2014 Act Constitutions I
The Companies Act, 2014 provides for new types of company constitution. A limited company’s constitution is now a single document, containing or incorporating clauses which formerly would have been comprised in the memorandum and articles of association. The other forms of companies, PLCs (of each type), UCs, CLGs and DACs (of each type) have constitutions which follow the pattern of the traditional memorandum of association and articles of association.
The memorandum is the more fundamental document and is typically shorter. The Articles are usually subordinate to the Memorandum, more detailed and deal principally with the mechanics of the company’s operations.
A private company limited by shares referred to as an “LTD” for short, must have a constitution. It is to set out the company’s name, that the liability of its members is limited and that it is a private company limited by shares. There is no Table A in the 2014 Act with default articles, unlike the case with earlier Companies Acts. If the company adopts additional regulations, the constitution is to set them out.
2014 Act Constitutions II
The company’s constitution constitutes a contract between the shareholders (with each other) and with the company. The terms of this contract extend both to the provisions of the constitution and the provisions of the Act relating to the governance of the company. Accordingly, it covers the operational matters now provided for in the Act, which were formerly provided for by standard articles.
There is an enormous flexibility in relation to what may be contained in the company’s constitution (formerly the memorandum and articles of association for LTDs). In practice, the vast majority of companies use standard form memorandum and articles of association, with minimal and relatively uniform amendments on certain matters The standard forms, formerly reflected in 1963 Act’s model articles, are now largely reflected in statutory default provisions in the Companies Act, 2014. The default position in that Act may now be tailored by supplemental regulations which cater for the particular governance and organisational requirements of that company.
Private Limited Company / LTD I
The constitution of a private limited company (an LTD) is to be in accordance with the forms specified in Schedule 1 of the Companies Act, 2014. It shall state
- the company’s name;
- that it is a private company limited by shares registered under the Act;
- that the liability of its members is limited;
- as respects its share capital, either the amount of share capital with which it proposes to be registered and the division of that capital into shares of a fixed amount specified in the constitution, or without stating such amount, that the share capital of the company shall, at the time of its registration, stand divided into shares of a fixed amount specified in the constitution;
- the number of shares (which shall not be less than one) taken by each subscriber to the constitution; and
- if the company adopts supplemental regulations, those regulations.
The constitution shall be divided into paragraphs numbered consecutively. It shall either be signed by each subscriber in the presence of at least one witness who shall attest the signature or be authenticated by a digital signature.
Private Limited Company /LTD II
A shareholder is not be bound by an alteration to the constitution which requires him to take up more shares or increase his liability to contribute capital to the company. This reflects the fundamental rule that the shareholder’s obligations are limited to that to which he (or the original holder of the share) agreed to contribute to the company upon its issue. This amount is usually paid up in full so that the shareholder has no further liability. A shareholder can agree to make further contribution in a separate contract, such as a shareholders’ agreement.
The constitution may be amended by special resolution. Where subsequent to its registration, an amendment of the constitution is made affecting the share capital or any of the above matters, the constitution is to be restated as it stands in consequence of that amendment.
The constitution of an LTD no longer includes an objects clause. The legislation confirms that an LTD is to have the full and unlimited capacity to undertake any business or activity or enter any transaction for any purpose. It is to have full rights and powers for such purposes. It may not have an objects clause, unlike the other types of company. Accordingly, the “ultra vires” (outside powers) rules do not apply to LTDs under the 2014 Act.
An LTD under the 2014 Act includes almost all private companies incorporated under earlier Companies Acts, which were converted into an LTD on 1st December 2016. Other companies could be converted during the transitional period in accordance with a simplified procedure. Companies generally may be converted from one type to another under the Act in accordance with specified procedures.
The share capital of the company is to set out the amount of the authorised share capital and its division into shares of fixed amounts. Alternatively, it may set out that the share capital stands divided into shares of a fixed amount specified in the constitution. In this case, the authorised capital need not be specified as such. It suffices to state that the share capital is divided into shares of a particular amount, commonly €1.00 each.
