Jamaica: Jamaica’s Proposed Companies Act

This is a short bulletin intended to highlight and summarising the salient provisions of the proposed new Companies Act for Jamaica which is currently before the Parliament. The Act, which is likely to be promulgated soon has actually been tabled since July 2001 but has been delayed for reasons which are uncertain.

The new Act, is intended to improve corporate governance, to introduce additional flexibility to financial management and to modernise the framework of company law in general. It is generally in keeping with worldwide developments in this area and is long overdue.

The Act, in its present form however, is replete with cosmetic and other errors and some contradictions, and it is hoped that before passing through the Parliament that the necessary corrections and amendments will be made.

This Bulletin summarises:

• The general implications of the Act for existing companies;
• The nature of increased liabilities of directors;
• Capital restructuring; and
• The requirements for formation of new companies.

The following are the highlights, not necessarily in any order of importance.

Public companies will be obliged to maintain a share capital of $500,000. This amount may be altered by government. Affected companies must obtain a certificate from the Registrar of Companies confirming that their allotted share capital exceeds $500,000. They are also required to file a statutory declaration detailing the company's capitalisation and its liability to promoters.

The proposal under the last available draft of the Act is that shares at ‘par value’ will be abolished (there has been some reconsideration of this issue but the matters has not been finalised). If shares may no longer be issued with a par value, existing shares are to be treated as not having a par value. In certain instances, this may create uncertainty for existing preference shares. Therefore, for the sake of clarity, it may be advisable to effect amendments to references to par value in share documentation and in company's articles where possible.

The existing practice of issuing shares at a premium will therefore need substantial review and this area mey yet be adjusted in the final Bill.

Companies are to be incorporated under a single "articles of incorporation". However, the memoranda and articles of association of existing companies continue to be valid under the new Act.

Companies now have the same capacity and power to act as natural persons. Thus, companies are no longer restricted to powers enumerated in the old memoranda of association. Companies may however still validly restrict their powers by enumerating restrictions in the incorporating documents.

Contracts formed after the entry into force of the Act which are between companies and third parties will be binding regardless of any conflict with restrictions in the articles or old memorandum of association. However, directors and officers may nonetheless be liable for breaches of these restrictions.

This may generate problems vis-a-vis shareholders and creditors who may continue to rely on the memorandum to determine contractual rights. Therefore, for the avoidance of doubt, we are of the view that companies consider amending their existing memorandum to incorporate any restrictions on a company's powers which would have previously been unnecessary.

Directors of public companies must take all reasonable steps to ensure that persons appointed Company Secretary have the requisite knowledge and experience for the position. It is advisable that this be evidenced by appropriate professional qualifications.

Although not directly applicable to private companies, it would arguably constitute a breach of the duty of care to appoint an unqualified company secretary, regardless of a company's status.

Companies must also give notice of the appointment of every new company secretary to the registrar within 15 days of appointment.

Companies may repurchase their own shares provided they declare that they are not in financial difficulty. Directors are liable if they knowingly make a false statement in the declaration. Thus, due diligence is required in assessing a company's financial health prior to entering into repurchase agreements.

For certain repurchases, the company must also show that the shares vendors are not being

given unfair priority over pari passu shareholders in a winding up. Companies are also required to notify all shareholders, giving them full details of the repurchase and its implications no more than 30 days after the repurchase.

The Act introduces the new concept of "Shadow Directors". Persons who do not formally occupy a seat on the board of directors, but whose directions and instructions are habitually followed by the board now owe many of the same duties as directors.

Lawyers, accountants and other professionals are not deemed shadow directors where they provide advice in a professional capacity. It is unclear whether parent companies and their directors not represented on the board of a subsidiary would be deemed to be shadow directors, but there are circumstances in which this may arise.

The personal representatives of deceased shareholders and Trustees in Bankruptcy of bankrupt shareholders are now deemed to be members of companies, and are entitled to the privileges of membership.

There are new restrictions on declaring dividends. Dividends may not be declared if the company is in financial difficulty, or would put itself into financial difficulties by paying the dividend.

