Demystifying the Companies Act

This is the text of a paper given by Paul Keane to the Annual Conference of the Law Society of Ireland on 10 May 2013

INTRODUCTION

The Companies Bill is the largest piece of legislation ever introduced to the Oireachtas.  There is a danger that solicitors will recoil from the task of digesting such a behemoth.  The profession must not concede this ground to others,  who will not hesitate to seize it.  The Business Law Committee is focussed on arming the profession with the knowledge of company law required to retain our pre-eminent role as advisers to business and business people.

Today marks the start of a programme of education in relation to company law.  Later on this month, we will host a half day seminar introducing the new legislation.  Later in the year, when the shape and time-line of the legislation have become settled, we will roll out more detailed sessions on particular aspects of the bill.

COMPANY LAW AS YOU HAVE KNOWN IT, BUT MADE EASIER:-

Mass of Legislation since 1963

The 1963 Act was, in its day, a modernizing and reforming measure. But since then there have been 30 pieces of legislation, both Acts and SIs implementing EU directives, which have enormously complicated an already complex area of the law. The result is a profusion of overlapping and occasionally inconsistent legislative instruments.

In many cases, this arises because EU directives required legislation on areas already governed by the 1963 Act, but which were expressed in different terms.  Two simple examples:- we have two regimes dealing with foreign companies with a place of business in the State [external company and branch] and two quite different definitions of subsidiary and subsidiary undertaking.

CLRG working since 2000 

The CLRG was established in 2000 to develop an efficient world class company law infrastructure, suited to the needs of Irish business.  We can be proud of the leading role our colleagues such as Tom Courtney, Paul Egan, William Johnson, Mark Pery Knox Gore, Deirdre-Ann Barr and others have taken in the detailed, scholarly and practical work done since 2000 which has culminated in the current proposal.

Companies Bill – Restatement and Reform

At 1136 pages and 1429 sections, the bill is a comprehensive and coherent restatement and reform of our company law.

Unlike the 1963 Act, the bill takes as it cornerstone the private company limited by shares.  The bill is designed around that  model. Thus Parts 1-14 (714 pages, comprising 887 sections) deal with the private company limited by shares.

Parts 15 to 19 deal with other types of company and miscellaneous matters adopting and adapting the earlier rules to the requirements of the particular type of company.

Five types of companies 

The bill seeks to describe in a structured and accessible manner the life, activities and demise of a company.  A major initiative is to distinguish between the model company limited by shares with unlimited capacity and a private company established for a designated purpose.

1. Private company limited by shares (“Ltd”)

This is the model company.  It will use the word “limited” or “ltd” as part of its name.  In the bill, this class of company, is called a CLS or a company limited by shares.  The Ltd will have a simplified constitution, no objects clause and need have only one director and one member.

2. Designated Activity Company (“DAC”)

The DAC is essentially the same as an existing private company.  It is a private company limited by shares but with a specific object.  This will have the words of Designated  Activity Company or DAC as part of its name.  It will continue to have two directors and an objects clause.

3. Company limited by guarantee (“clg”)

No major change except that the minimum number of members will be reduced to from 7 to 1 and the audit exemption will be available to a clg.

4. Public Limited Company (“plc”)

Henceforth a plc, will need to have only one member.

5. Unlimited Company (“uc”)

Again no fundamental change, except that the minimum number of members is again reduced to one, for both public and private UCs.

REFLECTS IRISH BUSINESS AS IT REALLY IS:-

1963 Act derived from the needs of a public company

The 1963 Act is based on the law relating to a public company, with modifications for the private company.  We can see this in a very marked fashion on the model form of articles.  Table A Part1 sets out the great bulk of the rules.  These are rules that would accommodate a great enterprise with thousands of shareholders listed on a public exchange.

Part 2 has 10 articles tacked on at the end and modify the great edifice for the more modest demands of the private company.

Emphasis on private companies limited by shares

Private companies comprise more than 85% of all Irish companies. Only approximately 1% are plcs.  The new bill will reflect the reality of Irish business.  It will allow a company with one director and one shareholder.  It recognises that AGMs and other meetings are a mere fiction.  Thus, it allows a ltd to operate without AGMs, provided all of the members entitled to attend and vote sign documents dealing with the business of the AGM  .

