Companies act 2006: the impact on directors - update

July 2007

Simplification of the law relating to directors’ transactions

Home addresses will be able to be withheld from public disclosure

From 1 October 2008, directors will be able to provide a service address for the public record and keep their residential address private. The service address can be the same as or different to their usual residential address (for instance, directors might choose to give the company’s registered office address as their service address) but the public will only have access to the service address and it will not be possible to tell from the record if that is the director's home address or not.

Companies will have to create and maintain a new register of individual directors’ usual residential addresses. This will not be open to public inspection. Companies will also have to maintain their existing register of directors (which is open to public inspection) but this need only contain the service addresses of directors. Unfortunately, like the present law, there will be no cleansing of historic residential addresses on the register so members of the public will still have access to this information for current directors unless a confidentiality order is in place. However, in the Written Statement issued by Margaret Hodge on 26 June 2007, it is made clear that the procedures the DTI  (now the DBERR ) is proposing for removing existing residential addresses on the public record at Companies House, are to be extended to former directors and company secretaries. In addition, the extent to which credit agencies have access to directors’ residential addresses is also to be restricted. The existing confidentiality order regime will be repealed. Another change to the existing register of directors is that details of other directorships held will no longer require disclosure.

A statutory liability regime for misleading statements made in directors’ reports

Directors were concerned about the exposure they could face in respect of disclosures required by the Transparency Directive and the forward-looking statements required by the Operating and Financial Review (which have been largely reproduced in the expanded business review). To address these concerns, the Act introduces a new safe harbour to limit the liability of directors.

Directors are liable to the company for statements or omissions made in the directors’ report (including those in the expanded business review), the directors’ remuneration report and any summary financial statement (these three together referred to as “directors’ reports”) derived from those reports.

Liability will only attach to directors if the company suffers loss as a result of any untrue or misleading statements in directors’ reports which are made in bad faith or recklessly or, in the case of omissions, there is dishonest concealment of material facts.

A director will only be liable to the company for misleading statements in directors’ reports, and not to shareholders, potential investors or third parties. The criminal liability regime remains unaffected by this change. The change means that statements included in the expanded business review (including the forward-looking, non-financial elements) will benefit from the safe harbour.

The first commencement order makes clear that the new provision applies to directors’ reports first sent to shareholders on or after 20 January 2007.

Companies must still comply with the business review requirements set out in the CA  until the expanded business review provisions come into force on 1 October 2007.

Notification of directors’ shareholdings provisions repealed

The share dealings provisions in the CA were repealed with effect from 6 April 2007 as they were regarded as having been superseded by the market abuse regime in s118 of the Financial Services and Markets Act 2000 (FSMA) (applicable to traded companies) and the FSA's   Disclosure and Transparency Rules for Official List companies.

Although there is no equivalent of the Disclosure and Transparency Rules for AIM  companies, AIM Rule 17 requires an AIM company to notify the market of directors’ dealings and Rule 31 requires it to ensure that each director accepts full responsibility for its compliance with the AIM Rules and discloses without delay all information which the company needs to comply with Rule 17. So whilst there is no specific obligation in the AIM Rules imposed on directors to notify the company of their share dealings, in practice the company will expect directors to continue to notify such dealings to the company to ensure that the company can meet its obligations under Rule 17.

The change means that directors of private companies and unquoted public companies (and their families) no longer need to disclose their shareholdings and dealings in the company’s shares.

Simplification of the law relating to directors’ transactions

The Act replaces and amends the current provisions of the CA regulating transactions between directors and the company (these provisions are commonly referred to as the directors’ conflicts rules). These provisions fall into two main categories: those requiring disclosure to shareholders and those requiring shareholder approval. In relation to the former, Schedule 6 to the CA sets out extensive disclosure requirements relating to directors’ loans and other similar transactions with the company. The Act provides that the information to be disclosed will be included in regulations to be made by the Secretary of State.

The provisions relating to shareholder approval in respect of directors’ long-term service contracts, substantial property transactions, loans, quasi-loans and credit transactions, and ex gratia payments for loss of office, have been brought together and, where appropriate, drafted to facilitate comparison between the different requirements. Although the rules have been substantially rewritten, the Act makes few substantive changes. Companies may enter into such transactions if they are approved by an ordinary resolution of the company’s members. There will no longer be criminal penalties for failure to comply with the requirements.

The Act prohibits directors’ service contracts exceeding two years without prior shareholder approval (the current limit is five years). The Combined Code recommends that service contracts for directors of Official List companies should not exceed one year, so as to limit the compensation payable to directors on termination. The Act brings the law for all companies closer to the current best practice requirement for Official List companies.

There are also some changes to the provisions relating to substantial property transactions. These are transactions where the company sells or buys a substantial non-cash asset from a director of the company or of its holding company or a person connected with such a director. The Act relaxes the present rules in the CA as follows:

• by permitting a company to enter into a contract which is conditional on shareholder approval (currently, shareholder approval must be obtained before the contract is entered into);
  
• by excluding any payments to which a director is entitled under his service contract; and
  
• by raising the minimum threshold of what may be regarded as a substantial non-cash asset from £2,000 to £5,000 (although this only applies where the asset’s value also exceeds ten per cent., of the company’s asset value, as under the current CA).

The most significant change in relation to the provisions regulating loans, quasi-loans and credit transactions is that the Act permits public companies or their associated private companies, with member consent, to make loans, quasi-loans, enter into credit transactions, give guarantees or provide security in connection with a loan, to a director, provided that prior disclosure is made of the nature of the transaction, the loan amount and purpose and the extent of the company’s liability under any related transaction (for example, a guarantee). This reverses the current prohibition on such transactions in the CA. The exception for loans to directors to fund their defence of criminal or civil proceedings has been extended to cover proceedings relating to the company’s holding company. There is also a new exception for loans to fund directors’ expenditure in defending regulatory actions or investigations.

Age limits for directors

The previous maximum age limit of 70 years for the appointment of directors of public companies was repealed with effect from April 2007. Persons over 70 are able to become or continue as directors of public companies (or their private company subsidiaries) without specific shareholder approval. This is welcome news for those directors in their late 60s who wish to continue serving on public company boards and for companies that do not wish to lose the expertise of such directors. Companies should check and, if necessary, amend their articles of association to reflect this change.

The Act also tightens the law by introducing a minimum age of 16 for directors from 1 October 2008.

Minimum of one natural person to act as a director

Although corporate directors will still be permitted, from 1 October 2008 at least one director must be a natural person. This is so that there is a natural person who can, where the law provides, be held personally accountable for the company’s failings. Corporate groups will need to ensure in good time before 1 October 2008 that all group members have at least one natural person appointed as a director to comply with the new law. However, in her Written Statement of 26 June 2007, Margaret Hodge announced that there would be a grace period so that companies which did not have a natural person as a director on 8 November 2006 (when the Act received Royal Assent), will have until October 2010 to appoint one.

Next section: Implementation timetable