Preface The Corporate Law provides a framework within which formal business enterprises function and helps regulates a multitude of interactions between various stakeholders in the corporate sector. It also supports the infrastructure behind a country's commerce and trade. The Companies Act of 1913 regulated Pakistan's corporate sector until being replaced by the Companies Ordinance, 1984. Whereas major amendments were incorporated through changes in corporate legislation in 2002, the last two decades have witnessed unprecedented growth in the sector, necessitating overhaul of controls in place.
The ways of doing and conducting business have become ever more complex in a global context and Pakistan has been following suit. The Securities & Exchange Commission of Pakistan took up the challenge and on November 11th of last year Companies Ordinance, 2016 was promulgated. Although it was soon struck down by the upper house of the Parliament, it has now survived as Companies Act 2017, with certain changes made by both houses of the Parliament.
The Companies Act, 2017 retains prevailing fundamental concepts. Amongst other things, it has eased the procedure for incorporation, induced electronic means in corporate compliances, provided more protection to shareholders and inculcated corporate governance principles. Also it has introduced certain concepts to counter and control unwarranted business activities. At the same time, however, the Commission has emerged more empowered.
With this summarization of the Companies Act, 2017, we aim to highlight key changes and new concepts worth the attention of reader, be it from the existing or proposed set ups. The Memorandum contains the comments which represents our interpretation of the legislation. We, therefore, recommend that while considering their application to any particular case reference be made to the specific wording of the Act
1. COMMENCMENT DATE
The Companies Act, 2017 has come into effect on 30th May 2017, except for a section dealing with real estate companies, the enforcement of which has been deferred for the time being. The Companies Ordinance, I984 has simultaneously been repealed except for certain sections concerning Non-banking Finance Companies.
2. NEW CONCEPTS AND PROVISIONS
A. Class of Companies
i) Shariah Compliant Company
A company which conducts its business according to the principles of Shariah and is certified by the Commission for compliance has been termed as a "Shariah Compliant Company". A banking company is an exception to this concept, falling under the domain of the Central Bank.
Persons appointed or engaged for shariah compliance, shariah advisory or shariah audit shall be subject to fit and proper criteria and will have to fulfil the terms and conditions, as may be specified by the Commission.
It may be noted that listed companies are already required vide a SECP circular to provide additional disclosures so as to help assess their shariah compliance. Last year the FBR announced tax concessions for shariah compliant listed manufacturing companies.
ii) Free Zone Company
A Free Zone Company may be incorporated for carrying on business in an Export Processing Zone or an area notified by Federal Government as Free Zone. The names of such companies will have the parenthesis and alphabets 'FZC' at the end. Free Zone Companies shall be exempted from such requirements of the Act as are to be notified by the Federal Government.
The Act offers protection of information pertaining to promoters, shareholders and directors of a Free Zone Company, if foreign nationals. However, the aforesaid protection shall not prevent disclosure where required by revenue authorities or for meeting Government's information sharing obligations under international laws, treaties or commitments.
iii) Agriculture Centric Companies
To promote corporate farming and to manage agriculture lending, the Act provides for incorporation of varying types of agriculture centric companies namely Agriculture Promotion Company, Producer Company and Collateral Management Company.
Any activity by such companies or their members which may be considered detrimental to the interest of farmers, lending institutions, commodity exchanges, consumers or other stakeholders, will attract penalties.
iv) Inactive Company
The introduction of 'Inactive Companies' aims to reduce reporting and other regulatory requirements for companies not actively engaged or contemplating to engage in business operations.
A company, other than a listed company, can obtain the status of an 'Inactive Company' if it is formed for a future project or simply to hold an asset or an intellectual property, provided it has no significant accounting transactions. Similarly, companies which have either not carried on any business or have not made significant accounting transactions, during the last two financial years, may also obtain the status of an inactive company.
A register of such companies will be maintained by the Registrar who can also enter therein, names of companies who fail to file financial statements or annual returns for two consecutive financial years.
v) Public Interest Company (includes Public Sector Company)
The concept though not entirely new, merits attention. The notion was brought in the year 2015, vide a SRO, primarily for the purposes of determining the financial reporting framework for such companies. The Act has now defined a Public Interest Company, which constitutes either of the following:
-- A listed company
-- A Public Sector Company
-- A large sized Foreign Company
-- A large sized Not for Profit Company
-- A company in the business of providing essential public service eg a public utility company.
-- A company holding assets in a fiduciary capacity for a broad group of outsiders such as a bank, insurance company, securities broker, pension fund, mutual fund or an investment banking entity.
A Public Sector Company was first defined in Public Sector Companies (Governance) Rules 2013. In essence it is a company where the Government owns, directly or indirectly, at least 51% shareholding or voting power (previously 50%) or has the power to elect majority of the directors.
B. Roles and Functions
i) Registered Valuers
Under the Act there are varying instances where services of professional valuers will be required by Companies to get valued their assets, liabilities or net worth. To facilitate and regulate the process, the Commission shall maintain a panel of registered valuers and for the purpose will prescribe regulations.
