By Selma Ryan, Solicitor, Business Department
Irish Company law is getting simpler. At least that is what is envisaged by the lawmakers of Ireland who have undertaken the mammoth task of consolidating the existing body of Irish company law into a new Companies Act. When enacted, the new Companies Act will repeal all previous company legislation in Ireland and will modernise Irish company law. The draft Companies Consolidation Bill 2007, published by the Company Law Review Group in May 2007, is currently being moulded into its final form in the Office of the Parliamentary Draftsman and is expected to be published in late 2008 / early 2009. The Bill will then go before the Oireachtas for approval. The proposed changes are significant and directors and company secretaries will need to engage in a suitable preparatory programme to ensure that their company is ready for the new regime.
Structural Reform – The New Companies Act will be divided into Pillar A and Pillar B
At present, Irish corporate legislation is structured to present the public limited company as the default company type in Ireland. The model Articles of Association for the public limited company are set out in Schedule 1, Part 1 Table A to the Companies Act 1963 and the other types of companies, including private limited companies, take their rules from the public model, amended as appropriate. The reality however is that the vast majority of Irish companies are private companies rather than public companies and the new legislation thankfully acknowledges this fact. The draft bill proposes to divide the law into two sections namely, Pillar A setting out the law for the private limited company and Pillar B setting out the law for all the other main company types, including the public limited company. Pillar B will also govern a new type of company to be created under the new Act to be known as a designated activity company (DAC). A DAC is in effect a private limited company with an objects clause.
Changes for Private Companies
The principal amendments that will be made by the draft bill to the private company limited by shares may be summarised as follows: –
- The doctrine of ultra vires will no longer apply to the private limited company, i.e. a company will no longer have an objects clause. Therefore a private company will have the same capacity as a natural person.
- As there will be no objects clause, the existing Memorandum and Articles of Association for a private company will be replaced by a one-document “constitution”. A company will therefore be obliged to make the decision to either re-register as a private company without an objects clause or register as a Designated Activity Company (i.e. a private company with an objects clause). If, at the end of the transition period provided for in the draft bill the company has not re-registered, the company will automatically become a private company without an objects clause and will be governed by a default constitution currently referred to as a “deemed constitution”. This document will be issued by the Registrar of Companies directly to the Company at that time. The possibility of an automatic conversion of the company structure is one of the most controversial proposals of the draft bill. The Company Law Review Group have commented that in their view the “deemed constitution” is “on balance a proportional and reasonable measure given that the private company will be the preferable alternative for the large majority of existing private companies”.
- Interestingly, there are also proposals in the draft bill for aggrieved members and creditors to apply to court for relief in certain circumstances. Firstly, where a company fails to re-register as a DAC and is thereby automatically converted to a private company limited by shares, a member or shareholder will be able to apply to court for an order to have the company re-registered as a DAC. Secondly, where a constitution prejudices the interests of a member it is envisaged that the member can apply to court for an order for remedy in the case of oppression. In such circumstances, there is a presumption that the directors have exercised their powers in an oppressive manner or in disregard of the member’s interests. Accordingly, company directors will have a positive obligation to take action to ensure that their company is well prepared for the new system, or risk potential court action by aggrieved members and/or creditors.
- The private limited company will be able to have up to ninety-nine members rather than the current maximum of fifty.
- Offers to the public of shares or debentures in private limited companies in certain limited circumstances will be allowed where the publication of a prospectus is not required and the offer is confined to 99 people or less.
- A private limited company may have just one director and a company secretary who are not the same person rather than two directors as currently required.
- The fiduciary duties of directors have been encoded for the first time and also for the first time the duties of the secretary are set out in legislation
- The rules relating to the maintenance and reduction of share capital will be relaxed.
- The private limited company will have the power to dispense with the requirement to hold an AGM.
- Majority written resolutions will now be possible (previously unanimous written resolutions only).
- New figures and thresholds will apply to eligibility for audit exemption.
- Creation of designated activity company type – this is a private company limited by shares or guarantee having a share capital and with an objects clause.
- Revision of offences – offences are to be categorised on a scale of 1 to 4 with the sanctions applicable to each category to be set out in the legislation.
Changes for Public Limited Companies
The public limited company is currently the basic company and model company type under the Companies Act 1963 and its default articles of association are set out in Part 1, Table A of the First Schedule to the Companies Act 1963. Now, as discussed above, the company limited by shares will be the basic model company type and the rules relating to a public company will be set out in Pillar B of the new bill. The proposed changes to private company law discussed above will not apply to public limited companies.
The primary change for public limited companies is that most of the legislation relating to public limited companies has now been gathered into one place. Most of the plc-specific conditions relating to share capital from the 1983 Companies Amendment Act have been retained unchanged in the new bill. The full rules on public offer of securities will be incorporated into the Act as implemented by the Investment Funds Companies Miscellaneous Provisions Act 2005.
Likewise, the new transparency requirements flowing from the Transparency (Regulation of Markets) Directive will apply. Another change worth noting is that a public limited company will be able to avail of the validation procedure to permit financial assistance in connection with the purchase of its own shares provided it also follows the conditions set out in the draft bill.
Finally, a public limited company will be able to prepare a summary financial statement for shareholders instead of the full annual accounts, which could be an advantage for companies with a broad shareholder base.
The draft bill provides for a transition period of twelve months after the introduction of the new Act, albeit that the Minister will have limited power to extend any such transition period. It is expected that an eighteen month transition period is likely to apply.
The proposed new Companies Act will repeal all previous company legislation in Ireland and modernise Irish company law.
The Memorandum and Articles of Association for private limited companies are to be replaced by a single ‘constitution’ document.
The fiduciary duties of directors have been encoded for the first time.