On 1 November 2005 the Company Law Reform Bill was
finally introduced to the House of Lords, seven years after the
Company Law Review Steering Group started its review of the
existing law. Running to 855 clauses and 15 schedules, it will
repeal about two-thirds of the Companies Act 1985 and amend other
parts, and will pave the way for further changes to be introduced
through secondary legislation. When the Bill comes into force as
the Company Law Reform Act 2006 – which is expected to be in
April or October 2007 – it will affect companies of every
Principally, the Bill aims to:
- simplify the administrative burden on smaller private
companies, which make up the vast majority of the corporate
- facilitate shareholder engagement, particularly in quoted
- update and clarify the law in various areas, particularly in
relation to directors' duties.
In this article the changes proposed are grouped
into the following topics:
- Directors and corporate governance
- General meetings, resolutions and shareholder rights
- Capital maintenance and transactions benefiting
- Auditors and accounts
- Company administration
- Further changes, and how the new Act will relate to other
Although most of the provisions in the Bill have
had a long genesis, and have been the subject of lengthy
consultation, changes may of course be made during the Bill’s
passage through Parliament.
This article simplifies and condenses those
provisions of the Bill that we think are likely to be most
significant for companies and their advisers. It does not cover all
of the clauses in the Bill and in most cases does not discuss the
ramifications of those provisions that are covered. Particular
aspects of the Bill may be examined in more detail in subsequent
1. DIRECTORS AND CORPORATE GOVERNANCE
Statutory statement of directors' duties
For the first time, the duties owed by directors to
their company will be set out in statute, making them clearer and
more accessible than at present. Sections 154-170 of the Bill are
intended to 'codify' the duties that have been established in cases
to date, although slight changes will be made in relation to
conflicts of interest.
A director must:
- Act within his powers under the company's constitution, and
only exercise powers for the purposes for which they are
- "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", having regard (as far as reasonably
- the likely consequences of any decision in the long
- the interests of the company's employees
- the need to foster the company's relationships with customers,
suppliers and others
- the impact of the company's operations on the community and the
- the desirability of the company maintaining a reputation for
high standards of business conduct; and
- the need to act fairly as between members of the
The obligation to take account of these 'statutory
factors' is said to embody the concept of "enlightened shareholder
value". The key question, of course, is whether the obligation has
any real 'teeth' – ie. could directors be found liable for
failing to have due regard to these factors, or for attaching
insufficient weight to them?
The formula "have regard (as far as reasonably
practicable)" clearly acknowledges that, depending on the
circumstances, directors may legitimately decide that other
pressures and constraints outweigh any or all of these statutory
factors. Traditionally, the courts have been reluctant to
re-examine commercial judgements of this kind made by directors,
but directors who have failed altogether to consider the interests
of, say, different classes of shareholders, or the best interests
of the company, have been found liable for breach of duty. In the
DTI's Guidance on key clauses, published alongside the Bill, the
Government stresses that the obligation to "have regard to" the
statutory factors cannot be discharged merely by paying lip service
to them: directors must exercise the same level of skill, care and
diligence as they would in carrying out any other function, at
least as far as is "practically possible in the circumstances of
any particular business decision". Directors are therefore expected
to do all that they reasonably can to take these factors into
account: the more significant a decision, the more important it
will be to ensure there is a paper trail showing that the board has
actively considered how a particular decision will impact the
company's employees, customers, suppliers, the environment and its
But as long as a director can show that he did
actually consider these statutory factors, even if he ultimately
decided that they were less important than other factors, he will
probably have discharged his duty. In any event, liability will
only follow if the company can show that it suffered a loss as a
result of the director's breach of duty.
A director must also:
- Exercise independent judgement, and not fetter his discretion
except pursuant to an agreement that was considered to be in the
best interests of the company when it was entered into.
- Avoid conflicts of interest.
- Not accept benefits from third parties.
- Declare his interest in any proposed transaction or
Changes to rules on conflicts of
Where a transaction is proposed between a director
and his company, so that the director's duties to the company may
be in conflict with his personal interests, the rules of equity
currently require shareholders to approve the transaction.
