Countdown to the Companies Act 2014: Day10

Friday, May 29, 2015

This is the last working day until the Companies Act 2014 (the “Act”) comes into force in Ireland. The Act will radically change the existing legal framework for companies in Ireland. Each day, we have provided you with a snapshot of key changes to consider in advance of the Act commencing on June 1st.

Share Capital, Shares and certain other instruments

The Companies Act 2014 (“the Act”) consolidates the existing law relating to share capital and certain other instruments into one section and simplifies the rules relating to share capital and share capital maintenance. In this briefing we will examine the new developments.

Authorised Share Capital

Every company with a share capital has an authorised share capital amount, with one exception. Under Part 2 of the Act a private company limited by shares (“an LTD company”) is not required to have an authorised share capital figure. An LTD company can abandon its authorised share capital by passing a special resolution and in that event must re-register its constitution, it having been amended. This is a welcome reform as to date a company could only issue shares within the limits of its authorised share capital amount. Another helpful change is that an LTD company 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.

Allotment of shares 

Unless a company’s constitution provides otherwise, a number of statutory default provisions apply in relation to the allotment of shares. Shareholders in LTD companies and Designated Activity Companies may wish to displace these provisions.

1. Duration of authority to allot – The authority to allot may be limited in duration by the stipulation of a time period (current law specifies 5 years). This provision can be displaced by providing in a constitution that there is no time limit on such authorisation.
2. Allotment by directors – Only directors can allot shares. This provision can be overridden by providing that shares can be allotted by other persons authorised by the directors.
3. Authorisation to allot – The allotment of shares must be authorised specifically by ordinary resolution or by the constitution of a company. This provision can be displaced by a company’s constitution providing that allotment is authorised generally so that an ordinary resolution is never required to allot shares.
4. Pre-emption rights – Holders of ‘relevant shares’ (shares not capped or restricted as to dividends/capital) have pre-emption rights over the allotment of shares, which are shares and options. As is currently the case in practice, shareholders may wish to contract out of this provision so that statutory pre-emption rights will not apply.

Reduction and variation of share capital

Under the Act a company may reduce its share capital by use of the Summary Approval Procedure (“SAP”).  Previously, court approval was required for a reduction in share capital.

Employee Share Option Plans

One drawback of the Act 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.

Share Transfers

Another reform is that unless the constitution of a company provides otherwise, the directors have absolute discretion to decline to register a transfer of shares without assigning any reason. This discretion must now be exercised within two months otherwise it will lapse. Previously there was no time limit specified by legislation.

Acquisition of own shares / Buy-backs

Chapter 6 sets out a company’s power to acquire its own shares and it also sets out a number of measures which may facilitate a company in its acquisition of shares. Significantly, the rule requiring that ten percent (in nominal value) at all times be non-redeemable has not been maintained from the current law. Transactions involving redeemable shares will be made easier as a result.

Distributions

Many of the existing rules regulating distributions by companies to their members have been maintained. For example, distributions can still only be made out of profits available for that purpose or out of the proceeds of an issue of fresh shares and the distribution must be authorised by the constitution, a special resolution or rights attaching to the shares in question. A new provision dealing with “distributions in kind” has been added to deal with distribution of non-cash assets. Significantly, section 1255 of the Act provides that no restrictions shall apply in relation to the making of distributions out of the assets of an unlimited company.

Commentary

The Act greatly simplifies the rules relating to share capital, especially for LTD companies, who are no longer restricted by the rule relating to authorised share capital. It will be necessary for companies to actively amend their constitution so as to avail of the new developments otherwise the more restrictive default position will apply.

The content of these updates articles is provided for information purposes and does not constitute legal or other advice.