Significant penalties are imposed on valuers for contraventions, including imprisonment where a fraudulent intention is established.
ii) Registered Intermediaries
The Act has allowed filing of documents through intermediaries. To perform services as an intermediary, a person is required to possess qualifications, as may be specified, and to get itself registered with the Commission. Accordingly companies will now be able to choose from a pool of intermediaries comparatively better equipped to undertake compliance responsibilities on their behalf.
iii) Licensed Transfer Agent
Transfer of shares in certain companies, as may be notified by the Commission, shall be executed with the help of a duly licensed agent. The transferors and transferees of shares of such companies will have to appear before a licensed agent to record their statements who shall then share a certified copy of such statements with the respective company for further action.
Such agents shall be responsible for the loss caused to any person due to a fault on their part, if determined by the Court while deciding a case pertaining to rectification of members' register.
C. Disclosures and Provisions
i) Beneficial Ownership held outside Pakistan
Beneficial ownership in listed securities of locally incorporated companies and its reporting is primarily covered in the Securities Act, 2015. Now reporting of ownership in companies incorporated outside Pakistan is being introduced.
Every Pakistani, whether or not a dual national, who is a substantial shareholder or an officer of a company incorporated in Pakistan (Pakistani Company), shall disclose his shareholding in a foreign company or body corporate, to the Pakistani Company, within 30 days of holding such position or interest or any change therein.
The Pakistani Company receiving the information will report it to the Registrar through a special return, along with its Annual Return.
From the date of commencement of this Act, all companies have been provided a period of 60 days for reporting the aforesaid information. This information will then be made part of the Companies Global Register of Beneficial Ownership to be maintained by the Commission.
The Commission vide SRO 546(I)/2017 issued on June 21, 2017 has prescribed two separate formats for compliance ie one for reporting by the beneficial owners to the companies and second one by the companies to the Commission for entireties in the Global Register.
The Commission has been empowered to share the information maintained in the Global Register with Federal Board of Revenue or any other agency, authority or court.
The Commission has been also vested with a power to direct a foreign company to furnish information or documents of its shareholding including beneficial ownership.
ii) Anti-Money Laundering
Every officer of a company is now responsible to take all reasonable measures to prevent commission of fraud, money laundering and other offences provided in the Money Laundering Act, 2010 with respect to the affairs of the Company.
On failure, an imprisonment and fine up to 3 years and 100 million is provided for, besides any punishment attracted under Anti-Money Laundering Act, 2010.
iii) Dispute Resolution through Mediation or Arbitration
The option to resolve disputes through mediation was available to companies by adopting enabling provisions through their Articles of Association. Moving further in the direction, the Commission will now maintain a "Mediation and Conciliation Panel". Any dispute between a company, its management or its members or creditors can be referred to any individual listed on the panel. Even during pendency of proceedings with the Commission or the Appellate Tribunal, either of the parties may request to take the matter to the panel.
The Panel shall dispose of matters within a period of 90 days from the date of reference and forward recommendations to the Commission or Appellate Bench as the case may be.
Enabling provisions have also been inserted in the Act to enable a company to refer any existing or future issue for Arbitration in accordance with the Arbitration Act, 1940.
iv) Employment of persons with disabilities
Public Interest Companies with 100 or more employees will ensure a special quota of a minimum of 2% for employment of persons with disabilities.
v) Security Clearance of Shareholders and Directors
For the last few years companies have been submitting documents with the Commission for security clearance of foreign shareholders and directors by the Ministry of Interior. A provision made part of the Act empowers the Commission to obtain security clearance of any shareholder, director or other office bearer of the company as may be notified by the Federal Government.
3. INCORPORATION OF COMPANIES AND MATTERS INCIDENTAL
A. Name of Company
i) Restriction on Company Names
The names applied for, will now be reserved for 60 days and not 90 days. The Commission has been empowered to notify words and expressions which cannot become part of a company's name. This is besides the general power to label any proposed name as inappropriate or deceptive. Companies which are subject to license from the Commission, shall require prior approval of the proposed name.
The right of appeal to the aggrieved promoter continues to remain available. However, as it was the position earlier, the final verdict remains un-appealable before any court of law.
ii) Rectification/Change of Company's Name
The registrar always had the power to direct a company to change its name, if found in violation of the requirements. This power was exercisable within three years of the date of incorporation. This time limitation has now been done away with. Further, in case of non-compliance with directions given, the registrar can now assign a name of his choice to the company and enter it in the register of companies, he so maintains.
In case of change of name, whether by the Company on its own or under a direction, the former name will have to be mentioned, along with its new name for a period of 90 days, from the date of issue of Certificate of Change of Name. Under the repealed Ordinance this period was one year.
iii) Publication of Name by a Company
It has been made mandatory to display a certified copy of certificate of incorporation at every place of business of the company.
Besides name, registered office address, telephone number, fax number, e-mail and website addresses, if any, shall be printed on letter-head and all company documents, notices and other official publications.
B. Correspondence Address
A correspondence address is required to be provided for registration of Memorandum & Articles of Association. The correspondence address shall remain effective till the registered office of the company is established, within 30 days of incorporation.
