Act redefines duties of directors

Jan 10, 2008

DESIGNED to bring the UK’s corporate law framework into line with the demands of the 21st century, the Companies Act 2006 contains many provisions. Three that now affect all businesses are those relating to directors’ duties, derivative claims and annual general meetings, which came into effect on October 1 last year.

The Act seeks to define more clearly what is expected of the board members of UK companies. The role of the director has, until now, largely been defined by common law and court judgements but the Act codifies directors’ duties for the first time.

Along with that structure comes accountability. Directors are required to consider how their actions could affect stakeholders beyond the shareholder community.

For instance, it may be wise to show that, in their decision-making process, they have considered the impact of their decisions on the community and environment. In practice, this could be by way of a simple statement in board meeting minutes outlining their consideration of external factors.

Where derivative claims are concerned, the Act widens the rights available to shareholders to commence legal action against directors on behalf of the company. There are dangers here, not least that public companies could suffer a surge of actions brought by those individuals who buy up shares to make mischief.

To protect against abuse, the court must find a prima facie case based on the evidence before the action can proceed. Companies may wish to take this opportunity to review directors’ indemnity policies.

On the subject of annual general meetings and written resolutions, the good news for private companies is that there is no longer the need to opt out of holding an AGM.
In reality there is no need for many owner-managed businesses to hold AGMs. The Act recognises that. However, it should be noted that some Articles of Association may still require an AGM to be held.

The Act changes the rule on written resolutions. Since October 1, written resolutions have no longer required unanimous consent. Instead, the requisite majority for the passing of an Ordinary or a Special Written Resolution will be sufficient – that is 51 per cent or 75pc of those entitled to vote.

There are, therefore, some positive aspects to the new legislation, as well as some additional burdens, so there is no better time than the present to get up to speed.

For more information, telephone Andrew Lawes on 01908 687800, e-mail andrew.lawes@bakertilly.co.uk or visit www.bakertilly.co.uk

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