DERIVATIVE CLAIMS: directors must adhere to rules or risk action from shareholders


Radical changes to company law come into effect next week with the introduction of the first statutory code on directors' duties alongside new rules on derivative claims.



Monday 1 October 2007 is the first of three key implementation dates for the Companies Act 2006 - at 1,500 clauses, the longest piece of legislation ever to have been passed in the UK.



The most important new provision, lawyers agree, is the statutory code to which directors must now turn when considering their duties.



Nigel Edwards, a corporate partner at City firm Lewis Silkin, said: 'It will bring about subtle, but significant changes, affecting every director personally.'



The code says directors should act in a way most likely to promote their company's success for the benefit of shareholders as a whole. In doing so, they must have regard to at least six 'factors', including: the interests of the company's employees, suppliers and customers; the long-term consequences of their decisions; and the impact on the community and environment.



Crucially, directors must also be able to demonstrate that they paid due regard to these factors when making their decisions. Otherwise, they would lay themselves open to derivative actions, where shareholders can pursue directors in the company's name following their negligence or breach of duty. Peter Kennerley, company secretary and general counsel at Scottish & Newcastle, said: 'This requirement has implications for accurate record keeping. But it is important that a consensus develops that boards don't have to produce reams and reams of minutes just to cover their backs.'



Simon Graham, head of corporate governance at Birmingham and London firm Wragge & Co, warned that the bureaucratic demands of the new provisions could have a disproportionate impact. He said: 'Compliance will pose few problems for listed companies, where having regard to the factors cited in the new Act is ingrained in their culture. For smaller, private companies, however, it could be more of an issue.'



Simon Welch, chairman of the Commerce & Industry Group's corporate governance committee, pointed to the wide array of issues that must be looked at. He said: 'Financial, sales, marketing, human resources, tax, jurisdictional - all these inputs need to be considered in the light of the six factors if directors are to avoid derivative actions.'



Jonathan Rayner