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Company/Commercial- Bermuda

Introduction

A comprehensive review of the Bermuda Companies Act 1981 was undertaken last year by the Legislative Change Committee of the Bermuda International Business Association, in collaboration with the Ministry of Finance, with a view to modernizing the act to take account of the various company law reform initiatives that have taken place in the United Kingdom and elsewhere. Following this review, the Companies Amendment Act 2006 was passed in legislature and enacted on December 29 2006.

 

All amendments came into immediate effect on the operative date, with the exception of the amendments to the delivery of electronic records to the registrar of companies.

 

The new act contains a number of significant amendments.

 

Electronic Delivery of Documents

In the past, a company could deliver documents (eg, notices, reports, instruments and registers) in hard copy via post, mail or fax. The Companies Amendment Act makes it possible for a company to deliver electronically (including email and website postings) an electronic record of these documents, and include an electronic code or device to decrypt or interpret the electronic record. Therefore, a Bermuda publicly listed company may, subject to the provisions of its bylaws, communicate with its shareholders by posting information (eg, proxy material and notices of shareholders' meetings) on a website. The act also specifically empowers the registrar of companies to accept filings electronically. The registrar will develop specific 'e-delivery' guidelines in due course.

 

Use of Secondary Names

The act permits companies to apply to the registrar of companies for registration of a 'secondary name', which is defined as "a name of a company in a script other than Roman script and in addition to the primary name of the company". Thus, companies may now register a secondary name with non-Roman or non-alphabetic characters.

 

Authorized Share Capital

Before the enactment of the act, a company (other than a mutual fund) was required to maintain a minimum level of authorized and issued share capital (ie, $12,000). This amount was an arbitrary amount which had no bearing on the business activity undertaken by companies. The act has abolished this requirement. A company may be incorporated with any amount of authorized share capital. These new provisions do not apply to insurance companies which are registered under the Insurance Act 1978 (as amended) and other offshore legal, fiduciary and administration services companies carrying on business requiring a licence, for which a minimum level of share capital is prescribed under the relevant licensing laws or regulations.

 

Unrestricted Objects and Powers

Before the entry into force of the act, a company was required to set out its objects and powers in its memorandum of association. Typically, companies established a broad range of bespoke objects and powers, in addition to the statutory objects and powers set out in the Second and First Schedules of the Companies Act, respectively. The rationale for including such a broad range of objects and powers was to ensure that a company had the requisite corporate capacity and power to enter into as wide a range of business as possible. The Companies Amendment Act now allows companies to have unrestricted objects, as well as the capacity and powers of a natural person. The ultra vires rule would thus become redundant for those companies which adopt such objects and powers, and thereby enjoy unfettered capacity and power. The First and Second Schedules of the Companies Act have been repealed accordingly. These amendments will not affect the objects and powers of any company in existence before the operative date of the Companies Amendment Act.

 

Indemnification of Directors and Officers

The Companies Amendment Act clarifies the position on a company's ability to fund the costs of proceedings against directors and officers where there have been allegations of fraud or dishonesty. Specifically, a company is permitted to advance monies to an officer or auditor for the cost of defending any civil or criminal action involving allegations of fraud or dishonesty against that officer or auditor, on condition that such officer or auditor must repay the advance if the allegations are proved.

 

'Private Character' Exemption

The Companies Act provides that where a company offers shares to the public, the company - subject to a number of exceptions - must file a prospectus with the registrar of companies. The act also enumerates certain types of share offering which are not treated as a public offer, including offers having a private character. The Companies Amendment Act seeks to clarify the 'private character' exemption in two respects. First, it provides that an offer of shares pursuant to an employee share scheme or employee share incentive plan is considered to have a private character. Second, the new provisions state that an offer does not have a private character solely because it is made to members or debenture holders of the company.

