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Companies Act 2006: Intention, Interpretation, Implementation

Margaret Hodge MBE MP,  Minister of State for Industry and the Regions
Victoria Park Plaza,  27 February 2007

Good morning and thank you for coming.

I am pleased to see so many people here today, which demonstrates the importance of this piece of legislation.

The Companies Act received Royal Assent on 8 November 2006. As you are already probably aware, the Act is fast becoming famous for being the biggest Act to be taken through Parliament. More importantly, it is the product of a long period of considered reform of company law, which has brought together the best experts in the field, with government working in partnership with all stakeholders.

I know that there is great interest in the timetable for implementation. I have had discussions with interested parties about this, and we will announce the timetable in a couple of days.

We want to set out a clear timetable for the whole of implementation of the Act, as I am sure it will be helpful for all concerned to be able to plan. I know we promised to do this before the end of February – if I tell you we shall be keeping to our promise it won’t keep you waiting for long!

Before I come to talk about the Act, I would like to set the scene a little.

Our role is to increase the competitiveness of the UK. We are committed to ensuring that the legal and regulatory framework within which business operates promotes enterprise, promotes growth and provides the right conditions for investment and employment.

A robust yet flexible company law framework is one of the essential ingredients of a successful, competitive economy.

In an increasingly global market place with ever-changing and ever-newer technologies, the way businesses operate and communicate has changed, and our company law framework must enable businesses to flourish in this dynamic environment.

The UK is a prime location for setting up business – since 1997 new incorporations have risen by over 60%. The number of EU firms choosing to incorporate in the UK has increased by more than four times since 1997. A World Bank Survey of 155 countries entitled “Doing Business in 2006” found that it is quicker and cheaper for companies to set up in the UK than in any other EU member state.

I was recently at Companies House in Cardiff where I had the opportunity to see first-hand the commitment of the operations which enable companies to incorporate quickly and easily. Some of you may have visited Companies House and have shared my surprise that there was so much paper! But they are efficient within their constraints: Companies House add 120 new companies to their register every working hour, and the customer record for the fastest incorporation is less than 15 minutes.

Managing the records of two and a half million companies and making them available to customers means having modern, reliable systems. Companies House customers are increasingly using electronic services because they are easy to use, cheaper and faster. So Companies House itself is also modernising its IT systems, replacing its old database system and transferring to a new system later this year. We have had to consider the implications of this transformation in the implementation timetable, and some elements connected to Companies House will have to be implemented later rather than sooner.

This Act will make the UK an even more attractive place to invest and do business. It is a real step forward in the reform and modernisation of company law, and help us ensure that the UK remains a leader in the world of business and finance.

Company law had previously been changed and updated in piecemeal, iterative fashion over the last 50 years, and some of it even dated back to Victorian times. It needed reforming to make it simpler and more accessible, especially for small businesses. We also wanted to bring together these changes into one single piece of legislation.

After 8 years of work starting with the independent Company Law Review, and after extensive consultation with business, investors, practitioners, and the professionals like yourselves, we have the huge achievement of the Companies Act 2006.

I will take a few minutes to set out the key provisions in the Act.

Behind the 1300 sections of the Act lie 4 key themes:-
enhancing shareholder engagement and a long-term investment culture;
ensuring better regulation and a ‘Think Small First’ approach;
Making it easier to set up and run a company; and
Providing flexibility for the future

I will first outline the key areas where the Act will enhance shareholder engagement and a long-term investment culture.

Companies do work best where there is a good understanding and a good engagement between the directors and the shareholders. These roles and responsibilities should be clearly defined and efficient mechanisms need to be in place for effective communication. This should ensure that directors and shareholders can work together in a way which promotes long-term investment.

The Act recognises that in order to have sustainable success for the benefit of shareholders, directors need to have regard to wider factors other than just short-term profit.

The concept which is commonly known as the ‘Enlightened Shareholder Value’ is enshrined in the Act and recognises that directors will be more likely to achieve long term sustainable success for the benefit of their shareholders if their companies pay appropriate regard to wider matters such as the environment and their employees.

