THE COMPANY LAW REFORM BILL

COMPANY FORMATIONS AND RELATED ISSUES AS AT 19 JUNE 2006

RICHARD PATON

Partner, Hill Dickinson LLP

Member of the Law Society Standing Committee on Company Law

STATUS IN PARLIAMENT -Brought from the Lords to the Commons on 24 May 2006

In Committee in the Commons since 20 June, expected to finish by 13 July 2006ROYAL ASSENT - Expected Autumn 2006

IMPLEMENTATION - Expected October 2007 onwards

REGULATIONS - None published yet, except for two sets of draft Model Articles

ORIGINS -Company Law Review, started in 1998

SIZE OF BILL - Over 900 clauses plus 16 Schedules, 500+ pages

Directors’ transactions with their companies (note that the rules about quasi-loans and credit transactions are extended to private companies except wholly-owned subsidiaries)

Derivative Actions (new statutory procedure)

Communications with Shareholders (use of websites is the default position for quoted companies)

Company records (can have a separate register for past members)

Registrar of Companies’ powers (to cleanse the register, etc)

SELECTION OF TOPICS COVERED BY CLRB (BUT NOT IN THIS SEMINAR)

Codification of Directors’ duties (in detail)

Accounting requirements (revised - OFR abandoned and replaced by Business Review for all except small companies)

Aveling Barford v Perion (problems of transfer of non-cash assets at book value removed so long as company has distributable profits)

Redenomination of share capital into foreign currency (easier, no reduction of capital)

Variation of class rights (simplification, no distinction between rights in memorandum and those in articles)

Takeovers (Implementation of the Takeovers Directive)

Reductions of capital (new procedure for private companies, with no court proceedings)

Auditors’ liability (able to limit by a liability limitation agreement)

Transparency (implementation of the Transparency Directive)

Striking off, dissolution and restoration (new administrative restoration procedure; voluntary striking off extended to public companies; six-year time limit for applications for all types of restoration application, except for personal injury claims purposes)

Abandonment of Company Law Reform Power, reliance on Legislative and Regulatory Reform Bill?

Consolidation of existing Companies Acts

Extension to Northern Ireland

Registration of charges (not in CLRB, details awaited)

Business Names (control via regulations for individuals, partnerships and LLPs)

Names indicating a connection with H M Government / Local Authority / public authorities specified in regulations

Use of symbols, accents and punctuation

Use of characters and signs (especially at the beginning of a name)

Prescribed standard style or format

Proscribed words

“Same As” rules

TOPICS RELEVANT TO COMPANY FORMATION

NAME OF COMPANY

“Too like” rules and Company Names Adjudicators; effect on “opportunistic registrations”

Similar requirements to CA 1985 if “limited” omitted

only one needed for a public company become holders of shares on incorporation

First Directors 2 needed for a public company

All directors can use a service address, but can elect to state that this is also their residential address (“opt-in”)

Service address can be stated as “The company’s registered office”

PERSONNEL

Subscribers to the memorandum

At least one director must be a natural person

Company has to maintain a separate register of directors’ residential addresses, and file details with the registrar

Neither the company nor the registrar can disclose a director’s residential address without his / her permission or to an official body such as the Insolvency Service or to a credit reference agency (criminal offence)

Problem of historic filings

Former names (maiden names no longer excluded)

Corporate directors (registration details required)

Company secretary

Required qualifications for a public company

No secretary required for a private company

Minimum age of 16 for directors

Other directorships (no requirement to list)

Introduction of “Authorised signatories”

Problems with execution of documents

Authenticated by subscribers

Application for registration

No “objects clause” in memorandum, prescribed form only

Whether a limited company, and if so whether by shares or by guarantee

FORMATION DOCUMENTS

Memorandum of Association

Company has unlimited objects unless restricted by articles

Location of registered office

Proposed name

Whether a private or a public company Name and address of agent for subscribers (if appropriate) Statement of capital and initial shareholdings, or statement of

guarantee Statement of the first officers

Address of registered office

Articles of Association (unless a model form is adopted by default)

Aggregate nominal value of those shares

Separate details for each class of shares

Amount to be paid up / left unpaid on each share (including premium)

Prescribed information for identifying the subscribers (Money Laundering?)

