1. Introduction

The Companies Act 2014 (the Act[1]) was signed into law in December 2014 and is expected to commence with effect from 1 June 2015. The Act presents a number of drafting options and challenges for private companies deciding to adopt new-form constitutions. Unlike previous company law consolidating statutes, the Act obliges one class of existing companies to prepare a constitution in an amended statutory form. The Act also abolishes the old-form model regulations set out in Table A of the First Schedule to the Companies Act 1963 (Table A) and instead incorporates the optional provisions of company law in substantive law for the first time. Optional provisions of the Act will apply as default provisions unless disapplied or modified in a company’s constitution. This paper will examine the implications of these developments for drafting new-form constitutions both during and after the transition period that is specified in the Act.

2. The appearance and form of new-form constitutions

(a) Adoption of constitutions during the transition period

The transition period is an 18 month period from the date of commencement (extendible by the Minister by up to 12 additional months) during which an existing private company must elect either to register as a Designated Activity Company (DAC) or to register (or otherwise be deemed to register) as a new-form company limited by shares (LTD).

(i) Adoption of an altered memorandum and articles of association upon re-registration as a DAC

It is a requirement for re-registration of an existing private company as a DAC, that the company’s memorandum and articles of association must be altered in the following manner:

• to state that the company is a designated activity company; and
• to substitute the words “designated activity company” or “cuideachta ghníomhaíochta ainmnithe” for “limited” or “teoranta” in the company’s name (Section 63(2)).

With the foregoing exceptions, the form of the constitution of a new-form DAC will be the same to the form of a memorandum and articles of association under the current regime.

The way in which the alteration is effected by a company depends on the circumstances of its re-registration as a DAC. The alteration is effected either:

• by ordinary resolution, in the case of voluntary re-registration in accordance with Section 56(1); or
• by resolution of the directors, in any of the following cases of compulsory registration:
  • upon notice by a shareholder holding more than 25 per cent of the total voting rights in the company under Section 56(2);
  • by reason of the company’s non-compliance with the limitation on offers of securities to the public under Section 56(3); or
  • pursuant to a court order under Section 57(1).

Certain charitable and other companies currently avail of the exemption from the obligation to use “limited” or “teoranta” as part of their names given under Section 24 of the Companies Act 1963. A similar exemption will continue to be available to qualifying DACs under the Act to dispense with the words “designated activity company” or “cuideachta ghníomhaíochta ainmnithe” in their names. A licence previously granted to an existing private company that is in force at the time of commencement will continue under the new Act (Section 971(9)).

(ii) Deemed constitution

Where a company does not deliver a new-form constitution to the CRO for registration during the transition period, it is deemed to have a new-form constitution in place of its existing memorandum and articles, which constitution comprises:

• the provisions of its existing memorandum of association, other than provisions that—
  • contain its objects; or
  • provide for, or prohibit, the alteration of all or any of the provisions of its memorandum or articles;

and

• the provisions of its existing articles (Section 61(1)(a)).

While the appearance of such a constitution will be unchanged, it will be deemed to satisfy the requirements of Section 19 as to the form of a company’s constitution.

(iii) Preparation of a new-form constitution by the directors

The directors of an existing private company are obliged during the transition period to prepare a new-form constitution, circulate it to members and deliver it to the CRO for registration, unless the company either:

• adopts a new-form constitution by special resolution; or
• re-registers (or is obliged to re-register) as a DAC (Section 60(1)-(2)).

No offence is specified for a failure by the directors to prepare a new-form constitution. However, it should be noted that a failure to do so would amount to a breach of the directors’ general duty to ensure that the Act is complied with by the company (Section 223(1)), which may be actionable either in its own right or in connection with an application by a member or creditor for relief under Section 62.

Unlike the case of a company that adopts a new-form constitution by special resolution, the form of a constitution prepared by directors is strictly governed by the Act. The constitution is required to comply with the requirements of Section 19 and must consist solely of:

• the provisions of its existing memorandum of association, other than provisions that—
  • contain its objects; or
  • provide for, or prohibit, the alteration of all or any of the provisions of its memorandum or articles;

and

• the provisions of its existing articles (Section 60(3)).

This means that the preparation of a new-form constitution by the directors does not provide an opportunity for the company to reform or update its existing constitutional documents.

For most companies, the preparation by directors of a new-form constitution in accordance with the requirements of Section 60 will consist of the following tasks:

• deletion of the objects clause from its memorandum;
• deletion of any provision of its memorandum that entrenches or otherwise provides for alteration of any of its articles;
• insertion of a statement that it is a private company limited by shares, registered under Part 2 of the Companies Act 2014; and
• consecutive renumbering of each of the paragraphs of its former memorandum and articles of association as a one-document constitution.

As a result, a new-form constitution adopted by the directors will be identical in all material respects, save for objects clauses and entrenching provisions, to the form of its previous constitution. It is anticipated that a substantial proportion of companies will simply take the option of carrying out a simple word-processing exercise on their existing memorandum and articles of association during the transition period and will defer a more substantial update and revision of their articles until the occurrence of a subsequent corporate transaction or event that requires them to do so.

