Ireland: Companies Act 2014 For Funds: Should Mancos Convert To DACs?

The Companies Act 2014 (the "Act") came into effect on 1 June 20151. The Act consolidates the existing 17 Companies Acts, which date from 1963 to 2013, into one Act. While re-stating existing company law, the Act also introduces significant reforms to Irish company law. It aims to reduce company law obligations for all types of Irish companies and make them easier to understand.

This note briefly assesses the impact of the Act on existing Irish investment funds which are investment companies established as public limited companies ("PLCs") and Irish fund management companies established as private limited companies ("Mancos"). It also highlights some recommended proactive steps these respective entities should consider in order to adapt to the new regime.

Impact on Existing Alternative Investment Fund PLCs

To date, an alternative investment fund constituted as a PLC has been subject to Part XIII of the Companies Act 1990, as amended ("Part XIII"). Going forward, such PLCs will be subject to the Act and Part 24 in particular.

Part 24 is divided into nine chapters and is essentially a re-statement of Part XIII and no substantive changes have been made.

Section 1393(5) of the Act provides that the memorandum and articles of a Part XIII company registered before 1 June 2015 shall, save to the extent that they are inconsistent with a "mandatory provision", continue in force. Under section 1395(6), references to the prior Companies Acts shall be read as references to the corresponding provisions in the Act.Therefore, no immediate action is required for existing PLCs regarding their memorandum and articles of association (their "constitution" under the Act), save to the extent that any provision contained therein conflicts with any "mandatory provision" under the Act.

Recommended steps:

  • Review the existing memorandum and articles to ensure that they do not contain any mandatory provisions inconsistent with the Act (the memorandum and articles would generally not be expected to contain inconsistencies unless they contain specific, unusual provisions). Then no further immediate action is required.
  • Update Companies Act references in the existing memorandum and articles when next reissuing.

Impact for Existing UCITS PLCs

A UCITS investment fund constituted as a PLC is and continues to be subject to the UCITS Regulations2 as opposed to the Act directly.

These Regulations disapply certain provisions of the Companies Act 1963 to UCITS PLCs and specifically apply certain other provisions of the Companies Act 1963. Provisions corresponding to the relevant sections of the 1963 Act have been carried into the Act.

Recommended step:

  • Update Companies Act references in the existing memorandum and articles when next reissuing.

New Alternative Investment Fund and UCITS PLCs

New investment vehicles to be formed as companies after 1 June 2015 will be required to adopt a one-document constitution. This replaces the memorandum and articles, but will be similar in substance and will be fully reflective of the relevant provisions of the Act.

Impact for Existing Mancos

The Act provides for new forms of private companies including (i) a company limited by shares ("LTD") (the new form of private limited company); (ii) a designated activity company ("DAC") (a company with restricted objects); and (iii) an unlimited company with a share capital (a "ULC").

As a matter of good corporate governance, private limited liability companies should convert to either an LTD or a DAC.

The key distinction between an LTD and a DAC is that the DAC is required to have an objects setting out its main activity and therefore remains subject to the doctrine of ultra vires. Some other differences are set out below:

  • Unlike the LTD, the DAC will maintain the more traditional memorandum and articles (as its constitution).
  • A DAC must have at least two directors (an LTD can have one director).
  • A DAC must hold an annual general meeting if there are more than two shareholders (an LTD can dispense with this requirement).

The Act prevents an entity that is regulated as a credit institution or an insurance undertaking from operating as an LTD, therefore requiring them to convert to DAC. The assumption here is that such regulated entities should retain an objects clause and adherence to the doctrine of ultra vires, on the basis that their activities should be restricted to those for which they are regulated. It would therefore be unnecessary (and inappropriate) for such entities to have the capacity to conduct other forms of activity. Similarly, some of the other more flexible LTD provisions would be considered as not appropriate (for example, the ability to have only one director).

The Act does not extend this condition specifically to Mancos authorised by the Central Bank of Ireland ("CBI") as UCITS management companies and/or alternative investment fund managers. It is therefore a matter for each entity to determine. However, in light of the rationale outlined above (in the context of regulated credit institutions and insurance undertakings), and the fact that Manco's are regulated by the CBI, Maples and Calder consider it prudent for Mancos to elect to re-register as DACs.

For a company to re-register as a DAC, an application must be made to the Registrar of Companies for re-registration no later than 31 August 2016 (being the end date of the transitional period). An ordinary resolution is required to be passed by shareholders (no later than 31 May 2016) resolving to re-register as a DAC and altering the memorandum so that it states that the company is a DAC. The following documents have to be submitted to the Registrar of Companies to affect the re-registration:

  • A copy of the ordinary resolution.
  • A copy of the constitution (document comprising the memorandum and articles of association), as altered by the resolution to conform to relevant requirements of the Act.
  • A Form N2, signed by a director or secretary, stating compliance with the requirements of the Act.

Once registered as a DAC, the name of the entity must end with "designated activity company", "DAC" or "D.A.C." (or Irish language equivalent).

Recommended steps:

  • Adapt the memorandum and articles as a constitution in line with the Act.
  • Ensure the necessary shareholders' resolution is passed before the transition deadline of 31 May 2016.
  • Proceed to register as a DAC before the end of the transition period on 31 August 2016.
  • Liaise with the CBI (in advance of re-registration) to obtain necessary regulatory approval.

Miscellaneous Points of Note

  • The Act sets out certain fiduciary duties of a director – this codifies certain existing common law duties. The codification is not exhaustive and directors will still have other duties under common law and equity.
  • There is a new system for filing securities and ensuring priority of charges.
  • Funds using Irish corporate special purpose vehicles which are private limited companies should ensure these entities re-register as either LTDs or DACs, noting that an LTD will not be able to issue listed debt securities.

Conclusion

The Act is a substantive piece of legislation. Its impact on existing Irish investment fund PLCs is minimal, in terms of required actions. However, it has a more significant impact for Irish Mancos and it is recommended that they consider converting to a DAC.

Footnotes

1. Under the Companies Act 2014 (Commencement) Order 2015. It commences most provisions of the Act.

2. SI 352 of 2011 - European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011.

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.

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Authors
Peter Stapleton
Stephen Carty
Ian Conlon
 
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