Companies' articles frequently modify this equitable duty, instead
simply requiring directors to disclose their interest to the rest
of the board.
Clause 161 of the Bill reflects the current
position in section 317 CA 85 and in the articles of most companies
by requiring an interested director to disclose the nature of his
interest to the rest of the board before the transaction is
approved. Disclosure need not be made if the interest cannot
reasonably be regarded as likely to give rise to a conflict of
interest or if the other directors are already aware of the
director's interest. These caveats broadly reflect principles
established in related case law.
Existing equitable rules prevent a director from
exploiting personally without permission any opportunity which
properly belongs to the company, even if the company is not itself
in a position to exploit it. Believing this to hinder
entrepreneurial and business start-up activity, the Government has
included provisions in clause 159 of the Bill that will allow
non-conflicted directors to authorise a director to proceed
notwithstanding his conflict of interest. Directors of public
companies will only be able to authorise such conflicts if the
articles allow it.
Duty of skill and care
The standard of skill and care expected of
directors will reflect the combined objective and subjective test
in section 214 IA 86, which has been applied in recent cases
– ie. the higher of the knowledge, skill and experience
reasonably expected of a director in that position, and the
knowledge, skill and experience of that particular director.
Relevance of previous cases
Although the new duties expressed in the Bill will
displace those formulated in previous cases, cases on directors'
duties will continue to be relevant for the purpose of determining
how those duties should be applied in particular circumstances.
However, cases in which a duty was formulated in a different
way, especially one that is inconsistent with the statutory
statement, are likely to have less authority.
Transactions between directors and their
Various changes will be made to the rules on
substantial property transactions between companies and their
directors, on loans to directors, payments to directors for loss of
office, and on long-term service contracts, principally to make the
rules more accessible and consistent, and to remove a number of
- All companies will be able to make loans to their directors if
the loan is approved by shareholders. At present such loans are
generally prohibited, subject to various exceptions.
- The rules on quasi-loans and credit transactions, which
currently only apply to companies that are public or that are
members of a group containing a public company, will be extended to
- Companies will be able to enter into transactions that would
currently fall within section 320 CA 85 before shareholder approval
has been obtained, as long as the transaction is made conditional
on such approval.
- Shareholder approval will be required where a company proposes
to make a payment to a director in compensation for loss of his
employment as a director of the company (not just for loss of his
office as a director) which goes beyond his existing contractual
- The complex rules in existing section 346 CA 85 determining
which persons are "connected" to a director for these purposes will
also be re-written and extended to catch a director's civil
partner, a person who lives with the director "as partner in an
enduring family relationship", the director's parents, and any
infant children or step-children of the director's partner who live
Transactions with third parties: ultra
Unless a company's objects (which will be contained
in its articles – see section 5 below) are specifically
restricted, they will be deemed to be unrestricted as far as third
parties are concerned.
Sections 35-35B CA 85, which deal with a company's
capacity and the power of directors to bind it, will be replaced
with new provisions that do not make any substantive change to the
current rules. A third party will continue to be protected if he
deals with the company in good faith. Third parties dealing with a
company will still have to concern themselves with the question of
whether the director they are dealing with has sufficient
As between the company and themselves, directors
will still have a duty to observe the company's constitution,
including any restrictions on the company's activities.
All directors – and not just those at serious
risk of violence or intimidation - will be able to provide a
service address for the public record.
Appointment and eligibility
At least one director of every company will have to
be a natural person.
The 70 year age limit for directors of public
companies and subsidiaries of public companies will be abolished.
There will be a 16 year minimum age limit for directors of all
Private companies will no longer need to have a
Derivative actions initiated by
As a general rule, if a wrong is done to a company,
only the company itself (and not a shareholder) can bring an action
for damages or some other remedy. In practice, the directors must
decide whether or not to bring a claim. Clearly, if the wrong was
done by the directors themselves, or a majority of them, no claim
is likely to be pursued. Unless shareholders are able to force the
board to bring a claim, either by passing an ordinary resolution to
replace the existing directors with new appointees, or by giving a
direction to the board by means of a special resolution, the
company and the shareholders will have no remedy in respect of any
loss the company has suffered. Minority shareholders can therefore
find it difficult to force directors to overturn their decision not
to bring an action.