(iv) Adoption of a new-form constitution by the members

An existing private company may adopt a new-form constitution during the transition period by special resolution, subject to:

• compliance with its existing memorandum and articles of association; and
• statutory requirements with respect to the variation of rights attaching to classes or shares (Section 59(1)).

The form and contents of a new-form constitution are given by Section 19 and Schedule 1 of the Act. These requirements can be summarised as requiring that a company state at least the following matters in its constitution:

• The name of the Company.
• That it is a private company limited by shares, registered under Part 2 of the Companies Act 2014.
• That the liability of the members is limited.
• Either:
  • the amount of its authorised share capital and the division of that capital into shares (and classes) of a fixed amount (nominal value); or
  • without stating an authorised share capital, the fact that the share capital of the company is divided into shares (and classes) of a fixed amount (nominal value).
• Supplemental regulations, if any, which:
  • disapply or vary any of the optional provisions of the Act; and
  • regulate other matters with respect to the company.

The principal difference between a constitution that takes the foregoing form and an existing memorandum and articles of association is that it does not contain any objects clause. It appears from Section 19 that the provisions of a new-form constitution are properly called “regulations” rather than “articles”. It is also noteworthy that a LTD may dispense with the requirement to specify an authorised share capital (Section 19(1)(d)).

The constitution must be signed by each subscriber and witnessed or authenticated in a manner to be provided for under Section 888.

It is also a requirement that the constitution is divided into paragraphs numbered consecutively (Section 19(2)(b)). This requirement has particular relevance to the preparation of a new-form constitution by the directors of a company during the transition period, since it is not possible to simply excise the objects clause from a company’s memorandum in order to comply with this requirement – the provisions of the remaining provisions of its former memorandum and articles must be renumbered (and internal references updated) in order to comply with the requirement.

Adoption of a new-form constitution by special resolution gives members full freedom (subject to compliance with the rules on variation of class rights) to revise the provisions of a company’s existing memorandum and articles of association. This permits the inclusion of references to the Act and to the adoption (or disapplication) of new optional provisions set out in the Act, a number of which are summarised below.

(b) Adoption after the transition period

After expiry of the transition period, a LTD may adopt a new-form constitution either:

• by special resolution (Section 32(1)); or
• on incorporation, by subscription and registration (Section 21(1)).

3. Interpretation of new-form constitutions

(i) Deemed constitution

While the form and appearance of a deemed constitution will be identical to the existing memorandum and articles of association on which it is based, such a constitution will be interpreted as if the objects clause and any entrenching provisions in its memorandum did not exist. The remainder of the provisions of its memorandum and articles will continue to apply.

To the extent that the regulations in Table A of the First Schedule to the Companies Act 1963 (Table A) are applied in a deemed constitution, those regulations will continue to apply -

• to the extent that they are not inconsistent with a mandatory provision of the Act; and
• as if references to the Companies Act 1963 are read as references to the corresponding provisions of the Act (Section 61(5)).

For these purposes, Table A is treated as having been updated to the form in which it existed on the date of repeal[2], rather than the form in which it existed on the date of adoption of the relevant articles of association.

The situation is slightly less clear for the small minority of companies that may be governed by model regulations specified in prior Companies Acts, such as:

• Table A of the First Schedule to the Companies (Consolidation) Act 1908;
• Table A of the First Schedule to the Companies Act 1862; and
• Table B of the Schedule to the Joint Stock Companies Act 1856.

The saving set out in Section 5(3) that states that “[a]ny document referring to any former enactment relating to companies shall be read as referring to the corresponding enactment of this Act” would appear to cover such cases, notwithstanding that Section 5(2) states that “[t]he effect of this Act in relation to a private company limited by shares incorporated under any former enactment relating to companies is provided for in Chapter 6 of Part 2.” On this basis, the effect of a deemed constitution on companies that have adopted model regulations under prior companies statutes will be identical to the position for companies that have adopted Table A of the First Schedule to the Companies Act 1963, with the exception that such regulations will not be deemed to have been updated to the position in which they had been amended at the commencement of the Act.

A number of companies have incorporated reference texts under Section 80 of the Company Law Enforcement Act 2001 in their articles of association. It is arguable that the saving set out in Section 5(3) will apply in a similar way to these articles of association and that to the extent that such reference texts apply regulations of Table A, such regulations will apply in the same way as for companies that have adopted them directly.

As a practical matter, the interpretation of a deemed constitution that adopts Table A in whole or in part requires the reader to refer:

• first, to Table A, to understand the substance of the regulation in question; and
• second, to the Act, to understand whether the regulation in question is consistent with the mandatory provisions of the Act and, if the regulation in question had been modified or disapplied, to understand whether the equivalent provision of the Act is an optional provision which is capable of being modified or disapplied.

(ii) New-form constitution

Where a new-form constitution is adopted by special resolution either during the transition period or afterwards, a company will probably include up-to-date references to the optional provisions of the Act rather than to the provisions of the former Table A.

