PHILIP

As described in a separate article in this newsletter the new Limited Company Act, which was passed by the Danish parliament last year, will come into force in stages starting on 1 March 2010. In response to the new Limited Company Act’s taking effect, Danish limited companies must comply with new rules when convening and conducting Shareholders’ Meetings. Also, in order to comply with the new Act it is necessary that some of the provisions contained in a typical set of bylaws be revised. Additionally, the Act creates a number of new opportunities but also in some situations new challenges and risks. Below please find a description of the changes of bylaws, shareholders’ agreements etc. which are necessary or which businesses should consider in response to the new Act.

Necessary changes to the companies’ bylaws

It follows from section 28 of the new Limited Company Act that a company’s bylaws must contain information on:
 
1.      The company’s name and possible secondary names
2.      The business purpose of the company
3.      The size of the corporate capital and the number of shares or the par value of each share  
4.      The rights attached to the individual shares
5.      The governance bodies of the company
6.      The rules on convening Shareholders’ Meetings
7.      The fiscal year of the company
 
This outline of the required minimum contents of a company’s bylaws does not deviate significantly from what is required under the old company laws (the Public Limited Company Act governing A/S companies and the Private Limited Company Act governing ApS companies). Accordingly, the need for a review of a typical set of bylaws does not primarily arise out of the new Limited Company Act’s imposing new requirements as to the subjects which should be dealt with in a company’s bylaws. Rather, the need for a review primarily arises out of the fact that the new Limited Company Act contains various changes of the regulation of the above-mentioned topics which must be addressed in the bylaws under the old rules as well as under the new rules.
 
Below will be found a description of the most important of the changes of a typical set of bylaws which are necessary according to the rules contained in the new Limited Company Act.
 
It should be noticed that since bylaws in companies with a single or only a few shareholders are normally kept very short, the majority of the necessary changes outlined below will only be relevant for publicly listed companies or companies which otherwise have a widespread group of shareholders. In such companies there is a tradition and need for a detailed set of bylaws, often containing references to and reiterations of the rules contained in the Limited Company Act concerning the topics dealt with in the bylaws.
 
Under the old rules (the Public Limited Company Act) the bylaws of a company might contain a provision requiring the shareholders to give notice of their intent to attend the Shareholders’ Meeting in order to be able to participate and exercise their voting rights. According to the old rules, the deadline for giving such notice must be no more than 5 days prior to the Shareholders’ Meeting. Pursuant to the rules of the new Limited Company Act, cf. its section 84, such deadline must be no more than 3 days prior to the Shareholders’ Meeting. Accordingly, bylaws which contain a cut-off date which is more than 3 days prior to the Shareholders’ Meeting must be revised.
 
Furthermore, it follows from section 89 of the new Limited Company Act that special Shareholders’ Meetings in limited companies must be called for if a minority of 5 % of the registered shares of the company so requires. This represents an enhancement of the protection granted to minority shareholders as under the present rules a minority of 10 % of the share capital is required in order to enforce a special Shareholders’ Meeting. Accordingly, the new Limited Company Act requires that bylaws containing a reference to the present 10 % minority requirement must be changed.
 
It follows from section 90 of the new Limited Company Act that shareholders are entitled to have topics added to the agenda of the annual Shareholders’ Meeting no later that 6 weeks prior to the Shareholders’ Meeting. In case the bylaws of the company contain a deadline which is more restrictive towards the shareholders than the one contained in section 90 of the new Limited Company Act, a change to the bylaws is necessary.
 
It follows from section 94 of the new Limited Company Act that the timeframes for convention of Shareholders’ Meetings have been made more restrictive. Thus, Shareholders’ Meetings must now be convened at a notice of at least 2 weeks and 4 weeks as a maximum as opposed to previously 8 days and 4 weeks as a maximum (however as regards publicly listed companies the timeframe is 3 weeks as a minimum and 5 weeks as a maximum). Should the bylaws of a company contain a notice requirement which is shorter that the present 2 weeks as a minimum (3 weeks for publicly listed companies), it will be necessary to change such notice requirement in accordance with the provisions of the new Limited Company Act.
 
