After my earlier introduction and summary of the new Companies Bill, I will be writing a series of articles on the new Companies Bill. I aim to release an article every few weeks or so, touching on the different areas of the new law. For ease of reference, I will continue to refer to it as the Companies Bill and insert the clause references in brackets.
I kick off this series by focusing on 3 things existing companies should already look out for under the Companies Bill. While the Companies Bill may only come into force in the next 6-12 months or so, I highlight 3 areas companies should start preparing for right now.
In summary, these 3 areas are:
- Your existing Memorandum and Articles of Association: Do you need to fine-tune the provisions?
- The new law will shift to a no-par value regime: Impact on your existing share premium account.
- Putting in place checklists and guidelines for the new internal processes.
(1) Memorandum and Articles of Association vs Constitution vs No Constitution
The first consideration is whether your existing company needs to make any amendments to its Memorandum and Articles of Association (M&A). Under the new law, the M&A of the company would be deemed to be the constitution of the company (see clause 34(c)). In future, there will be no more usage of the terms ‘Memorandum of Association’ or ‘Articles of Association’.
The constitution would have no effect to the extent that it contravenes or is inconsistent with the Companies Bill (see clause 32(2)).
Therefore, if you are considering whether to draft a fresh constitution, then you have to consider what the areas which the Companies Bill will allow you to opt-in and to opt-out of, and what is still mandatory under the new law.
Next, having a constitution is also optional. Hence, you may want to consider carrying forward your legacy M&A or relying on the default provisions under the new law. The Companies Bill sets out comprehensive default provisions to govern all the rights, powers, and processes of the company. It will be a one-size-fits-all template for companies. But if you want a more bespoke option, then you have to carefully consider what clauses can be legally inserted into the constitution.
Related to this, the new law provides for a company’s unlimited capacity to carry on business (see clause 21). A company is no longer restricted by any objects clause in its Memorandum of Association. However, if you do carry forward your legacy Memorandum of Association, that would be deemed to be the company’s new constitution and you would restrict the company’s business and activity within the confines of your objects clause. Thought must be put into whether you want this or not.
Finally, it is common for companies to have shareholder agreements or joint venture agreements in place. You have to consider whether any of the clauses may now be inconsistent with the Companies Bill. Or I have come across situations where parties have very detailed shareholder agreements but omit to make the consequential amendments to the Articles of Association. You must be prepared for the new wide-ranging default provisions under the Companies Bill, which may very well override or conflict with the provisions in your shareholder agreement.
(2) No par value for shares
A significant development is the move to the no-par value for shares. All shares issued before or upon the commencement of the new law shall have no par or nominal value (see clause 74).
This essentially means that companies need not set any minimum value for shares. Under the present law, companies must set a par value, i.e. a threshold below which value a company could not issue new shares. Under the new law, companies can issue shares at any value they choose.
The immediate impact to existing companies is that all amounts credited to the share premium account and the capital redemption reserve will become part of the company’s share capital (see clause 618(2)).
However, there are transitional provisions you may want to make use of. You have a 2-year time frame from the date of commencement of the new clause 74 to use the amount in the share premium account but only for specific purposes. These purposes include:
(i) paying premium on redemption of redeemable preference shares issued before the commencement date;
(ii) paying for unissued shares which are to be issued on the commencement date as fully paid bonus shares pursuant to an agreement made before the commencement date;
(iii) paying up in whole or in part the balance unpaid on shares issued before the commencement date; or
(iv) paying for shares which are to be issued in satisfaction of dividends declared before the commencement date.
(3) Checklists and Guidelines
Finally, companies should start preparing checklists for the new processes and requirements.
I set out some examples below and they are not an exhaustive list:
- Shareholders’ written resolutions which are to be circulated among the shareholders and then returned within a time frame. The procedure and the timing to carry this out (see clause 297 onwards).
- The requirements for distribution of dividends (see clause 132). These requirements include the directors being satisfied that the company will be solvent when they authorise the distribution. Next, the directors must continue to be satisfied of this solvency up until the dividend is paid out.
- The requirements for the approval of director fees, and the difference in a private and public company. So for example, there is now a requirement that in a private company, the directors can approve their director fees but this approval must be recorded down in the Board minutes. Next, the Board must notify the shareholders within 14 days (see clause 230(3)). You will need to prepare for these new steps and requirements.