Scamper for Rule Changes; Focus It Is the Largest Piece of Legislation in British History and Is Set to Fundamentally Change the Way That Companies Operate. Ian McDonald of Newcastle Law Firm Ward Hadaway Looks at the Implications of the Companies Act 2006

Article excerpt

Byline: Ian McDonald

SCAMPI is an unlikely source of controversy, but the humble shellfish sparked high-level parliamentary debate late last year.

The row centred on plans by sea food company Young's to send scampi and other shellfish caught in Scottish waters on a 12,000-mile round trip to be processed.

Instead of being hand-peeled in Annan in south-west Scotland, the fish would be sent to Thailand to be processed before being shipped all the way back to the UK. As a result, 120 workers at Young's in Annan would lose their jobs and, environmentalists contended, several more tonnes of carbon dioxide would be added to further heat up global warming.

The issue led to debate in the Scottish Parliament with one MSP asking: "How can government encourage companies to take social and environmental factors into account?"

The answer - or at least the first steps towards it - may well have been provided by the Companies Act 2006. The largest single piece of legislation in British history, weighing in at a hefty 1,300 sections, the Act overhauls and consolidates the law governing how companies are formed and run.

While many parts of the new legislation are designed to make running a company easier, a more controversial aspect is the bringing in, for the first time, of statutory duties for directors touching on areas beyond the balance sheet - notably how companies handle environmental matters, employees and social and community issues.

Whilst the intention behind the new "code of conduct" is to provide greater clarity on what is expected of company directors and make the law more accessible, it also sought to address the key question of "in whose interest should companies be run?" in the context of the modern business environment and wider expectations of responsible business behaviour.

The Act states that "a director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:

The likely consequences of any decision in the long term.

The interests of the company's employees.

The need to foster the company's business relationships with suppliers, customers and others.

The impact of the company's operations on the community and its environment.

The desirability of the company maintaining a reputation for high standards of business conduct.

The need to act fairly as between members of the company."

In other words, they have to think about more than just the bottom line.

In a case like Young's, a shareholder could conceivably argue that the company's directors had breached this duty by taking no regard of its employees, the environment and the local community since the decision to ship the shellfish thousands of miles away would have an adverse impact all three.

Importantly, the rights of shareholders in this area have also changed - they have been given a new statutory "power" which arguably makes it easier to bring a claim against a director on behalf of the company "in respect of a course of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust".

Under the Act a shareholder could start what is known as a derivative claim on behalf of the company against the directors through the courts. To take advantage of this new power you simply need to be a shareholder and importantly such a claim may be brought by a member of a company in respect of wrongs committed prior to their becoming a shareholder.

Those with an interest in ensuring protection for the environment and communities (who have been following the progress of the new Act and lobbying for more "dramatic change") are, it would seem, in some cases, already preparing strategies to mount such legal challenges against big business they see as adversely affecting the environment or local communities. …