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28-August-2007

 

Legal Perspective: directors must be ready for yet more reforms

 

More company reforms are just around the corner.  These are the latest introduced by the Companies Act 2006; the biggest ever Act of Parliament.  The aim is to cut red tape, promote shareholder engagement and encourage a long term investment culture in the UK.

 

A raft of reforms come in on 1st October 2007. Codification of Directors Duties is one of the most significant and controversial changes.  These duties also extend to “shadow directors”, someone not formally appointed as a director.    In certain circumstances, Shareholders may be able to bring a “derivative action” against the Directors to enforce these duties.  The 7 general duties are to:

 

  1. Comply with the company’s constitution and exercise powers properly
  2. Promote the success of the company for the Members’ benefit.
  3. Exercise independent judgement.
  4. Exercise reasonable care, skill and diligence.
  5. Avoid conflicts of interest.
  6. Declare interest in a proposed transaction for arrangements with the company.
  7. Not accept benefits from third parties.

A major change is the list of factors that Directors must consider in exercising their duty to promote the success of a company for the Members benefit.  This includes “enlightened shareholder value”.  This concept requires a Director to act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its Members as a whole.  In fulfilling this duty, a Director must, amongst other matters, consider:

 

    • The likely consequences of any decision in the long term
    • The interests of the company’s employees
    • The need to foster the company’s business relationship with suppliers, customers and others
    • The impact of the company’s operations on the community and the environment
    • The desirability of the company maintaining a reputation for high standards of business conduct
    • The need to act fairly as between the Members of the company

     

    This list is not exhaustive, and is subject to a duty to act in the interests of the creditors of the company where the company is threatened by insolvency.

     

    The Government says that it is for the Directors’ good faith judgement to decide what amounts to “success”.  The Government’s also says that business decisions on, for example strategy and tactics are for the Directors, and not subject to decision by the courts, subject to good faith. Nevertheless, an active shareholder, or future liquidator may well seek to challenge a Directors’ decision in the Courts. It is therefore important for a Company, and its individual Directors to be fully aware of these new obligations and how to show compliance.

     

    Detailed advice is essential for each company on its individual particular circumstances so as to take advantage of the opportunities offered, and to limit exposure to claims.

     

    Levi Solicitors in conjunction with Mazars LLP are hosting a free Companies Act Update seminar in Bradford on the 6th September and in Leeds on the 26th September.  If you are interested in attending any of these or would like further information, please contact Sinead Sopala on  ssopala@levisolicitors.co.uk to book your place at these free events or call 0113 297 3198.

     

    ENDS

     

    About Levi Solicitors LLP
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    Tel: 0113 297 3198   | Email:

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