However, where it can be shown that an act amounts
to a 'fraud on the minority', and that the wrongdoers are in
control of the company, the courts have for some years allowed
minority shareholders to bring a "derivative action" - in effect,
allowing the shareholder to prosecute a claim on behalf, and for
the benefit, of the company. Although fraud in this context is a
wider concept than elsewhere, it is still difficult to prove, and a
derivative claim can only be brought at the discretion of the
court. Moreover, no claim can be brought where the act is capable
of being ratified in general meeting. Many breaches of duty by
directors fall into the latter category.
Because of the difficulty in bringing such claims,
the Company Law Review recommended that derivative actions should
be put onto a statutory footing. Clauses 239-243 of the Bill
therefore provide that derivative claims may only be brought
- pursuant to a court order in proceedings for unfair prejudice
under section 459 CA 85; or
- with the permission of the court where:
- the claim is in respect of a cause of action "arising from an
actual or proposed act or omission involving negligence, default,
breach of duty or breach of trust by a director of the
- the court is satisfied that a (hypothetical) director acting so
as to promote the success of the company for the benefit of its
members as a whole would bring the claim; and
- the act or omission has not been authorised or ratified by the
In deciding whether to give permission, the court
must take various matters into account, including whether the
shareholder is acting in good faith, the importance of the claim to
the company, and whether the shareholder could bring a claim in his
own right, rather than on behalf of the company.
In effect, therefore, the court will have to put
itself into the position of an independent director of the company
and decide whether or not it is appropriate for a derivative claim
to be pursued. This kind of judgement, which depends upon a mixture
of 'commercial' and 'legal' factors, is of a sort that courts are
usually reluctant to make.
Until the new rules are applied in practice, it is
difficult to know whether the number of derivative claims is likely
to increase. It has been suggested that the possibility of bringing
claims in respect of directors' negligence or breach of duty,
without having to show 'fraud on the minority', means that more
claims are likely. But even activist shareholders are still likely
to be discouraged from bringing such claims by the fact that any
damages recovered will go to the company, and not the shareholder
Application for relief
Under a section that will replace section 727 CA
85, if a director "has reason to apprehend that a claim will or
might be made against him in respect of negligence, default, breach
of duty or breach of trust", he will be able to apply to court for
relief without having to wait for the claim to be made.
The new rules introduced on 6 April this year,
allowing companies to indemnify their directors in certain
circumstances, and to advance funds to them to meet defence costs,
will be re-stated without significant amendment.
Defective accounts; fraudulent
The Government has dropped a proposal to make the
maximum sanction for approving defective accounts a term of
imprisonment. Instead, the maximum penalty will be an unlimited
fine. But the maximum prison term for fraudulent trading will be
increased from seven to ten years.
Liability for offences committed by
In the light of responses to its consultation,
which criticised the proposals on both policy and technical
grounds, the Government has decided not to extend to "senior
executives" and "responsible delegates" the category of "officers
in default" who can be made personally liable for acts and
omissions of their company.
Corporate governance of listed companies
In anticipation of new European rules on corporate
governance, the FSA will be given the power to make or amend
Handbook rules (such as the Listing Rules) to implement any EC
Directives on corporate governance that apply to companies listed
on a regulated market.
2. GENERAL MEETINGS, RESOLUTIONS AND SHAREHOLDER
Shareholder rights to raise
Shareholders in quoted companies who hold at least
5% of the voting rights, or who number at least 100 (with an
average of at least £100 of share capital each) will have the right
to publish on the company's website free of charge a statement of
any concerns about the audit, or the circumstances in which the
auditors have resigned, that they intend to raise at the AGM. But
contrary to the Government's original plans, the auditors will not
be legally obliged to answer shareholder questions.