Unlimited Capacity

Companies will have full and unlimited capacity to carry on any business activity and to do any act or transaction .  Directors and persons registered for the purpose (“Registered Persons”) are deemed to have authority to exercise any power of the company .

The constitution will consist of single document.  There will no limitation to the objects of the company.

CLS AND DAC COMPARED

Most private companies will be pleased to cast aside the shackles of its memorandum and embrace the facility of the new structure.  However, some will wish to continue to have a confined object clause.

PAINLESS TRANSITION (WE HOPE)

The bill establishes a regime that allows the new arrangements to become effective with the minimum disruption.  Private companies and their stakeholders have a number of options which allow the company to move to the new omnipotent ltd or to stay as a DAC.

Masterly inactivity 

At the end of the transition period of 18 months after the commencement of the bill, existing private companies limited by shares automatically become a ltd .  The directors are obliged to file an amended constitution to reflect the new rules, but if they do not, the existing memorandum and articles will continue to have effect (with the exception of the objects clause and provisions dealing with the variation of the M&A).  During the transition period, the rules relating to a DAC (basically the status quo) will apply

Object- to preserve the status quo

A shareholder holding more than 25% of the voting rights can require the private company to re-register as a DAC.

Shareholders holding 15% or more of the issued share capital or  creditor(s) holding 15% or more of company’s  debentures can ask court to direct re-registration as DAC

– Convert Early To DAC 

In first 15 months of transition period, by passing special resolution.

– Convert Early to To Ltd 

By special resolution, adopting the new form of constitution

Re-Register later 

A company of one type may re-register as another (eg Ltd to DAC) at any time by passing a special resolution and changing its constitution .

SIMPLIFIED PROCEDURES

One document constitution

The constitution of a ltd will be simplicity itself: the name, the fact that it is a CLS, the authorised share capital and the subscription and signature of the subscribers.  No need for articles, object clause or memorandum.  The result will be a fully functioning, full-capacity corporate with a modern constitution.  One can adopt supplemental regulations, but if not, the default rules set out in the bill will apply.

Summary approval procedure

Many will be familiar with the procedures under s60 of the 1963 Act, under which the giving of financial assistance that would otherwise be restricted and unlawful, is validated.  S60 is a provision designed to protect the interests of minorities and creditors.  There are other protective provisions which have different validation procedures, including such measures as a report of an expert, notices to shareholders or creditors, statutory declarations or court approval.

The CLRG proposed that one consistent validation procedure be adopted that could be applied to a number of restricted transactions. This procedure is known as the Summary Approval Procedure .  It is based on the s60 procedure.  Thus, it requires a special resolution (which can be passed by written resolution) and declaration of solvency by the directors.  In some cases there are additional requirements;  unanimity (for a merger) or the report of an expert (the reduction of capital, pre-acquisition profits or  voluntary winding-up).

The restricted activities to which the SAP can be applied are:-  

• reduction in capital
• financial assistance for acquisition of  own shares
• variation of capital on reorganisation (no need for a court order)
• treatment of pre-acquisition profits as distributable
• loans etc to directors and connected persons
• mergers
• members voluntary winding up

Written resolutions

Resolutions in writing currently require unanimity.  Under the bill it will be possible to transact business by written resolution with requisite majorities  to pass an ordinary resolution (simple majority) and a special resolution (75%).  It is a condition of the use of this procedure that the proposed text and an explanation of its purpose be circulated to the members.

Declarations no longer required to be statutory

CLRG’s recommendation that statutory declarations be replaced with unsworn declarations has been adopted.  A minor contribution to greater efficiency and cost saving, but one that may not be universally welcomed by those who benefitted from commissioner’s fees.

TRAPS REMOVED

Ultra vires

Generations of lawyers have tussled with the doctrine of ultra vires, the distinction between objects and powers and the extent of the authority of directors or others purporting to act on behalf of the company.

