On 21 March, 2017, the Companies (Amendment) Act, 20171 (“Amending Act”) came into force after having been passed by the House of Representatives at Sitting No. 495 of 15 March, 2017. The Malta Registry of Companies (“Registry”) was very much at the forefront of the discussions leading to the Amending Act, since the Registry was particularly interested in banning share warrants to bearer given the difficulties that arise when determining ownership both from the record-keeping and AML perspectives.
Abolition of Share Warrants to Bearer
The main aim behind the Amending Act was to abolish share warrants to bearer, since in terms of the Act they could still be issued by public companies with respect to any fully paid up shares if so authorised by their memorandum or articles of association, though for several years it had already not been possible for private companies to issue share warrants to bearer. Indeed, the typical opening provision of the articles of association of a pre-Amending Act private limited liability company mirrored textually the content of Regulation 2 (d) of Part II of the First Schedule to the Act, which ordinarily read as follows: “the company shall not have power to issue share warrants to bearer.”
The Amending Act starts off by amending the definition of “shareholder” in article 2 of the Act, whereby the words “or the bona fide holder of a share warrant referred to in article 121 [the provision dealing with share warrants]” have been deleted. Indeed, all the references in the Act to share warrants to bearer or to a bearer of a share warrant have been deleted. Interestingly, one notes that prior to its amendment by the Amending Act, article 121 of the Act defined the expression “share warrant” as meaning a ‘share warrant to bearer’, making it clear at the pre-amendment stage that every reference in the law to “share warrant” unequivocally meant a reference to a “share warrant to bearer”. The general meaning of “share warrant” – which included a reference to the fact that the “bearer of the warrant is entitled to the shares therein specified” – was also deleted. The removal of this explanation, which could be construed as a ‘definition’, is unfortunate given that now, references to share warrants without the qualification ‘to bearer’ are undefined. This may leave room for interpreting the term as referring to ‘warrants’ giving the holder thereof an ‘entitlement to acquire shares’ upon submission of the warrant to the company, but not actual ownership of the shares indicated in the warrant as was the meaning of the term previously (please see further commentary on this point below).
Article 121 as amended now states clearly:
“No company may issue a share warrant to bearer notwithstanding anything contained in its memorandum and articles of association.”
In addition, a new article 121A is of great significance since it clearly details the transitory provisions applicable to the amendments introduced by the Amending Act. Thus, a holder of a share warrant (undefined) must – before the expiry of nine (9) months from the coming into force of the Amending Act (i.e. 9 months from 21 March, 2017) – surrender for cancellation the share warrant to the company issuing such warrant. Upon the surrender of a share warrant, the company must:
- cancel the share warrant issued by it;
- enter in its register of members the name of the persons requesting that their names and addresses be entered in the register of members in lieu of the share warrants surrendered; in this regard, the provisions of article 123(1) (a) and (b) and (2) – dealing with the relevant entries to be made in the register of members – apply, namely:
- the names and addresses of the members and a statement of the shares held by each member, distinguishing each share by its number, so long as the share has a number, and of the amount paid or agreed to be considered as paid on the shares of each member; and
- the date at which each person was entered in the register as a member; and
- notify the Registry of any changes in the register of members in the above manner.
Failure to abide with the above procedure has serious consequences for the share warrant holder. In fact, any share warrant which is not surrendered to the issuing company by the end of the nine (9) month period from the coming into force of the Amending Act will no longer be recognised by the company after the end of this period, and such share warrants are deemed cancelled. In effect, this means that the share warrants are no longer enforceable against the company which issued them in the first place. The time period set for this transitory provision is short by any measure – and being peremptory – may conceivably give future cause for question or judicial action based on notions concerning the undue deprivation of ownership rights.
The above-mentioned new article 121A leaves much to be desired in this respect because it fails to use the term “to bearer” and seems to require that all share warrants be returned to the issuing company for cancellation whether or not they are ‘to bearer’ and whether they fell within the previous definition of the term or not. It may be argued that article 121A may indeed have been intended to have the effect of capturing all share warrants – whether to bearer or not and whether as previously ‘defined’ or otherwise (i.e. the omission of ‘to bearer’ may have been deliberate) – but this remains debatable. Better drafting would have made the position clear.
Moreover, despite removing the ‘definition’ of the term, the concept of share warrants has still been retained in the Act in other instances2 leaving the current position unclear and subject to interpretation. In fact, the first proviso to article 123 of the Act outlines the way in which share warrants are to be entered in the company’s register of members:
“Provided that on the issue of a share warrant the company shall strike out of its register of members the name of the member then entered therein as holding the shares specified in the warrant and shall enter in place of the aforesaid requirements the following particulars:
- the fact of the issue of the warrant;
- a statement of the shares included in the warrant, distinguishing each share by its number so long as the share has a number; and
- the date of the issue of the warrant”.
This wording seems to assume the previous ‘definition’ of the term ‘warrant’ as an instrument actually denoting ownership in the company rather than an ‘entitlement to acquire ownership’ (akin to an option), which latter concept3 is often attributed to the term ‘share warrant’ in market practice, and may cause confusion.