Separate details for each subscriber / class of share

Statement of capital and initial shareholdings

Total number of shares to be taken by subscribers

Statement of amount guaranteed by each subscriber

Statement of proposed officers

Required particulars of first directors (those required to be stated in the register of directors and register of directors’ residential addresses)

In relation to a public company, required particulars of secretary/ies

Required particulars of authorised signatories

Consent of first officers to act as such

Statement of guarantee

Names and addresses of the subscribers

Statement of Compliance

Not a statutory declaration, but same penalties

Public companies (draft published June 2006)

Private companies limited by shares (draft published March 2005)

Private companies limited by guarantee

Default regime

Relevant model applies to a new company except to the extent excluded by its articles

No effect on existing companies

ARTICLES OF ASSOCIATION

Model Articles of Association

Existing companies can adopt with or without modifications

Transitional provisions

Can be made by statutory instrument

Details awaited

New company has unrestricted objects unless its articles restrict them

Special rules for charities and companies omitting “limited” from their names

Entrenched provisions

Specified articles may not be altered or repealed unless agreed unanimously or by a higher than 75% majority

Can be in original articles or inserted by unanimous resolution

Special notice to registrar on formation / alteration of articles

Objects

Objects clause of existing company treated as being in its articles

Statement of compliance on subsequent amendment

Notice to registrar on removal of entrenched provisions, with statement of compliance

Private companies with one class of shares: directors have unlimited authority to allot shares, grant options, etc, except to the extent that they are prohibited from doing so by the company’s articles; pre-emption rights can be disapplied by articles or special resolution

Other companies: authority must be conferred by articles or by a resolution of the company; must state the maximum amount of shares; must be subject to a time limit (maximum 5 years); can be renewed; similar pre-emption rights apply to current provisions of CA 1985

No requirement to file the contract where shares are allotted for a non-cash consideration

Directors’ authority to allot shares

Abolition of authorised share capital

Written resolutions of private companies no longer unanimous, can be signed by the requisite majority of eligible members

Still can’t remove a director or an auditor by written resolution

Written resolutions can be circulated in hard copy form, in electronic form or by means of a website; eligible members must be given a deadline by which to signify agreement to the resolution, or it will lapse

5% (or lower if so provided in the articles) of members may require circulation of a written resolution unless ineffective, defamatory, frivolous or vexatious

Rules about written resolutions cannot be disapplied by the articles

RESOLUTIONS

Ordinary (50% + 1) and special (75%) resolutions continue, extraordinary resolutions abolished

Model Articles for private companies do not contain any provisions about meetings. Unclear how to remove director / auditor!

Resolutions of public companies have to be passed at meetings

All general meetings (even if convened to pass a special resolution) can be convened on 14 days’ notice, unless the articles specify a longer period. Exception for AGMs of public companies (21 days)

Can be convened on shorter notice if holders of 90% of issued shares (excluding treasury shares) so agree; articles of a private company can specify higher percentage (up to 95%). Exception for AGMs of public companies

MEETINGS

Private companies not required to hold AGMs

Proxies can vote on a show of hands

Schedules contain provisions facilitating communications between a company and its members in electronic form or via a website. Special rules for traded companies, which avoid the need for agreement by the member or holder of debt security or debenture concerned

CLRB’s intention is that the duties can be relaxed or disapplied in the same way as they can be under the existing law

There are special rules for companies which are charities

Current draft Model Articles include partial relaxation of rules about conflicts of interests

It will only be possible to draft new articles of association dealing with directors’ duties once the CLRB has been enacted and the Model Articles finalised

DIRECTORS’ DUTIES

Codification of directors’ duties, but not remedies for breach

Exemption from liability for breach of duty, negligence, default or breach of trust in relation to the company is still void

Indemnity for these is void except in case of insurance (but excludes any excess payable) and “qualifying third party provision” (but excludes fines and regulatory penalties and costs of an unsuccessful defence or claim for relief)

A company’s articles can specify a higher percentage than a simple majority to rectify a director’s negligence, default, breach of duty or breach of trust in relation to the company

DIRECTORS - OTHER PROVISIONS

Abolition of upper age limit

New rules about names, directors, secretary and authorised signatories

New Model Articles

New rules about a company’s objects

New rules about allotment of shares

New rules about resolutions

New rules about meetings

SUMMARY OF IMPLICATIONS FOR COMPANY FORMATION

New prescribed forms

Codification of rules on directors’ duties

Need for articles to reflect changes