Client Update February 2006

Transcription

1 Highlights Memorandum And Articles Of Association... 1 When Do The Memorandum And The Articles Of Association Need To Be Amended?... 1 Par Value... 2 Treasury Shares... 3 Reduction Of Capital... 3 Other Documents... 4 Conclusion... 4 The Impact Of The Companies Act Amendments On Articles Of Association Etc The Companies (Amendment) Act 2005 came into force on 30 January 2006 ( Amendment Act ). The changes implement further recommendations of the Company Legislation and Regulatory Framework Committee ( CLRFC ). This is the third round of CLRFC amendments proposed to the Companies Act ( Act ), the earlier amendments having come into force on 15 May 2003 and 1 April 2004, respectively. The amendments that have been made to the Act by the Amendment Act include the following: abolishing the concept of par value and authorised share capital; introducing an alternative capital reduction process which does not require court sanction; liberalising the financial assistance restrictions to allow financial assistance to be provided under additional circumstances; allowing share-buybacks to be funded out of profits as well as capital where supported by a declaration of solvency; allowing repurchased shares to be held as treasury shares; and introducing a more effective and efficient statutory form of merger / amalgamation process. Please feel free also to contact the Knowledge & Risk Management Group at eoasis@rajahtann.com A natural question which arises from these amendments is: does my company have to amend its memorandum or articles of association? What about other documents, such as contracts entered into by the company, employee share option schemes etc? This Update discusses whether the memorandum or articles of association of companies and other documents have to be amended in the light of the changes to the law. Memorandum And Articles Of Association When Do The Memorandum And The Articles Of Association Need To Be Amended? The Companies Act, being a statutory instrument, takes precedence over the articles of a company. If the memorandum and articles are silent on a particular matter, it would be clear that the Companies Act applies. 1

2 Contacts Abdul Jabbar Partner Direct: (65) Facsimile: (65) However, if there are evident restrictions in the memorandum or articles then an amendment would be necessary, as this could be viewed as a contractual restriction on the members. Par Value The CLRFC recommended the abolition of the concept of par value as it considered that it served no useful purpose. Rather, in analysing a company s capital structure, the CLRFC felt it was more meaningful to consider the total consideration paid for or payable on the shares, which would include the nominal value and the share premium of each share. To facilitate these changes, a new section 62A was inserted into the Act. This section states that shares of a company have no par or nominal value. This change applies to all shares, including those in existence prior to the coming into force of the Amendment Act. Consequential amendments were also made throughout the Act to remove references to the phrase nominal amount or nominal value and to rephrase the words in affected provisions. For example, where a provision previously referred to a certain percentage in nominal value of the company s issued share capital, the phrase now refers to that same percentage of the total number of issued shares of the company. Examples of affected provisions include those dealing with substantial shareholders, alteration of share capital and requisition of meetings. Transitional amendments were also made, for instance, to provide that immediately after the commencement of the amendment, the amount standing to the credit of the company s share premium account and capital redemption reserve will become part of the company s share capital. In addition, new section 62B provides that for the purposes of interpreting and applying, on or after the appointed day, a contract (including the memorandum and articles of the company) entered into before the relevant date will be interpreted as follows: A reference to the par or nominal value of a share shall be a reference to: if the share is issued before the in force dare, the par or nominal value of the share immediately before that day; if the share is issued on or after that day but shares of the same class were in existence immediately before the in force date, then the par value that the share would have had if it had been issued then; and if the share is issued on or after the in force date and the same class of shares were not on issue immediately before that day, then the par or nominal value determined by the directors. In each of the preceding scenarios, any reference to the share 2

