The Gazette 1980

GAZETTE

SEPTEMBER 1980

COMPANY LAW NOTES Second Council Directive on Co-ordination of Regulations relating to the formation of Public Limited Liability Com- panies and the Maintenance and Alteration of their Capital (97/91/EEC)*

The Second EEC Directive on Company Law was adopted by the Council of Ministers on 13 December 1976 and required Member States to adopt legislation implementing its provisions by December 1978. The Directive was implemented in the United Kingdom some months ago by the Companies Act, 1980, but no legisla- tion has yet been proposed in Ireland, although it is expected that a Bill will be published before the end of this year. Of the Directives under review, the Second Directive will undoubtedly have the most noticeable effect on Irish solicitors' everyday practice of company law. Its most significant provisions may be discussed under the following headings: Classification of Companies In Ireland and the U.K., the Directive applies to public companies limited by shares and to public companies limited by guarantee and having a share capital, and (unless otherwise stated) the word " c omp a ny" in this note is intended to refer only to such companies. A company must indicate its nature in its title; in the U.K., this has been done by requiring such a company to include the words "public limited c omp a ny" in its corporate name. The U.K. has also altered the grounds for distinguishing between public and private companies found in Ireland in Section 33 of the Companies Act, 1963 by removing the provisions requiring private companies to limit the number of their members and restrict the transfer of their shares. Instead, the U.K. Act provides that the essential distinction between public and private companies will now be the prohibition on private companies offering their shares to the public. (The U.K. Act also prohibits the formation of any new companies limited by guarantee having a share capital, but this is not required by the Directive.) Provisions will have to be made in the implementing legislation for somewhat altered procedures for the incorporation of public and private companies and for the conversion of private companies into public companies and vicc versa. Memorandum and and Articles of Association The Directive specifies certain basic data relating to the company which these documents must contain and also requires the publication of other information not presently filed, such as the actual or estimated amount of all costs payable by the company in connection with its forma- tion. Subscription of Capital The Dircctivc requires a company to have a minimum subscribed capital of 25.000 European Units of Account (about IR£16,750) before it can commence business. It provides for the adjustment of this minimum •(Official Journal L26 of 3 1.1.77).

capital in the event of fluctuation of the exchange rate between national currencies and the E.U.A. and also provides for a fiveyearly review of the minimum as calculated in E.U.A. The Directive contains transitional provisions hich will allow existing public companies achieve the minimum capital figure over a period of up to 3 years from the date on which the implementing legislation enters into force. Member States are free to adopt a higher figure if they wish: the U.K. Act requires a minimum capital figure of £50,000. Shares issued (for cash or other consideration) on incorporation or on an increase in capital must be paid up to at least 25% of their nominal value before the company can commence business. Where the consideration is other than cash, it must be contributed to the company within five years of the date of allotment. The Directive prohibits the issue of shares at a discount except to persons who "place shares in the exercise of their profession". This provision has led to the repeal in the U.K. of the equivalent of Section 63 of the Companies Act, 1963. The Directive requires a company's subscribed capital to be made up of assets "capable of economic assessment" and prohibits a company from accepting an undertaking to perform work or supply services as part of those assets. To ensure that these principles are observed, the Directive goes on to provide that where shares are issued for a consideration other than cash, either on the incorporation of a company or on an increase in capital, the company must obtain an independent expert's report on the value of the assets being contributed to the company and this report must be published. The "independent expert" in Ireland will almost certainly be the company's auditor. A similar report is required if, within two years of incorporation, a company acquires any assets from its promoters for a consideration equivalent to 10% or more of its issued capital. Member States need not require an expert's report on an increase of capital where shares are issued on a take- over or merger involving an exchange of shares. Maintenance of Subscribed Capital The Directive introduces an important new rule in relation to the payment of dividends by providing that they can be paid only to the extent that the company's "net assets" after payment of the dividend will not be less than the subscribed capital plus any reserves not avail- able for distribution. The term "net assets" is not defined in the Directive; in the U.K., the legislation provides for the definition of net assets by statutory instrument, which will permit developments in accounting practice - such as inflation accounting — to be taken into account. The Dircctivc also provides that distributions to shareholders may not exceed the aggregate of (a) the profits at the end (continued on p. 181) 179