What the Companies Act 2006 means for you
A guide to the third and final instalment of the Companies Act 2006
With the third and final installment of the Companies Act 2006 now implemented, GB discovers that the law will give entrepreneurs greater power over their companies’ governing documents.
The Companies Act 2006 is a huge piece of legislation covering an array of business issues. The government sensibly refrained from dropping it all on businesses in one go and instead implemented it in seven tranches; the first on October 1, 2007, and the last at the start of this month.
The main areas of interest in this final implementation are the changes to businesses’ memorandum of association and company articles. Companies formed after October 1, 2009 will start off with a more flexible framework, and the Memorandum of Association is now an historic document.
Setting share capital
When you set up your business you had to decide how many shares were in it. This may have seemed academic, especially if you were pre-revenue and only had one partner. However, new companies no longer need to specify their authorised share capital and there will be no cap on the amount of shares that can be allotted. Also, an existing business with just one class of share can alter its articles to enable directors of a business to allot shares by their own authority, which might be useful if they are considering bringing an investor on board.
“Existing companies should consider whether to remove any limitation from their articles on the maximum amount of shares that may be allotted,” says Ricky Sidhu, a specialist in corporate and commercial law at Lester Aldridge LLP. “If, for instance, an investor was looking to come on board, it would mean that the company doesn’t have to go through the whole rigmarole of having a shareholders’ meeting before taking investment.”
However, before you start tinkering with your company articles take some advice on how much power you feel you and the other directors should possess. Remember that you may require investors and the support of shareholders. They need to feel that their interests are being served.
“This new power is subject to the articles and a company may need to amend its articles if it wants to apply it,” says Sidhu. “Alternatively it may wish to consider whether the articles should restrict the directors’ ability to allot shares without first getting the members’ approval, or whether it wants to place some other restriction on the directors’ allotment powers.”
Reducing share capital
As well as creating shares the new law makes it easier for a company to reduce its share capital. But why would you want to do that? Sidhu says that there are advantages as it can create a reserve which can be distributed to shareholders.
A company might also have surplus capital that it wants to return to shareholders. In the instance where an equity owner has left the business, this power can be used to buyback the shares.
Names and addresses
It’s now easier to change your company’s name than ever before. Under the old Act a company required a special resolution. Now, a company can change its name by whatever process is described in its articles.
As you are probably aware, your contact details are available from Companies House for anyone that wants them. However, the government has moved its position in light of threats and attacks on companies from groups such as animal rights activists and now business owners can opt to have only a service address (such as an accountant or solicitor) available to the public. You still need to provide Companies House with your address, it just won’t be made public unless the enquirer passes a vetting procedure.
The 75% figure
If you wish to amend your existing articles in light of the new Act then you need to get agreement from 75% of your shareholders. The 75% refers to the amount of equity held by those casting a vote, rather than the number of people who own shares.
Therefore, if you and your fellow directors own 75% of the business or more than then you have a greater degree of control over your business’ articles. However, discussing your proposals with shareholders, even those without voting rights, is usually a move in the direction of harmony.