The Recent Companies Act Amendments
The amendments are relatively minor, save for one that increases the threshold in a buy-back of a company’s own shares from 10% of the issued share capital to 50%, creating return of capital opportunities erstwhile impossible or impracticable from this source. On that score alone, the import of this amending Act is significant, and yet it is perhaps, in some sense, more noteworthy for the amendments it omitted to make than for the ones it did; in particular, updating our rules on financial assistance does not appear to be on the cards for the time being. We will review (in Part 1) the changes brought about by the 2013 Act and examine (in Part 2) the reasons why we believe it is now time to rethink our rules on financial assistance.
Part 1 – The Recent Companies Act Amendments
The Company Service Providers Act, 2013 (Act XX of 2013; the “Act”) came into force on Christmas Eve 2013. Despite its name, the Act is actually an omnibus legislative instrument that, apart from regulating company service providers, also amends the Companies Act, Chapter 386 (“Cap.386”) together with another 9 of the suite of statutes that comprise Malta’s financial services legislative portfolio. This is yet again an unfortunate instance of laws being amended by a broad sweep-up legislative instrument. It may be effective in saving Parliamentary time, and perhaps usefully agglomerates several amendments to related laws, but it is a practice that sits uneasily with the expected norms of legal taxonomy.
EU Sources of Company Law
Cap.386 now rather helpfully records its EU sources of law by listing the EU Directives transposed and Regulations implemented into domestic law. Other amendments are evidently the result of a redacting exercise, some in the nature of procedural refinements addressing relatively minor deficiencies in the law that evidently came to light during application in practice.
In similar vein is the obligation to use the abbreviated form “SE” for a public company having the legal shape of a Societas Europaea (in lieu of “p.l.c.”). SE may either follow or precede the company name.
Unacceptable Company Names
Likewise, the Registrar of Companies has been given wider latitude when applying criteria to establish at his discretion whether a proposed name for a company registration is offensive or undesirable. This provision ought to have also covered changes in name that occur after registration, given that today it clearly contemplates discretion being exercised only at the pre-registration stage; although the assumption is that the Registrar will not fail to exercise similar discretion in a post-registration context.
The ‘two shareholder’ Rule
More interestingly, the Act now records the formal and final demise of the ‘two shareholder’ rule (Article 68). In truth, this happened much earlier with the introduction of the single member company and more recently – but much more effectively – by last May’s amendment of Article 211 (by Act No.III of 2013) allowing single member companies to be wholly owned also by bodies corporate, local or foreign. This new amendment could have been effected earlier in May of last year, but the Act now sets things right. In addition, the anomaly regarding the activity of a single member company being mainly “trading” has been corrected.
Directors’ ex ante Authority to Issue Shares
One of the more relevant changes introduced by the Act relates to the ex ante authority that formerly could have been embedded in a company’s statute permitting the general meeting (by ordinary resolution) to authorise the Board to issue shares up to a maximum amount as specified in the statute during a period of 5 years (renewable for successive periods); and where not so embedded, the same authority could have been granted to the Board by an extraordinary resolution (Article 85).
The Act now widens the options by allowing the grant of ex ante permission (either in the company’s statute or by extraordinary resolution) authorising (i) the board of directors to issue shares in the same manner or (ii) the general meeting (by ordinary resolution) to authorise the board to issue them in the same fashion. These provisions apply equally to private and public companies (and in the latter case additional requirements could apply), but this change has introduced much more flexibility to both the authorisation and share issuance processes. Furthermore, it is now much clearer that an under-subscription renders a prospective share capital increase ineffective, unless the terms of issue permit an increase of issued share capital by the amount actually received.
Perhaps even more pertinent and useful for local and foreign corporate operations is the short but punchy amendment that will permit a company to acquire its own shares as long as the nominal value of the acquired shares (including the ones previously acquired and still held by it) does not exceed 50% of the issued share capital (Article 106). While the other conditions for a share buy-back still apply, this increase from 10% to 50% is significant.
The 10% threshold was far too low (especially as previously acquired shares also had to be aggregated) for a practical application of this rule in corporate and securities scenarios. Some may view this change as an unnecessary erosion of the capital maintenance safeguards protecting creditors, but the utility and benefits of share buy-backs in various settings are well-documented. It should at the very least open up new opportunities for returning value to shareholders, especially in the context of publicly traded shares and SICAVs, in ways that have been available in some countries for several years.
One may theorise that amendments of this nature become possible because previous developments in the law, intentionally or not, prepare the ground. The codification in 2003 of directors’ duties thrust the risk of personal liability to the front and centre of any discussion on corporate conduct and responsibility. It may have rendered our regulators more amenable to introducing this amendment which, on the security of the directors’ liability, appears to achieve a balanced trade-off between the protection of creditors and new measures to facilitate corporate objectives.
Financial Assistance Rules
The same reasoning does not seem to have prevailed in relation to the prohibition of financial assistance which is still extant in respect of public companies and, though in whitewashed form, in private companies too. There is a current of opinion among practitioners that it is now time to rethink and re-contextualize the utility of this prohibition, and for the legislator to grasp the nettle and consider its abrogation in all instances saving those involving public companies.
Part 2 of this article focuses on Financial Assistance and is available by clicking here.