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West Midland directors urged to look closely at the new companies act

30/01/2007

"West Midland directors will have to tread more carefully following the biggest shake-up in company law since the 19th century but most have little to fear".

So said Martineau Johnson partner Andrew Stilton, addressing a meeting in Birmingham of the Young Directors’ Forum, an arm of the Institute of Directors in the West Midlands, on the subject of the new Companies Act.

“The changes in this Act are not as controversial as some of the advance publicity has suggested.

“However, a limited number of businesses are likely to be hard hit by the new requirement to take on board the interests of the environment, the community, employees and others rather than just those of the company” he said.

“For example, if the business is involved in controversial areas like experimenting on animals or if it is a heavy polluter or open to criticism on grounds of carbon emissions, the new Act could add layers of worry to management.

“In any event, directors will no doubt want to use detailed board minutes to document the reasoning behind their decisions to cover themselves if there is any challenge in the future.

“However, there has to be a detailed discussion, which clearly considers the interests of the broader community and judges are unlikely to be fooled by detailed board minutes used as justification, but without substance.”

A further factor which could make directors’ lives more difficult is that the new Act permits individual shareholders to take action against directors on behalf of the company, through suing directors for breach of duty, in a so called ‘derivative action’.

Mr Stilton highlights the concern amongst some directors that politically motivated people or lobby groups could buy a small number of shares in a company and use their status as shareholders to sue the directors.

He added: “Most companies will not fall foul of this but, where there is a danger, the safeguards in the Act should be effective in restricting the scope of extremist shareholders to cause problems.

“One step I would advise directors to take as soon as possible is to check that their liability insurance policies are robust enough for the new situation.”

“The requirement to list suppliers could cause a few problems in some industry sectors but one saving grace is that only key suppliers need to be declared and there are exemptions, for example, if security issues could be involved.”

One area where West Midland dealmakers were looking for simplification was that of ‘financial assistance’ or the use of a target company’s assets and business to secure a loan by the buyer to fund the acquisition.

In the past, such arrangements were only possible after a long winded and expensive process to support the solvency of the expanded group but the Companies Act promises the abolition of this red tape for private companies later this year.

“I welcome this change but I am afraid it may be a damp squib in many cases because the banks will probably still insist on similar safeguards” said Mr Stilton.

For further information please contact Andrew Stilton on andrew.stilton@martjohn.com