The ability of private companies limited by shares incorporated prior to 1 June 2015 to convert to a Designated Activity Company by way of ordinary resolution expired on 31 August 2016. The passing of this deadline serves as a gentle reminder that the 18 month transposition period, ending 30 November 2016, is fast approaching.
The Companies Act 2014 (the "Act") allowed companies a transition period, from 1 June 2015 to 30 November 2016, during which they could elect to re-register as a Designated Activity Company ("DAC"). On 1 December 2016, any existing private company that has not taken the appropriate steps to re-register as a DAC will automatically convert to a private company limited by shares ("LTD").
A company which does not intend on becoming an LTD on 1 December will need to do the following to re-register as a DAC:
- pass a special resolution approving re-registration; and
- file the necessary paperwork with the Companies Registration Office ("CRO") well in advance of the 30 November 2016 deadline.
Why re-register as a DAC?
- certain types of companies must register as a DAC, eg credit institutions or companies that have or wish to have debentures admitted to trading or listed on a regulated market;
- certain types of companies are more suited towards being a DAC, eg joint ventures or companies that are incorporated for a single purpose;
- directors may be in breach of their duties by not ensuring the Act has been complied with, in circumstances where the company should be re-registered as a DAC;
- shareholders could seek redress in circumstances where they feel their rights have been prejudiced by the company's failure to re-register in accordance with the Act; and
- although a company which takes no action prior to 30 November 2016 will automatically convert to an LTD on 1 December 2016, its constitution, ie its memorandum and articles of association, will look exactly the same. The constitution will not make reference to, or take account of, the change in the law governing the automatically converted LTD or the conversion of the LTD. This may make the constitutional documentation of the company difficult and time consuming to interpret.
For a more detailed analysis of the distinction between a DAC and an LTD, please click here.
Practical advice for those considering re-registering as a DAC
The CRO anticipates that it will be inundated with re-registration applications approaching 30 November 2016 and it will not guarantee that all applications will be processed in advance of 1 December 2016. Where directors of a company are of the view that a company should re-register as a DAC and have not yet taken steps to re-register as a DAC, it is recommended that the application to re-register is filed with the CRO well in advance of 30 November 2016.
As part of the re-registration process, the company must adopt an amended form of memorandum and articles of association, called a constitution. All companies preparing for re-registration should:
- review any shareholders' agreements in place in respect of the company to determine if any additional shareholder approvals (in excess of the 75% approval required for a special resolution) are required to amend the constitution; and
- consider if the company has any contractual obligation to obtain third party consent to amending the constitution, ie under bank funding documents,
to ensure that the new constitution is duly approved as part of the re-registration process.
Other Considerations for an LTD
Taking no action will result in a company automatically converting to an LTD on 1 December 2016. Although an LTD may be the correct and most suitable company type, the constitution of an LTD that automatically converts due to inaction will make reference to the old company law legislation. From a corporate governance perspective, we recommend that companies should be proactive and update their constitutions to bring them in line with the Act. This will make the constitution easier to interpret and avoid confusion.
Certain types of private companies limited by shares are required to re-register as a DAC and other such companies, by virtue of what they do, are more suited to becoming a DAC than an LTD. A company will automatically become an LTD if no action is taken by 1 December 2016. Directors should consider whether it is necessary or prudent to re-register as a DAC. In order to ensure an application to re-register as a DAC is processed, the application should be filed as soon as possible to avoid missing the 30 November 2016 deadline.
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.