A proposal in an earlier draft of the Bill to grant
shareholders of quoted companies a right, within a 15-day "holding
period" after the accounts become available, to propose a
resolution to be moved at the general meeting where the accounts
are laid has also been dropped. Instead, as originally proposed,
shareholders in public companies will be able to require the
company to circulate resolutions and any accompanying statement at
the company's expense (rather than their own) if the materials are
provided to the company before the end of the financial
Exercise of voting rights
To make it easier for beneficial owners to exercise
voting rights held by the registered holder (who is often a nominee
or intermediary), all companies will be able to change their
articles to allow registered holders to nominate someone else (such
as the beneficial owner) to exercise some or all of their statutory
rights as a member, including the right to receive notices of
meetings and to appoint proxies. If sufficient companies do not
change their articles to do so, the Government may make Regulations
giving registered holders such rights automatically.
Unless voluntary shareholder engagement appears to
be working in practice, the Government has also threatened to force
institutional shareholders to publicly disclose their voting
records. A few institutions have already started to do so
voluntarily: for example, last week Fidelity International, one of
the UK's largest fund managers, has published its voting record at
shareholder meetings on every motion proposed by companies in which
it invests in the UK, Europe, the US and Asia between 1 July 2004
and June 2005.
Quoted companies will have to disclose the results
of any poll on their website. Some quoted companies already do so
as a matter of best practice. Shareholders who hold at least 5% of
the voting rights, or who number at least 100 (with an average of
at least £100 of share capital each) will be able to require the
directors to obtain an independent report on any polled vote.
Members of both private and public companies will
be able to appoint more than one proxy. Proxies will be given the
same rights as registered holders to ask questions, demand a poll
and vote on a show of hands at general meetings (as well as on a
The statutory minimum period of 21 days for
acceptance of rights offers will be retained, but the Bill allows
the Secretary of State to make Regulations to vary this period
upwards or downwards (but to no less than 14 days).
Transfer of shares
Directors will have a statutory obligation to give
reasons for any refusal to register a transfer of shares.
Various technical changes will be made to simplify
sections 125-127 CA 85 (variation of class rights).
New rules will also expressly allow companies to
entrench provisions in their articles – ie. stipulate that
certain provisions cannot be changed at all or can only be changed
if certain conditions are met.
Technical changes will also be made to the regime
requiring companies to obtain shareholder authorisation before
making any donation to an EU political party or organisation or
incurring any EU political expenditure. The regime has been
criticised for being too wide, so that it could catch various
activities that would not normally be thought of as party
political, and for requiring an excessive number of shareholder
Amongst other things:
- private companies will be able to authorise donations and/or
expenditure by written resolution;
- a holding company will be able to seek authorisation of
donations and expenditure in respect of both the holding company
itself and one or more subsidiaries (including wholly-owned
subsidiaries) through a single approval resolution;
- a specific exemption will be introduced for donations to
3. CAPITAL MAINTENANCE AND TRANSACTIONS
Private companies will be able to give financial
assistance for the acquisition of their own shares or those of
their (private company) parent, without having to go through the
'whitewash' procedure (which will be repealed). But public
companies will still be prohibited from giving financial assistance
for the acquisition of their own shares or those of their parent
company (whether public or private).
Directors will still need to consider whether a
proposed arrangement is in the best interests of their company. But
the removal of the threat of criminal sanctions for giving unlawful
financial assistance is likely to simplify many M & A
transactions which involve only private companies.
Reduction of capital
Private companies will be able to reduce their
share capital by passing a special resolution, supported by a
directors' solvency statement signed by all the directors, rather
than having to go to court. The statement will be similar to a
statutory declaration of solvency for the purposes of a financial
assistance whitewash under the current law.
The procedure for private companies to purchase or
redeem their own shares out of capital will be retained, but as
shares can be cancelled and non-distributable reserves returned to
shareholders by means of a reduction of capital, the procedure will
probably be used less often.
Shareholders in both public and private companies
will be able to adopt articles that allow the directors to decide
the terms on which redeemable shares are to be redeemed (rather
than having to set out those terms in the articles). The terms of
redemption must be decided before the shares are actually
Intra-group transfers and the rule in
Section 577 of the Bill will make clear that assets
can be transferred intra-group at their book value, rather than
their market value, provided that the transferor has distributable
profits. If an asset is sold at less than its book value, the
company will need to have sufficient distributable profits to cover
the amount of the undervalue.
