Bermuda: Improvements To Bermuda's Company Law The Companies Amendment (No.2) Act 2011

On 14 December 2011, following a comprehensive review of the Bermuda Companies Act 1981 (the "Companies Act") undertaken by the Legislative Change Committee of Business Bermuda, of which Appleby (Bermuda) Limited is an active participant, and in collaboration with the Ministry of Business Development and Tourism, the Bermuda Legislature enacted the Companies Amendment (No.2) Act 2011 (the "Amendment Act"). The Amendment Act updates and improves Bermuda's company law and provides, amongst other benefits, the opportunity for simplified management and operation of Bermuda companies, widened exemption from the requirement of transfer of listed securities by written instruments and an enhanced choice of corporate structures for mergers and acquisitions aimed at making Bermuda a more attractive and competitive jurisdiction.

The effective date of the Amendment Act will not be known until it has received the assent of His Excellency Sir Richard Gozney KCMG, CVO, Governor of Bermuda, which is anticipated to take place before year end.

This Brief provides a summary of the key changes brought about by the Amendment Act.

A. ADMINISTRATIVE AND ORGANISATIONAL IMPROVEMENTS

i. Introduction of Corporate Directors

Historically, only individuals were entitled to be appointed as directors of Bermuda companies. However, with the concept of corporate directors gaining broad acceptance in the jurisdictions of both the Americas and Europe as an integral part of modern governance for many corporate structures, the Amendment Act provides for individuals, companies, partnerships and other associations of "persons" whether incorporated or unincorporated, to be appointed as directors of Bermuda companies.

This change provides greater flexibility to the law and practice of convening meetings whilst also expanding the categories of those eligible to form part of the composition of the board of directors. Individuals may retire, resign or otherwise take leave from office, whilst corporate directors allow companies to circumvent such interferences to business continuity.

ii. Minimum Number of Directors Reduced to One

The Amendment Act reduces the required minimum number of directors of a Bermuda company to one individual, thereby making it possible for the affairs of a company to be managed by a sole director. For consistency, this amendment resulted in related changes to other provisions of the Companies Act that previously required two or more directors. Not only will some of the provisions of the Companies Act be amended to provide for only one director to act where the applicable company only has one director but other sections will also be amended to allow only one director to act even where the company for which they are acting has more than one director. For example, only one director will be required to sign the balance sheet page of the financial statements of a company prior to being laid before general meeting.

For many companies, having the ability to appoint a sole director will not only reduce administrative costs but also remove the burden of having to arrange for multiple directors to attend meetings (whether in person or otherwise) or sign and return written resolutions. This will result in companies having increased speed and efficiency to react and approve business affairs.

iii. Ability to Opt Out of Holding Annual General Meetings

The Amendment Act introduces the ability for shareholders of a Bermuda company to resolve to opt out of the requirement to hold an annual general meeting each calendar year (other than the mandatory members' statutory meeting held upon incorporation).

Companies will have the flexibility of either continuing to convene further annual general meetings or electing by members' resolution to opt out of this requirement for a specified number of years or indefinitely. The election to dispense with the holding of an annual general meeting is subject to the right of any member of the company to request that the company convene an annual general meeting in any particular calendar year.

iv. Changes to Solvency Tests for Dividends and Other Distributions

If, in relation to the declaration and payment of a dividend, or distribution out of contributed surplus, there were reasonable grounds for believing that (i) a company was, or would after the payment be, unable to pay its liabilities as they became due (the "Cash Flow Test"), or (ii) the realisable value of the company's assets would be less than the aggregate of its liabilities and its issued share capital and share premium account after such payment (the "Asset Test"), a company was prohibited from declaring or paying such a dividend or distribution out of contributed surplus.

The Amendment Act removes issued share capital and share premium accounts from the Asset Test. This will clarify the point, previously in doubt, that a company which has a retained loss balance from previous years may declare and pay a dividend to its shareholders out of current year profits, and is consistent with emerging global norms which have trended away from restrictive capital preservation rules.

B. TRANSFERS OF SECURITIES

i. Widened Exemption from Security Transfer Requirements

The registration of a transfer of securities of a Bermuda company is currently prohibited unless a proper instrument of transfer (i.e. a written instrument) is delivered to the company or, where the securities are listed or admitted to trading on an appointed stock exchange, such security is evidenced and transferred by an agent (an "Appointed Agent") approved by the Minister of Finance for such purposes.

