Committee Reports > List of Committees > Joint > 1976 > Committee on the Secondary Legislation of the European Communities > Report No. 42 - Company Law, Formation and Capital of Public Companies

REPORT

1. Introduction

The Joint Committee has completed its examination of the Draft Second Council Directive on Company Law which is concerned with the formation of public companies and the maintenance and alteration of their capital.

The original proposal for the second Directive appeared in 1970. It was amended by the Commission in October, 1972 to meet the position obtaining in the new Member States. The amended proposal has been under examination by a Working Party since then and it would seem that at that level several amendments have been suggested. The Joint Committee has had the opportunity of considering the latest available draft. It is anticipated that the final version will be submitted to COREPER in the near future.

2. Legal Basis

Article 54 (3) (g) of the EEC Treaty obliges the Council and Commission in the furtherance of their duty to abolish restrictions on the right of establishment to co-ordinate “to the necessary extent” national measures designed to protect the interests of members of companies and others so that the “safeguards [are] equivalent throughout the Community”.

It would appear, therefore, that while equivalent safeguards are required throughout the Community these need not necessarily be identical. The fundamental object is to promote the right of establishment and this does not necessarily require the imposition of a uniform system of company law in all the Member States. This is reflected in the proposal dealt with in this report to the extent that several provisions apply only if the national laws contain certain requirements while other provisions allow Member States to prescribe certain requirements at their option.

The purpose of the present proposal is to secure uniform protection for investors in and creditors of public companies in so far as company formation and the maintenance and alteration of capital are concerned.

3. Method of Implementation

The Joint Committee is strongly of opinion that the proposed Directive when adopted should be implemented in this country by statute and not by statutory instrument under the European Communities Act, 1972 even if it is considered in light of the legal considerations already mentioned that it is possible to avail of the latter method. It is important in the Joint Committee’s opinion that changes in company law should be enacted only by the Oireachtas with all the publicity attendant on that procedure, and that all available statutory law should be contained in the bound volumes of statutes. These considerations apply equally to any further Directives on this subject which may be adopted as well as to Directive 68/151/EEC which has already been implemented by the European Communities (Companies) Regulations, 1973 but which should, in the Joint Committee’s view, be re-enacted in a statute at the earliest convenient opportunity.

4. Bodies to which Proposal refers

The latest version of the proposal limits the provisions in Ireland to a public company which is either (i) limited by shares or (ii) limited by guarantee having a share capital, and to statutory and chartered companies with limited liability and having a share capital.

As an amendment of the 1972 proposal, private companies in Ireland and the United Kingdom are being excluded subject to the condition that a distinct “designation” be prescribed for public companies to distinguish them from private companies.

5. Contents of Proposals

The proposals deal with

(i)Formation and contents of memorandum and articles of association.

(ii)Minimum paid-up capital.

(iii)Consideration for issue of shares.

(iv)Dividends.

(v)Losses of capital.

(vi)Acquisition by a company of its own shares.

(vii)Increase of capital.

(viii)Reduction of capital.

6. Formation and Contents of Memorandum and Articles of Association

The information to be included in the company’s statutes appears to be of the type that is already available by virtue of Irish law or practice.

The Joint Committee notes that the Incorporated Law Society questions the necessity of including transient or variable details in the memorandum and articles. To some extent this criticism can be met in national legislation in the case of existing companies because Article 35 of the draft Directive will permit derogations from certain information requirements where the details in question were only significant at incorporation.

As to the detailed provisions of the draft Directive on the formation of public companies the Joint Committee would like to see some points clarified. It should be made clear that the position in Irish law is maintained whereby a professional person who draws up the memorandum and articles of association is not for that reason treated as a person who has “taken part in the formation of a company” so as to attract the provisions of Article 3 (k) of the draft Directive.

Section 5 of the Companies Act, 1963 provides that a public company may be formed by any seven or more people “subscribing their names to a memorandum of association”. In the case of a company having share capital, section 6 (4) (b) provides that no subscriber “may take less than one share”. In the event of the number of members falling below seven, section 36 provides that if the company continues business for more than six months thereafter each member is severally liable for the company’s debts. Section 213 (d) allows the company to be wound up by court order in the same event. Article 5 of the draft Directive provides that where national law “requires a company to be formed by more than one person” the fact that the number falls below the minimum shall not lead to the automatic dissolution of the company. The Joint Committee assumes that in the event the provisions of sections 36 and 213 (d) of the Companies Act, 1963 will continue to apply.

7. Minimum Paid-up Capital

The Directive would require minimum capital to be subscribed in order that a company may be incorporated or authorised to commence business. Although the figure is still under discussion it is likely that the minimum capital will be fixed at 25,000 units of account (say £14,000) of which 25% (£3,500) would be paid up. The units of account would, of course, be expressed in national currency in domestic legislation and it is further proposed that if, as a result of devaluation, the national currency figure remains below the equivalent of 22,500 u.a. for twelve months it must be adjusted upwards by amending legislation within the following 12 months but at the discretion of Member States this adjustment will not apply to companies already incorporated until eighteen months after such legislation takes effect.

This proposal involves a change in Irish law but the Joint Committee does not object to the figures suggested.