Also, the new Limited Company Act imposes more strict rules concerning the timeframe for submitting documents for the shareholders’ review in public limited companies. Thus, pursuant to section 98 of the new Limited Company Act documents including the audited annual report which is to be approved at the annual Shareholders’ Meeting must be submitted at least 2 weeks prior to the Annual Meeting in question, as opposed to previously 8 days. Bylaws containing provisions for a shorter submission deadline than now provided for in section 98 of the new Limited Company Act must be revised accordingly.
 
Specially as regards private limited companies organized with only one governing body, such governing body according to section 111 of the new Limited Company Act must be designated the “Management Board”. Accordingly, the new Limited Company Act unlike the old Private Limited Company Act does not leave the companies the choice between designating such body the “Management Board” or the “Board of Directors”. If the bylaws of the company do not reflect such new rule, they must be revised accordingly.
 
Also, the new Limited Company Act in its section 111 opens up for the possibility that all companies (including public limited companies) can choose between a governance structure under which the company, as is presently mandatorily prescribed with respect to public limited companies, is governed by a Board of Directors which in turn employs a daily management or a governance structure under which the company is to be managed by a Management Board which as regards public limited companies is to be employed and supervised by a Supervisory Board. As mentioned above, bylaws must contain provisions on the governance structure of companies. According to the provisions contained in the present Public Limited Company Act it is sufficient that the bylaws indicate the number of members of the companies’ Board of Directors. Since public limited companies until now have been subject to a mandatory governance structure with a Board of Directors appointing the members of the Management Board, it has so far not been a requirement that bylaws should contain provisions for the company’s Management Board. With the requirement of the new Limited Company Act that the bylaws must contain rules on the company’s governance bodies and since also public limited companies now have the option to choose between 2 alternative governance structures, it must presumably now be considered a requirement that the bylaws of public limited companies contain provisions specifically outlining its entire governance structure and specifying whether it is organized with a Board of Directors and a Management Board or with a Supervisory Board and a Management Board.  

The initial Shareholders’ Meeting after the coming into force of the Limited Company Act  

It is important to be aware that the initial Shareholders’ Meeting of a company following the coming into force of the new Limited Company Act on 1 March 2010 must be convened and conducted according to the rules contained in the new Act.
 
This applies disregarding the fact that the bylaws of the company at the time of the company’s convening such Shareholders’ Meeting obviously still reflect the old law requirements.  

Changes to bylaws which must be considered in consequence of the new opportunities arising out of the new Act

In addition to the above-mentioned mandatory changes of the bylaws of a company, attention should be drawn to the fact that the Act makes the application of modern communications technology in connection with the convening and conducting of Shareholders’ Meetings possible. The exploitation of such possibilities requires a change of the bylaws of a company on various points as described below.
 
The Act additionally allows for the possibility that various other liberalization measures be implemented through changes to the company’s bylaws. Also, the most important of such changes will be described below.
 
As mentioned above, the described mandatory changes to the company’s bylaws primarily “hit” publicly listed companies and other companies with a widespread group of shareholders. On the other hand, it is also primarily this type of companies which will be able to enjoy the benefit of exploiting the below described possibilities.
 
It follows from section 28 of the new Limited Company Act that it is no longer necessary that the registered office of a company be stipulated in the bylaws. Accordingly, a removal from existing bylaws of provisions on the company’s registered office will create the advantage that there is no need for changing the bylaws in the event of the company’s subsequent changing of its address.
 
As a new creation it follows from section 76 of the new Limited Company Act that also public limited companies – in line with what is already the case with respect to private limited companies under the private Limited Company Act – can decide that the decisions of the shareholders at the Shareholders’ Meetings can generally be made in deviation of the formal rules of the Act on calling for and conducting of Shareholders’ Meetings if unanimously waived by the shareholders. If so decided, the shareholders’ waiver of such rules must be reflected by the bylaws. Also, in such case the bylaws must be amended to reflect the alternative procedure for decision-making agreed upon. 
 
Section 77 of the new Limited Company Act allows for electronic handling of the notice and conduct of Shareholders’ Meetings to the extent provided for in the bylaws.
 
As regards publicly listed companies section 84 of the new Limited Company Act stipulates the so-called “registration date” used for purposes of determining the extent of the shareholders’ voting rights at the Shareholders’ Meeting. Thus, the shareholders are entitled to vote based on the shares held on the registration date, which is one week prior to the Shareholders’ Meeting. Additionally, as mentioned above it can be determined by the bylaws that shareholders in order to participate in a Shareholders’ Meeting must give notice to the company no later than 3 days prior to the Shareholders’ Meeting. Such provisions can also by an amendment of the bylaws be extended to companies not listed on a stock exchange.
 
