Companies ? what you now need to know

Significant changes in company law that affected all companies came into force on 1 October 2007, and more provisions will apply in stages up to 1 October 2009. The last Companies Act dates from 1989 and an overhaul was thought to be long overdue. The headline aim is to reduce the burden of bureaucracy on small companies – and this should benefit many arts organisations.

The Companies Act 2006 is causing particular problems, though, as the drafting is unclear. The government department responsible for the Act is the Department for Business Enterprise and Regulatory Reform (see www.berr.gov.uk), which admits that there are provisions in force on which it is unable to give clear guidance. The picture is likely to improve in the next few months, but, for the present, all companies need to be aware of the current uncertainty and act accordingly.   A number of changes will affect your company whether you like it or not:  

• Proxy voting at meetings  

Prior to these changes, companies could choose whether to allow voting by proxy. Many charities did not allow for this, but from 1 October there is a new right for members/shareholders to appoint a proxy to vote on their behalf at a meeting. This applies even if the company’s articles specifically prohibit proxy voting. Every notice of a meeting must include a prominent statement of the right to appoint a proxy – failure to do this is a criminal offence committed by every director or trustee of the company, and will result in a fine for every officer found in default, although the validity of the meeting is not affected.  

Many companies’ proxy notices will not comply with the new requirements and companies should therefore make the necessary changes. Those that are new to proxy voting should equip themselves with:  

• Wording to include in notices of meetings (to avoid potential criminal penalty)
• Proxy forms tailored to suit the company and
• Provisions in their articles dealing with some of the mechanics of proxy voting (e.g. timescales for notifying appointment and termination of proxies) and, if appropriate, restricting the right of a proxy holder to be appointed Chair of the meeting.  

There are default provisions in the Act, but most companies will want to choose provisions tailored to their specific requirements. [[From 1 October, the only companies required to hold AGMs are publicly listed companies and any other company whose articles specifically include a requirement to hold one.]]  

• Written resolutions

Many companies have been using written members’ resolutions for years as an effective way to make decisions without the need for a meeting. The only practical hurdle has been that written resolutions required unanimous approval – so the failure of one member to respond could halt the process. From 1 October, written resolutions no longer require unanimous approval – this is the case even if the Articles specifically state otherwise. Instead, the percentage of members/shareholders needed to pass a written resolution will depend on the type of resolution being passed.  

This is a very useful provision as it is relatively easy to obtain 50% or 75% of the required signatures, but obtaining the last signatures can be very difficult and can result in long delays.  

•  Periods for filing accounts  

Companies currently have ten months from the end of their accounting reference date to file their accounts at Companies House. From 6 April 2008 this period for filing accounts is reduced from ten months to nine months.   There are also some other changes that you should think about:  

• AGMs  

All companies are currently required to hold an Annual General Meeting, although the law does allow them to elect not to hold one in some situations. From 1 October, the only companies required to hold AGMs are publicly listed companies and any other company whose articles specifically include a requirement to hold one. Many companies operating retirement of directors by rotation do so linked to the AGM – so, if a company is not going to hold AGMs any more, new retirement mechanisms will need to be set out in the articles. Companies may see this as an opportunity to deal with retirement separately to other business.  

• Notice period for meetings

From 1 October 2007, the notice period for all members/shareholders meetings has been reduced from 21 days to 14 days, regardless of the type of resolution to be passed. If a company’s existing constitution specifies 21 days, then the constitution will have to be changed before the company can rely on the new notice provisions.  

• Newly defined directors’ duties 

Until now, the duties a director owes to the company have come from a mixture of legislation and case law. Now, for the first time, there is a detailed checklist of general duties owed by a director to the company. From 1 October 2007 these are:

• To act within the company’s powers to promote the success of the company for the benefit of the members as a whole, including considering the impact of a company’s actions on the interests of the employees; the need to foster business relationships with customers/suppliers; and the impact of the company’s actions on the community and environment •           To exercise independent judgement
• To exercise reasonable care, skill and diligence
• To avoid conflicts of interest (from October 2008)
• Not to accept benefits from third parties
• To declare an interest in proposed transactions or arrangements. (This is new and is in addition to the existing duty to declare an interest in existing arrangements. Failure to declare an interest in existing arrangements is already an offence).  

The duty “to promote the success of the company for the benefit of its members as a whole” is one area likely to attract some attention. In the case of charities, and other companies that are established for the public benefit and purposes wider than benefiting their members, there seems to be a contradiction with this new duty. In order to resolve any such tension it is widely thought that this duty will be interpreted as being that so as long as the company fulfils its objects the directors will be seen as complying with this duty. However, the real effect will not be known until a body of case law develops.  

• Chair’s casting vote 

A government statement was made suggesting that a chair of a members’ meeting cannot have a casting vote irrespective of what the articles of the company say. It appears that whether the chair is also a member (which is usually the case for charities) may be the deciding factor as to whether a casting vote can apply. Until the issue is absolutely clear organisations are best not relying on a casting vote in members’ meetings.