COMPANIES ACT 2014 MARCH 2015

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1 COMPANIES ACT 2014 MARCH 2015 COMPANIES ACT 2014 OVERVIEW Company law in Ireland is to undergo a major overhaul in the coming months. The changes will affect nearly every business in Ireland. The Companies Act 2014 (the Act) was signed into law on 23 December The Act consolidates the existing Companies Acts and many of the related statutory instruments into a single statute. The principal objective of the Act is to restructure, consolidate, simplify and modernise company law in Ireland. It is anticipated that the Companies Act 2014 will come into effect on 1 June We address the following topics in this bulletin: Company conversions Other company types Corporate governance Other key changes IN THIS ISSUE Get up to speed on the Companies Act, planned to come into effect on 1 June. Learn about the implications for nearly every business in Ireland as a result of this major overhaul. COMPANY CONVERSIONS The Act will introduce new company models and the new law will affect all companies that are already on the register. All existing private companies limited by shares will be required to change to a new company type. The Act introduces a conversion process under which all private companies limited by shares must elect whether to opt into the new regime for a private company limited by shares (called an LTD ) or opt out of that regime by becoming a designated activity company ( DAC ), or some other type of company that the Act permits. LTD. This will be a new form of simplified private company limited by shares and will have a single constitutional document. This single constitutional document will replace the traditional memorandum and articles of association. WELCOME Welcome to the Philip Lee Corporate update. If you would like to know more about anything we have covered, or any other corporate or commercial matter, please do not hesitate to contact us. Contact details for the team can be found at the end of this publication. private limited company, will continue to have a memorandum and articles of association, and an object clause. The doctrine of ultra vires will therefore still apply to this company type. 7/8 The Wilton decision Terrace to Dublin register 2 as T: LTD or DAC will depend on the philiplee.ie circumstances for each company and the purpose for which it is

2 The LTD will have no objects clause and the concepts of ultra vires (an act outside the legal powers of a company) or limited corporate capacity will no longer apply. DAC. The DAC will more closely resemble the existing form of private limited company and will continue to have a memorandum and articles of association as well as an object clause. The doctrine of ultra vires will therefore still apply to this company type. The decision to register as LTD or DAC will depend on the circumstances of each company and the purpose for which it is incorporated. It is anticipated that most companies will become LTDs. All companies should prepare for the implementation of the Act by starting to review their existing company or group structure to identify which companies are public, private or unlimited as different rules will apply to these once the legislation takes effect. How to Convert? Following commencement of the Act, there will be an 18 month transition period, during which private companies limited by shares can take action to become the type of company they choose. If a private company limited by shares does nothing, then by default it will become an LTD at the end of the transition period. A company may convert to an LTD by a special resolution of the members during the transition period. If the shareholders do not pass this resolution, the directors are obliged to register the company as an LTD by the end of the transition period. We would strongly recommend conversion by the members. It allows for greater flexibility in the changes to be made to your company s constitution and will avoid potentially negative consequences; for example, where directors fail to take action, it is deemed to amount to oppression and members can seek relief under section 212 of the Act for oppression, where the remedies include an order to purchase their shares, compensation or such other order as the court sees fit. To convert to a DAC, members can pass an ordinary resolution during the first 15 month period of the transition period. What if you do nothing? We do not recommend this approach for a number of reasons. If your company does nothing, it will also not be able to avail of the advantages of being an LTD during the transition period. For example, an LTD can dispense with the requirement to hold a physical annual general meeting (AGM) which can save time and money. It will also mean that your company s constitution will be deemed to be your company s existing memorandum and articles, excluding the objects clause and any provision that prohibits the alteration of the memorandum or articles. This means that the document filed at CRO will not match the actual deemed one-document constitution and anyone trying to interpret the company s constitution will have to consult the filed document, Table A of the existing Companies Act 1963 and the new Act, which will inevitably lead to confusion and undesired consequences. For example, under the current Table A regulations, all general meetings of companies are to be held in Ireland. The Act provides that they may take place inside or outside Ireland. If your company s constitution provides for the Table A standard, this will be trumped by the new Act as it is not an optional provision. Another example is the written resolution procedure; under the current Table A regulations, most private companies limited by shares adopt the standard regulation 6 of part 2 of Table A which allows for written resolutions of the members without the need to hold a members meeting. The resolution in this case must be signed by all voting members. Under the new Act, it will be possible to pass majority (>50% voting rights) and special resolutions (75% of the voting rights) using the written resolution procedure, without the need to have all the voting members sign the document.