All of this learning will be rendered redundant by the bill.
We have seen that the ltd will have no object clause, that it will have full capacity and that the directors will have power to exercise any power of the company.

Even in relation to a DAC, where an object clause will be retained, ultra vires has had its day.  Although the object clause will have effect as between the shareholders and the company, and the directors may have a liability for ignoring it, the doctrine of ultra vires will not apply to a DAC  .  Thus, the validity of an act done by a DAC shall not be called in question on the ground of lack of capacity by reason of anything contained in the DAC’s objects  and a party to a transaction with a DAC is not bound to enquire as to whether it is permitted by the DAC’s objects   It remains the duty of the directors to observe any limitations on their powers flowing from the DAC’s objects  and shareholders may seek an injunction to prevent an act beyond the DAC’s capacity

“In connection with” financial assistance for acquisition of own shares

Section 60 of the 1963 Act was intended to facilitate financial assistance for the acquisition of the company’s own shares and to provide a mechanism to validate a transaction that would otherwise have been contrary to the strict capital maintenance rules of the law at the time.

However, the prohibition contained in section 60(1) is expressed in wide terms and catches not only financial assistance for the purpose of the acquisition of shares but also includes assistance “in connection with “ such an acquisition.  This general text has given rise to considerable uncertainty.  There have been numerous exceptions and clarifications added to the section to deal with particular issues, but doubts remained.

Section 83 of the bill sweeps aside a number of these doubts.  The prohibition is limited to assistance for the purpose of acquisition. Moreover, it clarifies that the prohibition does not apply if the principal purpose is not to give it for the purpose of such acquisition or if the assistance is only incidental to some larger purpose .

Security

– Registration

Section 99 or CA63 sets out the categories of charges that must be registered on pain of invalidity upon liquidation.  Any charge outside those categories is not registerable.  This means that the register of charges is misleading, because valuable assets of the company may be charged, but are not so shown.

The existing categories are cumbersome.  Frequently, charges are marked as coming within a particular category that does not apply.  This is done for the purposes of completing a registration for fear that failure to make a return might be used to challenge the security later.

The bill abolishes these fine distinctions.  All charges over any interest in any property, assets or undertaking of the company (except for those exempted to comply with the Financial Collateral Arrangements Directive) must be registered.

– Priority 

At the moment priority as between charges is determined by the date of their creation, provided they are registered within 21 days of creation.  Accordingly, even though a lender may take the precaution of getting a clear CRO search and registering its charge promptly, an earlier charge, though registered later, would take priority.

The bill now provides that priority will be ranked by the order of registration, not creation.  However, where the priority of charges is otherwise governed by other legislation (such as, for example, that governing charges over land) that other legislation will determine the matter.   And of course, inter-lender agreements will be recognised

These new rules are combined with a new registration system. The existing “one —step” filing of a notice of the charge will continue.  However, a new “two-step” facility is being introduced.  This will involve filing a notice of intention to grant the charge.  Priority will relate to the date of filing of this notice, provided notice of the actual creation of the charge is filed within a further 21 days .

CORPORATE GOVERNANCE

Directors duties codified 

Directors fiduciary duties and duties of care and skill have been developed by jurisprudence.  For the first time, they have been restated and codified together with  certain duties that have been imposed by statute, such as the duty to act honestly and responsibly in relation to the affairs of the company

The duties are as follows:-

(a) act in good faith in what the director considers to be the interests of the company;

(b) act honestly and responsibly in relation to the conduct of the affairs of the company;

(c) act in accordance with the company’s constitution and exercise his or her powers only for the purposes allowed by law;

(d) not use the company’s property, information or opportunities for his or her own or anyone else’s benefit unless–

(i) this is expressly permitted by the company’s constitution;

or

(ii) the use has been approved by a resolution of the company in general meeting;

(e) not agree to restrict the director’s power to exercise an independent judgment unless–

(i) this is expressly permitted by the company’s constitution;

or

(ii) the case concerned falls within subsection (2);

(f) avoid any conflict between the director’s duties to the company and the director’s other (including personal) interests unless the director is released from his or her duty to the company in relation to the matter concerned, whether in accordance with provisions of the company’s constitution in that behalf or by a resolution of it in general meeting;

(g) exercise the care, skill and diligence which would be exercised in the same circumstances by a reasonable person having both–

(i) the knowledge and experience that may reasonably be expected of a person in the same position as the director; and

(ii) the knowledge and experience which the director has;

and

(h) in addition to the general duty owed to employees under section 225, have regard to the interests of its members. 