8. Consideration for Issue of Shares

It is to be provided that on incorporation shares must be paid up to the extent of 25% of their nominal value. In the case of shares issued against consideration other than cash the consideration must be fully paid within five years from date of issue of the shares. The Joint Committee is advised that such consideration may be in the form of intangible assets such as goodwill, know-how and patents but not service under a contract of service. The Joint Committee is very concerned about the possible implications of restrictions of this character on the economy at this country’s stage of development. It considers that the implementing domestic legislation will need to be most carefully drafted so as to avoid the creation of unintended impediments to enterprise.

There is provision for independent expert valuation where the consideration for shares is other than cash whether the shares are issued on formation or on increase in capital. It will be permissible for national law to define “independent expert” and to determine what should happen if the expert’s report were to show that the exchange of shares for the consideration was not equitable.

Member States need not apply the foregoing provisions in the case of increases of capital for the purpose of mergers and take-overs.

The proposal regarding expert valuation would also apply where, outside its normal course of business and other than by stock exchange transactions or court order, assets are acquired within two years of formation from a subscriber to the Memorandum and Articles for a consideration of not less than one tenth of the subscribed capital. The acquisition must be approved by a general meeting. Member States may extend this provision to any shareholder or other persons. In the Joint Committee’s view Member States should be allowed to exclude mergers and take-overs from this requirement.

The issue of shares at a discount is to be prohibited. Present Irish law allows the issue at discount of shares of a class already issued.

9. Dividends

The latest draft provides that dividends may not be paid if net assets are or would be, if the distribution were made, less than the subscribed capital plus reserves. Losses must be made good before either dividends or interim dividends are paid and interim accounts must be prepared to justify paying interim dividends.

The determination of net assets, profits and losses is to be left to national legislation pending the adoption of the Fourth Directive on company accounts. Many of the problems which had been raised by the proposed Directive as it appeared originally would seem therefore to have been either met by the revisions made or postponed to the stage of the Fourth Directive.

10. Losses of Capital

In the case of serious loss of subscribed capital (to be fixed at not higher than 50%) a general meeting of the company must be called to consider whether the company should be wound up or other measures taken.

The Joint Committee notes that the Select Committee of the House of Lords has expressed concern about this proposal on the grounds that it might well precipitate the disaster it was intended to avert because such a meeting might lead to disagreement about the extent of the loss which might in any event be temporary and might occur when the proposed meeting would hamper negotiations with third parties. The Joint Committee agrees with this view and would like to see the provision dropped.

11. Acquisition by Company of its own Shares

The minimum conditions under which a company may acquire its own shares are specified. Generally such acquisition is not permissible under Irish law except by Court Order or in the case of Redeemable Preference Shares issued under Section 64 of the Companies Act, 1963 and Preference Shares issued before 5th May, 1959, to which Section 65 of the Act refers. The provisions of Sections 64 and 65 of the Companies Act are regarded as being compatible with Articles 33 (b) and 18 respectively of the draft Directive. It is also proposed that a company may not advance funds, make loans or provide security for the acquisition of its own shares except in transactions in the normal course of business or with a view to acquisitions by its own employees. This would involve a significant change in Section 60 of the Companies Act which, the Joint Committee is advised, has been found to be a useful method of dealing with problems in relation to company reconstructions.

12. Increase of Capital

A decision to increase share capital would require a two-thirds majority of the votes attaching to shares and represented at a general meeting or alternatively a simple majority if at least half the subscribed capital is represented. At present in Ireland a simple majority suffices. Where there are different types of shares a decision to increase capital would require a separate vote for each class where the rights of that class are affected. Following an increase in capital, shares issued against cash must be 25% paid up and any share premium paid in full.

It is also proposed that shares issued for cash must first be offered to existing shareholders though the general meeting of the company is to be given power to derogate from or restrict this provision or to authorise the directors to do so. The Joint Committee is strongly of opinion that the pre-emptive right to acquire equity capital must be confined to ordinary shareholders. The Joint Committee is informed that it is common practice to issue redeemable preference shares to financial institutions and there is no good reason why a new issue of ordinary shares should necessarily be offered to them.

13. Reduction of Capital

In Ireland a reduction of capital requires a special resolution and the sanction of the Court. The Joint Committee is advised that the existing provisions can be continued under the terms of the draft Directive.

14. Protection of Private Companies

Generally some of the restrictions of the draft Directive could have very serious consequences of a damaging nature if inadvertently they came to apply to a private company. The Joint Committee believes that there ought to be a provision whereby such inadvertence could be dealt with by empowering the competent authority to authorise within a stipulated time steps to enable the private company to recover its status as such.

15. Acknowledgements

The Joint Committee wishes to record its grateful appreciation of the considerable assistance it received in considering this matter from the Incorporated Law Society of Ireland and also from Mr. G. W. Coleman of Craig Gardner and Co. whose comprehensive memorandum on the subject was made available to the Joint Committee through the good offices of the Consultative Committee of Accounting Bodies in Ireland.

(Signed) CHARLES J. HAUGHEY,

Chairman of the Joint Committee.

30th June, 1976.