The holders of the share capital are the owners of the company. The constitution must specify the classes of shares (if more than one). There is commonly one class of ordinary shares. Alternatively, there may be several classes of shares, each carrying different rights. There may be differing voting rights. There may be differing and relative priorities of entitlement to a dividend and to distributions on a winding up.
There may be different classes of shares, each carrying different rights. There may be, for example, ordinary and preferred (preference) shares. There may be significant differences in the rights they carry. The classes are commonly labelled “A” ordinary shares, “B” ordinary shares, etc.
There is a great deal of flexibility as to how the share capital may be structured and divided. The facility to create different classes of shares gives considerable scope for financial engineering. It facilitates investments and different classes of ownership, each with different rights of participation in the management and/ or in the profits, gains and assets of the company.
The rights of a class of shareholder can be varied by a special resolution (75% majority) of the holders of the shares concerned. Minority shareholders of that class who dissent, may object and apply to the court for relief. Within 28 (formerly) 21 days, the holders of 10% (formerly 15%) of the dissenting class of shareholder can apply to the court to have the change cancelled as being unfair and against their interests.
It is possible to entrench the rights of a particular class of shares in the constitution, so that the rights of those shareholders may not be varied without the consent of each of them. This requires a particular structure in the constitution. There are practical limitations on the extent to which the rights of a particular class can be effectively entrenched in perpetuity. Generally, the issue of further shares or a new class of shares does not vary the rights of existing shareholders.
The authorised share capital of a private company is the maximum nominal share capital which may be issued. It may be as low as €1.00 (or less). More commonly, the authorised share capital is larger in order to allow for future share issues. It can be increased at a later date.
Unlike the case with public limited companies, there is no minimum value of issued share capital which a private limited company must have. Commonly the issued share capital is nominal. It may be as low as €1.00 or less. A company in which a restricted director is involved must have a minimum paid-up capital.
Shareholders in private companies are liable only to the extent of the share capital they have agreed to subscribe. This is the amount the money or other value which they have promised to give in return for their shares. Usually, this will have been paid up or contributed, when the share was issued. Sometimes, there may be outstanding obligation attaching to shares, by way of a liability to pay further calls of the original subscription price.
In the case of a public limited company, there must be at least €25,000 (formerly IR£30,000/ €38,092.14) of issued paid-up capital. This implies that the company must have a nominal value of at least this amount. A stock exchange listed company must have a considerably higher level of paid up capital. This is provided by the exchange rules for admission.
The question may arise as to whether money has been subscribed as capital or loaned to a company on a particular occasion by its promoters or members. It is presumed that in the absence of documentation to the effect that it is a loan, that it is a capital contribution. Accordingly, it would be available to the entirety of its creditors or members on liquidation.
A private limited company requires one shareholder only. The share capital may be as low as €1.00. Therefore, a company may have no real capital and be little more than a so-called “man of straw”. Of course, a company may by trading and other means acquire substantial value over time, regardless of its nominal share capital.
Statutory default positions on the governance and operation of companies are set out in the body of the Companies Act. Many provisions which were formerly commonly adopted as articles of association are reflected in the statutory default provisions. The provisions in the Act in relation to procedural matters and the mechanics of running the company apply, subject to any contrary or amending provision in the supplemental regulations of the company’s constitution. Model supplemental regulations are not set out in the Act.
Most of the default provision in the Act may be amended to the same extent as was the case when they were provided for in the articles. The supplemental regulations will be usually shorter than traditional articles as they need only incorporate the changes to the default provisions. The structure makes it easier to determine what default provisions (which are now set out in the Act) have been omitted or supplemented, in the case of a given company.
There are many significant freedom and options in the 2014 Act, as to what supplemental regulations may provide. These are likely to become reflected in standard additional regulations. They may, for example, involve the removal or variation of the default provisions in relation to shareholder’s pre-emption rights and the acquisition of the company’s own shares.
Designated Activity Company
A designated activity company may be incorporated for a limited purpose or purposes. This allows for the possibility of a company with limited objects, in respect of which the” ultra vires” (powers) rules still apply. There may be a designated activity company (DAC) limited by shares and a DAC limited by guarantee, having a share capital.
