COMPANIES ACT 2014- PRACTICAL IMPLICATIONS FOR IRISH COMPANIES

COMPANIES ACT 2014- PRACTICAL IMPLICATIONS FOR IRISH COMPANIES
UCITS FOR INVESTMENT MANAGERS 2014




COMPANIES ACT 2014 -
PRACTICAL IMPLICATIONS
FOR IRISH COMPANIES




                                                          1
COMPANIES ACT 2014- PRACTICAL IMPLICATIONS FOR IRISH COMPANIES
WILLIAM FRY




2
CONTENTS
THE ACT		                               3

BENEFITS OF THE ACT		                   3

NEW COMPANY TYPES		                     4

CONVERSION PROCESS		                    5

THE ADVANTAGES OF THE NEW LTD COMPANY   6

WHY CONVERT TO A DAC?		                 6

OTHER COMPANY TYPES		                   7

FOREIGN COMPANIES		                     8

COMPANY CONSTITUTIONS		                 8

PARTICULAR ISSUES FOR DIRECTORS         9

CORPORATE TRANSACTIONS		                11

ACCOUNTS		                              12

ACTION REQUIRED		                       13

TIPS		                                  15

EXPECTED TIMELINE		                     15

HOW WILLIAM FRY CAN HELP		              16
                                             1
WILLIAM FRY




              PHOTO TBC
COMPANIES ACT 2014 - PRACTICAL IMPLICATIONS FOR IRISH COMPANIES




THE ACT                                         BENEFITS OF THE ACT
The Companies Act 2014 is due to be             The Act has many benefits, including:
commenced on 1 June 2015 and will affect all
Irish registered companies.                       • Consolidating all company law provisions
                                                    into one piece of legislation, rather than
Although much of the current law will remain        being spread over 17 Acts and numerous
the same, the Act introduces some significant       Statutory Instruments;
changes, many of which are designed to make
it easier to operate a corporate business in      • Making legal obligations clearer and
Ireland.                                            easing the administrative burden on
                                                    companies;

                                                  • Simplifying procedures for carrying out
                                                    certain corporate transactions, removing
                                                    the need to obtain court approval in
                                                    certain instances (for example when
                                                    reducing company capital); and

                                                  • Widening the audit exemption to include
                                                    dormant companies, qualifying group
                                                    companies and guarantee companies and
                                                    expanding the exemption thresholds.




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WILLIAM FRY




NEW COMPANY TYPES
One of the most significant features of the Act is that it provides for two new forms of private   Although the Act provides for an automatic
company limited by shares.                                                                         default to a LTD at the end of the transition
                                                                                                   period, it is not recommended that existing
                                                                                                   private companies take no action and merely
                    LTD                                                 DAC                        rely on the default provisions in the Act to
                                                                                                   convert to the new company type for the
                                                                                                   following reasons:
                 (Limited)                               (Designated Activity Company)
        A new form of simplified                           Similar to existing form of             1.   If the directors fail to prepare a new
                                                                                                        constitution for the company as required
         model private company                              private limited company.                    by the Act, they will be in breach of a legal
        limited by shares, having                            Will continue to have a                    obligation, although this does not carry any
          a single constitutional                         memorandum and articles of                    specific sanction under the Act;

        document and unlimited                            association, with an objects             2.   The memorandum and articles of
              legal capacity.                               clause limiting its legal                   association of the LTD on the public record
                                                                                                        will, on the expiration of the transition
                                                                     capacity.
                                                                                                        period, be deemed to be its constitution,
                                                                                                        although it will not include the objects
                                                                                                        clause or provisions inconsistent with
The current form of private company limited by shares will cease to exist 18 months after the
                                                                                                        mandatory provisions of the Act. However,
commencement of the Act (known as the ‘transition period’).
                                                                                                        those provisions will not be physically
To deal with this situation, existing private companies limited by shares have three options:           redacted from the constitution as available
                                                                                                        on the public register, with the result that
1.   Convert to a LTD;                                                                                  the constitution on the public record will
                                                                                                        not reflect the actual constitution of the
2.   Convert to a DAC; or                                                                               company; and