Authorised share capital
Concerns over whether a company has 'sufficient
headroom' to issue new shares will disappear, as the Bill abolishes
the concept of authorised share capital. However, a proposal to
allow companies to issue shares of no par value has been dropped:
shares must have a fixed nominal value.
The existing requirements for public companies to
have a minimum share capital will be kept.
Allotment of shares by private
Unless its articles provide otherwise, a private
company's directors will no longer need shareholder approval to
allot shares, although approval will be necessary if the company
has, or will have as a result of the allotment, more than one class
Re-denomination of shares
A simplified procedure will allow limited companies
to convert their share capital from one currency to another, and to
re-denominate their shares after conversion to achieve round share
values, without having to go to court or buy back shares out of
capital and issue new shares.
4. AUDITORS AND ACCOUNTS
Time limits for filing annual accounts
Private companies will have to file annual reports
and accounts at Companies House within seven months of the year end
(down from ten months at present), and public companies within six
months (down from seven).
Limitation of auditors' liability to
Subject to annual shareholder approval, all
companies will be allowed to limit the liability of their auditors
to an amount considered by a court to be "fair and reasonable in
all the circumstances" (ie. an amount proportionate to their
fault). When the Act comes into force, companies can expect their
auditors to propose such limitations in their audit engagement
A company that has entered into a liability
limitation agreement with its auditors must disclose this in its
annual financial statements.
Auditors' duty of care
After consideration, the Government has decided not
to codify in statute the principle expressed by the House of Lords
in Caparo Industries plc v Dickman  2 AC 605 that the
auditors' statutory duty is owed to the company's shareholders as a
body, to enable them to exercise their rights in general meeting
(for example, to approve or disapprove the election or re-election
of directors, or the appointment or reappointment of the auditors),
but not to individual shareholders or the public at large who may
rely on the accounts when deciding whether or not to invest in the
Appointment of auditors
There will be a presumption that auditors of
private companies will be automatically reappointed each year.
Resignation of auditors
A firm which ceases to hold office as auditor of a
quoted company will always have to make a statement about the
circumstances of its departure. The statement will have to be
circulated to the company's shareholders unless a court is
persuaded that the auditor is "abusing his rights". A copy must
also be sent to Companies House and the Financial Reporting
Quoted companies will have to publish their annual
accounts and reports and preliminary results on their websites.
True and fair view
Apparently in response to concerns that the
introduction of IFRS and changes to UK GAAP are eroding the concept
of the 'true and fair view', clause 366 of the Bill provides that
the directors of a company must not approve annual accounts unless
they are satisfied that they give a true and fair view. It also
requires auditors to have regard to this standard in carrying out
their audit. The existing requirement for auditors to state in
their report whether or not the accounts give a true and fair view
will be retained.
Clause 494 of the Bill makes it a criminal offence
for an auditor knowingly or recklessly to cause a misleading, false
or deceptive audit report to be made. The maximum penalty will be
an unlimited fine - not imprisonment, as originally proposed.
For the first time, the audit report will have to
be signed by the lead auditor, as well as the audit firm. However,
the risk attaching to this will be reputational rather than legal:
section 492 provides that the signatory will not be subject to "any
civil liability to which he would not otherwise be subject".
Auditors' terms of engagement
Regulations may be made in future requiring
auditors or companies to publish audit engagement letters and/or
details of the services provided by the auditors (and their
associates) to the company, and the remuneration received.
5. COMPANY ADMINISTRATION
Resolutions and meetings
Company decision-making processes will be
streamlined. In particular:
- Private companies will not be required to lay their accounts or
to appoint an auditor (if they have one) at an AGM. Companies that
wish to continue to hold AGMs may do so.
- Public companies will have to hold their AGM within six months
of their financial year end.
- Other than resolutions to remove a director or auditor, all
resolutions of private companies will be capable of being passed in
- Instead of needing unanimity, an ordinary resolution will be
capable of being passed in writing by a simple majority of the
total voting rights of eligible members; and a special resolution
in writing by 75%.
- The percentage of shares or voting rights necessary to hold a
meeting in a private company at short notice will be reduced from
95% to 90%.
