Companies Act 2006 — constitutional changes being implemented

Key points

  • Directors of new private companies may issue shares without shareholder approval. For an existing company to have this power, an ordinary resolution is needed.
  • Communicating with shareholders electronically and via a website is now available but may require authorisation by the articles and the consent of shareholders.
  • Directors’ conflicts of interest may be authorised by the directors if empowered to do so by resolutionor articles. This could avoid a breach of duty.
  • The new Act has reduced red tape in a number of areas: shorter notice for meetings, no compulsory annual general meetings and easier written resolutions by way of example. Your articles may be out of step and block the use of new flexible provisions or contain provisions which will be invalid. In our view, directors should be recommending to shareholders that a company’s articles be amended to simplify administration and remove misleading provisions from the articles.

General points

*The new model articles
Companies limited by shares or guarantee which are incorporated in England and Wales on or after 1 October 2009 will be registered under the Companies Act 2006. New sets of model articles for private companies to replace Table A will be introduced, one for private companies limited by shares and the
other for private companies limited by guarantee. These will be the ‘default’ articles for companies incorporated on or after 1 October 2009, although a company may instead adopt its own articles which may exclude or modify the model articles. We expect that, as is usually the case now, new companies will choose to incorporate some parts of the model articles, but will also set out their own provisions separately.

Existing companies can choose to adopt the model articles if they wish, but do need not do so. In future if you amend your articles this should be done by reference to the provisions of the 2006 Act and it would be prudent practice for the amended articles to be based on the model articles rather than Table A.

Articles of association

There is no legal requirement for you to amend your articles as a result of the October 2009 changes and you could choose to continue with your existing constitution. However, as you will see below, there are a number of changes which may affect your current articles and you may wish to make life easier by updating them to take advantage of the more flexible regime being introduced for private companies under the 2006 Act.

*Memorandum of association
The 2006 Act simplifies a company’s constitution. From 1 October 2009 the memorandum of association of new companies will look very different and in particular will have no objects clause. It will simply be a ‘snapshot’ document and of no continuing relevance after incorporation. For existing companies, most of the provisions of the current memorandum will automatically be treated
as part of the articles of association and so can be amended or deleted by special resolution. Existing companies do not have to amend their articles to reflect this change, but may do so if they wish. New companies may have unrestricted objects, whereas an existing company will need to amend its
articles to take advantage of this.
Authorised share capital
New companies will no longer have an authorised share capital, although a company may impose a limit on the number of shares it may issue in its articles.The authorised share capital of an existing company operates as a restriction in the articles on the number of shares which can be allotted by directors and an existing company should consider whether to remove this restriction by passing an ordinary resolution. We suggest that it would also be advisable to remove any other provisions in the articles referring to authorised share capital. Alternatively, an existing company could adopt new articles by special resolution with effect from any date after 1 October 2009 which do not refer to authorised share capital.

*Existing authority to allot
After 1 October 2009, it will no longer be possible to pass an elective resolution under s80A of the 1985 Act granting indefinite or extended authority to allot shares. Once expired, all authorities to allot will have to be made under the new Act and will be limited to five years in duration. Existing authorities for directors to allot shares under s80 and s80A Companies Act 1985 will continue to
have effect after 1 October 2009 until they expire and they will be treated as if passed under the 2006 Act. Consequently, existing companies could, before 1 October 2009, pass an s80A elective resolution in respect of an indefinite authority, or one for more than five years, to allot a specific number of shares in
order to avoid the new provisions of the 2006 Act which require five-yearly renewals. Provisions in an existing company’s articles which contain s80 authorities will need to be renewed in order to update them to reflect the wording of the new Act.
Issue and terms of redemption of redeemable shares

*Private companies will no longer need specific authorisation in the articles to issue redeemable shares. An existing company wishing to continue to restrict or prohibit the issue of redeemable shares must include appropriate restrictions or prohibitions in its articles. Currently, the terms and manner of redemption must be stated in the articles, but from 1 October 2009 the directors of the company will be able to determine the terms, conditions and manner of redemption, if they are authorised to do so by the articles or by an ordinary resolution. If the directors are not given such authority, all of these terms must be set out in the articles. Shares must generally still be paid for on redemption although the terms of redemption may now allow the redemption monies to be paid after the redemption date if the terms of redemption, whether fixed by the articles or by the directors, allow and the relevant shareholders agree. An existing company which has issued redeemable shares could renegotiate with its shareholders the terms of redemption contained in its current articles and amend its articles in order to take advantage of the flexibility allowed by this new development. In the current economic climate this may be useful for some companies since it will improve a company’s cashflow.

*Reduction of share capital
Since 1 October 2008 private companies have been able to reduce their share capital by passing a special resolution and no longer need to obtain court approval. The resolution is accompanied by a solvency statement made by each director. This new procedure is subject to any restriction or prohibition
in the company’s articles. You may wish to consider whether you require any such restrictions or whether to delete an existing authority requiring court approval, which is now redundant. There is no longer any need for specific authorisation in the articles to effect a reduction of capital. If your articles contain such authorisation you need do nothing further. However, if you are updating your articles for any other reason then you may choose to omit these provisions in order to avoid any duplication with the 2006 Act.

There are a number of important changes being made in relation to the rights of proxies which may affect your articles after October this year. If any provision of your articles provides that a proxy has fewer votes than the member would have had, this will be invalid. If your articles incorporate Table A pre-October
2007, it would be advisable to amend them since regulation 54 does not allow proxies to vote on a show of hands and will, therefore, be void after October this year. Also any provisions of your articles requiring an appointment of a proxy to be received by the company more than 48 ‘business’ hours before the
meeting will be void although your articles can set a time limit closer to the meeting. You must also ensure that your articles do not specify a period longer than 48 ‘business’ hours before a meeting for receiving notice of termination of a proxy’s appointment since this will also be void.

*Registration of share transfers
If your articles state that the company does not have to give reasons for refusing to register a transfer of shares or allows share transfers to be at the discretion of directors, they should be amended to reflect the new rules which make it a criminal offence not to give reasons for refusing to register a transfer.
Nomination of third party rights Since October 2007 companies can include in their articles provisions enabling members to nominate another person to exercise their rights as a member, for example, the right to receive notice of general meetings and to be sent proposed written resolutions. If you have not done so you may wish to amend your articles to allow your members this flexibility.

*Directors’ indemnities
In April 2005, the ability of companies to indemnify their directors against the legal and financial costs of claims brought by third parties was extended. Companies were also permitted for the first time to pay directors’ defence costs as they are incurred (provided these are repaid if the defence is unsuccessful),
rather than at the conclusion of legal proceedings. The 2006 Act has extended the scope of directors’ indemnities still further to include liability incurred by a director in connection with his acting as a trustee of an occupational pension scheme. Many companies have outdated indemnity provisions in their articles
which will not cover all these matters.

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