Likewise, it follows from section 91, cf. section 88 of the new Limited Company Act, that provisions in bylaws stipulating the agenda of a company’s annual meeting, which have so far been mandatory, can be revised or removed in the future as under the new Limited Company Act the Annual Meeting can at any time decide on matters concerning the approval of the annual report, disposal of profits/covering of deficits according to the approved annual report, a possible change of a decision on the auditing of future annual reports – unless the company is subject to mandatory auditing under the rules of the Annual Accounts Act or other legislation – as well as in other matters submitted to the Shareholders’ Meeting under the bylaws of the company.
 
It follows from section 95 of the new Limited Company Act that a company can choose to call for Shareholders’ Meetings via its website to the extent provided for in its bylaws. As regards publicly listed companies the convening of Shareholders’ Meetings mandatorily must be made via the company’s website regardless of whether the bylaws additionally prescribe other methods.
 
Additionally, it follows from section 98 of the new Limited Company Act that the companies’ submission of documents for the shareholders’ review prior to a Shareholders’ Meeting can be made via the company’s website. Accordingly, it will no longer be a law requirement that the documents must be available for inspection at the company’s office. Also, the companies are no longer required to send such documents to registered shareholders. If the company’s bylaws contain provisions on making available and forwarding such documents prior to the Shareholders’ Meeting, it could be considered whether such provisions should be revised, allowing the company to provide such documents via its website.
 
The new Limited Company Act also provides the possibility that it can be decided that Shareholders’ Meetings shall be conducted in another language than Danish. Decisions made in this regard must be included in the bylaws, cf. section 100 of the Act. 
 
Section 182 of the new Limited Company Act provides that an authorization issued by the Shareholders’ Meeting to the Board of Directors to pay out extraordinary dividends no longer needs to be reflected in the bylaws.
 
The new Limited Company Act abandons the prescription contained in the existing company laws that companies’ holdings of their own shares be maximized at 10 % of the share capital. Thus, it follows from section 197, sub-section 1, of the new Limited Company Act that companies following such provision’s becoming effective will be permitted to acquire their own capital shares as long as the free reserves of the company so permits. In consequence, existing provisions in the bylaws of the company authorizing the Board of Directors of the company to acquire its own shares could be considered amended in order to allow the company to utilize the new more flexible rules on companies’ acquisition of own capital shares.
 
Finally, it can be considered whether the company in consequence of new terminology introduced by the new Limited Company Act should apply such terminology in the bylaws, e.g. capital owner instead of public company shareholder/private company shareholder, owners register instead of shareholders register and capital share instead of public company share/limited company share. Such new terms are introduced in the new Limited Company Act in consequence of its being a consolidation of the 2 existing limited company acts (the Public Limited Company Act and the Private Limited Company Act), and accordingly its regulating both types of limited companies.
 
It should be noted that the terms public limited company and private limited company have not been abandoned in the new Act. Therefore, there are no hindrances to maintaining the use of traditional terminology attached to the 2 respective company types. 

Shareholders’ agreements are not considered binding on the company 

Through many years it has been disputed as to whether, and if so to what extent, shareholders’ agreements in addition to binding the shareholders, who are parties to the agreement, can also be considered binding on the company.
 
In section 82 of the new Limited Company Act it is expressly stipulated that the company is not bound by the shareholders’ agreements or decisions made by the shareholders.
 
Such provision has recently been subject to massive criticism, including from prominent corporate law scholars asserting that “coup makers through such provision are given a bounty land of opportunities” and can throw lots of businesses into deadly conflicts as it for practical purposes will eliminate existing shareholders’ agreements.
 
In our opinion, the described criticism is a bit over the top. As mentioned, it has always been subject to debate whether shareholders’ agreements are to be considered binding only among the shareholders who are parties to such agreements or whether also the management of the company and the Shareholders’ Meeting (including the chairman of such meeting) would be bound by the shareholders’ agreement in case of a conflict.
 
