MJ O'Connor Solicitors

Sean Nolan, Partner in M J O’Connor Solicitors highlights the Company Law Consolidation and Reform Bill (“the Bill”) which represents the most far-reaching and comprehensive review of Company Law in Ireland since 1963.

 

Shareholders, directors and others having an interest in Company Law frequently, and with legitimacy, bemoan the fact that Company Law is inaccessible, overly complex and, as a result, it is difficult to readily identify the relevant obligations which apply in a particular situation. This is not surprising bearing in mind that the legislation alone occupies 13 primary Acts of the Oireachtas and 18 statutory instruments, which have been enacted since 1963 primarily to give effect to various EU Company Law Directives. The net result is that the Companies Act 1963 is layered over with a bewildering array of additional provisions, exceptions and provisos. The case for making company law more accessible and intelligible was recognised as long ago as 2001 when the Company Law Enforcement Act 2001 established the Company Law Review Group (“the CLRG”) with a remit of advising the Minister for Enterprise Trade and Employment on the task of consolidating and reforming Irish Company Law. The CLRG has spent the last 7 years engaged in consultation with the legal profession and business interests and has undertaken a root and branch review of the Companies Acts to ensure that Ireland’s Company Law is remodelled in order to promote enterprise and to simplify the operation of Irish Company Law. The Heads of the Bill have also been prepared with close cooperation from the office of the Director of Corporate Enforcement. (The Director of Corporate Enforcement is charged with policing compliance by companies and their directors with their respective obligations under Irish Company Law).

 

Following an extensive consultation process the CLRG has prepared a General Scheme containing in excess of 1,250 provisions which consolidate all primary and secondary company law legislation enacted since 1963. The General Scheme constitutes a blue print for the Bill. Not surprisingly the Bill represents the longest Bill in the history of the State. It is anticipated that the Bill will be published later in 2008 with a view to enactment in 2009. 

 

 

One of the difficulties with the existing Company Law framework is that it proceeds on an assumption that the majority of companies are public companies, whereas the reality is that 90% of companies are not public companies at all but are private companies. Accordingly the present emphasis in the Companies Acts on public companies which has underpinned our company law since 1963, such as the model form of Articles of Association contained in Part I of Table A to the Companies Act 1963, will be changed in favour of two separate codes, namely Pillar A which will contain provisions relating to private companies limited by shares and Pillar B which will contain provisions relating to all other types of company. Given that 90% of all companies are private companies this will enable directors and practitioners to readily access the relevant provisions applicable to private companies as these will be contained exclusively in Pillar A. Directors of such companies and practitioners will need look no further than Pillar A. 

 

 

In contrast to the existing preoccupation with public companies Pillar A of the Bill will regulate the predominant body corporate namely the private company limited by shares, to be known for short as a “CLS”. The provisions relating to the new model form of CLS will apply to all private companies limited by shares which are incorporated after the commencement date of the Bill in 2009 or 2010.  The Bill also contains provisions which will enable existing private companies limited by shares to convert into the new model form of CLS. In order to avoid creating a parallel system of private companies limited by shares if existing private companies fail to elect to convert into becoming a designated activity company (a “DAC”), see below within 18 months of the commencement date of the Bill a default mechanism will apply following which such companies will automatically be converted into a CLS. 

 

 

The reforms to be introduced under the Bill include the abolition of the distinction between the Memorandum of Association and Articles of Association. In the case of a CLS the Memorandum of Association and Articles of Association will be replaced by a single constitution and the provisions which are presently found in a company’s Articles of Association will be applied by statute to all CLS companies unless the constitution provides otherwise. 

 

 

Company Law practitioners will be familiar with the long established rule of company law concerning corporate capacity under which companies are required to act within the confines of the corporate capacity identified in the objects clause of the company’s Memorandum of Association. Where a company acts outside of the scope of its objects the act or transaction is ultra vires and is generally not binding on the company save in certain circumstances. Following the enactment of the Bill, not withstanding anything contained in the constitution of a CLS, the company will have full and unlimited capacity to carry on and undertake any business or activity and to do any act or enter into any transaction. Accordingly a CLS will have the legal capacity of a natural person. As a result the ultra vires rule will be abolished in relation to a CLS. This reforming measure reflects provisions of the New Zealand Companies Acts. One of the consequences of this reforming measure is that the long established custom of drafting objects clauses running to 10 or so pages of dense legal capacity will be dispensed with, thereby reducing the length of the constitutional document applicable to a CLS.

 

Naturally, certain existing companies such as those incorporated to pursue a specific activity or those companies which are joint venture companies may not wish to automatically convert into becoming a CLS. Such companies will have a transitional period during which they may re-register as a designated activity company (a “DAC”) by passing an ordinary resolution, in which case the company will be governed by the provisions contained in Pillar B (for which see below). Companies and their directors should review their existing status with a view to deciding whether they wish to convert to becoming a CLS or to re-register as a DAC. It is currently anticipated that a period of 18 months will be allowed following the enactment of the Bill to enable existing companies to convert into becoming a DAC.

