1 October 2009 was a landmark date for UK companies as it heralded the implementation of the final tranche of provisions of the Companies Act 2006.
Over a decade has passed since the initial Company Law Review started the reform process and now, after many years of build-up and numerous transitional and savings provisions, the 2006 Act replaces, with very limited exceptions, the Companies Acts 1985 and 1989. The Act represents the biggest change to business law in a generation. As all UK companies are affected by these changes, James Hunter, corporate finance partner, considers whether this major upheaval has been worth all the effort.
"At 1,300 sections, the 2006 Act is certainly a gargantuan piece of legislation. Coupled with the plethora of transitional provisions, secondary legislation and non statutory guidance, it has been no mean feat to assimilate the volume of material generated," comments Mr Hunter. "I know that many advisers have struggled to keep abreast of the changes, so it must be debatable whether companies, many of whom are already overburdened by red tape, have managed to get to grips with the new Act."
1 October saw the remaining 550 sections or so of the Act coming into force, a process that started in 2006. Changes brought about by the latest tranche of new provisions include revised procedures for forming a company, the introduction of new style company constitutions and a major revamp of all of the forms that companies customarily file at Companies House. But after such a long gestation, has the new Act really been worth the wait? Have its underlying objectives of enhancing shareholder engagement, better regulation with a think small first approach, making it easier to set up and run a company and providing flexibility for the future been achieved?
"For the vast majority of private companies, I don't believe that the 2006 Act has really had a great deal of impact on their day-to-day operations so far," says Mr Hunter. "For those companies that don't get involved in M&A transactions, or reducing or buying back their share capital, I don't think that they will have noticed a great deal of change. The Act's greatest impact will be when the time comes to file their next set of accounts and they realise that the filing periods have shortened and the fines for late filing have increased, or they send in their next annual return to Companies House only to have it rejected because they haven't used the new form that is introduced from today.
"For companies that are regularly involved in corporate transactions, then it's probably a different story. Certainly, some of the Act's streamlining procedures have been welcomed by our clients. For example, the new method brought in last October for private companies to effect capital reductions without the need to go through a cumbersome court process has been well received. We've received a steady flow of instructions from companies throughout the past year wanting to take advantage of this relaxation. But on a cautionary note, third party creditors are potentially open to greater exposure if this method is used and this has to be a concern in the current economic climate" adds Mr Hunter.
"Another useful deregulatory measure has been the repeal of the restrictions on financial assistance for the acquisition of shares in private companies, including the ‘whitewash' procedure. This change was also introduced last October. We used to find that the restriction had significant cost implications for our clients and was a real hindrance in deal structuring, particularly on buy-outs. But as the market is slow at present for the types of deals that would benefit from the lifting of this restriction, I don't believe we've seen the full impact of this one yet.
"One of the most controversial changes introduced by the Act was the first codification of directors' statutory duties. There were important changes that directors had to factor into their thought processes and recording procedures when taking decisions. At the time of its introduction in October 2007, the new duty to act in good faith to promote the success of the company caused quite some consternation in directors' minds. Although the new duties have not heralded a sea change in approach, they have certainly presented directors with the opportunity to spend some time refocusing on what it means to be a director, whether executive or non-executive, and the responsibilities that it entails. That must be a good thing at the moment.
"All in all, although there have been some benefits, I don't believe that the 2006 Act is a great improvement on its predecessor. The volume of statutory material that has been generated is mind-boggling and, looked at from the busy director's perspective, I don't think that the Act can be said to have achieved its objective of better regulation and ‘thinking small first'. As for making it easier to set up and run a business – well that is open to debate too. The paper mountain is now even higher as there are now extra Companies House forms that companies have to remember to file, such as on a change of company name, and even those that companies are used to, such as incorporation and annual return forms, are nearly double in length. Only time will tell whether the 2006 Act will be considered a success," concludes Mr Hunter. "But as the Government is likely to conduct a review of some parts soon, yet more changes are already on the cards."