On 23 December 2014, the long awaited Companies Bill 2012 was signed into law and enacted as the Companies Act 2014. It is expected to enter into force with effect from 1 June 2015.
While the exercise in consolidating and updating over 13 separate acts into one piece of legislation with over 1440 sections was immense, the impact for the Irish Investment Funds industry will be limited.
Set out below are summaries of some of the key provisions as they impact the Irish investment fund industry.
UCITS Management Companies and Alternative Investment Fund Managers
While the Act gives the option to existing private limited liability companies (the legal form UCITS management companies (Mancos) and alternative investment fund managers (AIFMs) take) to convert to either (i) a private company limited by shares (CLS) or (ii) a designated activity company (DAC), it is anticipated that the Central Bank of Ireland will specifically require Mancos and AIFMs to re-register as a DAC.
The Act provides for a transition period of 18 months from 1 June 2015 during which existing private companies such as Mancos or AIFMs can convert. Although the Act provides that if no action is taken by the relevant private limited liability company during that 18 month period, the default position is that an existing company will be deemed to be a CLS, it is unlikely that the CBI will permit existing Mancos or AIFMs to adopt the CLS structure by default.
Key Characteristics of a DAC
- While much has been made of the fact that CLS are permitted to have only one director, DACs must have at least two directors.
- DACs can also pass “majority” written resolutions (but cannot dispense with the requirement to hold an AGM (where they have more than one member)).
- The name of the company once re-registered as a DAC must be amended to end in “Designated Activity Company” and references to “Limited” should be removed on documentation and websites.
- DACs are required to have a one-document “constitution” which is essentially an umbrella term for its current memorandum & articles of association (M&As). This constitution will, in fact, take a similar form to the existing M&As combined. The constitution must contain an objects clause stating the objects for which the company has been incorporated, and any amendment of the objects clause must be by way of special resolution with 10 days notice provided to members in advance of the meeting to approve any such proposal (a key difference between a CLS and a DAC is that a CLS will not have an objects clause within its constitution).
- The Act provides that the “Articles” section of the constitution, instead of containing the rules and regulations in relation to the DAC, may consist solely of a statement to the effect that the provisions of the Act are adopted and, if the Articles consist solely of such a statement, a number of optional provisions which are outlined in the Act and apply to CLSs will apply to DACs unless the Articles specifically modify or exclude such optional provision.
Whilst to a large extent the content of the constitution of a DAC will remain the same as that of the M&As prior to conversion, it will be necessary to review the M&As of Mancos/AIFMs to determine whether they are fit for purpose and identify if any provisions conflict with certain mandatory provisions in the Act (any provision in a Manco or AIFM’s existing M&As will be invalid where they are inconsistent with a mandatory provisions of the Act).
Simple Conversion Process to DAC
The conversion process is in itself relatively straightforward.
Under the Act, members of existing private limited companies must begin the process of registering as a DAC no later than three months prior to the expiry of the transition period (i.e. 15 months after the commencement of the Act). The Act allows for the following two methods to achieve this, namely:
- The members passing an ordinary resolution resolving to convert
- If notice in writing is served on the company requiring such registration by shareholders holding, in aggregate, more than 25% of the voting rights
Once the company has resolved to convert, the company applies to the Irish Companies Registration Office with the appropriate form, together with a copy of the resolution to alter the company type and the company’s new constitution. A statement in a prescribed form confirming that the registration requirements have been complied with will also be submitted.
We would recommend that Mancos and AIFMs simply pass an ordinary resolution to convert to a DAC in good time well in advance of the 15 month deadline.
New Compliance Statement Obligation
For certain larger Mancos or AIFMs (i.e. DACs that have, in a particular year, a balance sheet total exceeding €12.5 million and turnover in excess of €25 million) they will be required to include a compliance statement in the Directors’ Report.
This compliance statement will include an acknowledgement that the directors are responsible for securing the company’s compliance with its relevant obligations which are described as:
- Provisions of the Act, the contravention of which, is:
- A category one or two offence (these are the most serious offences under the Act)
- A serious offence under market abuse or prospectus law
- Tax law
In addition, the Directors’ Report must confirm that the directors have:
- Drawn up a compliance policy statement setting out the company’s policies regarding compliance with its relevant obligations
- Put in place appropriate arrangements or structures that are designed to secure material compliance with relevant obligations
- Conducted a review during the financial year of the arrangements and structures put in place
If these statements, confirmations and reviews have not been made or carried out, the directors must specify the reasons why not (i.e. comply or explain basis).
The Act is largely a re-statement of the existing law as regards investment companies.
The Act provides that existing investment companies will continue in existence after the commencement of the Act but will be deemed to be an investment company regulated by the Act (i.e. there are no re-registration requirements).
Investment companies established under the Act will also have a one-document “constitution” which will take the form of combined M&As. However, the M&A of an investment company that is in existence before the commencement of the Act will continue to apply except to the extent that its provisions are incompatible with the mandatory provisions under the Act.
Codification of Directors’ Duties
It is worth noting that the Act consolidates the existing statutory duties of directors in one statute and codifies for the first time the principal fiduciary duties which have applied to company directors.
A new initiative is that the Act imposes a requirement that directors of newly incorporated companies and directors newly appointed to existing companies following the commencement of the Act acknowledge in writing their duties as set out in the Act.
As to next steps, we are recommending that a thorough review be undertaken of a company’s M&A and other documentation as against the provisions of the Act before its commencement. While there is a transition period for Mancos and AIFMs to re-register as a DAC (subject to Central Bank confirmation that the DAC is the mandatory form to take), early consideration of the implications of the Act for all affected companies is recommended.