Conversion Options for Private Limited Companies – LTD or DAC?
Under the Companies Act 2014 (CA14), all private limited companies registered in Ireland must convert during 2016 to a new company type – either a private company limited by shares (LTD) or a designated activity company (DAC). The conversion deadline is 30 November 2016 (the Conversion Deadline) but with one important caveat in the case of DACs. Please click these links to learn more about reasons and related considerations in converting to either LTD or DAC.
Why do Irish companies need to be aware of 31 August deadline?
While the majority of existing Irish private limited companies are expected to convert to LTD, for companies which are either required to or may wish to convert to a DAC prior to the Conversion Deadline, the company must have passed the requisite members' resolutions prior to 31 August 2016 to approve conversion to DAC and adoption of a new DAC-appropriate constitution. Note also that, while not required in order for a company to convert to a DAC, members holding more than 25% of a company’s voting shares are entitled to serve a notice pre 31 August 2016 requiring conversion to DAC.
What happens if the 31 August deadline is missed?
The key consequence is that directors lose control of conversion, the company will not be permitted to convert to DAC prior to the Conversion Deadline and instead automatically converts to LTD on that date with the rules applicable to LTDs and a deemed LTD constitution applying to it. To become a DAC in that scenario, the company would have to undergo a two-stage process, firstly, the above conversion to LTD on the Conversion Deadline and then separately re-registering from LTD to DAC following the Conversion Deadline using the CA14 company re-registration procedures.
What are the implications under CA14 if Conversion Deadline missed?
Apart from the fact that the company directors will be in breach of CA14 by not effecting conversion prior to the Conversion Deadline, it could also have other consequences for the company, for instance:
- At least 15% of company's members or certain classes of secured creditors may seek a court order directing re-registration of the company as a DAC;
- the company may be carrying out an activity which isn’t permissible for an LTD (e.g., listing debt securities, holding a banking or insurance licence) in which case it will be in breach of CA14 as soon as it automatically converts to LTD; and
- the company's objects clause will be deemed deleted with effect from Conversion Deadline which certain companies/investors may not want;
- as it will have a deemed unwritten LTD constitution (a combination of its current M&A deemed updated in line with CA14 to extent it doesn't conflict with CA14 and the default governance rules for LTDs in CA14), there may be uncertainty about applicable governance rules.
What should directors of Irish private limited companies do next?
|If company is required to convert to DAC (i.e. carries out an activity which LTD is not permitted to carry out)||Liaise with members/legal & cosec advisors ASAP to arrange new DAC-appropriate Constitution and passing of requisite members’ resolutions by 31 August 2016 and for submission of conversion application in good time pre 30 Nov 2016. Be aware of practical knock-on implicationsof DAC replacing LTD in company name on stationery, website, seal, signage, party information on contracts etc.|
|If preference is for company to convert to DACrather than LTD (e.g., if, for any reason, it wishes to retain objects clause even if not required to)||Liaise with legal & cosec advisors ASAP to obtain advice/guidance and, if DAC conversion determined, proceed as above.|
|If preference is for company to convert to LTD||
No action required pre 31 August but directors should liaise with members / legal & company secretarial advisors to arrange new LTD-appropriate Constitution, passing of requisite board and members’ resolutions and submission of conversion application in good time pre 30 November.
|If company directors are unsureabout which conversion option (LTD or DAC) is preferable but wish to convert prior to Conversion Deadline||Liaise with legal and company secretarial advisors for further advice and guidance ASAP but pre 31 August so that both options remain available|