Whether nominee directors were entitled to have regard to the interests of their appointers has always given cause for debate.  The bill introduces a welcome sense of realism that a nominee will have regard to the interests of the appointer.  However, this is to be without prejudice to the general duty to act in good faith in what the director considers to be the best interests of the company.

Compliance statement for larger companies 

The introduction of a requirement for directors to make a statement of compliance with laws relating to the business of the company provoked considerable disquiet and were never operated .  CLRG recommended a modified regime in 2005 and this regime is reflected in the bill.  It will only apply to companies with a balance sheet of more than €12.5m and turnover of more than €25m.  The compliance statement is confined to company and tax law.

Director’s loans 

– S31 retained

The now familiar restrictions in relation to loans, quasi-loans, credit transactions in favour of directors and those connected with them (and associated guarantees and security) are retained.  The relevant section is section 240.  The existing law is largely reproduced.  The validation procedure, that now appears in section 34, is replaced by the SAP described earlier.

– Undocumented Loans to/from directors

A loan to a director/connected person from a company which is not in writing will be presumed to be repayable on demand and to bear interest  .

A transaction which is claimed to be a loan to a company from a director, but which is not in writing is presumed not to be a loan or quasi-loan.  Where it is proven to be a loan, there is a presumption that it is interest-free, unsecured and subordinated to all other debt .

Restriction of director :extent of cooperation  with liquidator

A director of an insolvent company, who cannot demonstrate that he has acted honestly and responsibly in the conduct of the affairs of the company is exposed to being restricted in being appointed or acting as a director of other companies.  This arises under s 150 CA 63 .  The bill adds a further basis for restriction: the director must show that he has cooperated as far as could reasonably be expected in relation to the conduct of the liquidation of the insolvent company.

RESTRUCTURING FACILITATED

Mergers

The bill introduces a procedure for the merger of two private companies, modelled on the EC (Cross-Border Mergers) Regulations 2008.  However, the necessity for a cross—border element is dropped. The effect of the merger will be the transfer of the assets and liabilities of one by operation of law to the other, before the transferor is dissolved. No court order is required.  As we have seen the proposal can be approved with a unanimous SAP.

Divisions

For the first time, it will be possible to split the undertaking of an Irish company so that it is divided  between two  other Irish companies.  This is the reverse of the mergers procedure and many of the elements of the merger are common to both.  This will be a very useful device in dealing with family succession and in the sale of a part of a business conducted by a company, where it is desired to retain another element

Share for undertaking swap

There is a statutory exemption from CGT for what is known as a share for undertaking swap.  This involves the transfer of part or all of a company’s undertaking to another company in consideration of the allotment of shares in the capital of the acquirer.  However, the consideration shares are not allotted to the transferor company, but to the shareholders of the transferor.

This is effect is a return of capital to the shareholders and thus it has been held to be unlawful, unless the company had distributable reserves equivalent to the value of the assets transferred.

There is no statutory framework for such a transaction and as result there has been much debate (and many expensive opinions) on whether the value should be market or book-value.  Such transactions were also fraught with concerns as to ultra vires, the authority of directors and the appropriate resolutions that were required to accomplish them.

The bill now sets out a clear statutory regime for these transactions. Henceforth, approval by a way of a SAP will be sufficient.  As to the value, the amount to be deducted form the reserves of the company is the book value of the assets concerned.

CONCLUSION

Although the bill is enormous, it is very well laid out, clearly expressed and reflects concepts and practices with which we are familiar.  Where new ideas have been introduced, they are sensible and user-friendly.  After a period of study and familiarity, we will quickly find it a useful aid in our key role as advisers to Irish businesses.