minimum age
From 1 October, every company must have at least one “natural person” as a director. This means that a company cannot have a sole director which is another company.
All directors must also be over 16.
We have one corporate director - what should we be doing?
You must also appoint an individual as a director.
One of our directors is 15 - what should we be doing?
Nothing, provided they are not the sole director - the director will be deemed to have resigned automatically. You can reappoint them again when they are 16.
Under the Companies Act 1985, private companies could only give financial assistance (eg by granting security or making loans) to enable a third party to buy its shares if the ‘whitewash procedure‘ was followed. Public companies could not give financial assistance. From 1 October, the rules for private companies relating to financial assistance are repealed and private companies will be free to give such assistance. The prohibition remains for public companies.
We are a private company buying a target company; the target is going to have to give security for the loan being made to us by our bank for the purchase price - what should we do?
If you are going to complete after 1 October 2008, and provided that the assistance is out of distributable reserves - do nothing!
The giving of security by the target would have amounted to financial assistance before that date, but from 1 October there are no rules to stop that. Your lender may still insist, however, on restrictions in your loan documentation preventing the target from giving financial assistance without their consent or may require some form of auditors report, but that is not a requirement of the 2006 Act.
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Whilst every effort has been made to ensure the accuracy of this review, it does not provide complete coverage of the subjects referred to, and it is not a substitute for professional legal advice and should not be relied upon as such.
If you want to know more about us, our business, or how we can help your business, please contact:
Philippa Dempster, Cumberland Court, 80 Mount Street, Nottingham NG1 6HH
Direct line: 0115 936 9334
philippa.dempster@freethcartwright.co.uk
Sarah Martin, Cumberland Court, 80 Mount Street, Nottingham NG1 6HH
Direct line: 0845 634 9809
sarah.martin@freethcartwright.co.uk