Companies Act 2006 – the practical impact of 1 October 2009
SEPTEMBER 2009
On 1 October 2009, the final provisions of the Companies Act 2006 (“2006 Act”) come into force, including Part 3 of the Act relating to “A Company’s Constitution”. This part of the Act makes some substantial changes to the rules governing the memorandum and articles of association of a company, its share capital and how directors and members are required to conduct themselves in relation to these things. The provisions will apply in their entirety to all companies incorporated on or after 1 October, but what will the passing of this date mean for small private companies already in business?
Memorandum of Association and Articles of Association
Following final implementation of the 2006 Act, the Memorandum of Association of a company will become a much less significant document than it has previously been, containing only the subscribers’ statement of intention to form a company.
For newly incorporated companies (after 1 October 2009) the memorandum will represent a snap shot of the company as at the date of incorporation but will have little relevance thereafter. The Articles of Association will include matters that were previously dealt with in the memorandum, such as the statement of limited liability. After 1 October 2009 a company’s objects will be unrestricted unless specifically restricted in the articles of association.
For companies already in existence, there is no obligation on them to amend their existing constitutional documents. But from 1 October 2009 the terms of their memorandum (except for the subscribers’ statement) will be automatically deemed to form part of their articles.
RISK - It is important to note that once this happens, any objects clause contained in the memorandum will be incorporated into the articles and will be interpreted as a restriction on the powers of the company. Whilst objects clauses have traditionally been drafted to be as wide as possible there is now a risk that they could inadvertently restrict a company’s objects post 1 October 2009. We would recommend that objects clauses be deleted from the articles on or after 1 October 2009.
TIP - If a shareholder requests a copy of the company’s articles on or after 1 October 2009, directors should remember that they are required to send a copy of the old memorandum along with the articles, either attached to the articles or indicating in some way that the terms thereof are now deemed to form part of the articles.
TIP - The first time that the articles of an existing company are amended after 1 October 2009, a copy of the amended articles should be filed with the Registrar. This can either be an amended version of the articles incorporating the remaining terms of the memorandum or it can be the original articles with a copy of the old memorandum appended to it and appropriately marked to demonstrate which provisions continue to have effect as part of the articles.
RISK – Be sure when deleting the redundant provisions of the old style memorandum that you do not delete or alter any provision relating to the limited liability of the members of the company or if you wish to do so, ensure that you insert a new express provision (similar to that contained in the new model articles) into the articles dealing with limitation of liability.
Shares & Share Capital
Authorised Share Capital
From 1 October 2009 the concept of authorised share capital will no longer exist. Companies incorporated on or after 1 October 2009 will not be required to set a limit as to the number of shares that may be allotted. Shareholders will retain some control over the dilution of their rights by virtue of the continuing requirement for directors to obtain authority from the members to allot new shares and also from the continued operation of pre-emption rights (but see below regarding private companies with only one class of share).
For those companies that already have an authorised share capital set out in their memorandum, this limit will continue to operate as a restriction once it is deemed to form part of the articles (see above). Companies will be able to overcome this restriction either by removing it by way of an ordinary resolution, or by simply ignoring its existence and altering the articles of association by way of a special resolution to authorise the directors to allot shares over and above the old limit. The amendment to the articles would override the restriction implied by the memorandum and render it ineffective.
RISK - Whilst there is no obligation to remove the authorised share capital provision from the articles after 1 October 2009, it is likely to become misleading when further and increased authority to allot is granted by the members. For the sake of clarity, we would recommend that it be removed from the articles entirely.
TIP - Where previously it was necessary to pass resolutions both increasing the authorised share capital of the company and authorising the directors to allot the shares, subject to the exception set out below, it will now only be necessary for the members to pass a resolution giving the directors the authority to allot new shares.
Allotment of new shares – private company with one class of share
The Companies Act 2006 introduces a new power for directors of private companies with only one class of share; unless specifically restricted by the articles of association, there will be no requirement for the directors to seek shareholder authority to allot new shares in the company.
For new companies incorporated on or after 1 October 2009, it will be necessary for the subscribers to consider whether they wish to restrict this power in any way. If they do, appropriate provisions will need to be inserted into the articles.
For companies already in existence, directors will not be able to exercise this new power unless the shareholders have passed an ordinary resolution to that effect. Companies should consider whether such a power would be appropriate for their circumstances.
RISK – If the power of directors to allot new shares is not restricted, shareholders (and in particular shareholders with no board representation) should be aware that their shareholdings could be diluted against their wishes. Shareholders should ensure that the statutory pre-emption rights are not disapplied, and even then should consider whether it is appropriate to reassert the requirement for directors to obtain shareholder authority before allotting further shares.
TIP - Whilst it will no longer be necessary to limit the number of shares of a company in issue, it will be necessary to inform the Registrar every time the share capital changes. Companies must file a new statement of share capital and shareholdings with the Registrar within one month of any changes.
If you would like any further information about the issues raised in this article, or any other aspect of Corporate Law, please contact Rebecca Gardner or another member of Goodman Derrick LLPs Corporate Department on 0207 404 0606.
This guide is for general information and interest only and should not be relied upon as providing specific legal advice.
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