3 This is not an optional provision for LTDs but it is optional for DACs. The core point is that you cannot rely on your deemed constitution as it reads on its face. The new Act will have to be consulted and understood to decipher what rules actually apply. LTD DAC Possible to have one director One document constitution No objects clause and unlimited corporate capacity Possible to dispense with need to hold physical AGM No requirement to change name May utilise the majority written resolution procedure Not entitled to list securities (debt or equity) Two director requirement remains Two document constitution Objects clause still applies limited corporate capacity Must hold physical AGM Will be required to change its name (with knock on effect on stationary, websites, company seal etc.) May utilise the majority written resolution procedure, unless the memorandum and articles provide otherwise May list debt securities OTHER COMPANY TYPES Guarantee Companies (CLGs) CLGs are companies limited by guarantee, with no share capital. Guarantee companies with share capital will become DACs once the new Act commences. The CLG is a popular company type with sports and social clubs, charities and property management companies. This company type will continue to have a two document constitution (memorandum and articles of association). Unless exempt from doing so, a name change is required as the name must end in company limited by guarantee or cuideachta faoi theorainn ráthaíochta. This can be abbreviated in use thereafter to clg or ctr. The audit exemption available for other company types is also available to CLGs under the new Act (subject to member objection). Unlimited Company (UCs) The UC encompasses three different company types 1) Private unlimited company with a share capital (UC); 2) Public unlimited company with a share capital (PUC); 3) Public unlimited company without a share capital (PULC). Unless specifically exempted, the name of an unlimited company must end with either unlimited company or cuideachta neamhtheoranta. This may be abbreviated in use thereafter to uc or cn. Notably, the statutory rules on distributions will not apply to UCs. This company type must have at least two directors, and will continue to have a two document constitution (memorandum and articles of association). A UC may have only one member in which case the requirement to have an AGM can be dispensed with. Public Limited Company (PLC) The PLC will continue to be a company type under the new Act. The key difference between a private company and a PLC is that a PLC may offer its shares to the public and list its shares on a stock

4 exchange. However, there are some substantive changes in relation to the law in the new Act. A PLC must have at least two directors (currently seven) and may not dispense with the requirement to hold an AGM. There is no name change required for a PLC. It will continue to have a two document constitution (memorandum and articles of Association) and also an objects clause. Investment companies There are no substantial changes under the new Act to the current laws relating to investment companies. Investment companies will note however some important new features of the Act that will apply to them including the codification of directors duties and the categorisation of company law offences into four tiers. CORPORATE GOVERNANCE Directors Compliance Statement The Act requires the directors of PLCs (other than investment companies), LTDs, DACs and guarantee companies of a certain size (balance sheet > 12.5m and turnover > 25m) to prepare a statement of compliance, called a Directors Compliance Statement. UC's are not subject to this requirement. The statement to be set out in the directors report in the company s financial statements must set out the company's policies on its compliance and obligations under the Act and under tax laws. Where this is not done, the directors must provide an explanation as to why. A breach of this obligation will amount to a Category 3 offence, which includes the possibility of imprisonment of up to 6 months and a fine of up to 5,000. Decision-making mechanisms The Act introduces new decision-making mechanisms for shareholders. Majority written resolutions can be passed as ordinary resolutions (50% or more of total voting rights) or special resolutions (75% or more of total voting rights) and will take effect 7 and 21 days respectively, after the last member has signed. This is in addition to the old system where written shareholder resolutions can be passed unanimously and take immediate effect, which is still available to companies. Board minutes There is a statutory requirement for directors to minute their meetings and enter them in the register as soon as may be after the meeting. A failure to comply with this obligation amounts to a category 4 offence which attracts a Class A fine of up to 5,000. Directors service contracts There are new requirements for certain long-term directors to have service contracts or memoranda outlining the terms of an unwritten contract and these are subject to rights of inspection. This rule applies to contracts which have more than 3 years to run or which the company cannot terminate within 3 years without payment of compensation. A breach of this requirement is subject to a Category 3 offence (imprisonment of up to 6 months and/or a fine of up to 5,000). Directors duties For the first time in Irish law, the Act sets out in statue the eight principle fiduciary duties of directors codifying the existing common law duties of directors. A director will continue to have statutory duties and responsibilities and these will not be affected by the Act. The duties will apply to all directors including shadow directors. The eight duties are: 1. Act in good faith and in the best interests of the company. 2. Act honestly and responsibly.

5 3. Act in accordance with the company s constitution and act within powers only for the purposes allowed by law. 4. Appropriate use of company property as set out by members of the company s constitution. 5. Use his/her independent judgment (unless the company constitution or members authorises otherwise). 6. Avoid conflicts of interest. 7. Utilise due care, skill and diligence. 8. Have regard to the interests of the shareholders of the company Company secretary The Act introduces a new provision that the directors must ensure that the person appointed as company secretary must have all the skills and resources needed to discharge his or her statutory and other legal duties. The Act does not prescribe what amounts to necessary skills ; this is a matter for the directors. The duties of the secretary include such duties as are delegated by the directors, the statutory duty to co-sign the annual return with a director and the common law duties of maintaining the company s statutory registers, retaining minutes of directors and members meetings and ensuring CRO filings are complied with. OTHER KEY CHANGES Share capital The Act will simplify many of the rules relating to share capital. For example, there will no longer be a requirement for LTDs to have an authorised share capital. This will ease the administrative burden on companies by removing the need to pass resolutions to increase the authorised share capital where that threshold has been reached or where it may be exceeded on an impending transaction. Another helpful change is that LTDs will be able to allot redeemable shares by default without the need to alter its constitution. Currently such authority must specifically be provided for in the articles of association. One drawback of the Act however, is in relation to shares to be issued or options granted under an employee share option plan (ESOP). Currently, there is no requirement for specific member authority to allot shares or grant options under an ESOP, either by member resolution or under the articles of association. Under the Act, directors will specifically require this authority and companies will need to monitor this going forward. Summary approval procedure One of the key innovations in the Act is the simplified written approval procedure for certain restricted activities that might otherwise prejudice shareholders or creditors. Through a combination of members special resolutions, directors solvency declarations and auditors reports, a company can sanction an otherwise prohibited transaction, for example financial assistance, reductions in share capital and freeing up pre-acquisition reserves. Extension of the audit exemption Audit exemptions may still be availed of by a LTD, a DAC, a guarantee company, and a dormant company, where two of the following three criteria are met (currently all three conditions are required to be met): (i) balance sheet total does not exceed 4.4m; (ii) turnover does not exceed 8.8m; and (iii) the average number of employees does not exceed 50. Where a company is part of a group they will now be able to avail of the exemption, provided the group meets the "small group" criteria laid down in the Act. Financial assistance Arguably one of the most welcome changes in the legislation is the change to the rules on financial assistance as currently set out in section 60 of the Companies Act The rule deals with unlawful

