Company law after SBEEA 2015

Company law after SBEEA 2015

Corporate analysis: How will the Small Business, Enterprise and Employment Act 2015 affect small businesses and entrepreneurs, and will it be effective in removing red tape and promoting transparency in the ownership and control of companies? Chris Pearson, a senior corporate partner at Norton Rose Fulbright, and Jo Chattle, senior knowledge lawyer at Norton Rose Fulbright, explain some of the changes and reforms that will now be a part of company law.

Original news

Small Business, Enterprise and Employment Act 2015, LNB News 27/03/15 128

What has been the reaction to SBEEA 2015 since it received Royal Assent?

There was relatively little reaction when SBEEA 2015 received Royal Assent on 26 March 2015. This is largely a result of both the length of the lead-in time to SBEEA 2015 receiving Royal Assent, and the fact that its provisions affecting companies are coming into effect in stages.

The government’s first discussion paper which raised many of the corporate aspects was published in July 2013, following the June 2013 G8 Summit at which the UK, as chair, committed to introducing transparency reforms in relation to company ownership. A number of consultation papers on different corporate aspects of SBEEA 2015 followed and so there has been time for companies and their advisers to familiarise themselves with the new requirements.

What company law reforms are coming into force in May 2015?

Two corporate aspects of SBEEA 2015 come into force in May 2015. The first concerns the abolition of bearer shares (or share warrants as they are referred to in SBEEA 2015). The second is the extension of the general statutory duties that apply to directors under the Companies Act 2006 (CA 2006) to shadow directors, being those people who are not formally appointed as directors but are people ‘in accordance with whose directions or instructions the directors of the company are accustomed to act’.

What is the significance of the abolition of share warrants to bearer? What should companies do? Has any guidance been issued?

In practice, very few companies have bearer shares in issue and most of those that do are small private companies. As at April 2014, the government reported that latest data from Companies House indicated that only 0.04% of registered companies had issued bearer shares. However, for those that have issued such shares, action now needs to be taken and the approach to be followed is set out in SBEEA 2015, Sch 4.

From 26 May 2015, no company can issue further bearer shares, regardless of whether the company’s articles of association so permit, and steps need to be taken to convert outstanding bearer shares into the underlying shares provided for in the bearer share warrants.

SBEEA 2015 prescribes a nine-month surrender process for the conversion and cancellation of existing bearer shares and this process must be under way by 26 June 2015. By that date, the company must have given notice to holders of bearer shares notifying them of their right to surrender those shares and explaining the consequences of not doing so by 26 December 2015. Once bearer shares are surrendered, the company must provide the holder with share certificates for the shares arising on conversion within two months of the date of surrender. If those shares are not surrendered by 26 December 2015, then any dividends and other distributions, to which the holders are entitled after that date, must be paid by the company into a separate bank account, and within one month of that date, the company must give holders of outstanding bearer shares a second notice of their right to surrender.

Once the nine-month surrender period has expired, if any bearer shares are still outstanding, SBEEA 2015 specifies the court process companies need to go through to cancel those outstanding bearer shares and the process former holders can follow to claim any sum paid into court by the company in respect of their cancelled shares.

What are some of the more interesting changes to the filing requirements under SBEEA 2015?

As part of its ‘Red Tape Challenge’, the government launched a consultation in October 2013 on a number of proposals to improve and simplify the current requirements for companies to file certain information at Companies House. The results of that consultation have been carried through into SBEEA 2015, which makes a number of amendments to CA 2006 in relation to these matters, and these amendments come into effect in April 2016.

Companies will no longer have to file an annual return. Instead, while they will need to confirm at least annually that all required information has been delivered to Companies House in the last 12 months, that confirmation statement can be submitted at any time (and more than once) in any 12-month review period and a new review period of 12 months will be set from the date of the last confirmation statement. This will give companies flexibility to confirm that their information at Companies House is correct and complete at any point in the year and will prevent the duplication of information in the annual return.

Statements of capital will no longer need to set out the amount paid and unpaid on each individual share. Instead, only the aggregate amount unpaid on all the shares will need to be specified. Companies will welcome the removal of the burden involved in providing information about the amount of paid up share capital since this can be a time-consuming and lengthy process where shares have been allotted at different prices or bought back, cancelled or consolidated.

Private companies will be able to elect to keep certain registers publicly available at Companies House and will not need to keep corresponding registers at the company’s registered office or elsewhere. The registers that can be kept at Companies House in this manner include the register of members and register of directors. However, private companies will need to think carefully about whether or not they want to maintain these registers at Companies House. As the register of members, for example, will only be updated once the member’s name is entered in the public register, companies may prefer to keep control of their register of members so that it can be updated quickly when necessary. Certain information that would not otherwise appear on the public register (for example, members’ addresses and full dates of birth of directors) will be available for inspection on the registers kept at Companies House and companies may decide that they would prefer to keep that information off the public record by continuing to maintain their own registers.

