RE: Legal Memorandum on the nature and responsibilities of a public limited company, the procedures for converting into a public limited company, the consequences for not converting into a public limited company as prescribed by the Securities Exchange Commission (“SEC”) and the acceptable reasons for seeking exemptions from not converting into a public limited company as prescribed by SEC.
We refer to your emails dated July 05, 2007 and July 09, 2007 on the above subject.
From perusal of your email and the provided documents it appears that, Company 1 (“Company 1”) has received a letter dated July 01, 2007 from the Securities and Exchange Commission (“the Letter”). In the Letter, SEC has asked Company 1 to inform SEC of the steps Company 1 has taken thus far to comply with SEC’s Notification No. ……………….. dated February 08, 2006, since Company 1’s paid-up capital at present is more than Tk. 40 crore (Company 1’s paid-up capital at present is Tk. 224,22,13,144.00)
In these circumstances you have requested us to give our legal opinion regarding the following:
1) The nature and responsibilities of a public limited company as against a private limited company;
2) The Procedures for converting a private limited company into a public limited company;
3) What are the consequences if Company 1 do not convert into a public limited company as prescribed by SEC?
4) What are the acceptable reasons to seek exemption from or deferment of the requirement to convert into a public limited company?
You have also asked us to prepare an appropriate response to the Letter of SEC in the context of seeking a deferment or exemption from this requirement to convert into a public limited company as Company 1 is not prepared to convert now.
THE NATURE AND RESPONSIBILITIES OF A PUBLIC LIMITED COMPANY AS AGAINST A PRIVATE LIMITED COMPANY
Following are the main points of difference between a Public Company and a Private Company:-
1. Minimum number of members: Minimum number of members required to form a private company is 2, whereas a Public Company requires at least 7 members (Section 5 of the Companies Act, 1994).
2. Maximum number of members: Maximum number of members in a Private Company is restricted to 50 (Section 2(q) of the Companies Act 1994), there is no restriction of maximum number of members in a Public Company.
3. Number of Directors: A Private Company may have 2 directors to manage the affairs of the company, whereas a Public Company must have at least 3 directors (Section 90 of the Companies Act, 1994).
4. Transerferability of shares: There is restriction on the transferability of the shares of a Private Company (Section 2(q)(i) of the Companies Act 1994) through its Articles of Association, whereas there is no restriction on the transferability of the shares of a Public company
5. Issue of Prospectus: A Private Company is prohibited from inviting the public for subscription of its shares, i.e. a Private Company cannot issue Prospectus, whereas a Public Company is free to invite public for subscription i.e., a Public Company can issue a Prospectus.
6. Commencement of Business: A Private Company can commence its business immediately after its incorporation, whereas a Public Company cannot start its business until a Certificate to commencement of business is issued to it (Section 150 of the Companies Act 1994).
7. Shares Warrants: A Private Company cannot issue Share Warrants against its fully paid shares, whereas a Public Company can issue Share Warrants against its fully paid up shares (Section 46 of the Companies Act 1994).
8. Statutory meeting : A Private Company has no obligation to call the Statutory Meeting of the member, whereas of Public Company must call its statutory Meeting and file Statutory Report with the Register of Joint Stock Companies and Firms (“RJSC”) (Section 83 of the Companies Act 1994).
9. Quorum: The quorum in a General Meeting, in the case of a Private Company, whose number of members does not exceed six, is TWO members present personally, in the case of a Private Company, whose number of members exceed six, is THREE members present personally; whereas in the case of a Public Company FIVE members must be present personally to constitute quorum (Section 85(2)(b) of the Companies Act 1994). However, the Articles of Association may provide other provisions stating the number of members to constitute quorum.
10. Rotation of Director: Every year at the Annual General Meeting, one third of the Directors of a Public Limited Company, who have been longest in office since their last election, has to retire (Article 79 and 80 of Schedule I of the Companies Act 1994, which has been made binding by Section 17 of the Companies Act 1994). This rotation of Directors does not apply to a Private Limited Company.
11. Copy of balance-sheet: In the case of a private company, which is not an subsidiary of a public company, no person other than a member of the company shall be entitled to inspect or to obtain copies of the profit and loss account of that company (Section 190 of the Companies Act 1994). In case of a public limited company every one is entitled to inspect or obtain copies of the profit and loss account of that company.