3 premium will bear the meaning of residual share capital in relation to the share. Any references to a right to a return of capital on a share will be a reference to a right to a return of capital of a value equal to the amount paid in respect of the share s par or nominal value. Given the aforesaid, it would seem that nothing immediate needs to be done to amend the memorandum and articles of a company. Changes to the memorandum and articles to remove phrases like nominal amount or nominal value, share premium and capital redemption reserve can be made for purposes of accuracy in language. However, as a matter of convenience, we would only recommend that the amendments be made at the earliest when the next annual general meeting or extraordinary general meeting is held. Treasury Shares The concept of treasury shares was introduced to give greater flexibility to companies to use share buy-backs as a form of capital structuring. Repurchased shares may now be held in treasury without being cancelled. These treasury shares may be used by the company, for instance, to meet its obligations under employee share option schemes. They may also be transferred to third parties to fund acquisitions or to raise cash. Some articles may state that repurchased shares are deemed to be cancelled immediately upon acquisition. If companies have such articles and they need to use the new provisions in the Act on treasury shares, they would need to amend their articles prior to embarking on such an exercise. Next, treasury shares do not come with the same rights as ordinary shares. Treasury shares carry no right to attend and vote at general meetings of the company and no right to participate in dividends nor any other distribution of the company s assets may be made to the company. Accordingly, the provisions of the articles of association dealing with attending and voting at meetings and participating in dividends or other distributions may need to be amended to recognise the restrictions on treasury shares. Reduction Of Capital An alternative process for capital reduction has been introduced, which does not require Court sanction but requires shareholders special resolution approval and a solvency statement. The Act has been amended to introduce such a process as an alternative for private as well as public companies. If a company s memorandum or articles contain specific provisions dealing with court sanctioned capital reductions, then the company may need to amend the same. 3

4 With the new changes, section 78A(3) has been introduced to allow exclusions or restrictions to be inserted into the memorandum or articles of a company to reduce the company s power as stated in the preceding paragraph. If it is desired to have such restrictions, then the memorandum or articles would have to be amended. Other Documents In the light of the discussion above on transitional provisions following the removal of the concepts of par value and authorised share capital in the new section 62B, documents such as circulars setting out employee share option schemes and contracts, share buyback mandates and share issuance mandates entered into by the company do not, strictly, have to be modified. However, as with the memorandum and articles, such documents can be modified for conformity. Listed companies should also note that the changes to the Act may affect the accuracy of the wording of share issuance mandates, which usually track the restrictions in the Listing Manual. The language of share buyback mandates by listed companies should also be reviewed given the additional requirements of the Listing Manual. Affected companies may take the opportunity to modify the wording of their mandates at the next general meeting of the company, or wait to see if the Listing Manual will be amended and draw guidance therefrom as to the appropriate wording of such mandates. Conclusion The amendments to the Act are far reaching. However, most companies would not have to amend their memorandum or articles to take advantage of them. It is only if there are express restrictions in the memorandum or articles which contradict the amendments and restrict the company from carrying out certain transactions that immediate action should be taken to amend the articles. Otherwise, companies may consider amending their memorandum and articles at the next annual or extraordinary general meeting. For other documents and contracts, the presence of the transitional provisions would render any modification strictly unnecessary. Listed companies with share issue mandates and share buyback mandates may take the opportunity to revise the wording of their mandates at the subsequent general meeting. If you require assistance in amending your memorandum or articles of association, or any other assistance on the matters set out in this update, please contact Abdul Jabbar, whose 4

5 contact details appear on the left of the second page of this Update, or the Knowledge & Risk Management Group at and we would be happy to assist you. Rajah & Tann is one of the largest law firms in Singapore, with a representative office in Shanghai. It is a full service firm and given its alliances, is able to tap into resources in a number of countries. Rajah & Tann is firmly committed to the provision of high quality legal services. It places strong emphasis on promptness, accessibility and reliability in dealings with clients. At the same time, the firm strives towards a practical yet creative approach in dealing with business and commercial problems. The information contained in this Update is correct to the best of our knowledge and belief at the time of writing. The contents of the above are intended to provide a general guide to the subject matter and should not be treated as a substitute for specific professional advice for any particular course of action as the information above may not necessarily suit your specific business and operational requirements. It is to your advantage to seek legal advice for your specific situation. In this regard, you may call the lawyer you normally deal with in Rajah & Tann or the Knowledge & Risk Management Group at eoasis@rajahtann.com. 5