Directors in the dock

Company directors could be in for a shock this month when more parts of the Companies Act 2006 come into force, thus expanding the range of people that directors must answer to and making it easier for shareholders to sue them for alleged breaches of their duties.

The Companies Act 2006 - the longest single piece of legislation ever passed by Westminster - is aimed at bringing a ragtag of company law together in a single piece of legislation. But it also adds some significant new duties on directors. From the 1st October, the duties of company directors will be widened beyond their existing obligation to promote the success of their companies to also taking account of the interests of their employees, the environment and the community.

Perhaps more urgently, the parts of the Act being introduced this month will also make it simpler for shareholders to sue the directors of companies they own a stake in. Previously, individual shareholders only had the right to sue company directors in cases of fraud, but now will be able to bring claims for breach of duty, meaning that directors may find themselves facing many more legal claims than in the past. These so-called “derivative actions”, in which shareholders can sue individual board members on behalf of the company, will mean that any compensation awarded will be paid to the company directly from directors’ own pockets, although many will be covered by insurance. Lawyers are certainly gearing up for a spike in litigation - a poll last month in trade magazine Legal Week found that 75% of business lawyers expect a rise in class actions as a result of the Companies Act.

The Companies Act will also introduce new laws on directors' conflict of interests; the use by directors of company property; remove the requirement for private companies to appoint a company secretary; and impose greater responsibility on companies to communicate with their shareholders. It will also amend takeover laws to make mergers between private companies easier, tighten up the rules on the appointment of auditors and change the requirements on new companies' memorandums and articles of association.

Further parts of the act will come into force next April and the Companies Act 2006 will be fully implemented by October next year. Those who feel in need of a bit of corporate legal help might find this timetable for the implementation of the new Companies Act useful.

Article Source: http://www.theukarticledirectory.co.uk