Minister Martin Announces new Regulations on Public Limited Companies and the Maintenance and Alteration of their Capital

1. Details of Amending Provisions

Directive 2006/68/EC, which is due for transposition by the 15 April 2008, amends Directive 77/91 in the following areas;

• Art. 10&11 - Valuation of non-cash consideration for the allotment of shares/acquisition of assets from those involved in the formation of a company – This removes the requirement for independent valuation of assets in certain circumstances;
• Art. 19 - Acquisition by a company of its own shares – aims to make more flexible the circumstances in which a company can purchase and hold in “treasury” its own shares;
• Art 23 - Financial assistance – this prescribes rules allowing the company to provide financial assistance to third parties for the purchase of its own shares (in general terms, financial assistance is presently prohibited by the Directive); and
• Art.32 - Safeguards for creditors in the case of a reduction in subscribed capital – this places an express burden on creditors to “credibly demonstrate” that their “claim is at stake” when objecting to a proposed reduction in the capital of a company.

1.1. Many of the changes are optional for Member States to adopt within the limits and circumstances specified in the Directive

2.Transposition of Directive

The Company law Consolidation and reform Bill, which is currently being drafted in the Office of the Parliamentary Counsel, will deal comprehensively with PLC’s , including the amendments arising from Directive 2006/68/EC. Pending the enactment of this Bill it is necessary to introduce interim measures to ensure that Ireland is in compliance with those mandatory elements of the Directive not already provided for in our existing national Law by the due date of transposition, namely, 15 April 2008.

3. Implementing Regulations

The effect of these Regulations is to amend the Companies Act 1963 and Companies Act 1990 as follows;

3.1 Amendment of 1963 Act:

• This amendment arises from the amendment made to Article 32(1) of Directive 77/91/EEC by Directive 2006/68/EC.
• The Directive amendment defines more closely the circumstances in which a creditor may apply to the courts to prevent a reduction of capital. They must be able to “credibly demonstrate” that the satisfaction of their “claim is at stake” due to the capital reduction, and that the company has not given them adequate safeguards (unless such safeguards are not necessary due to the assets of the company). The amendment is also designed to facilitate a level EU-wide playing field in this area.
• The change is being effected mainly by means of an amendment to Section 73(2) of the Companies Act 1963 which provides for creditor objections to Court orders confirming a reduction by a company of its issued share capital – the amendment reflects the change in emphasis in the Directive in respect of PLC’s, shifting the burden of proof from the company to the creditors in establishing grounds for an objection to the Court order. There is also a minor amendment to Section 77 arising from the amendment to section 73(2). The effect of the amendment to Section 77. (Penalty where companies conceal certain matters in proceedings for reduction of capital) is to exclude PLC’s from its scope.

3.2 Amendment of Companies Act 1990

The amendments here relate to Part XI of the Act, which implemented the purchase of own shares provisions of the original Directive 77/91/EEC.The specific amendments are to Section 207 and 211.

• The purpose of the section 207 amendment is to clarify in Part XI the tests which apply in the case of a PLC wishing to either redeem or purchase its own shares. Essentially section 207(2(d)(i) is being amended to make it clear that in the case of a PLC redemptions/purchases of own shares must also comply with the restriction on the distribution of assets specified in Section 46 of the Companies (Amendment) Act 1983 in addition to meeting the “profits available for distribution” criterion.

• The amendment to Section 211, which is the enabling section dealing with purchase of own shares, is designed to reflect the preamble to the amendment of Article 19 of Directive 77/91/EEC by Directive 2006/68/EC. Taking account of the Preamble section 211 is being amended to say that its operation is without prejudice to the principle of equal treatment of all shareholders who are in the same position and to Market Abuse legislation, which applies to certain PLC’s, namely those admitted to trading on a regulated market.

4. Reason why optional elements of Directive are excluded from Regulations

• Implementation of these optional provisions would increase legislation in an already complex area of company law and consequently we needed to be sure that before doing so they would bring real benefits to companies and relevant stakeholders - It was felt therefore that these issues could best be considered in the context of the upcoming Consolidation and Reform Bill which will deal with PLC issues in the round.

5. Summary

• These Regulations will act as an interim measure to ensure that Ireland meets the mandatory requirements of the Directive by 15^th April 2008. The intention is that these Regulations will be absorbed into the upcoming Companies Consolidation and Reform Bill along with those optional elements of the Directive that it is decided to take on board at that time.