 

Majority Approval for Written Resolutions

Before the enactment of the Companies Amendment Act, a company was permitted to pass shareholder resolutions in writing, provided that the resolutions were signed by all shareholders of the company. In effect, two different sets of voting requirements existed: if a resolution was voted on at a general meeting, subject to the company's bylaws, only a simple majority of the votes was required; however, if the same matter was decided by a written resolution, the consent of all members entitled to vote on the resolution was required. These different voting requirements no longer exist. Written resolutions will be effective where (i) notice of the resolutions and the resolutions have been circulated to all shareholders, and (ii) the resolutions have been signed by shareholders who represent the majority of votes, as would be required had the resolutions been voted on at a general meeting.

 

Treasury Shares

The Companies Amendment Act introduces the concept of treasury shares. 'Treasury shares' are defined as "issued shares that have been acquired by the company itself and have not been cancelled, but have been held by the company since they were acquired". Shares held as treasury shares are separate and distinct from shares which are repurchased for cancellation. Under the act, a number of conditions must be met in order for a company to hold shares as treasury shares:

  • The company's constitution must allow the company to acquire and hold shares as treasury shares;
  • An acquisition of shares to be held as treasury shares is expressly forbidden if the company would be rendered insolvent as a consequence of the acquisition;
  • A company that holds treasury shares can exercise no rights attaching to those shares;
  • Treasury shares can be transferred for cash or in-kind consideration; and
  • Treasury shares can be issued as fully paid bonus shares (ie, in connection with employee share option plans or share dividends).

 

Execution of Instruments

Historically, a company was required by statute to affix its common seal to various instruments or documents - most commonly, deeds. The use of the common seal for executing such documents has become an anachronistic practice in modern-day commerce. Under the provisions of the Companies Amendment Act, companies may now execute deeds and other instruments (eg, share certificates or debentures) which previously had to be executed under the company seal by the signature of an authorized person. Companies that wish to continue to use a seal can do so; any deed or documents to which the common seal is affixed will bind the company.

 

Appointment of Officers

In the past, a company was required to appoint certain officers (who were also directors): a president and vice president, or a chairman and deputy chairman. The Companies Amendment Act has removed this requirement. There is now more flexibility in terms of the ability of a company to appoint officers of any description, who may or may not be directors.

 

Directors' Authority

The scope of directors' authority is typically set out in the company bylaws. Before the enactment of the Companies Amendment Act, there was doubt as to whether a board of directors' authority was proscribed in certain circumstances (eg, in transactions relating to the disposal of all of the company's assets) and required shareholder approval. The act clarifies the position and removes any doubt about the scope of directors' authority towards shareholders. It is now explicitly stated that directors can exercise all the powers of the company, except those powers that must be exercised by shareholders under the Companies Act or the bylaws.

 

Fetter of Company's Power

Historically, a company was barred from contractually agreeing to fetter its statutory powers following the principles enunciated by the House of Lords in Russell v Northern Bank Development Corporation Ltd (HL1992). Thus, for example, a contract made by a company that it would not exercise its statutory power to alter its bylaws was deemed to be unenforceable. The strictures of the Russell decision have created a myriad of challenges and an environment of uncertainty in many spheres of commerce, particularly with respect to secured lending transactions. The provisions of the Companies Amendment Act allow companies to circumvent the Russell decision in specific circumstances. Subject to the provisions of a company's constitutional documents, a company may agree to fetter its statutory powers (ie, powers reserved to shareholders) in the following circumstances:

  • change of name (primary or secondary);
  • alteration to the constitutional documents (bylaws and memorandum of association);
  • changes in share capital;
  • removal of directors;
  • long-form amalgamation; and
  • voluntary winding-up.

 

Comment

The enactment of the Companies Amendment Act reflects the Ministry of Finance's critical assessment of Bermuda's company law and its commitment to modernizing it. With a modern company law framework in place, it is envisioned that Bermuda will continue to stand out as an offshore financial centre of choice for the formation and administration of companies.

 

"International Law Office"