Committee Reports > List of Committees > Joint > 1978 > Committee on the Secondary Legislation of the European Communities > Report No. 12 - Formation of Companies and Maintenance and Alteration of their Capital

REPORT

Introduction

1. The Second Directive on Company Law which deals with the formation of public limited companies and the maintenance and alteration of their capital was adopted by the Council of Ministers on 13th December. 1976. The Joint Committee’s predecessor reported on the Directive in its draft form in its Forty-Second Report of 30th June, 1976 (Prl. 5598).

Implementation

2. Member States are required to incorporate most of the provisions of the Directive in their national laws within two years of its notification to them but they may provide that the provisions shall not take effect for a further 18 months after incorporation in national law. The Joint Committee agrees with its predecessor that this should be done in Ireland by a statute amending the Companies Act, 1963.

3. The Joint Committee has had an opportunity of discussing the implementation of the Directive with the EEC Technical Committee of the Consultative Committee of Accountancy Bodies-Ireland (CCAB—I). Arising out of that discussion it wishes to draw attention to a number of points which it suggests should be borne in mind when considering the proposed amendment of the Companies Act, 1963.

Definition of a Public Company

4. The expression, public company, is not denned in the Companies Act, 1963 but is commonly used to denote a company which is not a private company. To qualify as a private company under the Act a company must have a share capital and must by its articles of association restrict the right to transfer its shares, limit its membership to 50 and prohibit any invitation to the public to subscribe for its shares or debentures.

5. The Directive applies to two classes of company in Ireland, namely, a public company (a) limited by shares or (b) limited by guarantee and having a share capital. It does not apply to. unlimited companies or companies limited by guarantee and not having a share capital. The CCAB—I has suggested that Irish law be changed to define a public company as one to which the Directive, applies and to classify all others as a private company.

6. The Joint Committee agrees with its predecessor .that some of the restrictions of the Directive could have very serious consequences if they came to be applied to private companies. It believes that there is less likelihood of any attempt being made to extend the provisions to private companies if the definition of a private company contained in the Companies Act, 1963 is maintained. It has been informed that the CCAB—I has no desire to alter the present position of the private company.

Dividends

7. Article i 5 of the Directive contains a number of provisions relating to dividends which will necessitate changes in existing Irish Law. The CCAB—I suggests that to remove the uncertainty occasioned by existing case law there should be a statutory definition of distributable profits and that the law on the subject of such profits should be altered only to the degree necessitated by EEC Directives. It also proposes that the Irish legislation be used to clarify the position in regard to sums placed on reserve insofar as there appears to be an inconsistency between Article 15(1)(c) and Article 15(2)(b) of the Directive. The Joint Committee trusts that these points will be carefully considered in formulating proposals for amending legislation.

8. Article 15(1)(c) would seem to require that losses carried forward would have to be deducted from profits before distribution. The Joint Committee views this provision with concern because of its likely inhibiting effect on carrying out rescue operations on companies which fall into difficulties. The Joint Committee recommends that the matter be examined to see if it is possible, within the terms of the Directive, to exempt from consideration losses accruing to companies in existence before the Directive comes into operation.

Designation of Public Companies

9. It would seem that in light of the Directive it will be necessary to provide that public limited companies can be distinguished in their title from private limited companies. The CCAB—I suggests that this could be done by requiring public limited companies to contain in the title the initials “P.L.C.” (i.e. public limited company). The Joint Committee agrees with this suggestion.

Payment for Shares

10. The Directive requires that at the time of incorporation or before the commencement of business not less than 25 per cent of the nominal value be paid. The CCAB—I consider that it should also be provided that 25 per cent of any premium must also be paid. The Joint Committee agrees that this would be a sensible provision.

11. Where any of the consideration is other than cash the Directive requires the transfer of the consideration in full to the company within five years. The Joint Committee assumes that this would allow the transfer to take place within the five year period which is what the CCAB—I proposes.

Expert Valuation

12. The Directive requires that a report on any consideration other than cash must be drawn up by one or more independent experts but it permits Member States to allow certain exemptions from the requirements. It also requires an expert’s report, with some exceptions, where an asset is acquired for consideration other than cash from an initial subscriber within two years of incorporation and Member States may extend this requirement to assets belonging to shareholders or others.

13. The Joint Committee agrees with the CCAB—I that the company’s auditor should be designated an expert for this purpose. For considerations of cost it believes that experts’ reports should be required only where the Directive specifically makes them obligatory.

Loss of Capital

14. Articles 17 of the Directive requires a general meeting of shareholders in the event of a serious loss of capital to decide if the company should be wound up or other measures taken. The amount of a loss for this purpose may be determined by national law but must not be higher than 50 per cent of the subscribed capital. The Joint Committee notes that its predecessor was not in favour of this provision at all because it feared that it might precipitate the disaster it was intended to avert. The Joint Committee shares these misgivings and recommends that the loss of capital be set at the maximum figure of 50 per cent of the subscribed capital.

Acceptance of Own Shares as Security

15. Article 24(1) provides that the acceptance by a company of its own shares as security is to be treated as an acquisition of its own shares for the purpose of other articles. Member States may allow exemption in the case of transactions concluded by banks and other financial institutions in the normal course of business. The Joint Committee agrees with the CCAB—I that advantage be taken of this exemption which would be in line with section 60 of the Companies Act, 1963.

Pre-Emption Rights

16. In the case of an increase in capital the Directive requires that shares issued for cash must first be offered to existing shareholders in proportion to the capital represented by their shares. The Directive would appear to allow a Member State to confine the right to equity shareholders and where there are different classes of equity shareholders to allow the right to be enjoyed by all such shareholders equally. The Joint Committee recommends that Irish law should so provide.

17. The CCAB—I suggests that the minimum period of 14 days for shareholders exercising their option is too short and that 30 days would be more appropriate. This suggestion seems reasonable to the Joint Committee.

18. Article 29(5) of the Directive permits Member State to allow a general meeting, which empowers a company to increase its subscribed capital, to authorise the directors to restrict or withdraw the right to pre-emption for a period. The CCAB—I recommends that this provision be enacted in Irish law and the Joint Committee has no objection.

Derogation for Employee Shareholdings

19. Under Article 41(1) Member States may, to the extent necessary to promote shareholding by employees, derogate from the rules as to the payment, upon incorporation or commencement of business and subsequently of 25 per cent of the nominal value plus, in the case of an increase in capital, the whole of any premium. The Joint Committee agrees with the CCAB—I that this derogation should be availed of for the benefit of employees, including directors holding salaried employment in the company,

Acknowledgement

20. The Joint Committee is deeply appreciative of the considerable trouble the CCAB—I went to dealing with this matter and wishes to extend its sincere thanks to that body.

(Signed) MARK CLINTON,

Chairman of the Joint Committee.

3rd May, 1978.