The Companies Act 2006, the largest piece of legislation in British history, has just been signed into law. What impact will it have on investors?
The Companies Act 2006 has just been signed into law. Its 1,500 clauses replace all existing company law, in particular the Companies Acts of 1985 and 1989, making it the longest piece of legislation in British history. But how will it affect you as an investor in a listed company?
Shareholder involvement
- Nominee shareholders have the right to vote, and the right to attend AGMs. They will also be entitled to receive reports electronically or in hard copy;
- Companies will be obliged to distribute all proposed shareholder resolutions at the companies' expense, provided these motions are received before the end of the financial year;
- The government wants all institutional shareholders to disclose how they vote. The Act facilitates making this compulsory, but the initial position is to encourage voluntary compliance.
So far, so good, but let's not forget that this imposes additional costs on brokers and companies. Offsetting those costs by an estimated £50m annually, is a clause allowing companies to use electronic communications as the default method, a move which will probably hurt some printers. Of course many Fools already receive company announcements automatically to their emails using our company announcement service.
Better information
Companies will have to issue a comprehensive business review, including such areas as environmental issues and social factors.
One of the more controversial elements is a requirement to list suppliers to the company. This is information that will doubtless be useful to competitors, and potential competitors, even though the list does not have to be exhaustive and there is an exemption for commercially sensitive information. The Finance Director of Tesco
(LSE: TSCO)
has recently expressed his concern about this requirement, and it will be interesting to see how it is implemented in practice.
Theoretically, the better the information available to investors, in terms of quality and quantity, the less risk they should face when investing. This should reduce the company's equity risk premium and cost of capital. To put it another way, increased transparency should lead to an increase in share prices, as shares are perceived to be slightly less risky than previously. Reality may be different.
Directors' roles and responsibilities
Directors' duties are defined in law for the first time, charging them with responsibility for promoting the success of the company while having regard to issues such as the environment and the interests of other stakeholders.
This will lead to more preparation and paperwork relating to board meetings, but it remains to be seen whether it actually changes the way companies behave. For example, the previous legislation required directors to have regard to the interests of employees, but I am not aware of any instance where a loss-making operation was saved from closure for the sake of the employees. "Having regard to" various factors does not necessarily force the company to take a different course of action.
Shareholders will be pleased to hear that it will be an offence for a director to mislead an auditor; shareholders will also be able to take group legal action against directors for breach of duty.
It remains to be seen whether these additional burdens discourage qualified candidates from becoming directors, or increase the remuneration they require.
The Act will be phased in over the next two years, but it will take longer than that to see the full effect on businesses and shareholders -- while the intention of the Act is to wrap everything up in one package, it may be necessary to resort to existing case law to determine its limitations. In the meantime, I'd expect training companies and conference organisers to do very nicely out of it.