The Act does not require directors to keep additional records – it simply requires them to have due regard to these wider factors, with the weight given to any factor a matter for their good faith business judgment.

Under the Act, directors of quoted companies will also need to ensure that they report on environmental, employee, social and community matters, as well as contractual and other relationships, in their Business Review, so that shareholders can have a clear understanding of the development, performance or position of the company’s business.

Again, this is not about requiring companies to list their suppliers or produce miles and miles of paperwork. This is about the directors using their judgement to decide what is relevant in the supply chain for them to report on. As section 417 says, a quoted company must include information in its Business Review “to the extent necessary for an understanding of the development, performance or position of the company’s business”.

Alongside these provisions on narrative reporting, we have clarified the liability of directors and of companies for the accuracy of the reports. This is about the ability of investors to sue for damages in respect of false or misleading statements in company reports made recklessly or with intent. It is important that the right incentives are in place to encourage meaningful, forward-looking information for shareholders, while also ensuring an appropriate but limited right to recover losses.

The sections on what have become known as ‘derivative claims’ set out in the legislation the process for minority shareholders to enable them to bring actions on behalf of the company against directors where there has been a breach of duty. This ability already exists, but the Act provides a clearer and more accessible procedure for bringing such claims while protecting directors against malicious or frivolous actions.

As the Law Commission recommended, such claims will in future be able to cover cases of pure negligence. We have ensured that the courts will be able to quickly dismiss claims that are not in the interests of the company.

The Act also provides for greater use of electronic communications. We hope and believe that this will enhance shareholder involvement by making dialogue between companies and their shareholders quicker and easier. It will bring many millions of pounds of savings to business.

Business groups and representatives have told us that these savings are so significant that they wanted these provisions brought into force as soon as possible.

This is why we commenced the provisions on company communications, including electronic communications, last month, so businesses can now take advantage of these benefits. We know that many quoted companies will be making changes to their articles this agm season to make electronic communications the default option in the future.

Increasingly, shares are being held through nominees. The Act will allow those who hold shares indirectly through a nominee to receive information from the company and to attend meetings through use of a proxy system.

We also consider it logical that investors should have access to information on how their investments are managed; that greater transparency of voting decisions should make institutions more accountable and reduce the potential for conflicts of interest.

That is why we have taken a power in the Act to permit the Government to require disclosure of voting shares by institutional investors. In taking this power, we are not – at this point in time - establishing a disclosure regime. We hope that the industry will itself put in place a sufficient voluntary disclosure regime. We would consult fully with industry before introducing any mandatory regime which should it become necessary.

I mentioned earlier that the Act will make it easier to set up and run a company and is driven by principles of Better Regulation. Under both these themes, the Act will reduce costs and increase flexibility for companies.

Before the Act, much of company law was designed with only the larger companies with numerous public investors in mind. Yet over 90% of companies are private companies and have 5 shareholders or less.

I’ve tried therefore to rewrite company law with the smaller company in mind – after all, they are the largest group of users of company law.

The ‘Think Small First’ principle is there, underpinning the new regime:

It will be easier and simpler to set up a company. The Memorandum is a one-off document which is created when a company is formed, and only the articles have ongoing effect. We intend to produce new, much simpler model articles for private companies.

Where new private companies do not make their own provision, these will act as a default. We will also produce separate model articles for public companies.

The Act removes the prohibition on private companies to provide financial assistance for the purchase of their own shares.

It simplifies the way private companies take decisions by taking away the requirement to hold Annual General Meetings and allowing more use of written resolutions. And it has removed the requirement – although not the opportunity - for private companies to have a company secretary.

But better regulation is not just about deregulating, it is about improving the quality of the legislation, and I hope that if you have looked at the Act you will realise that it is written in clear language that is easy for everyone to understand.

Finally, our fourth theme – flexibility for the future.

We recognise that company law is not static. Companies operate in a rapidly changing environment. We have therefore tried to draft the provisions with as much flexibility as possible, and in some areas we have powers to amend as circumstances change.

We are now at the stage of implementation of the Act, and bringing all of these benefits to fruition.

There are a number of elements to implementation.

