Companies Act 2006: Electronic communications and public company shareholdings

Although the vast majority of the Companies Act 2006 is not yet in force, some of its provisions came into force on 20 January 2007. These are the sections dealing with company communications with shareholders and others, including electronic communications and communications via a website, together with provisions regarding notification of interests in shares to public companies and rights to investigate who hold shares in public companies.

Companies whose shares are admitted to trading on a regulated market, or a UK prescribed market - including companies on the Official List, on AIM and on the PLUS (Ofex) markets - will also need to comply with the communication requirements in Chapter 6 of the FSA's Disclosure Rules and Transparency Rules, which also came into force on 20 January 2007.

This note considers how all companies can take advantage of the new regime for electronic communications, resulting in cost savings from reduced print requirements. These steps will include reviewing and if necessary amending the articles of association, possibly at the next AGM, and seeking the consent of shareholders to electronic and website communication. The note then goes on to describe the new rules relating to disclosure of shareholdings in listed companies and investigations into public company shareholdings.

Electronic Communications

What's new?

The 2006 Act allows companies to send documents and information to members, and others, who agree to this by electronic means (eg email or fax) or in electronic form (eg by delivery of a disk on which documents or information are stored). Similarly, the Act allows e-communications to be sent to companies that agree, or in some cases are deemed to agree, to this.

Companies may also be able to communicate by way of a website, provided specified conditions are met.

What do companies need to do in order to be able to send documents and information by way of a website?

In order to communicate by way of a website, companies need:

• for communications with members and debenture holders, provisions in their articles allowing this, or a resolution of the members or debenture holders (as the case may be) approving website communication - note that although amending the articles to give express permission would provide clarity, this is not required; an ordinary resolution is all that the Act requires; and
• in all cases, agreement from the recipient - in the case ofmembers and debenture holders, agreement is deemed to be given if the relevant persons are sent individual communications requesting agreement and stating clearly that if no response is received within 28 days, they will be taken to agree by default, and do not respond within that time. However, where the company receives an express refusal of agreement within 28 days, it cannot make a further request to the same person for 12 months.

Companies will still need to notify members and others who agree to website communication when documents or information are posted on the website. There are detailed rules governing how long particular information must remain accessible.

What do companies need to do in order to be able to send documents and information by email or fax?

In order to communicate by email or fax etc, companies will need individual agreement from recipients. Where a company sends a communication to another company, there may in some cases be deemed agreement to this - see further below. However, individuals cannot be deemed to agree and there is no "default" regime, as for website communication. No shareholder resolution is required to approve email or fax communication, as this is a private arrangement between the company and particular recipients. Each person who agrees must provide an electronic address to the company to which communications can be sent. Note that there is no restriction on how often companies may ask members to accept email or fax communications.

When can members and others communicate electronically with a company?

Companies may agree to receive electronic communications from members or other parties. In some circumstances, they may be deemed to agree to this, eg where they provide an electronic address in a notice of meeting or proxy form.

In all cases, any agreement to electronic communication by or to a company may be general or limited to specific purposes or communications and may be revoked or varied. Furthermore, any member or debenture holder receiving a communication in electronic form can require the company to send a hard copy of the relevant communication.

Companies may wish to send requests for consent to website or email communication to members with AGM notices or when there is next an occasion to circulate documents to all members.

New rules about notification of interests in shares to public companies

These provisions are relevant only to companies whose shares are admitted to trading on a regulated market or a UK prescribed market (see above for examples of the relevant markets). The rules they replace applied to all public companies, whether or not listed.

The old law

Under sections 198 - 211 of the Companies Act 1985, a person who acquired an interest of three per cent or more of the relevant share capital of a public company had to disclose that interest to the company within two business days. In certain limited cases, referred to as non-material interests, the disclosure threshold was 10 per cent. A person then had to disclose when the interest went through any whole percentage figure above three per cent (or 10 per cent as appropriate) and when his interest fell below three per cent (or 10 per cent).