Thus, it has always been advisable when drafting shareholders’ agreements to take into consideration the possibility that a court would reach the conclusion that the management of a company and the Shareholders’ Meeting were not obliged to consider themselves bound by the provisions of the shareholders’ agreement and that a possible breach of the agreement would solely be a matter between the shareholders who are parties to the agreement.
 
Having said that, it is useful that the new statutory provision and not least the voiced criticism thereof put a renewed focus on the issue. Additionally, it must be admitted that the criticism has a valid point in so far as it cannot be excluded that the fact that the uncertainty as to whether companies are bound by shareholders’ agreements has now been removed could have the effect of encouraging potential coup makers.
 
Accordingly, it can only be recommended that shareholders, subject to a shareholders’ agreement and companies which are the object of a shareholders’ agreement carefully consider as to whether the existing contract provisions governing the interrelation of the shareholders are sufficient or whether they should be supplemented.
 
As possible measures which could work to ensure sufficient enforcement for all parties involved, some of the provisions contained in the shareholders’ agreement (e.g. preemptive rights and voting agreements) could be inserted in the bylaws as a supplement. Also, enforcement problems could be remedied by inserting efficient sanctions in the shareholders’ agreement (e.g. provisions on liquidated damages or an exit provision entitling shareholders subject to a breach to buy out the breaching shareholder at a low price).  

The new Limited Company Act – freedom, subject to accountability 

The new Limited Company Act removes many of the mandatory objective duties to act which directors and the management of companies so far have had as a guiding light.
 
Just as an example, it could be mentioned that whereas it has previously been a requirement that the capital of a company be paid in upon incorporation it will be possible in future to leave part of the subscribed capital outstanding. Accordingly, the management on an ongoing basis must assess whether such outstanding capital can be collected in case of the company’s need for cash. If not, it must ensure that new capital is subscribed.
 
As another example, it could be mentioned that if a company is facing a reduction of its registered share capital for the purpose of covering an operational deficit, it has previously been a requirement that such decision should be based on a declaration issued by an independent appraiser. The new Limited Company Act does not require such a declaration, leaving it to the management itself to ascertain that the deficit at the time of the decrease in the registered capital at least corresponds to the amount of the decrease in the capital.
 
As a final example, it could be mentioned that where previously a requirement existed that an appointed independent appraiser should prepare a declaration concerning the position of the creditors prior to a merger/demerger, such declaration can now be opted out of against the creditors being given an opportunity to request payment of their debt. If such creditors’ declaration is omitted, it is the management’s own responsibility to ensure that the merger does not harm the creditors’ possibilities of receiving payment of their debts in the surviving company following the merger or the receiving company in a demerger.
 
The above outlined is just meant as a few examples of the increased degree of freedom which the new Limited Company Act provides to the management of companies and which under the circumstances can prove to be valuable tools to companies, making e.g. group internal restructuring significantly easier.
 
As the examples indicate, the flip side of the coin is that the managements of companies, if they utilize their new freedoms, expose themselves to an increased liability.
 
Accordingly, as part of the companies’ implementing the new Limited Company Act it is recommendable that it be determined at the Board of Directors/management level to what extent it is desirable that such new freedoms are exercised, e.g. by including guidelines in the Board of Directors’ rules of procedure on how to ensure that the company for future purposes should ensure an adequate administration of its capital.

Make certain that the new Limited Company Act is adequately implemented in your company 

All decision-makers in and advisors of companies should in the upcoming months put focus on ensuring that the new Limited Company Act is adequately implemented in the businesses for which they are responsible. As described above, the extent of such implementation varies significantly depending on the characteristics of the company in question.
 
The implementation work will in many companies (companies which are 100 % owned by a single shareholder, including subsidiaries in corporate groups) be quite simple in that the decision-makers of such companies merely should ascertain that a few simple formal changes to the bylaws are made. As regards companies with a widespread group of shareholders where the bylaws are of vital importance, a significant implementation work lies ahead, both in terms of ensuring that mandatory changes are implemented and in terms of ensuring that the possibilities which are created through the new Act are exploited where relevant.
 
As regards companies, the ownership of which is governed by a shareholders’ agreement, it should be ascertained that the parties’ agreement includes effective enforcement measures. This is due to the fact that the new Limited Company Act stipulates that shareholders’ agreements are not binding on a company.