6 assistance by a company for an acquisition of shares in the company itself. The Act removes the reference to the current problematic wording in connection with. The use of this language to date has caused difficulties on corporate transactions, in many cases where there might be no apparent financial assistance, but due of the wording of the current legislation, it meant that it was often difficult to avoid triggering section 60. While there are numerous exceptions to the general prohibition to financial assistance there will be a variation in the current whitewash procedure and that is the new summary approval procedure, which provides for a more streamlined authorisation by the members of the intended transaction. There are also two notable exceptions, providing that the transaction will not be caught by the prohibition if: (i) the principal purpose of the assistance is not for the acquisition; or (ii) the giving of the assistance is only incidental to the transaction. Corporate re-organisations Mergers For the first time under Irish law, there will be a statutory provision to allow for two Irish companies to merge. The process closely follows the European legislation on cross border mergers. Under Part 9 of the Act, it will now be possible to merge two Irish companies by court order or by using the summary approval procedure and thus reducing the time and cost of a court application. As is the case under the EC (Cross-Border Regulations 2008), there are three possible methods of merger, namely: (i) merger by acquisition; (ii) merger by absorption; and (iii) merger by formation of a new company. As with the European process, common draft terms must be drawn up and there are various notification requirements shareholder approvals to be obtained. Some of the main benefits for mergers under the new regime include: (i) no requirement for a liquidation, which will save on costs; (ii) less documentation as assets and liabilities pass automatically upon approval; and (iii) legal certainty as to validity of transfer of assets/liabilities. Divisions Part 9 of the Act provides for a statutory regime for corporate divisions of an Irish company into two or more other Irish companies. The rules will make it possible for the first time for a private Irish company to be divided, i.e. split the undertaking amongst two companies, with the transferring company being dissolved without going into liquidation. The main difference with this regime and the merger regime above is that the summary approval procedure cannot be availed of and the process will require court approval. Schemes of arrangement Where a company seeks to come to a compromise or arrangement as between the company and its creditors (or any class of them) or as between the company and its members, it is known as a scheme of arrangement. One of the most notable changes under the new Act is that court approval will no longer be required to convene a meeting for a scheme of arrangement. It will still require the approval of 75% in value of the creditors or class of members or class of members. Currently a court cannot sanction a scheme that is ultra vires; with the new LTD model company, this will no longer be an issue as an LTD will have unlimited corporate capacity. Dividend trap Under current legislation, where an acquiring company buys a company which holds reserves, those reserves are deemed to be trapped in the hands of the acquiring company and cannot, (unless certified by directors and auditors as being fair and reasonable and not prejudicing any person) be distributed to shareholders of the acquiring company as they are not deemed to be distributable reserves of the acquiring company. The Act will make this process easier by allowing members to use the summary approval procedure to approve the otherwise trapped dividends.

7 ABOUT US Philip Lee is a leading business law firm with offices in Dublin, Brussels and San Francisco. Our approach to our clients is clear. Their goals are our goals. Working in partnership, we aim to deliver first class legal services and advice to support our clients in achieving their business goals. Our continuous involvement in complex matters of all kinds, including many large-scale corporate transactions, ensures that we are constantly enhancing and adding to our skills. In particular we provide legal advice to clients in a number of specialised sectors, including high potential early stage, FDI, and corporate restructuring. For further information, please contact: Andreas McConnell Partner amcconnell@philiplee.ie Jonathan Kelly Partner jkelly@philiplee.ie Eoghan Doyle Senior Associate edoyle@philiplee.ie Anna Hickey Associate ahickey@philiplee.ie If anything in this update is of interest to other parties, please share. If you have received this publication from someone else and would like to subscribe, please contact one of the corporate team. If you do not wish to receive our newsletters please contact a member of the corporate team. The content of this publication is for information and does not constitute legal or other advice. Readers should obtain their own legal and other advice as required. Philip Lee does not accept responsibility for information on third-party websites. Philip Lee 2015