 

 

A CLS will be empowered to dispense with the requirement to hold an AGM, which, for such a company, may be replaced by a written procedure. In recognition of advances in technology it will also be possible to hold an AGM within or outside Ireland and, for the first time, an AGM may be validly held where the members are located in different locations.

 

 

It is anticipated that the Bill will provide that the number of Directors of a private company may be reduced from the current requirement of 2 to 1. The CLRG recognised that the reality for many private companies is that the second director is often a nominee director (frequently a spouse or life partner) and considered that the practice of using nominee directors was not in the best interests of good governance. However, the sole director will not also be able to perform the role of Company Secretary as the CLRG consider that this function should continue to be provided by a separate person so as to ensure good corporate governance. The relaxation of the rule concerning the number of Directors will only apply to a CLS. The existing rule that a company must have two Directors will continue to apply in relation to non CLS companies which are governed by Pillar B. 

 

 

The provisions relating to all companies, other than a CLS, such as DACs, unlimited companies, guarantee companies, external companies, unregistered companies, investment companies and public liability companies will be governed in a separate code set out in Pillar B of the Bill. In recognition that each of these categories of company should be governed by independent provisions, each category of company will be separately regulated within Pillar B. Where relevant the applicable provisions set out in Pillar A will apply or will be disapplied to such companies. It is beyond the scope of this Article to address these separate categories of company in any detail other than to highlight that the Bill will introduce a new category of company, the designated activity company (“DAC”) in recognition that some companies are formed to pursue a specific activity, such as a joint venture, in which case it will be appropriate to continue to circumscribe the corporate capacity (vires) of such a company. Owners and directors of joint venture companies and similar type companies will need to consider their position and decide whether they wish to elect to become a DAC during the transitional period provided for in the Bill. 

 

 

It is anticipated that the Bill will introduce a requirement that a director must have attained the age of 18 years before he or she can be appointed as director and any person acting as a director below that age will cease to become a Director following the enactment of the Bill. A similar rule will apply in relation to a Company Secretary. No upper age limit is to be imposed. 

 

 

The CLRG also considered whether a body corporate could act as a Director (as is the position under UK Company Law). However, the CLRG decided to maintain the prohibition on bodies corporate acting as directors of an Irish Company.

 

 

It is anticipated that the Bill will include a provision that the office of director will be automatically vacated if the director is absent from Board meetings for more than 6 months without the permission of his fellow directors. It is anticipated that the Bill will nonetheless permit a company’s constitution to disapply this rule.

 

 

Companies which are presently governed by Regulation 80 of Part I of Table A to the Companies Act 1963 may be familiar with the rule that the power of management of a company is conferred exclusively on the Directors subject nonetheless to a residual power of the members to remove the Board or to give directions to the Directors in general meeting. Case law establishes that the extent to which the members can give directions to the Directors concerning management issues is subject to a degree of uncertainty, for which see the recent Ryanair case where a substantial shareholder sought to issue a direction to the Board of Aer Lingus concerning the transfer of Heathrow landing slots from Shannon to Belfast. It is anticipated that the Bill will provide that the Directors’ management function can only be controlled by the members amending the constitution of the Company by passing a special resolution and that the existing provision for issuing directions to the Directors will cease to apply.

 

 

Practitioners may be familiar with the significant body of case law which has evolved over the last 150 years under which various duties have been identified which are owed by Directors to their companies. These duties are derived from certain common law rules and equitable principles which have been established and enunciated in various cases decided by the Courts. In this regard the Irish Courts have developed and applied these rules and equitable principles in a manner which is broadly consistent with the application of these rules and equitable principles in other common law jurisdictions notably the UK, New Zealand and Australia. Under these common law rules and equitable principles the following duties are imposed on each Director of an Irish company:-

 

In a most welcome development, the Bill will codify the common law and place the above rules on a statutory footing.

 

 

In general, directors do not owe their fiduciary duties to the shareholders, creditors or other third parties; their duties are owed exclusively to the company of which they are a Director. Accordingly directors cannot, as a general rule, use their powers except for the benefit of the company. This is reflected in the fact that a person who is nominated to the Board by, for example, a shareholder is not generally entitled to promote the interests of his or her appointor over the interests of the company on whose Board he sits. 

 

The Company Law Review Group has recommended that the position of and dilemma faced by nominee directors who are nominated and appointed by shareholders should be recognised and placed on a statutory footing for the first time. This recommendation will be reflected in the Bill which will contain a provision which recognises that a director who is nominated by a shareholder with an entitlement to make such a nomination under the Memorandum or Articles of Association of a company or in a shareholders’ agreement may have regard to the interests of that shareholder. This will be welcomed by banks and venture capitalists who frequently appoint a director to a client company to oversee their financial investment. 

 

 For further information contact Sean Nolan at snolan@mjoc.ie