Companies Act 2006: Share capital and members' rights

In this briefing, we consider some of the main changes that the 2006 Act will make in relation to companies' share capital and the exercise of rights by members. This briefing note should be read in conjunction with our earlier briefing, Companies Act 2006: Introduction and background.

Exercise of members' rights

From 1 October 2007, some of the most radical changes introduced by the new Act will come into force. Until this point, rights attaching to shares may be exercised only by the registered shareholder. In some circumstances, a shareholder could appoint an attorney to sign certain documents, such as share transfers, and could appoint a proxy to vote at general meetings. These rights will remain. However, for the first time, the Act will permit the exercise of member rights by non-members. Companies may choose to allow members to have rights to nominate others to receive information and exercise certain rights instead of the registered member. The key rights identified include:

• to receive notices of meeting, proposed written resolutions and annual report and accounts;
• to require the directors to call a general meeting, to circulate resolutions for public company AGMs, written resolutions and statements; and
• to appoint proxies to vote at general meetings.

However, the DTI guidance notes on the Act anticipate that nominations may be in relation to certain specified rights or all rights (but excluding the right to transfer shares). The provisions are expressed not to create any rights enforceable against the company by any party other than the registered member.

Companies with shares traded on certain public exchanges (excluding AIM) will be subject to additional provisions. Members holding shares on behalf of others will be able to nominate those others to enjoy "information rights", namely the right to receive copies of all communications sent to members generally or to a class of members including the nominating member. The nomination in this case must be "all or nothing", as companies need not act on a nomination purporting to relate only to certain information rights.

The underlying purpose of these changes is to allow nominee shareholders, such as investment trusts, to allow the ultimate beneficiaries - the holders of unit trust or similar investments - to have a direct voice in the running of the companies in which their funds are invested. This is in line with the principle of increasing investor engagement, one of the overriding aims of the Act.

Share transfers

The Act includes provisions enabling subsequent regulations to be made to permit or even, for the first time, to require paperless share transfers.

From 6 April 2008, directors will have to register share transfers, or give reasons for refusal where appropriate, within two months of the relevant transfer being lodged.

Minimum capital requirement for public companies

These rules will also change from 6 April 2008. As now, the minimum issued share capital for a public company will be £50,000 paid up as to at least one quarter of nominal value (and the whole of any premium). Regulations may provide for this amount to be increased. The minimum may be satisfied either in sterling or in euro, but not a combination of the two. However, once the minimum has been satisfied in this manner, and the Registrar issues a trading certificate, the DTI guidance notes state that there will be nothing to prevent a public company from redenominating the whole or part of its shares in different currencies. Regulations will provide for calculation of the minimum where shares are designated in currencies other than sterling or euro.

Authorised or nominal share capital

As from 1 October 2009, authorised share capital (sometimes referred to as nominal capital) will be abolished. Directors will therefore be able to continue to issue shares without limitation, subject only to authority to allot from members where required. Companies will have to deliver to the Registrar statements of issued capital on formation and at various other points, mainly where changes are made to the amount of issued capital. In relation to existing companies with authorised but unissued capital covered by authorities to allot, the existing authorised capital will remain in force under transitional provisions as a restriction applying to the company unless and until removed by an appropriate resolution. Exceptionally, an ordinary resolution will suffice for this purpose. Existing authorities to allot will also remain in effect.

Authority to allot

The following changes will also have effect from 1 October 2009. Where a private company has only one class of shares, the directors will be able to exercise any power of the company to allot shares or grant rights to subscribe. However, where directors:

• are prohibited from doing so by the company's articles; or
• are restricted by an existing authority to allot or a ceiling on authorised capital,

the directors must abide by these restrictions.

Where an existing company's articles do not include an authorisation to alter share capital, it will need to amend its articles in order to provide for this before applying the new rules.

Pre-emption rights will continue to apply to issues of ordinary shares, unless disapplied by the articles or by resolution of the members. A private company with only one class of shares will be able to pass a resolution disapplying pre-emption rights on a particular issue without complying with some of the requirements affecting other companies. For example, the company's directors would not need to make a written statement justifying the disapplication.