It was a criminal offence not to comply with the disclosure obligations. A company had to keep a register of the interests disclosed and, if it was a listed company, it had to notify a regulatory information service by the end of the business day after it received the notification (paragraph 9.6.7R, Listing Rules). These provisions were in the same part of the 1985 Act as the provisions dealing with a public company's right to investigate who had an interest in its shares (the section 212 procedure) and used the same concept of "interest in shares".

The new law

Sections 198 - 211 of the 1985 Act have been replaced by new provisions inserted in Part 6 of the Financial Services and Markets Act 2000 by Part 43 of the 2006 Act. The rules which implement these new provisions (namely the Transparency Rules) took effect from 20 January 2007.

The section 212 provisions allowing a company to obtain information from parties with interests in their shares have been dealt with separately and have been replaced by Part 22 of the 2006 Act, also with effect from 20 January 2007

What's new?

The main differences between the old law and the new law are as follows.

Obligations of shareholders to notify share interests to companies

As stated above, these rules no longer apply to public companies whose shares are not traded on a market.

The trigger for disclosure under the new rules is where a person controls the exercise of voting rights rather than where a person acquires an interest in shares. The obligation will also arise where a person holds specified financial instruments which result in an entitlement to acquire issued shares (but not for now instruments that give only an economic exposure to the underlying shares). Direct and indirect holdings and holdings of financial instruments are to be aggregated in order to see whether a relevant threshold has been crossed.

For UK issuers, the FSA has kept the existing three per cent and subsequent one per cent thresholds for disclosure. A category of holdings similar to what were non-material interests under the 1985 Act have to be disclosed at a five per cent and then 10 per cent threshold (and at every one per cent threshold above 10 per cent). There are different thresholds for non-UK issuers (where they have shares admitted to trading on a UK regulated market and the UK is their home member state).

The exemptions from notification are not identical, and certain exemptions no longer apply.

The notification deadline of two business days continues to apply where shares are held in a UK issuer but is extended to four trading days for non-UK issuers.

Notifications to the company must be made on a prescribed form that will be available on the FSA website. Shareholders must also file a copy of this prescribed form electronically with the FSA.

The deadline for issuers to make public notifications they have received is the end of the following trading day for a UK issuer with shares admitted to a regulated market. For other issuers the deadline is by the end of the third trading day.

There are new obligations on issuers to keep the market informed of changes in their share capital, of acquisitions and disposals of their own shares.

It will no longer be an offence for a shareholder to fail to disclose an interest. However the FSA is able to take enforcement action if a person breaches the new rules. The FSA also has new powers to make public information that shareholders and companies are required to publicise but fail to do so. It can also call for information and documents it reasonably requires for the exercise of its functions.

Rights of public companies to investigate who has interests in their shares

Section 793 Companies Act 2006 replaces section 212 of the 1985 Act. Like section 212, it applies to all public companies, with or without listed shares. A person who receives a section 793 notice must respond with the required information within such reasonable time as may be specified in the notice. The company may serve a section 793 notice in electronic form, provided the recipient has consented or is deemed to consent to communications in electronic form (see above).

Part 22 of the 2006 Act also restates Part 15 of the 1985 Act, giving a company the right to apply for restrictions to be imposed on shares when current or former shareholders fail to respond to a notice requiring information about their interests.

There is no change to the Part 22 definition of "interest in shares" (see section 820). Contrast this with the changes that have taken place to the disclosure obligations under sections 198 to 211 of the 1985 Act, which, as referred to above, are now triggered by the acquisition or disposal of voting rights in shares. Shareholders will now need to assess separately their voting rights and interests in shares for the distinct purposes of the two sets of obligations.

Other provisions in force

A few other provisions of the 2006 Act are also in force. In the main, these are technical and administrative provisions relating to the Registrar of Companies. Also in force are provisions imposing liability on directors in some circumstances for false or misleading statements in directors' reports, directors' remuneration reports and summary financial statements derived from them. For more information, see our earlier briefing note The Companies Act 2006: Directors' Duties and First Commencement Order.

Useful links

Companies Act 2006

Or perhaps more useful, the related DTI guidance notes (which do not have legal effect)