This memorandum has been prepared for the assistance of our clients in connection with the provisions relevant to the share capital regime under the Companies (Guernsey) Law, 2008 (the "Companies Law"). It is intended to provide only a summary of the main legal and general principles and it is not intended to be comprehensive in scope. It is strongly recommended that you seek specific legal advice on such matters and we would be pleased to assist in this respect. A series of briefings on other specific aspects of Guernsey companies has been produced by Ogier and is available on our website www.ogier.com. Transitional provisions have also been made (a separate briefing addresses the operation of these).
The memorandum has been prepared on the basis of the law and practice in Guernsey as at 1 July 2008.
The Companies Law came into full force on 1 July 2008.
This memorandum will briefly set out the types of share provided for under the Companies Law, and the principal provisions of the Companies Law relating to the issue of shares, alteration of share capital, purchase of own shares and financial assistance for the acquisition of a company's own shares. It should be noted that we await the publication of transitional provisions governing a number of matters where existing companies may be affected by changes in the Companies Law, and we recommend that specific advice be taken on any issue as and when such transitional provisions are published.
ONLY ONE FOUNDER MEMBER NECESSARY
Single shareholder companies are now permitted in Guernsey. However, it should be noted that if existing companies with the previous minimum of two shareholders wish to become single shareholder companies, regard should be given to whether this breaches any quorum provisions of the articles or (if applicable) shareholders' agreements.
POWER TO ISSUE SHARES AND CONSIDERATION
The powers of a company
The powers of a company to issue shares of any one or more of the various classes must be set out in its memorandum and articles of incorporation, and the company cannot issue shares if there is no such power of the company. If the memorandum and articles do not allow for the issue of a certain class of shares it is possible for the memorandum and articles of incorporation to be amended to provide for the issue of a new class of shares to suit the requirements of investors.
An important change brought about by the Companies Law is that Guernsey companies will no longer have an authorised share capital, but rather a particular issue of shares will need to be authorised, either by an authorisation in the company's constitutional documents, or by ordinary resolution of the shareholders. It will be preferable for new Guernsey companies to have no limit to their authorised share capital. Existing companies which have authorised share capital and wish to increase this, or make it unlimited as the Companies Law now allows, will require to be catered for under the transitional provisions referred to above, and we recommend specific advice be taken on this issue.
THE POWER OF DIRECTORS
General power to issue shares: authorisation by company
The directors may issue shares only if authorised to do so by the company's memorandum or articles or by an ordinary resolution of the company (i.e. a shareholders' resolution). The authorisation may be given for a particular issue of shares or rights or generally, and may be conditional or unconditional.
- The authorisation must state the maximum amount of shares that
may be issued under it, and the date upon which the authorisation
will expire. The expiry date must not be more than five years after
the date when the authorisation is given. The authorisation may be
renewed or revoked by a further ordinary resolution. Such renewal
may only be for a further five years. An issue in breach of this
authorisation requirement will be valid but a director who permits
or purports to authorise a contravention of the authorisation
requirement will be guilty of an offence.
Additional power to issue shares: companies with one class of shares
- There is an additional power in the Companies Law to issue
shares or grant rights to subscribe for them that applies to
companies with only one class of share. The directors may
exercise any power of the company to issue shares of that class,
except to the extent that they are prohibited from doing
so by the company's memorandum, articles or by any ordinary
resolution of the company. Companies with only one class of share
are not subject to the requirement to renew the authorisation every
This new regime relating to issuing of shares is of central importance as directors who issue shares without authorisation will commit an offence. Companies and their directors will therefore need to be aware of existing authorisations to issue shares in the constitutive documents, and the five year period for renewal thereof by ordinary resolution, in order to avoid this problem.
In particular, we recommend that open ended investment funds, which issue shares on a regular basis, have regard to this issue and keep authorisation in place for the issue of shares.
If a company only has one class of share, then the five year renewal does not apply and the additional power to issue shares is held by the directors, as described above.
It is unclear at present how these provisions will be implemented.
Consideration for the issue of shares may be in any form. Such consideration shall be transferred to an account of the company designated the "share capital account". Where the consideration is other than cash the fair value shall be designated in that account.
There is no requirement in the Companies Law to maintain a share premium account. It is, therefore, permissible to issue shares at a premium and for the premium to be transferred to the share capital account and used by a company without restriction. This gives a Guernsey company an advantage over companies in jurisdictions that impose restrictions on the use of a share premium, such as the United Kingdom. This will result in redemptions or purchases by the company of its own shares being facilitated.