- A company will be able to change its name either by special
resolution or by any other means provided in its articles.
- Subject to shareholder approval, companies will be able to make
electronic communications with shareholders the default
Formation of companies
Single member companies
It will be possible to have single member public
companies, as well as private ones.
The memorandum of association will be a brief
document simply stating that the subscribers have agreed to become
members and to take at least one share each. Other matters
currently contained in the memorandum, such as the company's
objects, can instead be incorporated in the articles. For existing
companies, such provisions will be treated as if they were in the
The Secretary of State will be given power to
prescribe 'default' articles for all types of company, rather than
just for those limited by shares. The Government's consultation
paper on the Bill included a new simplified set of model articles
for private companies limited by shares. It also proposed the
creation of separate sets of model articles for public companies
limited by shares and private companies limited by guarantee. Such
model articles are likely to be set out in secondary legislation,
and are therefore not included in the Bill itself.
When the new model articles are introduced, they
will apply automatically to companies that are incorporated after
that date, but not to companies incorporated beforehand. In both
cases, shareholders will be able to choose to adopt all or any part
of the new model articles.
New provisions will enable a person to object to a
company's name if that name is the same as, or confusingly similar
to, a name in which the objector has goodwill. The objection will
be upheld if the name was not adopted in good faith or if the main
reason for its choice was either to obtain money from the person
objecting or to prevent their using the name.
The Business Names Act 1985, which governs the use
of trading names by certain companies, partnerships and sole
traders, will be repealed and replaced with similar provisions.
Private companies offering shares to the
A private company that is intending to re-register
as public will be able to offer shares to the public without
waiting for the re-registration to complete. The definition of
"offer to the public" currently in section 742A CA 85 (which is
quite different to the definition used for prospectus purposes)
will remain largely unchanged.
Paper-free holding and transfer of
The Bill extends the power under section 207 CA 89
for the Secretary of State to make Regulations providing for shares
to be transferred electronically. This power has previously been
used to make the Uncertificated Securities Regulations 2001, which
enable shares in quoted companies to be transferred through CREST.
It will now enable further Regulations to be made requiring, as
well as permitting, any specified type of company to provide for
its shares to be held and transferred electronically. Such
Regulations will only be introduced after further consultation.
Inspection of the register of
A request from any person to inspect a company's
register of members need not be complied with if the company can
persuade a court that the request is not made for a "proper
Companies House filings
There will be a new offence of knowingly or
recklessly delivering information to the registrar of companies
that is misleading, false or deceptive in a material
From 1 January 2007 it will be possible to
incorporate a company on-line, and companies will be able to file
documents and particulars electronically.
The Registrar will be given limited powers to
accept informal corrections to, or replacements for, documents that
have been filed. At present, the formal position of Companies House
is that corrections or replacements can only be effected pursuant
to a court order.
6. FURTHER CHANGES, AND HOW THE NEW ACT
WILL RELATE TO OTHER LEGISLATION
Relationship with Companies Act 1985 and
Various parts and sections of the 1985 and 1989
Acts will be repealed and replaced by the Act; other sections will
be amended, re-ordered or simply re-enacted. The Bill also of
course contains a number of completely new provisions. Once the
Bill becomes law, the primary sources of company law will be the
Company Law Reform Act 2006, the remaining parts of Companies Act
1985, and Part 2 of the Companies (Audit, Investigations and
Community Enterprise) Act 2004 (which deals with community interest
In its Guidance on key clauses in the Bill, the DTI
refers to an 'annexed' table showing in broad terms which
provisions of the Bill replace 1985 Act provisions, which are
amendments, which are codifications of common law, and which derive
from EC Directives. Hopefully this table will be published in due
Company law reform power
Part 31 of the Bill lays the foundations for a new
form of legislation designed to be used in making further changes
to company law, the 'company law reform order'. Subject to certain
restrictions, and a consultation process with interested parties,
such orders will be capable of amending primary legislation "in
relation to companies". They will be made using an accelerated
Parliamentary approval process. The Government intends to use them,
in particular, to implement future EC Directives on public
companies, and on migration of companies between Member States, and
the Law Commission's recommendations on company charges.