Directors of public companies must take all reasonable steps to ensure that persons appointed as Company Secretary have the knowledge and experience required of that office. Notice of the appointment of a new company secretary is to be given to the registrar within 15 days of the appointment.

Directors’ Duty of Care

The standard of care required of directors in discharging their duties has been augmented to that of the "reasonably prudent person in comparable circumstances".

Directors possessing additional knowledge, skills and experience continue to be held to a higher standard in accordance with their attributes.

Directors continue to be duty-bound to act in the best interests of the company. However, they may now legitimately take the interests of employees and the community into account in determining what the best interests of the company are.

There is a new remedy for interested parties to have persons disqualified from involvement in the management of companies on the ground that they are "unfit to be concerned with the management of the company".

The Registrar of Companies may institute proceedings against persons for persistently failing to file documentation as required under the act. (Please see attached schedule for general penalties for failure to file).

A company may not extend loans or other financial assistance to directors, shareholders, employees or purchasers of company shares if such financial assistance would render the company insolvent or cause its liabilities to exceed its assets.

Companies in breach of this provision are liable to a fine of up to $3 million.

Officers in default are liable to both a fine and imprisonment.

Five (5) categories of assistance have been excluded from this head of liability:

1. assistance in the ordinary course of business where the lending money is part of the ordinary business of the company;
2. expense accounts;
3. assistance to a holding company;
4. assistance to a subsidiary;
5. assistance under the ESOP scheme.

Even where it would not lead to such financial difficulty, a company may not extend financial assistance in connection with the purchase of its shares unless (a) it is pursuant to specific categories of employee share-ownership schemes or (b) such loans are in and form part of the ordinary course of business.

Companies in breach of the latter provision alone attract a fine of up to $100,000.

Company directors and shadow directors are obliged to give written notice to the company secretary of any interest they, their spouses or children might have in the company or its affiliates.

Directors should make a full disclosure of their interests both at the time of their appointment to the board and following any changes in their interests.

Directors and shadow directors are liable to a fine of up to $500,000 and/or imprisonment for up to 2 years for failing to disclose or making a knowing or reckless misstatement of his interests.

Companies are obliged to continue to maintain a register of directors interests which should be made available for inspection.

Both officers and directors are required to give the company disclosure in writing of any material interest they may have in the company’s existing or proposed contracts.

Any contract in which a director or officer has a material interest must be approved by the board. In addition, the director in question must be absent from the voting and deliberations on the contract.

Directors may participate in such proceeding for exempted categories of contracts, namely: (a) certain security arrangements; (b) director’s remuneration contracts; (c) directors indemnity or insurance contracts; or (d) contracts with affiliates.

Interested directors may nonetheless be used to make a quorum at the meeting approving the contract provided the contract was reasonable and fair to the company.

Following disclosure, the Board must notify shareholders of the interest, keep a record of the disclosure and make that record available for inspection at the company’s registered office.

Companies have the right to apply to court to have contracts varied or set aside where a director or officer failed to disclose his or her material interest.

Companies are under a duty to keep a record of the terms and conditions of directors’ and shadow directors’ service contracts, including those of directors employed by subsidiaries. There is also an obligation to keep records of variations in such contracts.

There is no obligation to keep a record of contracts on which less than 12 months remain, or which provide for termination without compensation within 12 months.

These records are to be open to inspection by members of the company.

Companies are required to send notice to the registrar of the place where the records are kept.

The company and defaulting officers are liable to a fine of up to $200,000 for breach of this provision. The courts may also grant an order to compel immediate inspection of records.

Companies may indemnify directors, shadow directors, persons appointed to the board of another company at the company’s request and officers in any action brought against them in that capacity providing they have acted honestly and in good faith with a view to the best interests of the company and provided court approval is obtained.

Such directors, shadow directors and officers may be entitled to indemnity where they were successful on the merits and the court determines they are fairly and reasonably entitled thereto.

