The Companies Act 2014 was signed into law on 23 December 2014 and will come into effect on 1 June 2015. The Act will consolidate the various existing Companies Acts, simplify company law generally and introduce a number of new provisions. The Act does not alter the essential nature of an Irish company which has separate legal personality and a board of directors responsible for the management of a company. The Act affects all Irish companies, however the extent to which the Act will impact investment companies and management companies of UCITS or alternative investment funds (AIFs) is different. Investment companies and managers of both UCITS and AIFs need to consider how the Act impacts them, what changes need to be made to their existing corporate structures and when any changes need to be made.
Irish funds established as public limited companies are investment companies incorporated under Part XIII of the Companies Act, 1990. Investment companies are less impacted by the Act than private limited companies. The constitution (i.e. the memorandum and articles of association) of existing investment companies will be deemed to continue in force, except to the extent that any provisions are inconsistent with the mandatory provisions of the Act. Investment companies are not obliged to take any action on the commencement of the Act as they will automatically be deemed to be investment companies to which Part 24 of the Act applies.
Part 24 of the Act is largely a consolidation and restatement of the existing law. Many of the fundamental characteristics of investment companies will continue to apply to investment companies under the Act. By way of examples:
- The Act reconfirms that investment companies are still required to operate a policy of risk spreading.
- An investment company must be authorised by the Central Bank before carrying on business in Ireland.
- The Act provides that segregated liability will apply between sub-funds of umbrella investment companies.
- An investment company cannot dispense with the holding of an annual general meeting.
- Unlike a new model private company, the constitution of an investment company will continue to comprise of two documents, the memorandum and articles of association (the "M&A") which will continue to include an objects clause.
In addition to Part 24 of the Act, the following sections of the Act also apply to investment companies:
- Parts 1 - 14 which apply to limited companies (except as disapplied, modified or supplemented by either Part 24 dealing with investment companies or Part 17 which governs public limited companies (PLCs)).
- Part 17 which governs PLCs (except as disapplied, modified or supplemented by Part 24. For example, Part 24 disapplies certain requirements in relation to share capital which are inconsistent with the workings of an investment company).
- Certain provisions of the UCITS Regulations.
- Schedule 16 which provides a brief template M&A.
The requirement to produce a corporate governance statement applies to an investment company whose securities are listed or traded on a market. Investment companies are exempt from the requirements under the Act to include a directors' compliance statement or to form audit committees.
Although, as already mentioned, there is no need for investment companies to re-register under the Act in the way that private limited companies need to do so (see below), investment companies should review their existing M&A in order to consider whether to update them.
There are a number of reasons why investment companies might look to update their M&As in order to align themselves with the new regime. For example:
- The optional provisions of the Act will apply to an investment company except to the extent its M&A provides otherwise. This means that, until an investment company has expressly disapplied those provisions, there is a risk that it might be subject to such provisions without being aware that this is the case.
- An investment company's existing M&A may preclude it from benefiting from the reforms in the Act (such as, for example, if the M&A refers to the investment company having a minimum of two members whereas the Act now allows it to have just one member).
- The M&A may be inconsistent with the Act (such as in specifying different notice periods), thereby increasing the risk of confusion.
- The M&A is likely to refer to provisions of the existing Companies Acts and so would require users of the M&A to refer back to those Acts on an on-going basis which may be confusing.
If an investment company chooses to amend its M&A to address the above issues it can do so in one of two ways. It can carry out a line-by-line review of the M&A so as to update the existing M&A while retaining any existing bespoke provisions. The other option is to adopt a "standard" M&A. The majority of investment companies are likely to do a full review of their M&A. It will be for the directors of each investment company to determine which option is most appropriate to them and to put such option to shareholders for approval.
In terms of timing, it will not be possible to amend the M&A until after the commencement of the Act on 1 June 2015. In our experience, investment companies are unlikely to look to hold EGMs specifically for the purpose of amending their M&As and for efficiency reasons will look to consider such matters at their 2016 AGM. Any new M&A will require approval by way of a special resolution of the shareholders (i.e. approval by a majority of at least 75% of votes cast in person or by proxy at a general meeting).
UCITS MANAGEMENT COMPANIES AND AIFS
The Act has significant implications for management companies of UCITS and AIFs which are established as private companies limited by shares. Under the Act, the private company limited by shares will be replaced by two new company types, the new model private company limited by shares (the "LTD") and the designated activity company (the "DAC"). Every existing private company limited by shares will thus need to re-register as an LTD or a DAC (or some other company type). Most of the considerations below will also apply to Irish private limited companies that are subsidiaries of Irish funds (e.g. section 110 companies that are subsidiaries of Irish qualifying investor AIFs).
The key distinguishing features of an LTD are that it will have a single constitutional document which does not have an objects clause and will have full and unlimited capacity. The key differences as regards a DAC (other than its name) are that its constitution will be a two-part document (its M&A), which will include an objects clause. Other differences between an LTD and a DAC are generally optional. For example, while an LTD may have just one director, it is permitted to have more than one director if it prefers.
