The long-awaited Companies Bill 2012 (the Bill) is expected to be enacted this year, at which stage it will consolidate and reform – in some cases quite radically – Irish company law. For the most part, the Companies Bill simply restates the existing law without changes. However, the Companies Bill also contains reforms in some areas, including those which affect the operation of employee share schemes.
The definition of an employee share scheme has not changed and most of the company law exemptions which apply to employee share schemes remain, but there are some differences which companies, as well as share scheme administrators and trustees, should be aware of, and these are set out in more detail below.
Directors’ and Secretaries' Notifications of Interests in Shares – Introduction of New Exemption
The good news is that there is now a de minimis threshold which has to be reached before a notification of an interest in shares is required. This exception applies where the interest in respect of the shares is less than 1 per cent of the share capital of the company, or where the shares or debentures do not carry a right to vote at general meetings except in special circumstances.
Thanks in part to the submissions of the IPSA and the Business Committee of the Law Society, the de minimis threshold now applies to all aspects of notification of an interest in shares in a company including the grant and exercise of an award. Also, where the director or secretary acquires shares or debentures, the time period for notification has been extended from 5 to 30 days and the form of notification has been simplified. These reforms should lighten the administrative burden on companies and their officers in relation to such disclosures.
Authority to Allot Shares and Pre-emption Rights – Removal of Employee Share Scheme Exemption for Allotments
Under existing legislation there is an exemption from the requirement for shareholders to authorise the allotment of shares, for allotments under an employee share scheme. Unfortunately, this exemption has not been carried through in the Bill. In practice this means that sufficient authority will need to be obtained (either via the constitution of a company or specific shareholder's resolution) to allow the directors to allot shares or grant options over them. As companies can no longer rely on the previous share scheme exemption it will be necessary to monitor allotments in respect of share schemes to make sure an authorisation is in place. A positive reform however, is that a general authority to allot shares can now be given in the case of private companies for any duration (previously it was limited to a maximum of 5 years), which should temper the fact that the employee share scheme exemption no longer exists.
Thankfully the status quo remains in relation to pre-emption rights i.e. they shall not apply in relation to an allotment of shares pursuant to an employee share scheme.
Purchase of Options by Directors – More Flexibility for Listed Companies
Under existing legislation it is an offence for a director of an Irish company to buy a right to call for delivery at a specified price, at a specified time, of shares of a company in which he/she holds office, where the shares in question are listed. This had meant that a director's awards had to be fulfilled by newly issued shares in order to fit within an exemption in the legislation. This provision has not been carried through in the Companies Bill. This is a positive reform and means that awards to directors in listed companies can now be made in respect of existing shares, and not just newly issued ones.
Buy-back of Shares – Some Welcome Reforms
Sometimes private companies utilise a share buy-back to provide liquidity to employees who have acquired shares under an employee incentive scheme so that employees may realise value for their shares. The Bill does not go as far as the reforms introduced in the UK in 2013 which apply to buy-backs under employee incentive schemes; however it does contain some positive reforms. For example, a contract for the purchase of a company's shares will no longer need to always be authorised by special resolution: it will be possible for the authorisation of the purchase to also be provided for in the company's constitution, or in the rights attaching to the shares in question. In practical terms this means the company can "forward plan" to provide for buy-backs and this will negate the requirement to obtain approval from shareholders at a general meeting.
Also the requirement for 21 days' display of the contract to buy-back the shares at the registered office has been removed. It is now possible to abridge the time for passing the resolution by consent to short notice which, in practical terms, should mean that the time period for effecting a share buy-back may be decreased if necessary.
These reforms should add flexibility to the buy-back regime, and provided that a company has sufficient distributable reserves to effect the buy-back, may mean it being utilised more frequently.
Financial Assistance – Changes to the Whitewash Procedure
Under existing company law there is a carve-out for financial assistance for the acquisition of shares under an employee share scheme, and this continues to apply under the Bill. However, financial assistance issues can still arise in relation to share schemes if they don’t fall within the strict company law definition of an "employee share scheme" e.g. in cases where shares are awarded to non-employees such as consultants or NEDs. Financial assistance could arise if loans were being made by the company in connection with the issue of shares. If this is the case, and the financial assistance needs to be "whitewashed", a new procedure needs to be followed which has been introduced by the Bill, known as the new Summary Approval Procedure, which in many ways is similar to the existing financial assistance whitewash procedure. There are however some differences, for example the declaration which directors need to make requires greater detail than the current format and, more importantly, under the Bill a court can declare the director personally responsible, without any limitation of liability, for all or any of the debts of the company if the declaration was made without reasonable grounds for the opinion and the company becomes insolvent.
In many respects, it will be business as usual once the Bill is enacted, but there are some changes which will have a generally positive impact on share schemes. This article only provides a brief overview of the key changes, and every share plan is unique, so you should consult with your legal adviser in relation to how the Bill will specifically affect your company’s share plans.