Companies may also insure officers and the above classes of directors for liability for breach of the duty of care.

The personal representatives of deceased shareholders and Trustees in Bankruptcy of bankrupt shareholders are now deemed to be members of companies, and are entitled to the privileges of membership.

There are new restrictions on declaring dividends. Dividends may not be declared if the company is in financial difficulty, or would put itself into financial difficulties by paying the dividend.

Public companies must maintain a minimum allotted share capital of $500,000k or any other amount that the government may set from time to time.

Public companies may not transact business or borrow money until they have applied for and obtained a certificate of compliance from the Registrar of Companies.

To obtain the certificate companies must provide evidence of their allotted share capital and make a statutory declaration stating, among other things, the amount of their paid up share capital, preliminary expenses and monies owed to promoters. If a public company is unable to meet the minimum share capital requirements it must re-register as a private company.

All shares must now be issued and accounted for without a par value. Abolition of Par Value and the Obligation to Maintain Stated Capital Accounts

All shares must now be issued and accounted for without a par value. Separate state&capital accounts must be maintained for each class and series ot shares issued.

The exact consideration received must be entered in the share capital account, whether or not the shares were issued at a premium.

Existing shares are to be accounted for without reference to their par value. However, existing companies are not required to retroactively update their accounts. Companies need not alter references in their articles to the par value of shares which have already been issued.

Companies may apply to the Registrar to continue to refer in their articles to authorised unissued shares as having a par value.

A company may purchase its own shares where it is permitted by its articles. Prior to purchasing its shares, directors must file statutory declarations to the effect that there are no reasonable grounds for believing that the company will become insolvent or that its liabilities will exceed its assets.

Directors are liable for knowingly making a false statement in the declaration. Companies are required to notify all shareholders, giving them full details of the purchase and its implications no more that 30 days after the purchase.

The requirement of court approval for the reduction of share capital has been repealed. A special resolution is required to authorise a reduction in the share capital of a company.

Directors must declare that they have no reasonable grounds for believing that the Company would become insolvent following the reduction.

Public notice must be given for a reduction in share capital.

Prior to declaring a dividend, directors must declare that they have no reasonable grounds for believing that the company would become insolvent or that its liabilities would exceed its assets following payment of the dividend.

Separate stated capital accounts must be maintained for each class and series of shares issued.

The exact consideration received must be entered in the share capital account, whether or not the shares were issued at a premium.

Existing shares are to be accounted for without reference to their par value. However, existing companies are not required to retroactively update their accounts.

Companies need not alter references in their articles to the par value of shares which have already been issued.

Companies may apply to the Registrar to continue to refer in their articles to authorised unissued shares as having a par value.

Shares may now be redeemed out of profits or revenue reserves which would otherwise be available for the payment of dividends. (See note below on new prerequisites to the payment of dividends).

Prior to redeeming shares, company directors must ensure that the company will not (a) become insolvent, or (b) have fewer assets than liabilities AND that the companies assets will continue to exceed the amount due to shareholders ranking pari passu with holders of the shares being redeemed.

Prior to redeeming shares, company directors must file a declaration to that effect with the Registrar. Officers and companies in breach of this section are liable to a fine not exceeding $50,000.

A company may purchase its own shares where it is permitted by its articles.

Prior to purchasing its shares, directors must file statutory declarations to the effect that there are no reasonable grounds for believing that the company will become insolvent or that its liabilities will exceed its assets.

Directors are liable for knowingly making a false statement in the declaration. Companies are required to notify all shareholders, giving them full details of the purchase and its implications no more that 30 days after the purchase.

Separate stated capital accounts must be maintained tor each class and series ot shares issued.

• The exact consideration received must be entered in the share capital account, whether or not the shares were issued at a premium.

• Existing shares are to be accounted for without reference to their par value. However, existing companies are not required to retroactively update their accounts.

• Companies need not alter references in their articles to the par value of shares which have already been issued.

Companies may apply to the Registrar to continue to refer in their articles to authorised unissued shares as having a par value.