On 30 May 2012, the Commerce and Employment Department released revised proposals to amend the Companies (Guernsey) Law, 2008 (the “Law”) for consultation in a document entitled The Companies (Guernsey) Law, 2008 Company Law Amendments – Response Document (the “Response Document”).
Since the Law came into effect in July 2008, there have been a number of areas which have been highlighted as being in need of clarification or improvement. The Response Document arises as a result of an earlier round of consultation conducted in April 2010. Many of the changes set out in the Response Document are “evolutionary” rather than “revolutionary”, as the Department has confirmed that its intention was primarily to identify “teething trouble” following the introduction of the Law, and not to conduct a wholesale review of fundamental principles. However, there are also a number of new proposals which did not form part of the April 2010 consultation, and which we think will be of considerable interest to those who have dealings with Guernsey companies.
This Red Line highlights what we consider to be the principal proposed amendments to the Law in the Response Document. We have distinguished below between “new proposals” and “April 2010 proposals” to indicate which proposals have previously been consulted on, and which therefore are more likely to be proceeded with in final legislation. Full copies of the Response Document and the covering letter are available at http://guernseyregistry.com.
Applications for incorporation
Currently only Guernsey corporate services providers holding a full licence under the Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000 are permitted to incorporate Guernsey companies. It is proposed that (amongst others) Guernsey Advocates and entities holding licences under the other main Guernsey regulatory laws are also able to incorporate Guernsey companies. This is a new proposal.
Reservation of names
Currently name reservations for Guernsey companies are only permitted for the incorporation of new companies (rather than for changes of name for existing companies). It is proposed that this will be amended so that name reservation will be permissible for changes of a company’s name as well. This was an April 2010 proposal, which has received overwhelming support.
Amalgamation – different types of company
Section 61 of the Law currently prohibits one type of company from amalgamating with a company of a different type (for example, a non-cellular company may not amalgamate with a protected cell company). This rule will be relaxed so that different types of company may also amalgamate with one another. This was an April 2010 proposal, which has received overwhelming in principle support.
Amalgamation – short form amalgamations
Currently section 65 of the Law only allows two Guernsey companies to undertake the “short-form” amalgamation procedure. The “long-form” procedure, by contrast, allows a Guernsey company to amalgamate with a body corporate incorporatedn outside of Guernsey. It is proposed that this rule will be amended to permit a short-form amalgamation between a Guernsey company and a non-Guernsey body corporate. This is a new proposal.
Disclosure of interest
Currently, section 162 of the Law requires that directors must immediately after becoming aware of the fact that they are interested in a transaction or proposed transaction, disclose the nature, extent and (if quantifiable) monetary value of any interest that they have in a transaction. It is proposed that the requirement be simplified, so that in all cases directors are only required to disclose the nature and extent of their interest (and not the monetary value of that interest).
Duties of secretaries
Section 171 of the Law would have imposed a number of duties on secretaries of Guernsey companies. However, the section has never come into force (as its application is currently suspended under the transitional provisions) and it is now recognised that the duties of the secretary is properly a matter for a company’s articles of incorporation, particularly given that it is optional under the Law to appoint a secretary. Accordingly, it is proposed that section 171 will be repealed. This is an April 2010 proposal which has received overwhelming support.
Special resolutions – unanimous agreements to excuse technical or drafting errors
Currently, under section 178(6) of the Law, where a resolution is passed at a meeting, it will not be considered to be a special resolution unless the notice of the meeting included the text of the special resolution, and specified the intention to propose the resolution as a special resolution. The Department proposes to relax this rule for “very small companies” where all members are in agreement. It is not clear at this stage what a “very small company” will be defined as (or why this exception should be limited to very small companies only, given that all members must be in agreement for the exception to apply). However, we consider that this change will be welcomed by small companies. This is a new proposal.
Annual validations - content
Section 235(2) of the Law requires that companies with a share capital must include certain information in their annual validations, including the number of issued shares, the aggregate value of those shares, the amount paid up, the number of shares redeemed and the number of shares held as treasury shares. It also requires a company with more than one class of share to provide the information above in relation to each class of share. The Response Document includes a proposal that these requirements will be repealed. This is an April 2010 proposal, which has received support from a majority of respondents. There is also a new proposal to repeal the requirement in section 235(3) (which requires that companies distinguish between the amount paid up in cash and by other forms of consideration in the annual validation).
Duty to prepare a directors’ report
Section 248 requires directors to prepare a report stating the principal activities (if any) of the company in the course of the financial year. This report accompanies the accounts which must be sent to shareholders within 12 months of the end of the financial year. It is proposed that companies will be able to pass a waiver resolution (mirroring the audit exemption resolutions) which will mean that the directors do not have to comply with this requirement. This is a new proposal.