Directors' compliance statements are required for limited companies exceeding certain thresholds and so may apply to the larger management companies. This requirement for directors' compliance statements is disapplied for investment companies.
There is some speculation that the Central Bank will encourage management companies to become DACs but this has not been confirmed by the Central Bank.
KEY FEATURES OF DACS
DACs limited by shares will have the following key features:
- They will have the status of a private company limited by shares.
- They will be limited liability companies and the liability of their members will be limited to the amount unpaid on their shares.
- They can have between one and 149 members.
- They will have a memorandum of association which must contain an objects clause. However, it is worth noting that although DACs must have an objects clause, the Act seeks to oust the operation of the doctrine of ultra vires by providing that the validity of an act done by a DAC shall not be called into question on the ground of lack of capacity by reason of anything contained in the DAC's objects clause.
PRINCIPAL DIFFERENCES BETWEEN DACS AND LTDS
The main differences between the two forms of private limited company are set out below.
The law applicable to LTDs will be that contained in Parts 1 to 14 of the Act. The law applicable to DACs will be that contained in Part 16 of the Act. The law applicable to LTDs, as contained in Parts 1 to 14, shall also apply to DACs, save to the extent that they are disapplied, modified or supplemented by Part 16.
CONVERSION TO A DAC OR LTD?
Whether a private limited company is to convert to a DAC or an LTD, there are three options in terms of the changes that it can make to its M&A:
- make the minimal changes – in the case of a DAC, just to change the name from "limited" to "designated activity company", or in the case of an LTD, to remove the objects clause and shorten the M&A to one document; or
- adopt a standard M&A for a DAC or an LTD; or
- carry out a line-by-line review of the existing M&A so as to retain the existing provisions except where changes are necessary to convert the company to a DAC or an LTD, or to bring the M&A up to date with the Act.
The first option is the simplest on paper but the same issues identified in respect of an investment company will apply in this case too in that the company's constitution would include references to the old Companies Acts which will require users to refer back to the old Acts and may result in additional ambiguity or conflict. The second option is likely to be the most appropriate option, unless a company is particularly wedded to its existing articles. The last option will be the most appropriate choice where the company's M&A is bespoke and it is considered important to retain all the existing provisions but it will be the most expensive option. It will be a matter for the directors and shareholders to decide which option it will adopt.
TIMING OF ACTION TO BE TAKEN
The Act provides a transitional period of eighteen months within which to re-register as an LTD. If a company is to re-register as a DAC, this must be done within the first fifteen months. Ideally the re-registration should be approved by the shareholders (a special resolution is required to re-register as an LTD or an ordinary resolution to re-register as a DAC). If the shareholders do not act, the directors will be under an obligation to take certain steps. Any private company limited by shares which, at the end of the 18-month transition period, has not re-registered as some type of company recognised under the Act will automatically convert to LTD status. However this is not recommended for a number of reasons, including that the directors would be in breach of their obligation to act. It is therefore important that management companies consider which of the two options, DAC or LTD, is the most appropriate for them.
DAC LAW TO BE DEFAULT LAW DURING TRANSITION PERIOD
During the eighteen month transition period following commencement of the Act (or until the company converts to some other type of company), the law that will be applicable to every existing private company will be the law set out in Part 16 applicable to DACs. This means that until an existing private company limited by shares converts to an LTD (or some other company type), the law applicable to it will be the law applicable to a DAC, as set out in Part 16. An existing private company limited by shares will not benefit from those reforms which only apply to LTDs until it re-registers as an LTD.
CHANGES IN THE ACT APPLICABLE TO ALL COMPANIES
Several changes provided for in the Act apply to all companies and so are relevant to both investment companies and fund management companies. The Act codifies the directors' duties established under common law. These include the following principal fiduciary duties:
- to act in good faith in what the director considers to be the interests of the company;
- to act honestly and responsibly in relation to the conduct of the affairs of the company;
- to act in accordance with the company's constitution and exercise his or her powers only for the purposes allowed by law;
- to avoid any conflict between the director's duties to the company and the director's other (including personal) interests;
- to exercise the care, skill and diligence which would be exercised in the same circumstances by a reasonable person having both:
- the knowledge and experience that may reasonably be expected of a person in the same position as the director;
- the knowledge and experience which the director has; and
- to have regard to the interests of its employees in general and shareholders.
Other notable new features of the Act are that certain individuals, not directors, may have the authority to bind the company. The company law offences are categorised into four tiers, with category 1 offences being the most serious. New rules in relation to registration and priority of charges will also apply.
The action to be taken by a company will depend on its current form: investment company or private limited company. Investment companies and fund management companies need to consider the way in which their constitutional documents should be amended to reflect the new requirements of the Act. Fund management companies should consider whether to re-register either as an LTD (within the 18 months following 1 June 2015) or as a DAC (within 15 months following 1 June 2015). If such a company has not re-registered as some type of company under the Act by the end of the transition period, it will automatically convert to an LTD, which is not recommended.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.