The constitution of a designated activity company is to be by way of a memorandum of association and articles of association, which are together to comprise the constitution. The forms of constitution are prescribed by Schedules 7 or 8 to the Act. They are in the form of old-style company memorandum and articles of association. There are no detailed model articles in the 2014 Act, unlike the case with earlier Companies Acts.
The memorandum of association of a designated activity company is to set out
- its name;
- whether it is limited by shares or by guarantee with a share capital,
- its objects, and
- that its members’ liability is limited.
Designated Activity Company
In the case of a DAC limited by shares, the amount of share capital and the division into fixed amounts is to be set out.
In the case of a DAC limited by guarantee, each member undertakes, in the event of a winding up while he is a member or within a year thereafter, to contribute to the assets such amount as may be required for the payment of debts and liabilities contracted before he or she ceased to be a member, payments of costs and charges of winding up and the adjustment of rights, not exceeding an amount specified in the memorandum. The memorandum may specify the maximum amount which may be nominal.
The validity of an act done by a designated activity company is not to be invalidated on the grounds of lack of capacity, because of anything contained in its objects. The “ultra vires” rule continues to apply to it, but in a modified form.
The articles of association of the DAC may contain regulations. The regulations may provide for anything that is not prohibited by law.The same default provisions that apply to LTDs, apply to DACs. The provisions in the Act are to apply insofar as they are not excluded by the articles of association. The standard default provisions in the Act apply but may be modified by a contrary provision.
A company limited by guarantee without a share capital is to have a memorandum of association and articles of association. They are together to comprise a constitution. The format is set out in Schedule 10 to the 2014 Act.
The memorandum of association must state
- its name
- that it is a company limited by guarantee,
- its objects and
- the terms of the guarantee by members, which may be limited.
It is to set out that each member undertakes in the event of winding up, to pay an amount in respect of debts, liabilities, costs and expenses, not to exceed a specified amount.
The constitution must be printed, signed by the subscribers, witnessed and authenticated.
The articles of association of a company limited by guarantee may contain regulations. The optional provisions in the 2014 Act apply save to the extent varied. There is no detailed model table of articles.
An unlimited company may be a private unlimited company (ULC), a public unlimited company (PUC) or a public unlimited company without a share capital (PULC).
The constitution is to be by way of a memorandum and article of association. The schedule to the 2014 Act set outs the model formats.
The memorandum of association is to provide
- that it is a private unlimited company or a public unlimited company, as the case may be;
- the amount of share capital with which the company is registered; and
- that its members have unlimited liability.
The provisions differ slightly in respect of a public unlimited company without a share capital.
The articles of association of unlimited companies provide for the standard defaults, as varied by the constitution. The optional provisions may be varied.
References and Sources
Companies Act 2014 (Irish Statute Book)
Companies Act 2014: An Annotation (2015) Conroy
Law of Companies 4th Ed. (2016) Courtney
Keane on Company Law 5th Ed. (2016) Hutchinson
Other Irish Sources
Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury
Introduction to Irish Company Law 4th Ed. (2015) Callanan
Bloomsbury’s Guide to the Companies Act 2015 Courtney & Ors
Company Law in Ireland 2nd Ed. (2015) Thuillier
Pre-2014 Legislation Editions
Modern Irish Company Law 2nd Ed. (2001) Ellis
Cases & Materials Company Law 2nd Ed. (1998) Forde
Company Law 4th Ed. (2008) Forde & Kennedy
Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy
Companies Acts 1963-2012 (2012) MacCann & Courtney
Constitutional Rights of Companies (2007) O’Neill
Court Applications Under the Companies Act (2013) Samad
Company Law – Nutshell 3rd Ed. (2013) McConville
Questions & Answers on Company Law (2008) McGrath, N & Murphy
Make That Grade Irish Company Law 5th Ed. (2015) Murphy
Company Law BELR Series (2015) O’Mahony
Companies Act 2006 (UK) (Legilsation.gov.uk)
Statute books Blackstone’s statutes on company law (OUP)
Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington
Company Law in Context 2nd Ed. (2012) D Kershaw
Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam
Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington
UK Practitioners Services
Tolley’s Company Law Handbook
Palmer’s Company Law