Firstly, it will involve making a number of secondary regulations, some of which will need debating in Parliament.

However, I must emphasise that most of the substance is actually written into the Act itself. In this respect it is unlike, for example, the financial services legislation where much of the substance is in regulations.

We will soon be publishing a consultation document seeking comments on the approach we plan to take on the regulations. This will be available on our website, and the consultation will be open for three months.

We sincerely welcome your views – I want this to be an iterative, collaborative process - so please do consider the document and get in touch if you have any comments to make.

Secondly, one of the most important aspects to implementing the Act is providing the least burdensome and most efficient transition to the new regime for existing companies.

We consulted on some of the key areas in the Act that would need particular attention for providing transitional arrangements through a consultation in August last year. In the light of these views we announced our approach in December.

Our general approach to transitional arrangements follows three main objectives. These are that the new law should come into force for existing and new companies at the same time; to ensure so far as possible that existing bargains are not overrriden; and that it is as easy as possible for existing companies to take advantage of the new freedoms that the new Act offers.

This approach will be reflected in the consultation document, and again we will invite comments on that.

Thirdly, communication. We can make legislation that is simpler, easy to understand and suitable for business in the modern world. But, this means nothing unless we can communicate the benefits and changes in the law effectively to those who need to know. That is why I am keen to talk to audiences like you today, and my Department is keen to do as much as we can to help businesses and other users understand this Act.

We have already produced explanatory notes and tables of derivations and destinations for all of the Act’s provisions. These are on our website. We have commenced provisions through the use of Commencement Orders. We have produced two of these instruments so far, which we accompanied with “Frequently Asked Questions” about the provisions being brought into force to help practitioners.

We also intend to provide checklists for different users, which I hope will go some way to help people understand what it is that they have to do. We will do one for small companies and another for shareholders. These will again be available on our website as well as in hard copy.

Finally, we are working very closely with Companies House, who need to make changes to their processes and systems in line with the changes in the Act. This covers all areas of work from formation, to new systems for directors home addresses, changes in forms, e-filing services, and the information available to searchers.

The visit I made recently highlighted the challenges that this involves, which we need to build into the timetable for commencing provisions. Companies House will also be providing guidance on all the changes for its customers, and what customers need to do to comply with the Act, in due course.

As regards when the various provisions will be brought into force, those relating to the Transparency Directive, disclosure of a company’s registered name and details on websites from the First Company Law Directive, and e-communications provisions, were all commenced in January.

The second Commencement Order that was laid in draft this month will bring into force provisions relating to the Takeovers Directive and Northern Ireland Community Interest Companies on 6 April.

Various freestanding repeals will also commence in April, including provisions from the 1985 Act relating to the age of directors and share dealings by directors.

We have already said that our intention is to completed the commencement of all parts of the Act by October 2008. I should stress that we have said BY October 2008 – not IN October 2008. It is not good governance to leave legislation too long on the statute book without implementing it. As I mentioned earlier, it is not like the financial services legislation, because much of the detail is on the face of the Act. As I also said earlier, we have been talking to all our stakeholders to make sure we take into account practical considerations in deciding the timetable, as well as, for example, the need to meet European deadlines.

We expect to follow the principle of common commencement dates – that is bringing provisions into force in April or October of any year unless there are compelling, over-riding reasons to divert from this, and that helps business to be aware of when legislation is coming in that affects them.

We want to continue to work together with you through this critical implementation phase, and we do genuinely appreciate the invaluable contributions from interested parties throughout the development of the Act.

Achieving an effective company law framework has been and remains a top priority for DTI. We have set the framework, but we need you – small businesses, public companies, multinationals, shareholders, institutional investors, practitioners, professional bodies, associations and representative groups - to help spread the word and embrace these important opportunities.

This is a hugely important Act. I strongly believe that it will make Britain a place where business can continue to prosper by creating conditions for business success in a world of change and competition.

We are delivering on the ‘Think Small First’ principle, and we are modernising the law for our larger companies.

It benefits investors and we will help promote a long-term investment culture.

It delivers an improved company law framework that is appropriate for the 21st century and I look forward to working with you on the important task of implementation.

Thank you.