This article was first published in the February 2016 Ireland edition of Accounting and Business magazine.

The Companies Act 2014 came into force on 1 June 2015. From this date there is an 18-month transition period during which existing private limited companies will have to make a decision about which of the new business entity types they wish to become.

LTD or a DAC?

Company directors across the country will be wondering whether to take steps to become a private limited company (LTD), to re-register as a designated activity company (DAC), or simply to be converted automatically to a new-style LTD at the end of the transition period, which runs until 31 October 2016.

Act now or do nothing?

Existing private limited companies incorporated prior to 1 June 2015 can decide to convert to a DAC or the new-style LTD, or decide to do nothing – in which case, after the 18-month transition period has run its course they will be automatically converted into the new-style LTD.

Existing private companies that are happy to be converted into an LTD need take no action. They will simply lose their objects clause and the remaining part of the memorandum of association, and the articles will be deemed to be the company’s constitution at the end of the transition period.

If, however, an existing private company wishes to become an LTD before the transition period expires, then it must pass a special resolution and adopt a new constitution in line with the act. When it has done that, and sends the necessary documentation on to the Companies Registration Office (CRO), the latter will issue a new certificate of incorporation. It falls to the directors to prepare the new constitution, deliver the particulars to the CRO, and so on.

However, automatic conversion is not recommended for the following reasons:

  • A company may be deemed to have a corporate form and constitution that doesn’t suit its requirements.
  • There may be conflicts between the existing memorandum and articles of association lodged in the public records and provisions of the Companies Act 2014.
  • Under the legislation, company members (ie the owners) will be able to seek remedy in the courts (which can rule they must be paid compensation for their purchase of shares in the company) if they feel their rights as members have been prejudiced by the company taking no action.
  • Automatic conversion may impact the company’s dealings with banks, potential investors, enterprise boards and other third parties.
  • Companies that want to have a ‘single director’ will not be able to do so until they have converted.

What a DAC does

It is open to any existing company to become a DAC. Some companies may find that a DAC is a more relevant form for them – for example, they may feel that the specific purpose of the company should be clearly stated in the principal objects clause so that the capacity of the company is clearly defined. It should be noted that certain companies are obliged to convert to a DAC; an existing private limited company that has published an offering document or obtained an admission to trading on a regulated market for its debentures must take the DAC conversion route.

A DAC is essentially the same as a private limited company prior to the new legislation. It must have a memorandum of association with an objects clause, and it will have limitations on what it can do based on the provisions set out in its memorandum of association. A DAC has the capacity to do anything in its objects clause, which includes anything that is ‘requisite, advantageous or incidental to, or to facilitate’ the attainment of that object.

Single-member DACs are permitted. Unlike the new-style LTD, a DAC still requires two directors and can dispense with its annual general meeting (AGM) only if it is a single-member company.

Characteristics of an LTD

  • can have a single director
  • can dispense with holding its AGM even if it has more than one member
  • does not require an authorised share capital
  • will have a one-document constitution that replaces the need for a memorandum and articles of association.
  • will have unlimited capacity to carry on all types of business as it will not have an objects clause
  • will continue to have the designation Limited or Ltd at the end of its name.

How to change to an LTD

In an effort to simplify matters, all new-style LTD companies will have a one-document ‘constitution’. In a significant departure from previous practice, the constitution will not contain an objects clause. You can find the statutory guidelines in section 19 of the act. It must state the following:

  • the company’s name
  • that the company is an LTD
  • either the amount of authorised share capital and how the division of the capital into shares works, or a statement of how the share capital is divided
  • details of the original subscribers
  • whether the company is adopting supplemental regulations – and if so, which.

It should be noted that the list of subscribers must be the original subscribers as submitted to the CRO on incorporation. The most up-to-date authorised share capital must be indicated on the new constitution, where required. The new constitution should be submitted together with the form N1 and a G1.

Once the N1 form and associated documents have been registered, a new certificate of incorporation will be issued by the registrar of companies. The company becomes the new company type only on the issue of this certificate.

Characteristics of a DAC

  • must have at least two directors
  • must hold an AGM if the company has two or more members
  • will have a constitution document which includes a memorandum and articles of association
  • will state the object for which the company is incorporated in its memorandum
  • the company name will end with Designated Activity Company or DAC.

How to change to a DAC

If a company wishes to convert to a DAC, it should pass an ordinary resolution not later than three months before the expiry of the transition period. If a member of an existing private company who holds more than 25% of the total voting rights in the company serves notice on the company that they want it to re-register as a DAC, then it must do so. Also, members who hold more than 15% of the company’s issued share capital or creditors who hold 15% of the company’s debentures may apply to court for an order requiring the company to re-register as a DAC.

The DAC’s constitution takes the form of two separate documents, the memorandum and articles of association. The model constitutions can be found in schedule 7 and schedule 8 of the act. The new constitution should be submitted together with the form N2 and a G1.

Once the N2 form and associated documents have been registered, a new certificate of incorporation will be issued by the registrar of companies. The company becomes a DAC only on the issue of this certificate.

It would be prudent for directors of existing private companies to consult with the company’s shareholders, especially if they have shareholders who are not directors, to ascertain what their preference is regarding the two conversion options available to them. It would also be wise for directors to consult with key creditors such as banks.

Maeve Harrington, director of e-learning specialist KnowledgeBase