Other UK company law that has a bearing on financial strategies

Section 172 of the Companies Act 2006 states that to promote the success of the company, directors must continue to act in a way that benefits the shareholders as a whole, but there is now an additional list of non-exhaustive factors to which the directors must have regard:

(a) the long-term consequences of decisions;

(b) the interests of employees;

(c) the need to foster the company's business relationships with suppliers, customers and others;

(d) the impact on the community and the environment;

(e) the desire to maintain a reputation for high standards of business conduct;

(f) the need to act fairly as between members.

This was one of the most controversial aspects of the new legislation at the drafting stage. It is easy to envisage a strategy of stripping a company of its assets and winding it down, but this would not seem to be a policy that benefits those listed in (b), (c) and (d). However, it could well benefit the members, the shareholders. It is obvious to see why such no doubt well-meaning (what condemnation in those words) law is controversial, never mind very difficult to implement.

Further Companies Act 2006 sections of which executives should be aware

S173: to exercise independent judgment-directors must not fetter their discretion to act, other than pursuant to an agreement entered into by the company or in a way authorized by the company's articles.

S174: to exercise reasonable care, skill and diligence -this must be exercised to the standard expected of someone with the general knowledge, skill and experience reasonably expected of a person carrying out the functions of the director (the objective test) and also the actual knowledge, skill and experience of that particular director (the subjective test).

S175: to avoid conflicts of interest- methods for authorizing such conflicts by either board or shareholder approval are also to be introduced.

S176: not to accept benefits from third parties.

S177: to declare an interest in a proposed transaction with the company - there are to be carve-outs for matters that are not likely to give rise to a conflict of interest, or of which the directors are already aware. There will be an additional statutory obligation to declare interests in relation to existing transactions.

(Companies Act 2006)

Summary of legal requirements regarding the strategic report (covered in detail in Chapter 6)

Section 414A of the Act requires all companies that are not small to prepare a strategic report which contains a fair and balanced review, consistent with the size and complexity of the business, of:

(a) the development and performance of the company's business during the financial year;

(b) the position of the company at the end of the year; and

(c) a description of the principal risks and uncertainties facing the company.

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