Our Quarter 1 edition of (Re)insurance News gave a short overview of the Companies Bill 2012. Given the breadth of the changes, which will affect every Irish company, we are taking a more in-depth look at key changes relevant to (re)insurance companies.
William Fry will provide updates and briefing sessions on the Companies Bill as the effective date nears. This is expected to be 2014, although parts may be implemented later. Readers should bear in mind that this overview can only touch on some main topics. There may also be changes as the Bill moves through the Irish legislature.
When are the changes going to happen?
The Companies Bill 2012 will reform, consolidate and amend the company law statutes applicable to all Irish companies. While the implementation date is probably 2014, there will be a transition period of 18 months. During the transition period many of the compliance changes will, however, have immediate effect.
What happens during the transition period?
(Re)insurance companies are usually incorporated as private limited companies or, in a small number of cases, as public limited companies. During the transition period, undertakings will need to determine which type of new structure suits best.
The choices for companies will be a company limited by shares (CLS), a designated activity company (DAC), a public limited company (PLC) or a Societas Europaea (SE). Where a company fails to choose, it defaults into the CLS category after the 18 months. A company can only “become” an SE (itself a form of PLC) after a particular process, and is therefore outside the scope of this overview.
What is the difference between a CLS, a DAC and a PLC?
The CLS is going to be the predominant choice for companies on the Irish register. A CLS will be similar to the existing private limited company category. Such companies will, however, operate with a single constitutional document (i.e. no longer a memorandum and articles of association). A CLS, unlike a DAC or PLC, will have no specified objects and the principle of “ultra vires” therefore no longer applies. This can be contrasted with DAC, PLC and SE companies, which will retain generally the same type of constitution as under the current regime.
Bearing in mind that (re)insurance regulations require companies to limit operations to (re)insurance and related operations to the exclusion of other business, an objects clause may still be required by the Central Bank of Ireland. This would mean (re)insurance undertakings must opt for the DAC or PLC format. This point will, however, need to be queried with the Central Bank.
What key changes affect day-to-day compliance?
There will be a new annual compliance statement required of directors. In addition to the Central Bank’s regulatory returns compliance statement and the Corporate Governance Code’s requirement, directors will now also have to acknowledge each year that they are responsible for securing a company’s compliance with its “relevant obligations” under company and tax law.
Although there are thresholds for net assets and turnover below which the requirement does not arise, it would not be expected these will be enough to usually exclude (re)insurance undertakings.
Relevant obligations are the obligations under the Companies Acts where a failure to comply would constitute a “class 1” or “class 2” offence or a related obligation under tax law. The range of such offences is reasonably broad.
The compliance statement will have to confirm that each of the following has been done or, if any has not been done, explain why not:
- The drawing up of a compliance policy statement setting out the company’s policies (that, in the directors’ opinion, are appropriate to the company) regarding compliance by it with its relevant obligations
- Putting in place arrangements that are, in the directors’ opinion, designed to secure material compliance with relevant obligations (which may include reliance on the advice of persons who appear to the directors to have the requisite knowledge and experience)
- There has been an on-going review of the compliance arrangements
Directors’ roles will also be in the spotlight through the codification of the duties they owe to a company and a requirement they acknowledge their duties in writing on taking office. It also includes a duty to be satisfied the company secretary engaged is fit for the role. While previously the duties of directors existed through case law, following the approach taken in the UK since 2006, the duties of directors will now be listed in the Act, when enacted. While mooted as a big change, it does not appear to have given rise to major issues since inception in the UK.
Are board and shareholder meetings affected?
The existing demarcations between the roles of the board of directors and the shareholders are largely preserved in the Bill. There are, however, changes to make it easier to pass resolutions in writing, which may no longer require the signature of all members/directors. Companies which are a CLS may also dispense with the need for an annual general meeting.
Those taking minutes at board meetings, or involved in tax planning, will be interested in new provisions in the Bill which specify the place at which a board meeting is deemed to occur. The Bill states that a meeting occurs at the place where the largest group of those participating is assembled or, if there is no such group, where the chairperson is situated. If neither applies, the meeting may determine the location for itself.
An item of business often considered by board meetings is the receipt of so-called “Section 53 notices”, by which directors and connected persons notify interests in shares within five days of a change in the interest. It is a broad requirement, including a need to disclose interests such as stock options in a parent entity. Directors and officers will now no longer have to declare such interests unless they exceed 1%.
Boards will need to be aware of a new requirement for larger companies, likely to include the bulk of (re)insurance companies, to either have an audit committee or include a statement in the financial report why no committee has been created. To the extent the full board acts as the audit committee (e.g. under the Central Bank’s Corporate Governance Code), this may therefore need to change (or be explained). While the Bill includes protocols on how the audit committee is to operate, these seem lighter and not to conflict with the current Code. The Bill does not specify a legal requirement for other committees.
What about the new concept of a “registered person”?
The Bill includes changes which will affect (re)insurance companies’ executive licences and delegated authorities with the new concept of a “registered person”. This aims to make it clearer, by reference to a register kept at the Companies Registration Office, who has a power to bind a company.
If anyone suggests a transaction fails to bind because of an alleged lack of authority, it will now be the case that anyone who is a director or who is such a “registered person” is deemed to have had the authority to so act and to authorise others to do so. The scope of the powers which can be pushed-out to a registered person is therefore quite broad. The change brings arrangements more into line with the types of registrations in continental Europe.
Restructurings and High Court applications
In restructurings and portfolio transfers, (re)insurance companies often need a court approval for changes. While it will always need to be looked at individually, the Bill has a new “Summary Approvals Procedure” which allows the possibility of avoiding the expense of some court processes.
In areas such as a reduction of capital (e.g. a capital release where distributable profits do not exist), a merger or a division of two companies, it might now be possible to invoke the Summary Approvals Procedure. While the process will vary depending on what the company is seeking to do, the process broadly involves the following steps:
- The shareholders must pass a special resolution (unanimous for mergers or divisions) giving the directors authority to carry out the activity
- A declaration is made by the directors and lodged in the Companies Registration Office. In it, the directors must make statements concerning the continued solvency of the company, having taken into account the proposed changes
- In some cases, there will be a need for an independent report (e.g. from an accountant)
There will be concern whether directors are comfortable exposing themselves to a potential personal liability in making solvency statements in order to avoid the need for a High Court application. The option will, however, be a useful alternative to consider. The processes for voluntary wind-ups of solvent companies and strike-offs will also be easier.
Registration of security interests
(Re)insurance companies which give security over assets, such as collateral arrangements involving trusts and funds withheld, may need to take account of changes. The Bill clarifies the position relating to charges over cash accounts, which do not need to be registered. The general rule will remain that charges must be registered within a 21-day period to secure priority, but now with alternative one-stage or two-stage processes. The one-stage process will be similar to the current regime; however, the two-stage process will allow a preliminary filing of an intention to create a charge (thereby creating priority), with a second filing on the creation of the charge to occur within a 21-day period.
What should I be doing now?
The Bill is likely to be enacted in 2014, although latest indications are that it may be later. At this point, (re)insurance companies will need to be aware of the main changes and how these will affect the business. There will be some comfort in knowing that, apart from perhaps the new annual compliance statement, many of the changes should prove to be reasonably straightforward once they are demystified and appropriate corporate steps are taken to plan for the changes.
Contributed by: Eoin Caulfield