To implement the Takeover Directive, the Panel will
be put on a statutory footing and given certain powers. The
Directive must be implemented by 20 May 2006.
Various technical changes will also be made to the
statutory squeeze-out procedure in sections 428-430F CA 85. Some of
these are designed to bring the procedure into line with the
Directive: eg. the squeeze-out will have to be initiated within
three months of the last date on which the offer can be accepted,
rather than two months from when the bidder reached the 90%
threshold. Others were recommended by the Company Law Review and
are designed to make it easier for offerors to buy out dissenting
minorities. For example:
- An offer will still be treated as made on the same terms to all
shareholders of the same class if some recipients are offered a
different price in order to reflect their different entitlement to
- An offer which cannot in practice be accepted by certain
overseas shareholders, or which is communicated to such persons by
means of a notice in the London Gazette, will count as a 'takeover
- A bidder may not need to wait until it has dealt with
outstanding options over target shares before initiating the
- Technical changes will reduce the risk of shares which are the
subject of irrevocable undertakings not counting towards the 90%
threshold for the statutory squeeze-out.
- It will be made clear that shares which, immediately before the
offer is made, the bidder has contracted to acquire (other than by
means of irrevocable undertakings) will be treated as already held
by the bidder even if the contract is subject to conditions –
so that the offer will not be made for such shares. As a result,
they will not count towards the denominator or the numerator in the
fraction used to calculate whether the bidder has reached 90%
acceptances of the offer. If, during the offer period, the bidder
conditionally agrees to acquire shares to which the offer relates,
those shares will only count towards the 90% if the conditions have
all been met or waived.
Notification of shareholder interests: FSA
Part 6 of the 1985 Act will be repealed insofar as
it relates to shareholders' obligations to disclose their
shareholdings to the company. Instead, the Financial Services
Authority will be given powers to make rules with regard to
shareholder notifications (Transparency Rules). It is proposed that
the scope of the FSA regime will be broadly similar to the current
regime under Part 6 but, instead of all public companies, the rules
will apply to companies whose shares are traded on an EU regulated
market (such as the Official List) and possibly on other UK markets
(such as AIM).
These changes are to implement the Transparency
Directive, which lays down rules on periodic financial reports and
disclosure of major shareholders for issuers whose securities are
admitted to trading on a regulated market in the EU.
Before the date for implementation of the
Transparency Directive (20 January 2007), the FSA will publish
draft Transparency Rules for consultation.
Because no consensus of support for the Law
Commission's proposals emerged from the recent consultation
exercise, the Bill does not deal with company charges. The
Government has said that it intends to discuss further with
interested parties exactly which changes should be implemented.
The new Act, Part 2 of the Companies (Audit,
Investigations and Community Enterprise) Act 2004, and those
provisions of the 1985 Act that remain in force will apply directly
to Northern Ireland. The British legislation relating to SEs will
also be extended to Northern Ireland.
Background and further information
Materials relating to the Bill
Along with the Bill, the Government published
Explanatory notes, Guidance on key clauses, a Regulatory Impact
Assessment, and a summary for small business. There was also a
written ministerial statement to the House of Lords, outlining the
key changes from the draft Bill that was published in various
stages earlier this year.
All of these documents, other than the Written
Ministerial Statement, are available via the relevant page on the DTI's website.
The Ministerial Statement is available here.
July 2002 White Paper
In July 2002 the Government published a White Paper
on company law reform, containing many of the proposals that have
found their way into the Bill. We summarised the White Paper in our
LawNow article published on 12
Amongst other things, the White Paper proposed the
introduction of an OFR for quoted companies. Earlier this year,
changes were made to the Companies Act 1985 to require all UK
quoted companies to produce an OFR, and all UK large and
medium-sized unquoted companies to produce an expanded directors'
report, in respect of financial years starting on or after 1 April
2005. These changes were described in our LawNow article published on 28 January 2005, and in
various subsequent articles.
The new rules introduced on 6 April this year,
allowing companies to indemnify their directors in certain
circumstances, and to advance funds to them to meet defence costs,
were described in our LawNow article
published on 2 February 2005.