Some provisions come into force this month, but the whole act will not be fully implemented and become law until October 2008. The act will affect private, public and quoted companies as well as their shareholders, company secretaries and auditors.
So what impact will it have on company directors? The largest and perhaps most controversial change is that, for the first time, directors duties are to be codified. The aim is to make them more accountable. It also means directors are open to increased litigation as there is now an extended power for shareholders to sue directors for negligence, default, breach of duty—including breach of the new codified duties—or breach of trust.
These statutory duties largely replace the existing duties found in common law, and which have developed through case law over the years. Having these duties set out in one place may be seen as a useful function. Directors must comply with duties that apply to a particular set of circumstances.
The duty to promote the success of the company has proved contentious. A director must “act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of the members as a whole”. In exercising this duty a director will be required to have regard for: the likely long-term consequences of his decision; the interests of the company’s employees; the need to foster the company’s business relationships with suppliers, customers and others; the impact of operations on the wider community; the desirability of the company; maintaining a reputation for high standards of business conduct and the need to act fairly between members of the company.
This is not an exhaustive list but does impose new corporate social responsibility factors that need to be taken into account.
Although the duties are owed to the company, shareholders will be able to take action against directors by means of the new extended right for shareholders to sue directors—known as a derivative action.
Once the entire act is in force it is clear that it will affect many aspects of running a company.
NEW RULEs
There are seven duties that directors will have to comply with:
• Act within the company’s powers
• Promote the success of the company
• Exercise reasonable skill care and diligence
• Avoid conflicts of interest
• Exercise independent judgement
• Not accept benefits from third parties
• Declare interests in proposed transactions and arrangements
other changes to watch for
• There must be at least one individual named as a director
• Directors must be at least 16
• Companies will no longer need authorised share capital
• All directors will need to have a “service address” but
residential addresses can be kept private
• Private companies will no longer need a company secretary
• Rules relating to directors’ transactions will be simplified
• New company formation procedures will be introduced
