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Legal aspects of changeover Back  
Companies failing to convert their share capital to euros may end up with awkward figures according to Leonora Malone.
It is intended that from the 1st of January, 2002 until the 9th of February, 2002 there will be a dual circulation period in which the use of euro notes and coins will increase and the use of Irish notes and coins will correspondingly decrease as they are gradually withdrawn from use. It is intended that (pursuant to the Euro Changeover (Amounts) Bill, 2001) after midnight on the 9th of February, 2002 Irish currency units will no longer have any legal status (but will continue as a store of value) and thus certain Irish companies and their shareholders should, if they have not done so already, now begin to consider their approach to converting their shares and shareholdings into euros.

The European and Monetary Union Act, 1998 (the ‘EMU Act’) contains provisions relating to the introduction of a euro currency system and covers the conversion of share capital of Irish companies into euros. The procedures relating to share capital are referred to as redenomination and renominalisation. Irish companies whose share capital is expressed in Irish punts (or indeed the currency of another participating member state) before the 1st of January, 1999 can avail of the redenomination and renominalisation procedures under the EMU Act.

Redenomination
Redenomination is the conversion of the whole or part of the total authorised share capital, the total issued share capital or the total to be issued share capital from, for the purposes of this article, Irish punts to euros.
This is achieved by dividing the total amount of Irish punt authorised/issued share capital by 0.787564 and rounding to the nearest euro cent. The euro par value of each share is then calculated by dividing the total redenominated share capital by the total number of authorised, issued or to be issued share capital as may be the case. An example of this is as follows: -

If the authorised capital is ?100,000, made up of 100,000 shares each with a value of ?1, when this is converted to euros the value of ?100,000 becomes E126,973.81 (?100,000 x E0.787564). So the value of each share is now worth E1.269738 each.

The conversion of share capital into euros under Section 25 of the EMU Act allows for the rounding up of share capital. Section 25 will cease to have effect from 1st January, 2002.

In order to effect redenomination of share capital, the company must pass an ordinary resolution to allow for such redenomination and the ordinary resolution may be passed at a general meeting of the company or, if the company’s Articles of Association so permit, by way of written resolution by the shareholders.

The redenomination procedure does not change or effect any rights of or obligations imposed on shareholders where such rights or obligations existed prior to the passing of the resolution to redenominate the share capital and any reduction in the nominal value of the issued share capital of a company redenominating under the EMU Act is not deemed to be a reduction of share capital under the Companies Acts, 1963 to 1999.

Following redenomination, a company may seek to renominalise, meaning that the normal par value of shares may be further adjusted to achieve nominal share values which are appropriate to the then share price in the euro unit.

To increase the nominal value
Using the nominal share value in the previous example and assuming that the company has a total of 50,000 shares in issue, the company may, by ordinary resolution, decide to increase the nominal share value from E1.269738 to E2.00, which increase would result in an adjusted authorised share capital amount of E200,000 and an adjusted issued share capital amount of E100,000.

The company may decide to increase the nominal share value either (1) by way of a decrease in the company’s distributable reserves or profits (if any) equal to the difference between the initial nominal share value (E1.269738) and the adjusted nominal share value (E2.00) or (2) if there are no distributable reserves, then the shareholders must fund the increase through equity.

Decrease in nominal share value
Alternatively, the company may, by special resolution, effect renominalisation of its share capital by decreasing the nominal share value of each of its shares. To use the previous example, the company may decide to decrease the nominal share value of each share from E1.269738 to E1.20 (the adjusted nominal share value cannot be reduced to an extent that it would contravene the 10 per cent rule referred to below).

The amount of the aggregate reduction in the capital must be transferred to a fund known as the Capital Conversion Reserve Fund and any such reduction is subject to a limit of 10 per cent so that the amount transferred does not represent more than 10 per cent of the reduced share capital.

The Capital Conversion Reserve Fund is treated as if it was paid up share capital of the company. The Capital Conversion Reserve Fund may be applied by the company in paying up unissued shares of the company (other than redeemable shares) to be allotted to shareholders of the company as fully issued bonus shares.

Any renominalisation in the share capital via the method outlined above will not be deemed to be a reduction of share capital within the meaning of the Companies Acts, 1963 to 1999 (and thus will not necessitate court approval).

Whether the company decides to increase or reduce its nominal share value, the appropriate resolution and amended Memorandum and Articles of Association must be delivered to the Companies Office within 15 days of the passing of the resolution.

The provisions of the EMU Act in relation to renominalisation will cease to have effect on 30 June, 2003, thus allowing companies an extra 18 months after 1 January, 2002 to renominalise their share capital. The redenomination provisions cease on 1 January, 2002 and where a company does not redenominate prior to 1 January, 2002, then references to Irish currency shall be converted automatically to euro under the conversion rate without rounding up to the nearest cent and this could lead to awkward figures.

Preparation of Accounts
As it is intended that the Irish punt would no longer have legal status as and from midnight on 9th February, 2002, Irish companies should, if they have not already done so, make arrangements to have their internal and formal company accounts prepared and maintained in euros. Consequently, companies may wish to discuss this matter with their accountants.

I have focussed on share capital conversion but practically, the introduction of the euro as the legal currency of the State will involve many organisational and administrative changes in the manner in which Irish companies carry out their business. It would be prudent therefore for Irish companies to set about implementing those changes as soon as possible with a view to being euro compliant.

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