All change

Now’s a busy time for corporate secretaries in the UK, or company secretaries as they’re known across the pond. For the first time in over 20 years UK company law has been overhauled, resulting in the Companies Act 2006, which was approved last year and is in the process of being implemented. All parts of the Act will be phased in by October 2008, with the majority expected to be in force by September 2007.

The Act has been eight years in the making and will bring about dramatic changes to UK company law; for many company secretaries it will be the biggest change they’ve seen in their working lives. Right now, every company secretary will have a copy of the Act very close at hand. And with 1,300 sections – making it the single largest piece of legislation ever written in the UK – the Companies Act will be difficult to ignore.

Alistair Darling, the UK’s secretary of state for trade and industry said of the Act last year, ‘It makes sure the regulatory burden on business is light touch, promotes shareholder engagement and will help encourage a long-term investment culture in the UK.’ The Act is also meant to streamline and improve company law, making it easier to understand, more flexible and easier to update in the future. The changes are predicted to save UK businesses £250 million ($495 million) per year including £100 million ($198 million) for small businesses.

Leveling the playing field

According to Benjamin Hopps, partner at London-based law firm Sykes Anderson, the review of UK company law which led to the Companies Act found the law was far too complex, particularly for small companies, and decreased competitiveness through over-regulation. ‘The primary aim of the Act is to clarify and simplify the rules, making incorporating and running companies in the UK easier and (hopefully) cheaper. The Act makes the prospect of running and investing in UK companies much more attractive than their EU counterparts,’ he comments.

The Act introduces a wide range of changes, effecting directors’ duties and liabilities, company communications and shareholders’ rights. It also hopes to increase social responsibility by ensuring companies consider how their actions affect the community, employees, environment and suppliers.

‘The government believes that companies should recognize their wider obligations in order to achieve long-term sustainable success for the benefit of shareholders,’ explains Hopps. According to Bridget Salaman at Institute of Chartered Secretaries and Administrators (ICSA), this aspect of the Act has caused some concern for company secretaries who worry about the potential increase in minute-taking requirements if the consideration of these various factors – like employees or environment – has to be recorded for each decision directors make. ‘The general feeling, however, is that you have to use common sense and record how directors have considered these factors in decisions where they are relevant or in controversial decisions,’ she notes.

Salaman adds that company secretaries will need to ensure that directors realize the new expectations of them, particularly as the Act pays a lot of attention to directors’ duties and shareholders’ rights. ‘Directors themselves of course have a personal responsibility to understand and put into action the demands of the Act. But in practice a core part of the company secretary job is to make sure directors are kept up-to-date,’ she highlights.

Although much has been made in the UK about potential lawsuits being brought by shareholders against directors, Hopps explains that directors and company secretaries need not worry unnecessarily. ‘Directors fear their duties have been widened, while the Act makes it easier for shareholders to commence actions against them,’ he comments. ‘The Act sets out a new derivative procedure which, although allowing access to the criteria to permit shareholders to determine whether to pursue an action against a director and making it easier for shareholders to initiate derivative claims on behalf of the company where directors are not acting in the best interests of the company, actually sets up hurdles for the shareholder, which previously did not exist.’

‘The fact that derivative actions have been recognized in such detail in the Act and a procedure laid out is a very positive step for business transparency,’ he adds. ‘It sends out a clear message to directors nationwide that if they step out of line, they could find themselves defending court proceedings.’

Driving technology take-up

Another aspect of the Act expected to improve transparency – and that has a big impact on company secretaries – is the encouragement of e-communications. Previously, shareholders had to ‘opt-in’ to receive online rather than hard-copy communications. The Act makes e-communications the default setting, so shareholders will have to take a positive action in order to receive paper versions. It is expected that only around ten percent of shareholders will take this action.

‘It is hoped that allowing companies to publish information electronically will reduce their administrative burden and increase compliance. It will also allow shareholders remote access to company information,’ notes Hopps.

One aspect of the Act, which concerns company secretaries specifically, is that at private companies the requirement to have a company secretary will be abolished. However, Salaman notes that most company secretaries at private companies need not be too concerned. ‘This will affect mainly the very small companies where there was a company secretary in name only – often a spouse or a friend of management or a director. Going forward, those companies will probably make do just with directors. But the requirements of a company in terms of compliance is no less [significant] under the Act, so private companies will require the duties of a company secretary ... just as much.’

In the coming months and years, as more aspects of the Act are implemented and dealt with, companies will rely on the expertise of the company secretary even more. Right now, company secretaries are busy working on preparing internally to make sure aspects of the Act already enforced are being complied with, and ensuring that processes are in place to allow subsequent requirements to be dealt with smoothly.

Many companies are arranging company lawyers to brief directors on what the Act means, section by section. All across the UK there are conferences and panel discussions to assist companies in dealing with the changes. But the hope for UK company secretaries is that hard work now will result in improved working processes in the near future. ‘There is a huge amount of work to be done by company secretaries right now,’ says Salaman. ‘But once the last piece of the Act is in place in October 2008, and after a year or so of allowing things to settle down, things will look very different.’