What are the practical implications of the extension of directors’ duties to shadow directors?

Prior to SBEEA 2015, CA 2006 contained a restriction whereby the statutory duties of directors, as set out in CA 2006, only applied to shadow directors in the same way as the corresponding common law rules and equity principles could apply to them. As a result, if a rule or principle did not apply to a shadow director, the statutory duty replacing that rule or principle would not apply either.

That restriction has now been removed so, in future, the starting point for shadow directors will be that the general statutory duties apply to them unless they are not capable of applying.

This will increase the accountability of shadow directors and may make it less likely that someone would want to put themselves in a position of potentially being treated as a shadow director. This, in turn, should increase transparency around those who are actually running individual companies.

What is the next implementation date for company law reforms? What should lawyers be looking out for in the meantime?

Further corporate aspects of SBEEA 2015 are likely to come into force in October 2015. These include a prohibition on corporate directors, save in exceptional circumstances. These exceptions have not finally been determined, but the government is considering permitting a company to appoint a corporate director if both of the following conditions are satisfied:

  • all the directors of the corporate director are natural persons (individuals), and
  • the law under which the corporate director is established requires certain details of the directors of the corporate director entity to be included in a publicly maintained accessible register

Companies with a corporate director that do not fall within any of the exceptions will have 12 months to remove and/or replace that corporate director who is likely to automatically cease to be a director from October 2016.

A number of other amendments to CA 2006 are likely to come into effect from October 2015 and will be provided for in regulations which are still awaited. For example, while currently Companies House cannot reject a registered office as being inaccurate, ineffective or invalid—and so there are no steps that can be taken under CA 2006 where a company uses as its registered office the address of another business or private individual with whom the company has no connection, or an address that has not been authorised for use as its registered office—new regulations will permit the Registrar of Companies to change a registered office if the Registrar is not satisfied that a company is authorised to use the address.

New directors will no longer have to sign a ‘consent to act’ form that is filed at Companies House. Instead, when a company notifies Companies House of the appointment of a new director, it will make a ‘statement of truth’ to confirm the director has consented to their appointment. Companies House will then write to the new director to notify him or her that their appointment is being recorded on the public register and, at the same time, direct them to information regarding their legal duties as a director in order to increase awareness of directors’ duties generally. The new director will then be able to apply to Companies House for removal of their appointment from the public register on the grounds that they did not, in fact, consent to act as a director. In addition, from October 2015, while a new director’s full date of birth will still need to be supplied to Companies House, the day of the director’s birth will not be made available in the public register, with only the month and year appearing. This is to try and avoid individuals being exposed to the risk of identity theft or fraud.

Finally, in relation to changes coming into effect in October 2015, the process for enabling the Registrar of Companies to strike off a company which appears to be no longer carrying on business, or in operation, is being reduced from the current five to six-month period, to between three and four months, and the voluntary strike off process instigated by a company is also being reduced to around two months from the current three to four months.

In relation to other developments in October 2015, it is worth noting that while the new requirements for maintaining a register of people with significant control will not come into effect until January 2016, guidance to assist companies and shareholders in understanding the new requirements is expected in October 2015. Both statutory and non-statutory guidance is being prepared by different working groups and that should be published in October 2015, together with guidance from Companies House on the filing of information about persons with significant control on the public register.

Chris Pearson is a senior corporate partner at Norton Rose Fulbright LLP in London and has experience in mergers and acquisitions (domestic and cross-border), public company takeover offers, other stock exchange transactions and securities offerings, corporate governance and corporate advisory work, joint ventures, company reconstructions and institutional investments. He also leads the specialist Takeovers Working Party of the Law Society of England and Wales and the City of London Law Society, the leading specialist takeover lawyers’ group in the UK, and has been involved in all significant developments in UK takeover regulation for many years, and is a contributor to A Practitioner’s Guide to the City Code on Takeovers and Mergers.

Jo Chattle is a senior knowledge lawyer in the corporate team at Norton Rose Fulbright LLP in London. Jo’s particular focus is on company law developments, corporate governance, annual reporting, shareholder meetings and corporate advisory work.

Interviewed by Janine Isenegger.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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Jenisa is Head of Market Insights for Lexis®PSL, with responsibility for the delivery of Market Tracker, a transaction analysis product that sits within Lexis®PSL Corporate. She has over 15 years of legal publishing experience, with a focus on researching and reporting on trends and developments in the corporate and commercial legal market. Previous roles include content developer for Lexis®PSL, Legal Podcaster at Informa, and Research Editor at Practical Law Company where she specialised in reporting on cross-border corporate and commercial developments from the firm’s New York office.