The Amendment Act simplifies the ability of companies with securities listed or admitted to trading on an appointed stock exchange to transfer securities electronically by repealing the Appointed Agent provisions altogether and exempting all securities listed or admitted to trading on an appointed stock exchange from both the requirement to deliver a written instrument of transfer and the Appointed Agent provisions.

These changes mean that companies with securities listed or admitted for trading, or those seeking to have securities listed or admitted for trading, on appointed stock exchanges will no longer need to ensure that they are using an Appointed Agent for the purposes of transferring shares in electronic form. To remove any doubt as to the intent of the Legislature, the Amendment Act has gone as far as to state that nothing in the Companies Act or any rule of law shall operate to prevent securities from being transferred in accordance with the rules or regulations of an appointed stock exchange on which they are listed or admitted for trading.

C. BUSINESS ACQUISITIONS

i. Introduction of Merger and Concept of Surviving Company

The Amendment Act introduces new merger provision as a further alternative to the existing regime on amalgamations. Under Bermuda law an amalgamation provides for two or more existing companies to amalgamate into one company whereby the amalgamating companies neither cease to continue as before nor cease to exist, but instead continue with the others as a new combined and amalgamated company. All undertakings, assets and liabilities of the amalgamating companies vest in the amalgamated company without any one of the amalgamating companies being regarded as the 'surviving company'. This model of business combination has proven, and continues to prove, to be very effective (particularly from certain tax perspectives). However, Bermuda has not, until now, provided for the concept of a merger whereby two or more companies merge with one of the merging companies being recognised as the 'surviving company' and the others having been absorbed.

The Amendment Act introduces the possibility for Bermuda companies to merge with one or more Bermuda or foreign companies or corporations and for the undertakings, assets and liabilities of each merging company to vest in one of such companies as the 'surviving company'. The new merger provisions will provide for the designation of one of the merging companies as the 'surviving company' which in effect absorbs the other merging companies which will each cease to exist following merger. The surviving company is then at liberty to choose, post merger, to either continue in Bermuda or discontinue in Bermuda and continue in a foreign jurisdiction.

The introduction of the merger concept expands the range of business combinations available to Bermuda companies providing flexibility as to the structuring options for clients looking to address tax or other liability matters.

ii. Prohibition on Financial Assistance Abolished

In an effort to further reduce the complexity and burden of legislation and regulation on Bermuda companies, the Amendment Act abolishes the prohibition on financial assistance in its entirety. Historically the Companies Act prohibited any Bermuda company from providing any form of financial assistance in relation to the purchase or acquisition of shares in itself.

This change will remove the costly and time consuming effort that was often experienced prior to the Amendment Act when assessing whether or not a company was providing financial assistance.

iii. Compulsory Acquisitions – Dealing with Uncooperative or Untraceable Shareholders in 95% majority Acquisitions

The Companies Act provides for the ability to compulsorily purchase all of the shares or class of shares in a Bermuda company by persons holding at least ninety-five per cent (95%) of the shares or class of shares in that company. Shares acquired under these provisions will only be registered by the company upon delivery of a written instrument of transfer, which becomes an issue where the shares being acquired are held by untraceable or uncooperative shareholders. The Amendment Act removes this problem by allowing the purchaser of the shares to submit to the company with a proper instrument of transfer executed on behalf of the untraceable or uncooperative shareholder by a person appointed by the purchaser together with the consideration being paid for the shares.

These provisions provide additional certainty and security for those seeking to acquire a Bermuda company by way of this type of compulsory acquisition and, having already been tried and tested in other sections of the Companies Act, are a reliable and welcome addition to this section.

CONCLUSION

The Amendment Act reflects Bermuda's commitment to maintaining a modern, intuitive and practical approach to its company law whilst keeping up to date with global transactional requirements of companies and advisers doing business with Bermuda companies.

It improves the Companies Act by modernising and removing a number of obsolete provisions, giving greater flexibility in the choice of acquisition models and business combination structures available to international business and reducing the organisational and administrative burden formerly imposed on companies.

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.