The ongoing story of the Bill continues. First introduced into the House of Lords in November 2005 under the name of the Company Law Reform Bill, it has now finally completed the committee stage in the House of Commons and is expected to receive Royal assent in Autumn 2006.
The Bill was not originally intended to be a consolidating measure and it was envisaged that on enactment it would create another layer of regulation alongside the amended Companies Act 1985 and the Companies Act 1989. However, in June 2006 the Government announced its intention to consolidate further provisions of the 1985 and 1989 Acts into the Bill during its passage through the Commons with the aim of creating a more comprehensive code of Company law. As outlined in our previous edition of the Bulletin following an amendment agreed in the House of Lords (acknowledging that existing company law provisions were to be consolidated into the Bill) the Bill is now known as the Companies Bill and in due course the Companies Act 2006.
As we have charted in this Bulletin, there will be major changes to UK company law made by the Bill including the following:
- Directors' duties will be codified
- Regulatory regime for private companies will be streamlined, for example, they may reduce their capital without court approval (Chapter 10, Part 18)
- A new procedure for derivative shareholder actions will be established
- Auditors are given the power to agree liability limits with companies
- The Panel on Takeovers and Mergers will be put on a statutory footing
- A general scheme of electronic and web-based communications for companies is introduced
- Directive 2004/109/EC of the European Parliament and Council (the Transparency Directive) is implemented
Over the coming weeks we will be carrying out a round-up of the main substantive changes made in the Bill as it currently stands prior to its receipt of Royal assent in the coming months.
As a start point for recapping the changes to be implemented by the new Companies Bill we have discussed below the relatively common scenario of a director's service contract and how this will be affected by the new Bill.
In our next edition of the Bulletin we will be recapping more generally on the changes proposed to directors' duties following implementation of the Bill.
Directors' Service Contracts
Under the current regime, Directors' service contracts must be open to inspection by the shareholders unless the unexpired portion of the term for which a contract is to be in force is less than 12 months or where the contract can within the next 12 months be terminated by the company without payment of compensation (section 318), Companies Act 1985).
Shareholder approval is required for a director's fixed term service contract which is not terminable by notice and exceeds five years in duration (section 319).
Under the new Bill Part 10 contains the provisions on company directors including the provisions relating to directors' service contracts. The Bill replaces sections 318 to 319 of the 1985 Act and introduces a number of significant changes including:
- The introduction of a definition of "a director's service contract"
- The right of shareholders to request a copy of a director's service contract on payment of a fee and an extension of the existing laws regarding the requirement for shareholder approval of directors' service contracts in excess of two as opposed to five years.
Taking each of these in turn, clause 227 of the Bill for the first time defines the meaning of the "director's service contract" for the purposes of the Bill. This definition is very broad ranging and includes contracts for services and mere letters of appointment. Under clause 228 a company must keep a copy of all directors' service contracts (or where the contracts are not in writing memoranda of their terms) at the company's registered office or such other place notified to Companies House for a period of at least one year from the date of termination or expiry of the contract. This obligation applies regardless of the length of the term of the service contract or whether or not it is terminable within 12 months.
Under clause 229 members have the right on payment of a fee to request a copy of the director's service contract or if it is not in writing a memorandum of its terms. The copy must be provided within seven days of the company receiving the request. (This right to request a copy is in addition to a member's right to inspect free of charge a copy of the memorandum required to be kept under clause 228.)
Under clause 189 the requirement for shareholder approval of director service contracts in excess of five years (as is currently required by section 319 of the 1985 Act) has been amended so that shareholder approval will be required for contracts in excess of two years.
The prohibition on the company agreeing to pay a director's remuneration free of income tax or agreeing to vary the director's remuneration in line with changes to income tax (section 311 CA) is repealed by the Bill.
A number of these measures are designed to make the concept of a director's service contract more flexible. However, the requirement for shareholder approval of directors' service contracts in excess of two years duration rather than five years may result in a future trend towards offering directors shorter service contracts to avoid this administrative burden.
In the next edition we will be recapping on the provisions affecting directors more generally under the Bill.