Section 256 of the Law currently requires companies to pass an audit waiver resolution prior to the commencement of a financial year. An audit waiver resolution must also be passed annually. It is proposed that section 256 will be amended to allow companies to pass an indefinite audit waiver resolution and to allow the resolutions to be passed during the relevant financial year (but not retrospectively). This is an April 2010 proposal that has received almost unanimous support.
There is also a new proposal to allow individual cells of a protected cell company to be exempt from audit (which we would expect will mean that the shareholders in a cell will be able to pass waiver resolutions exempting that cell from the requirement to be audited).
Share capital and issue of shares
Sections 291-293 currently require that directors have authority from shareholders before issuing shares in a company, whether by way of an ordinary resolution, or authority arising from the company’s memorandum or articles, or (in the case of companies with only one class of shares) from the Law itself.
The inclusion of these sections in the Law has been widely criticised. It is proposed that they will be repealed and replaced with a general provision that allows directors to issue shares to the extent permitted by the Company’s memorandum and articles. There was unanimous support to this April 2010 proposal.
The effect of the change (particularly in combination with the amendments being made to the share capital provisions) will be that companies will need to review whether their memorandum and articles adequately reflect the position that they wish to take going forward with respect to the ability of directors to issue shares. We are aware of a number of companies (whether incorporated before or after the introduction of the Law) that have retained or included a “share capital” in their memorandum or articles with the intention of limiting the director’s authority to issue shares.
While it is recognised that there will need to be transitional provisions in respect of companies incorporated prior to the introduction of the Law, it would not appear that these will apply to companies incorporated after the introduction of the Law. Depending on the exact wording that is settled upon, we believe that all companies will need to review their provisions relating to the issue of shares and update them (where necessary) to ensure that they are appropriate.
Section 295(2) and 296(6) require the approval and production of “consideration certificates” on the issue of shares, stating (amongst other things) that the consideration received by the company is fair and reasonable to the company and all existing members. It is proposed that the certification requirement will be repealed, and further, that boards will be required to consider whether the issue of shares is fair and reasonable to the company only. Both of these proposals are April 2010 proposals (although the total removal, rather than the partial removal of the consideration certificate requirement is new) and have received unanimous or majority support from the earlier consultation process.
Recovery of distributions
Under section 309 of the Law, there is currently no time limit on the ability of a company to recover distributions from members if the solvency test was not met at the time the distribution was made. It is proposed that a two year time limit will be introduced. This was an April 2010 proposal that has received support from a majority of respondents.
Redemption of partly-paid shares
Section 311(3) of the Law prohibits the redemption of partly-paid shares. It is proposed that this will be amended, so that partly-paid shares may be redeemed to the extent that they have been paid up. This is an April 2010 proposal, which received support from a majority of respondents.
Restoration to the Register
Section 371(10) of the Law allows the Registrar to restore a company to the Register without the need for a court hearing, but only in certain circumstances and only if “the company was struck off in error”. The Registrar has to date taken a narrow interpretation of this subsection and has effectively applied it in a way that meant it could only be used if the Registrar had made an error and had struck off the company (and would not extend to circumstances where, for example, an application for voluntary striking-off had been made and correctly accepted by the Registrar, but it was subsequently discovered that the company that was struck off was still entitled to assets). It is proposed that the subsection will be amended to allow the Registrar a wider discretion to restore companies without the need for court proceedings. The Registrar will still need to be satisfied that court proceedings would be successful but are not necessary for the fair disposal of the matter, and that there is no prejudice to a creditor or third party.
This is an April 2010 proposal which has received support from a majority of respondents.
Protected cell companies – ability to incorporate a protected cell
There is a new proposal to allow a protected cell of a protected cell company to become incorporated. There is no detail given in the Response Document regarding this proposal or exactly what it would allow (for example, it is not clear whether the incorporated protected cell would be able to become a stand-alone company which is entirely separate from the PCC, or whether it would become part of an “umbrella” company, as is the case for incorporated cell companies at present). However, if adopted, this could prove extremely useful for situations where it is considered desirable to “move” a cell (and all of its assets and liabilities) out of a PCC.
A number of amendments have been proposed to the takeover sections of the Law (which, broadly, allow an offeror to compulsorily acquire the remaining shares in a Guernsey company once they have received 90% acceptance for the offer).
While some amendments are welcome (such as clarification that once an offeror has got to 90% acceptance, they may serve notices to compulsorily acquire the remainder of a company’s shares, without having to wait any longer), others are less welcome. One such amendment is to clarify that an offeror may not count any shares already held by the offeror towards the 90% acceptance threshold. In our view, this could render the takeover provisions entirely redundant (particularly as we are aware that the amalgamation procedure has been used as an alternative to the takeover provisions, with almost exactly the same effect, but which carry a 75% approval threshold, and on which the offeror can typically exercise voting rights on shares already held).
Restoration of wound-up companies
This new proposal would allow a company that was wound up under the voluntary or compulsory winding-up procedures to be restored to the Register, subject to appropriate terms and conditions. Currently, only companies which have been struck off may be restored.