C. Initial Subscription
The share subscription money shall be payable by the subscribers to the company within 30 days of incorporation and will have to be reported to the Registrar within 45 days of incorporation. The reporting will have to be supported by a certificate of a practicing Chartered Accountant or a Cost and Management Accountant.
Shares shall be deemed to be cancelled if the subscription money is not deposited within the prescribed time with simultaneous removal of the name of the relevant subscriber from the Register of Members. The Registrar has been vested with power to issue direction to the company, as deemed appropriate for compliance.
It is now expressly stated that shares taken by the subscribers to the Memorandum, on the formation of the company are deemed allotted and no Return of Allotment needs to be filed for such shares.
D. Nominee of Single Member
In a single member company the Act requires the subscriber to the Memorandum of Association, to nominate a person who becomes responsible for transfer of shares and management of the company's affairs in the event of his death.
E. Principal Line of Business
A general permission has been given to companies to operate in any lawful businesses, irrespective of their inclusion or not in the Memorandum of Association. Companies requiring special permission or license remain an exception.
The "principal line of business" (PLOB) of the company, however, is required to be inserted in the Memorandum of Association. PLOB means the business in which substantial assets of the company are held or from where substantial revenue is earned by the company, whichever is higher. Companies are required to report change in PLOB to the Registrar and submit the amended Memorandum of Association within 30 days thereof.
In case of existing companies the object stated at serial number 1 of the object clause shall be treated as their PLOB. So if it does not go along with the Company's main business, the company shall report its PLOB to the Registrar within such time from commencement of the Act, as may be specified, and furnish a revised copy of the Memorandum, stating its PLOB at serial number 1 of the object clause.
The name of the company is required to commensurate with its principal line of business. If it is in not conformance, the company may be issued a direction by the Registrar for change of name.
4. Increase in capital
A. Issue of Shares - General Provisions
- Henceforth a special resolution will have to be passed for alteration of capital, including for increase in the amount of authorized share capital.
- A minimum of 15 and a maximum of 30 days have to be provided to members for acceptance/renunciation of shares offered under a further issue.
- Where shares are to be issued against non-cash consideration, the value of consideration shall be determined by a valuer, registered with the Commission.
- Public companies can earmark percentage of further issue for its employees under a stock option scheme.
B. Issue of Shares at Discount
Special resolution is now required for issuing shares at a discount, as against the earlier requirement of ordinary resolution. Moreover, the minimum period of company's existence, required for issuing shares at discount, has been increased from one year, after commencement of business, to three years.
A listed Company can only issue shares at a discount if the market price of its shares has remained lower than the par value, for a continuous period of past 90 trading days, immediately preceding the date of announcement by the board of directors.
The issue of shares at discount must be sanctioned by the Commission. However, the requirement shall not apply on a listed company if the discount percentage is 10% or less.
The Commission shall not sanction any resolution of discount issue, if the offer price is less than:
-- 90% of weighted average daily closing price of shares for 90 prior days of announcement of discount issue, by the listed company
-- For other than listed, break-up value per share based on assets (revalued not later than 3 years) or value based on discounted cash flow.
C. Allotment of Shares
The time period for filing of Return of Allotment has been increased from 30 days to 45 days. Company's auditors report confirming the receipt of amount and issue of shares to each allottee has to be filed along with. Where allotment is made for other than cash consideration, a valuation report will go along.
5. SHARE CERTIFICATES AND TRANSFERS
A. Share Certificates
i) Shares in Electronic Form
From a date notified by the Commission, all companies formed shall have shares in book-entry form only. The existing companies are envisaged to replace their physical shares into book-entry form within a period of 4 years from commencement of the Act.
ii) Issuance of Share Certificates
The time limit for the issue of certificates of shares has been reduced from 90 days to 30 days from allotment. The certificates will now have to be delivered at the registered address of shareholder.
iii) Duplicate Shares
Duplicate certificates are required to be issued within 30 days of receipt of an application as against the previous 45 days. The timeline to communicate the reasons for not issuing duplicate certificates has been reduced from 30 days to 20 days of the receipt of application.
B. Share Transfers
i) Transfer of Shares in a Private Company
The transfer of shares in a private company was the subject of its Articles of Association. In year 2015, over-riding procedures were brought through Companies (General Provisions and Forms) Rules, 1985. These have now been adopted through the Act as well. The salient feature is mandatory provision of right of first refusal to the existing members in proportion to their shareholding, both for the number of shares first coming for transfer and any shares renounced therefrom, at a price determined under a prescribed mechanism.
ii) Timelines for Transfer
The time frame for transfer of shares has been reduced. Companies are required to complete the transfer within 15 days of lodgment. In case of conversion of physical shares into book-entry form the time allowed is 10 days.
The time to notify the defect in the instrument of transfer and refusal of transfer by the board has been also fixed at 15 days of lodgment of transfer, in physical form and 5 days where shares are held in book-entry form.
iii) Shares of a Deceased Member
The shares of a deceased member shall be transferred to the legal heirs under a succession certificate or a lawful award. There is now no discretionary power with directors to relax the aforesaid requirements, as was available under the Companies Ordinance, 1984, upon obtaining an indemnity.
(To be continued tomorrow)