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THE COMPANY LAW REFORM BILL

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. ORIGINS - Company Law Review, started in 1998 .

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THE COMPANY LAW REFORM BILL

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  1. 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

  2. ORIGINS - Company Law Review, started in 1998 SIZE OF BILL - Over 900 clauses plus 16 Schedules, 500+ pages 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 2006 ROYAL ASSENT - Expected Autumn 2006 IMPLEMENTATION - Expected October 2007 onwards REGULATIONS - None published yet, except for two sets of draft Model Articles

  3. SELECTION OF TOPICS COVERED BY CLRB (BUT NOT IN THIS SEMINAR) • Codification of Directors’ duties (in detail) • 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)

  4. Reductions of capital (new procedure for private companies, with no court proceedings) • Auditors’ liability (able to limit by a liability limitation agreement) • 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) • Transparency (implementation of the Transparency Directive)

  5. Registration of charges (not in CLRB, details awaited) • Business Names (control via regulations for individuals, partnerships and LLPs) • 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

  6. TOPICS RELEVANT TO COMPANY FORMATION NAME OF COMPANY • 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 • “Too like” rules and Company Names Adjudicators; effect on “opportunistic registrations” • Similar requirements to CA 1985 if “limited” omitted

  7. PERSONNEL Subscribers to the memorandum • only one needed for a public company • become holders of shares on incorporation First Directors • 2 needed for a public company • At least one director must be a natural person • 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” • 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

  8. Minimum age of 16 for directors • Other directorships (no requirement to list) • 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 • Problems with execution of documents • Introduction of “Authorised signatories”

  9. FORMATION DOCUMENTS Memorandum of Association • Authenticated by subscribers • No “objects clause” in memorandum, prescribed form only • Company has unlimited objects unless restricted by articles Application for registration • Proposed name • Location of registered office • Whether a limited company, and if so whether by shares or by guarantee • 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)

  10. Statement of capital and initial shareholdings • Total number of shares to be taken by subscribers • 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

  11. Statement of guarantee • Names and addresses of the 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 Compliance • Not a statutory declaration, but same penalties

  12. ARTICLES OF ASSOCIATION Model Articles of Association • 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 • Existing companies can adopt with or without modifications Transitional provisions • Can be made by statutory instrument • Details awaited

  13. Objects • Objects clause of existing company treated as being in its articles • 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 • Statement of compliance on subsequent amendment • Notice to registrar on removal of entrenched provisions, with statement of compliance

  14. Directors’ authority to allot shares • Abolition of authorised share capital • 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

  15. RESOLUTIONS • Ordinary (50% + 1) and special (75%) resolutions continue, extraordinary resolutions abolished • 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

  16. MEETINGS • Private companies not required to hold AGMs • 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 • 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

  17. DIRECTORS’ DUTIES • Codification of directors’ duties, but not remedies for breach • 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

  18. DIRECTORS - OTHER PROVISIONS • Abolition of upper age limit • 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

  19. SUMMARY OF IMPLICATIONS FOR COMPANY FORMATION • New prescribed forms • 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 • Codification of rules on directors’ duties • Need for articles to reflect changes

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