It is permissible to issue shares at a discount or pay a commission in respect of the shares.
The directors of the company have duties imposed on them in relation to the consideration for the shares being issued. The board of directors must:
- decide on the consideration and the terms on which the shares
will be issued and resolve that in their opinion the consideration
and terms of issue are fair and reasonable to the company and to
all existing members;
- where shares are issued other than for cash, determine the
reasonable present cash value of the consideration offered and
resolve that such consideration is not less than the amount to be
credited to the share capital account in respect of the shares
- approve whether shares issued (but not fully paid up initially)
may be credited as fully paid upon payment of the outstanding
- approve a certificate (to be signed by one of their number)
confirming in relation to each of the above circumstances specific
information relating to the consideration for the shares to be
It should be noted that the above requirements will not apply in the case of conversion of any security into shares or in the case of the exercise of any right to subscribe for shares. Similar requirements to those above will, however, apply where a company grants rights to subscribe for, or to convert any security into, shares in the company, whether for cash or other consideration.
ALTERATION OF SHARE CAPITAL
A company may by ordinary resolution, if so authorised by its memorandum and articles, alter its memorandum in a variety of ways which affect the share capital of the company so as to allow it to consolidate or divide or sub-divide any part (or all) of its share capital, cancel shares which have not been taken up by any person and reduce the amount of its share capital or convert any of its shares to a different currency.
A cancellation of shares does not constitute a reduction of share capital. A copy of every resolution effecting any of the above alterations must be delivered to the Registrar within 30 days of the date on which it was passed. Whilst failure to deliver the resolution does not invalidate the resolution itself it should be noted that it would constitute an offence on the part of the company.
TRANSFER OF SHARES
The shares of any shareholder in a company are transferable in the manner provided by the company's memorandum and articles and there is no statutory right of pre-emption imposed by the Companies Law. There are very often restrictions detailed in the articles that need to be complied with in relation to a transfer.
REDEMPTION OF SHARES
There is no longer any requirement that shares may only be redeemed by debiting particular accounts on the balance sheet, which provides greater flexibility in the redemption of shares. However, a company may not redeem shares such that it has no members after the redemption - it must retain at least one member. Redemption may now be effected debiting the capital and any other balance sheet account representing shareholder funds, and a company may now have ordinary redeemable shares, whereas previously the only shares which could be redeemed were preference shares. Redemption of shares will also be a distribution and will be subject to the directors making a declaration of solvency and liquidity, and the board must approve a certificate stating the grounds for this declaration. Redemption by open ended investment companies is subject to a less stringent solvency test.
PURCHASE OF OWN SHARES
A company may, if authorised by its memorandum or articles, purchase its own shares. This requires a special resolution of the company approving a contract for such purchase. Under the Companies Law such purchase may be made by debiting any account representing shareholder funds, whereas previously such shares could only be purchased out of the profits of the company or from funds derived from the issue of fresh shares. Further, for a market acquisition of the company's own shares, only the authorisation of the memorandum or articles or, failing that, an ordinary (and not a special) resolution is required, which makes the repurchase procedure less onerous for companies. It should be noted that the purchase by a company of its own shares (and also the redemption of shares) is now treated as a distribution, and therefore the directors must be satisfied that such purchase will not render the company insolvent or unable to pay its debts as they fall due, and the board must approve a certificate stating the grounds for this declaration.
FINANCIAL ASSISTANCE FOR THE ACQUISITION OF A COMPANY'S OWN SHARES
Financial assistance directly or indirectly for the purpose of or in connection with the purchase of shares in the company is permitted, but is treated as a distribution and the company has to satisfy the solvency test and the directors have so to declare in a certificate.
NO CONVERSION INTO STOCK
A company's shares may not be converted into stock. We do not anticipate this to be a problem, as conversion of shares into stock is rare and the Companies Law contains provisions wide enough to accommodate reorganisations of share capital without the need to convert to stock.
The Companies Law will offer a greater degree of flexibility for companies in structuring transactions, but for companies with more than one class of share consideration does need to be given to the five year time frame in relation to the power to issue shares. There are also a number of issues which arise in relation to the application of the Companies Law to companies formed under the old law, and as the transitional provisions of the Companies Law have not yet been published, we recommend that specific advice is taken in relation to the procedure for alteration of share capital, whether by redemption, cancellation, or purchase of the company's own shares. The transitional provisions are expected to cater for the position of existing companies in a number of ways in order to allow them to comply with the Companies Law as well as make any changes to their share capital needed or allowed by the Companies Law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.