Companies Act 2006 – The final chapter

business peopleAlmost unnoticed, the Companies Act 2006 came into full force on 1 October 2009. This was a low profile ending for a legal reform process that has lasted more than a decade and given rise to the longest ever piece of UK legislation (1300 sections).

Part of the reason for the lack of fanfare is the fact that the Act is already mainly in force. It has been implemented in a series of tranches over the last three years. The October 2009 measures represent only a small subset of the overall Act, and mainly relate to the operation of the Registrar of Companies at Companies House (which needed additional time to prepare for the changes).

One of the key objectives of the entire reform process – summarised by the slogan “think small first” – was to create a less bureaucratic environment for smaller companies. Despite its imposing length, the Act has made some progress towards this objective. There are a number of areas in which the Act reduces legal complexity and the burden of compliance for private companies. Given that most of the UK’s 2.8 million companies are private (rather than public) companies, this is a worthwhile achievement.

However, with respect to public companies, the deregulatory credentials of the Act are less obvious. The legislation has needed to incorporate the requirements of a number of European Directives aimed at listed companies, e.g. the Shareholder Rights Directive, which have dampened attempts to achieve an overall simplification of company law.

Perhaps the most controversial aspect of the Act is section 172 (effective in October 2007), which codifies director’s duties. In particular, the concept of “enlightened shareholder value” is introduced into company legislation for the first time. This requires directors to promote the success of the company in the interests of all of the shareholders while taking into account a wide group of stakeholder interests, e.g. employees, suppliers, local communities, the environment.

Although shareholders retain their primacy as the most important actors in a company, section 172 represents a significant step towards a more stakeholder-focused model. Directors will need to give greater thought as to how they incorporate and document the input of such wider stakeholder considerations into their decision-making processes.

Some of the key changes in the Companies Act that come into effect this month include the following

  • It is no longer necessary for companies to define their business objects in their constitutional documents (unless they wish to do so). Unless otherwise stated in the Articles, it will be assumed that company objects are unrestricted.
  • The Articles of Association become the main constitutional document of the company. The role of the Memorandum of Association is significantly downgraded.
  • New model articles (replacing table A) are available for use by private and public companies. Separate model articles are available for private companies limited by shares, private companies limited by guarantee, and public companies.
  • Directors may display a service address rather than their home address in the public record of the Registrar of Companies.
  • Private companies can reduce their capital more easily. The concept of “authorised capital” has been abolished. A “statement of capital” must be submitted by the company when it wishes to make a change in its share capital.

About Roger Barker

Since leaving investment banking, Roger has specialised in corporate governance and board effectiveness. He is the holder of a doctorate on corporate governance from Oxford University, where he was also stipendiary lecturer at Merton College, Oxford. He also co-authored the IoD’s main guide to the role of the board, The Effective Board: Building Individual and Board Success, which was published in 2010.
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