THE PROCEDURES FOR CONVERTING A PRIVATE LIMITED COMPANY INTO A PUBLIC LIMITED COMPANY
The provisions for conversion of private company into public company is provided in section 231 of the Companies Act, 1994. Pursuant to the said provisions of law, in order to convert Company 1 into a public company, the following procedures need to be observed:
i) Raise the number of member up-to seven or more, if not already seven or more.
ii) Hold an Extra-Ordinary General Meeting to alter the Articles of Association of Company 1 for the following amendments:
a) to delete Article 5 from the Articles of Association so that the Articles of Association no longer include the provisions which, under clause (q) of sub-section (1) of section 2 of this Act, are required to be included in the articles of a private company. Article 5 should be revised to include provisions corresponding to clause (r) of sub-section (1) of section 2 of the Companies act, which are required to be included in the articles of a Public Limited Company.
b) to delete any reference of the word “private”,
c) to amend/delete/revise those Articles which are not applicable to a public company.
iii) File with the Registrar of Joint Stock Companies (RJSC) within 15 days from the date of the EGM a copy of the Special Resolution.
iv) File with the RJSC within 30 days after the date of the EGM either a prospectus or a statement in lieu of prospectus containing the particulars set out in Part I and the reports specified in Part II of Schedule IV to the Companies Act subject to the provisions contained in Part III of that Schedule.
Please note that in accordance with section 231(2) of the Companies Act, 1994 if default is made in complying with the aforesaid provision regarding filing with the RJSC, Company 1 and every officer who is in default, shall be punishable with imprisonment or with a fine, or with both.
WHAT ARE THE CONSEQUENCES IF COMPANY 1 DO NOT CONVERT INTO A PUBLIC LIMITED COMPANY AS PRESCRIBED BY SEC?
Notification No. SEC/CMRRCD/2006 – 159/Admin – 03/23 dated February 08, 2006 was published by SEC (“the Notification”) in exercise of the power conferred by Section 2CC of the Securities Exchange Ordinance 1969.
The consequences of not complying with this notification/direction are provided in section 22 of the Securities Exchange Ordinance 1969, which states as follows:
“22. Penalty for Certain Refusal or Failure
(1) If any person:
(a) Refuses or fails to furnish any document, paper or information which he is required to furnish by or under this Ordinance; or
(b) Refuses or fails to comply with any order or direction of the Commission made or issued under this Ordinance; or
(c) Contravenes or otherwise fails to comply with the provisions of this ordinance;
the Commission may, if it is satisfied after giving the person an opportunity of being heard that the refusal, failure or contravention was wilful, by order direct that such person shall pay to the Commission by way of penalty such sum “not less than one lakh taka” as may be specified in the order and, in case of a continuing default, a further sum calculated at the rate of ten thousand taka for every day after the issue of such order during which the refusal, failure or contravention continues.
Therefore Company 1 may face a fine of minimum Tk. One Lac or more and if Company 1 fails to convert into a Public Limited Company, a further sum calculated at the rate of ten thousand taka for every day after the issue of such order during which failure continues.
WHAT ARE THE ACCEPTABLE REASONS TO SEEK EXEMPTION FROM OR DEFERMENT OF THE REQUIREMENT TO CONVERT INTO A PUBLIC LIMITED COMPANY?
We have perused the letter dated July 01, 2007 and Notification No. ………………….. dated February 08, 2006 of SEC. The Letter and the Notification does not contain any list of acceptable reasons for Company 1 to seek exemption from or deferment of the requirement to convert into a public limited company.
We have also perused the Securities Exchange Ordinance 1969. Although Section 2D of the Securities Exchange Ordinance 1969 contains provisions for exemption, this exemption only applies to Sections 2A, 2B and 2C of the Securities Exchange Ordinance 1969. There is no provision in the Act, allowing exemption from Section 2CC of the Act.
Therefore, we are of the opinion that the direction given by SEC vide their Letter and Notification appears to be binding. There also does not appear to be any list of acceptable reasons, either in the relevant law or in the Letter and the Notification, to seek exemption from or deferment of the direction of SEC.
Please note that, since we have not been provided with the reasons as to why Company 1 was unable to comply with the direction of SEC, we have not prepared the reply to be given to SEC. We suggest, Company 1 has to give their reply to the Letter of SEC, stating:
i) the reason as to why Company 1 has thus far been unable to comply with the Notification of SEC
ii) the difficulties that Company 1 shall face if they comply with the direction of SEC and
iii) ask SEC to exempt Company 1 from complying with the direction with reasons.
If you have any further query, please do not hesitate to contact the undersigned.
For: “The Lawyers & Jurists”