What should directors be doing from now until 30 November 2016?

The directors of a private company limited by shares incorporated before 1 June 2015 (an existing private company) have duties under the Companies Act 2014 (the Act) to re-register the existing private company as a designed activity company (DAC) or a private company limited by shares (LTD) no later than 30 November 2016.

Directors concerned to carry out these duties properly should:

1.   Consider whether the existing private company must be re-registered as a DAC

An existing private company must be re-registered as a DAC if it has debt securities that are traded or listed on any market.  Re-registration can be achieved by directors' resolution, adding a statement to the current memorandum of association that "the company is a designated activity company limited by shares" and replacing all references to "limited" in its company name with "designated activity company" or "DAC" in its current memorandum and articles of association, followed by appropriate Companies Registration Office filings. 

2.   Identify who has rights affected by re-registration as LTD where DAC re-registrationis not mandatory

The principal effect of re-registering as a LTD will be that the existing private company will cease to have an objects clause and its ability to transact business will be similar to that of an adult individual.  Stakeholders in the existing private company may be concerned that it should continue to carry on the business being conducted by it when they became stakeholders, and the objects clause gives comfort that the existing private company will only carry on business permitted by that objects clause.

The Act recognises that shareholders and certain loan creditors should be entitled to prevent an existing private company from discarding the business restrictions set out in its objects clause.

Shareholders:  Shareholders who have more than 25% of all share voting rights may give a written direction to the existing private company to re-register as a DAC.  If an existing private company fails to re-register as a DAC by 30 November 2016, shareholders with 15% or more of all share voting rights may apply to court under Section 57 of the Act for an order directing re-registration as a DAC, which will be made unless the court is convinced that it should not be made.  Any shareholder, who considers rights have been prejudiced because of the directors' exercise or non-exercise of re-registration duties, may bring court proceedings for oppression and/or disregarding of interests.  The court will presume, until satisfied otherwise, that an applicant shareholder has been oppressed or had its interests disregarded if the existing private company becomes a LTD by operation of law.  Therefore directors should canvas and respect shareholder views in the re-registration process.

Lenders:  When assessing the position of shareholders on re-registration, the directors should consider whether the shareholders, as is often the case, have granted share charges in favour of a lender as security for the liabilities of the existing private company to that lender.  That share charge may entitle the lender to intervene in place of the shareholder where the lender's rights will be affected by a proposed shareholder resolution.  In this situation, it is usual for lenders to stipulate that changes to the memorandum and articles of association must have prior lender approval.

In addition, where an existing private company becomes a LTD on 1 December 2016, Section 57 of the Act allows for an application to court for an order requiring re-registration as a DAC to be made by holders of not less than 15% of the existing private company's debentures, entitling the holders to prevent changes to the objects clause.  The definition of "debentures" in the Act seems to refer to debenture stock, bonds and debt securities, rather than a debenture drafted by a lender to secure a loan agreement.

Even where a lender does not have a share charge or rights under Section 57 of the Act, that lender may have stipulated in the loan agreement with the existing private company that changes to its memorandum and articles of association require prior lender approval.  Should the directors and shareholders decide to adopt a new constitution as part of the re-registration process, they may trigger a loan agreement event of default if they do not get this lender approval before making the changes.

Others:  Finance companies, debt factors/invoice discounters and other creditors may also have rights under their contracts with the existing private company to approve in advance changes proposed to its memorandum and articles of association. Directors should respect approval rights held by lenders and other creditors by requesting approval from the relevant contractual counterparty to change the constitution of the existing private company before the shareholders resolve to change that constitution.

3.   Consult with shareholders

The Act expects that shareholders of an existing private company will participate in its re-registration, apart from when an existing private company must re-register as a DAC because it has trading or listed debt securities.

As a result, the directors should consult with shareholders on re-registration prior to recommending re-registration.  As part of that consultation, directors should advise shareholders of the rights of lenders and any other parties that will be affected by re-registration.  Other relevant considerations should also be brought to the attention of shareholders.  For example, if the existing private company is a credit institution or insurance undertaking, the directors should inform the shareholders that it can only continue to carry on that activity if re-registered as a DAC.

The directors should ask the shareholders to indicate re-registration preferences and assess whether there is sufficient agreement for re-registration as a DAC or LTD.  The required shareholders engagement levels are 75% or more of all share voting rights for re-registration as a LTD, and more than 50% of all share voting rights for re-registration as a DAC.  For DAC re-registration, the relevant shareholder engagement level must be achieved by 31 August 2016.

4.   Request third party consents if a sufficient percentage of shareholders support are-registration option

If sufficient shareholders support re-registration as a LTD or DAC, the directors should request consent to re-registration from those identified as having pre-approval rights on changes in memorandum and articles of association.  Where a DAC re-registration is proposed, the directors should inform those with pre-approval rights that no substantive change to the memorandum and articles of association of the existing private company is proposed.

If any person with pre-approval rights objects to the re-registration proposal, the shareholders should be informed and advised of the consequences of proceeding to re-register without the required consent.  The shareholders should then decide whether they wish to proceed.

5.  Defer a re-registration decision until 31 August 2016 if a re-registration strategy isnot supported by a sufficient percentage of shareholders

Where re-registration as a LTD or DAC is not supported by a sufficient percentage of shareholders, it remains open to shareholders with more than 25% of all share voting rights to direct re-registration as a DAC until 31 August 2016.  Therefore, the directors should not make a unilateral decision to re-register as a LTD prior to that date.

6.   Prepare LTD constitution and re-register as LTD where another re-registrationobligation does not apply by 1 September 2016

For an existing private company that (a) does not have listed or trading debt securities, (b) has not received a DAC re-registration direction from shareholders with more than 25% of all share voting rights before 1 September 2016, and (c) has not passed a shareholder resolution to re-register as either a DAC or LTD before 1 September 2016, Section 60 of the Act requires that directors of that existing private company prepare a LTD constitution and send it to shareholders before 30 November 2016.  The directors should include in the LTD constitution all provisions of the memorandum and articles of association of the existing private company except for the objects clause of the memorandum of association and any provisions in the memorandum of association that prohibit alteration of the memorandum or articles of association.

The shareholders may approve the LTD constitution prepared by the directors and sent to the shareholders or another constitution preferred by the shareholders by special resolution (shareholders with 75% of all voting rights) at any time until 30 November 2016, but, if a LTD constitution is not approved in that way, the directors are obliged to file the LTD constitution prepared by them with the Companies Registration Office no later than 30 November 2016.