It will be governed by:

• the mandatory provisions of the Act;
• its constitution; and
• to the extent that its constitution does not modify or disapply optional provisions of the Act, the optional provisions of the Act.

The first supplemental regulation of a new-form constitution is likely to be a regulation that sets out a list of the optional provisions of the Act that do not apply to the company. In many respects, this list will resemble similar lists in the articles of existing companies that have adopted Table A in modified form. In this respect, the disapplication of optional provisions of the Act resembles the disapplication of Table A provisions by an existing company. However, it is worth noting certain differences between the provisions of Table A and the ways in which they have been incorporated as optional provisions in the Act. These differences can be grouped under the following headings:

• Former Table A Regulations that are mandatory provisions of the Act:
  • in many cases, these are matters that were always mandatory (such as the prohibition on issuing shares at a discount and the duty of a director to disclose his or her interest in contracts – Regulations 5 and 83);
  • in a smaller number of cases, the matters in question are almost universally adopted without modification (replacement of lost or destroyed share certificates and distributions in specie on a winding up – Regulations 9 and 137); and
  • in a small number of cases, the matters in question are now mandatory (such as the right of a company to grant powers of attorney and the list of persons entitled to receive notice of meetings – Regulations 81 and 69).
• Former Table A Regulations that are omitted in the Act:
  • in most cases, these merely repeated mandatory or default provisions of the Companies Acts (such as the power to give financial assistance in accordance with the Companies Acts and the prohibition on the payment of dividends other than in accordance with the Companies Acts – Regulations 10 and 118 of Table A); and
  • in other cases, these were default rules that were disapplied by the vast majority of companies (such as the limitation on the directors power to borrow and the rules for the rotation of directors – Regulations 79 and 92 to 98 of Table A).
• New optional provisions in the Act:
  • in a small number of cases, the Act enacts new default rules that were not previously contained in Table A (such as the power of a member holding 50% of a company’s paid up share capital to convene a meeting directly – Section 178(2)); and
  • in a small number of cases, the Act enacts default rules in a different manner to the equivalent provisions of Table A (such as the fact that the remuneration of directors is now determined by the board of directors, rather than in general meeting – Section 155(2)).

The remaining supplemental regulations of a new-form constitution will set out additional provisions governing the company. In this regard, it is worth remarking on two further categories of differences between existing articles of association and new-form constitutions:

• Matters provided for in the Act which no longer require to be provided for in a constitution: this category includes the execution of members’ and directors’ written resolutions in counterparts (Sections 193(3) and 161(5)), exclusion of the requirement for transferees to execute instruments of transfer (Section 94(2)) and participation in directors’ meetings by electronic means (Section 161(6)); and
• Matters not provided for in the Act which require to be provided for in a constitution: this category includes provisions for the indemnification of directors out of the assets of the company, which are commonly provided for in the form set out in Regulation 138 of Table A, which is not included in the Act – a directors’ indemnity does not apply by default, but may be implemented either in the company’s constitution or in a contract with the company (Section 235) – of course, since the constitution is a contract between the members, a director cannot rely in such capacity on any such provision in the constitution.

The foregoing sections summarise the areas in which the regulations of a new-form constitution interact with the provisions of the Act. Beyond these matters, the members of a company have considerable freedom to regulate their affairs in the constitution, which is a document that takes effect as a statutory contract between the company and its members in the same way as an agreement that had been entered into between each of them (Section 31(1)).

Incorporating optional provisions of company law in a statutory form that is liable to subsequent amendment entails a new category of legislative risk for companies that have incorporated under the Act. This represents a departure from the position under Table A, which applied to a company in the form in which it existed on the date of adoption (though it should be noted that none of the amendments that took effect on 1 April 1978, 3 August 1982, 13 October 1983 or 1 January 2011 respectively could be described as having a material effect on the organisation of companies). Under the Act, there is a risk that an optional provision will be amended by subsequent legislation in a manner that no longer suits the purposes of an existing company (though it should be noted that none. In such cases, a company may instead elect to disapply the entire suite of optional provisions in the Act and set them out in full in either direct or modified form as supplemental regulations in its constitution. This is current practice amongst quoted companies and other large private companies that currently disapply Table A in its entirety and set out the relevant provisions in their articles.

4. Conclusion

In summary, the task of drafting new-form constitutions involves the following steps:

• to consider a list of the optional provisions of the Act;
• in the case of an existing company, to consider the extent to which Table A provisions that are currently disapplied or modified by the company require to be, or are capable of being, disapplied or modified as optional provisions of the Act;
• to set out a list the disapplied optional provisions as a supplemental regulation; and
• to set out all additional and modified provisions with respect to other matters, such as share rights, that the company has chosen to adopt as additional supplemental regulations.

For more information on drafting new-form company constitutions, please contact David Mangan at dmangan@mhc.ie or 01 614 5807.

More on the Companies Act 2014:

FAQs: Companies Act 2014: Preparing Private Companies for Transition

The Companies Act 2014 – Continuing Obligation To Have A Company Secretary

Companies Act 2014: Dawn of a Simpler Era – Part 1

Irish Companies Act 2014 Overview

Companies Act 2014 Update

---