The amendments made as regards share warrants to bearer have also been reflected in the provisions that previously regulated the pledging thereof. Article 122 dealing with pledging of securities has been amended throughout to remove all references to share warrants, except one, which although explicitly stated in the Amending Act, was not transcribed in the Act itself. This is clearly a slip of the pen. Share warrants cannot be pledged any longer with immediate effect (i.e. which pledge was constituted by mere delivery of the share warrant to the pledgee and for which no other formalities were required). However, if there are share warrants that are currently pledged the position is unclear as there are no transitory provisions to cover them. This is worrying because as explained above, the transitory provisions are only limited to the surrendering of share warrants without indicating what the effect on extant pledges will be.
A final but natural amendment is that made to Regulation 2 of Part II of the First Schedule to the Act: the prohibition of a company to issue share warrants to bearer need no longer be clearly stated in its constitutive document because it now emerges at law. Practitioners may seek to remove this prohibition from their template memoranda or articles of association for private, private exempt and single member companies.
Admission to Listing of Debt Securities by Private Companies
The Amending Act also amended article 209 in respect of offers of securities made to the public and the admission of securities to listing. This amendment is significant since it enables private companies to admit debt securities to listing provided that they are not offered to the public. The amendment is welcome as it aligns our company law with that of other jurisdictions where special purpose vehicle issuers (established for the sole purpose of issuing asset-backed securities, for example) are not required to comply with onerous requirements applicable to public companies.
A public company is still required for the listing of “equity securities”, whether offered to the public or not. The term was already defined in the Act as:
“shares and other securities which are equivalent to shares in companies or which are convertible to such shares, or securities which give such right of conversion, provided such securities of the latter type are issued by the issuer of the underlying shares or by an entity belonging to the group of the said issuer, …”.
The admission to listing of convertible debt securities (convertible into shares of an issuer or of a company in the issuer’s group) would therefore still trigger the public company requirement.
Amendments to the Court’s General Powers in a Court Winding Up
The Amending Act made some other minor clarifying amendments to existing provisions of the Act. Article 258(2) of the Act – dealing with a court winding up scenario – has also been amended. The Amending Act has added to the list of the general order of priority which the court will give regard to in the event that the assets of the company are insufficient to satisfy its liabilities and the court then makes an order as to the payment out of the assets of the costs, charges and expenses incurred in the dissolution and winding up. These additions consist of: any necessary disbursements by the special controller appointed in such a company reconstruction procedure; his remuneration; and any new financing granted to the company for the purpose of a company reconstruction. As a result, the general order of priority has also changed, but this is clearly listed chronologically in the Act.
Amendments to the Procedure regulating Company Reconstructions
Part VI of the Act titled ‘Company Reconstructions’ (i.e. the company recovery procedure or the procedure to be followed for the purpose of rescuing a company undergoing financial difficulties, principally in the interest of its creditors and employees) was also heavily amended by the Amending Act. Most of the changes are procedural or clarificatory in nature. The principal provision outlining the details of the procedure for company reconstructions (article 329B) has undergone several amendments, ranging from the appointment of the special controller, his tenure and the payment of his remuneration and disbursements to the adjustment of relevant time periods and notice periods of meetings.
A significant amendment is the introduction of the possibility of appointing a mediator in terms of article 20 of the Mediation Act, Chapter 474 of The Laws of Malta. Where a compromise or arrangement is proposed between a company and its creditors, or any class of them, or between the company and its members, or any class of them, the company or any creditor, with the sanction of not less than two-thirds of the creditors or class of creditors, may seek the appointment of a mediator in terms of article 20 of the Mediation Act. The mediator must organise a meeting of the creditors, or class of creditors, as the case may be, in order for the creditors and the company to reach a compromise or arrangement. If all the creditors, as a result of the mediation process, execute a written agreement containing a compromise or arrangement, such arrangement shall be binding on all creditors, and also on the company or, in the case of a company in the course of being wound up, on the liquidator.
Interestingly, a new provision has been included that contemplates creditors with different interests being treated in separate classes reflecting those interests; for example, where both secured and unsecured creditors exist, they are treated as separate classes. In such cases, the principles under the Mediation Act apply. The Mediation Act was enacted to encourage and facilitate the settlement of disputes in Malta through mediation and regulates the conduct of the mediation process. Evidently, this measure goes beyond the norm, but seeks to capitalise on current trends encouraging the use of mediation as a dispute resolution tool; and aims to grant more protection to creditors while seeking amicable solutions to disputes that are usually very contentious. On the other hand, mediation may generally prolong the process in already lengthy cases.
Also notable is the new provision that where the court accepts the proposed recovery plan, with or without amendments, the dissenting creditors may apply to the Court of Appeal (Inferior Jurisdiction) if they consider that their rights are likely to be reduced to a level lower than had the company been dissolved and wound up at the time of the recovery application. In the interest of the creditors supporting the plan, the appeal does not automatically suspend the implementation of the recovery plan and procedures, and remedies are limited to compensation for the loss suffered by the applicant as a result of the recovery procedure. Where the proposed recovery plan seeks new financing, the financiers are, in the absence of any fraudulent actions, exempt from civil and criminal liability relating to the recovery procedure.
1 Act No. XI of 2017; an Act to amend the Companies Act, Chapter 386 of the Laws of Malta.
2 As in articles 121A, 122 and 123.
3 As contemplated by article 85(4) (formerly, article 85(5)) of the Act.