Directors of public companies and of private companies having more than one class of shares will, as now, be able to exercise powers to allot shares only if authorised to do so by the company's articles or a resolution of the company. Those authorities must specify the maximum number of shares which can be allotted under them. They must also specify an expiry date which must be not more than five years. This will be largely unchanged from the current position. Again, statutory pre-emption rights will apply unless duly disapplied.

Redenomination in other currencies

A limited company having a share capital will, from 1 October 2009, be able to redenominate its share capital, or any class of its share capital, by ordinary resolution. "Redenominate" means converting shares from having a fixed nominal value in one currency to having a fixed nominal value in another currency. Currently, public companies have to cancel shares, with court approval, and reissue shares in a new denomination in order to achieve a redenomination. Private companies may also redenominate in this way or may repurchase their own shares and reissue in a new currency. These procedures are often costly and take time to implement.

In connection with a redenomination, a company will be permitted to reduce its share capital by an amount not exceeding ten per cent of the nominal value of its allotted share capital immediately after the reduction. Such a reduction would not need court approval or any other procedure other than a special resolution. This power could be used to eliminate fractions of issued capital arising from exchange rate differences.

Any amount of reduction under these provisions will have to be transferred to a new undistributable reserve, which may only be utilised in paying up shares to be issued as fully-paid bonus shares (unless it is made the subject of a reduction of capital under other provisions of the Act in the same way as paid-up share capital).

Share premium account

From 1 October 2009, companies will no longer be able to use their share premium account:

• to write off preliminary formation expenses; or
• to write off any expenses, commission or discount relating to an issue of debentures.

They will be able to use share premium arising on a particular issue of shares to write off expenses and commission incurred on that issue only, or as now to pay up new bonus shares.

Register of members

The following changes will also come into force on 1 October 2009, except as detailed below. Companies will be obliged to provide details to parties exercising rights to inspect a register or index of members of when the information was last updated. Failure to do so will be a criminal offence.

Registers of members will not need to retain details of past members beyond ten years following cessation of membership (currently 20 years). Claims relating to register entries will be limited to ten years instead of the current 20 years. These changes come into force on 1 October 2008.

Regulations to be made under the Act will permit the register of members to be maintained in any location, not just at the company's registered office or at the location where it is written up, provided the location is notified to the Registrar. There will no longer be a power for companies to close the register periodically.

From 1 October 2007, there is no longer be an absolute right for anyone to inspect a company's register of members. Activists who object to a company's activities have sometimes abused these rights. Those who wish to inspect the register of members will have to apply to do so, providing details of their identity, the identity of those on behalf of whom they are acting and the purpose for which the information is required. Companies will be able to challenge by court action any request which appears not to be made for a proper purpose, but will have only five working days to do so. Regulations may alter the provisions requiring shareholder details to be included in annual returns on the public register.

New offences will be committed by any person who, in a request for information from the register, knowingly or recklessly provides information which is false, misleading or deceptive, or who discloses information from the register to anyone they know or suspect may use it for an improper purpose.

Similar provisions will apply to registers of debenture holders.

Share warrants and registration

Further changes will be made as follows from 1 October 2009. Companies will be able to issue shares in warrant to bearer form without first issuing them in registered form.

Registration of shares issued other than in warrant to bearer form will have to take place within two months. The current rules require only that a certificate is issued within this period, which will remain the case.

Subscribers who apply to form a company will be deemed to be registered as members on formation of the company, whether or not their names are actually entered in the register of members. It will no longer be possible to convert shares into stock. It will be possible to convert stock into fully paid shares without express authority in the company's articles.

Class rights

Class rights will be capable of variation in accordance with the company's articles or, if the articles do not contain relevant provisions, in accordance with the Act, which broadly reproduces the existing requirements. From 1 October 2007, a special resolution, rather than an extraordinary resolution, will be required to authorise a variation. Note that the requirements for a special resolution under the new Act - 14 days' notice and 75 per cent of the class in support, or in writing with 75 per cent of the class in support - will reflect the existing requirements for an extraordinary resolution.

Provisions relating to variation of class rights will be extended to companies without share capital. Members of a company without a share capital representing at least 15 per cent of a class will have a right to object to a variation of rights to which they have not consented and may apply to the court to confirm or overturn the variation. This tracks the current provision for companies with shares. Again, these changes will have effect from 1 October 2009.

Useful links

Companies Act 2006

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