Conversion of Existing Private Companies - Glossary
Written by 22nd July 2014on
Part 2 of the Companies Act 2014 (the Act) will not only consolidate all the Companies Acts 1963 to 2013 it will also introduce two new types of private companies limited by shares to replace the existing single type of private company limited by shares.
Therefore shareholders and directors of all existing private limited companies will have to decide whether to register as a company limited by shares ("LTD") or become a designated activity company ("DAC").
This is a decision that will effect approximately 90% of Irish registered companies which are currently private limited companies.
LTD’s and DAC’s
There will be a number of differences between the two types of private limited companies which will need to be considered when making this decision including:
LTD companies will be able to have a single director while DAC’s will need to have more than one;
LTD’s will be governed by a single constitutional document and will not be bound by the ultra vires rule while a DAC will retain the two document constitution in the form of the memorandum and articles of association and will be bound by the ultra vires rule (albeit in a restricted form); and
LTD’s will not be entitled to list debt securities for sale to the public whereas DAC’s will.
The Act provides for an eighteen month transition period from the date of its commencement during which the directors and members of an existing company will need to decide whether to reregister as a LTD or a DAC. During this time current private companies will continue to be governed by the Companies Acts and be treated as a DAC.
There are three options available to private limited companies during the transition period:
- Opt into the CLS regime by preparing a simplified constitution;
- Opt out of the CLS regime by re-registering as a DAC or other type of company; and
- Take no action.
Companies can convert to a LTD by submitting a Form N1 together with a special resolution and a copy of the new constitution.
Companies who do not wish to change to a LTD can choose to convert to a DAC by submitting a Form N2.
Where no action is taken during the transition period a company will default to a LTD and its existing memorandum and articles of association will be deemed to have merged into a single document constitution. This approach is not recommended as under the Act it could expose the directors to a claim from shareholders that their rights were being oppressed.
The Companies Act 2014 is expected to come into force on 1 June 2015. The Act will give rise to a more simplified company law regime where all legislation relating to LTD’s is dealt with in one part of the Act and all legislation relating to all other types of companies in another part of the Act. Directors and members will need to carefully consider what is appropriate for them and their company. The Act is intended to make it easier and cheaper to operate a company in Ireland. Practical changes such as this are an example of that aim being put into practice.