3.   Do nothing and be deemed a DAC during the transition period and a LTD thereafter.             3.   References in the constitution to the old
                                                                                                        Companies Acts will remain, possibly
                                                                                                        causing confusion.
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COMPANIES ACT 2014 - PRACTICAL IMPLICATIONS FOR IRISH COMPANIES




CONVERSION PROCESS
It is relatively straightforward to convert to      as a DAC. In addition, a company which has
either of the new company types.                    been deemed to have converted to a LTD at the
                                                    end of the transition period can subsequently
To convert to a LTD the members should              convert to a DAC should it so wish using the
pass a special resolution (75%) authorising         standard conversion provisions in the Act.
the conversion (and putting in place a new
constitution) before the end of the transition      Upon successful conversion to either of the
period. If the members of the company do            new company types, a new certificate of
not resolve to convert to a LTD (or a DAC),         incorporation will be issued, with the company
then there is an obligation on the directors to     retaining its original registration number.
prepare a new constitution for the company
in the form of a LTD before the end of the          For more detailed information on conversion
transition period and to deliver it to each         options for your company please see our
member of the company and the CRO.                  publication entitled ‘The New Forms of Limited
                                                    Company and How to Convert’ which is
To convert to a DAC the members can pass            available on our website.
an ordinary resolution (50%) within the first
                                      1
15 months of the transition period. Where an
existing private company limited by shares has
debentures admitted to trading or listed on any
debt market, it must convert to a DAC by way
of a director’s resolution before the end of the
transition period if it has not already converted
using the member’s ordinary resolution
process.                                                                                              1
                                                                                                        Alternatively a member or members holding more than 25 per
                                                                                                      cent of the voting rights in the company can serve a notice in
Where an existing private company limited by                                                          writing on the company requiring it to re-register as a DAC before
                                                                                                      the end of the transition period.
shares does not re-register as a DAC before
the end of the transition period, certain of its                                                      2
                                                                                                        Member(s) holding not less than 15% in nominal value of the
                       2                                                                              company’s issued share capital or any class thereof or creditor(s)
members or creditors may apply to court for
                                                                                                      holding not less than 15% of the company’s debentures entitling
an order directing the company to re-register                                                         them to object to alterations to its objects.

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WILLIAM FRY




THE ADVANTAGES                                      WHY CONVERT
OF THE NEW LTD                                      TO A DAC?
COMPANY                                             The following companies cannot be a LTD            agreement instead, although as the
It is expected that the majority of existing        under the new legislation and must convert         shareholders agreement is a private document,
private companies limited by shares will            to a DAC if they wish to continue as a private     third parties dealing with the company may not
become a LTD under the new law given the            company limited by shares:-                        be aware of such business restrictions.
advantages associated with that company type.
                                                      • Credit institutions
A LTD, for example:
                                                      • Insurance undertakings
    • Will not have an objects clause and so will
                                                      • Companies that have (or wish to have)
      have unlimited legal capacity to carry on
                                                        debentures admitted to trading or listed
      any lawful business or activity;
                                                        on a market
    • Need not have an authorised share
                                                    It is possible that the Central Bank of Ireland
      capital;
                                                    may require other regulated entities falling
    • May have a single director; and               within its remit to convert to a DAC, although
                                                    this has not yet been confirmed.
    • May dispense with the need to hold
      a physical AGM each year, whether it          In addition, minority shareholders and
      is a single member or multi-member            shareholders of joint venture companies and
      company, dealing instead with the relevant    special purpose vehicles may wish to convert
      matters by way of written resolution.         to a DAC to ensure that the company in which
                                                    they have invested continues only to carry on
The benefits associated with the LTD cannot be      a particular business. If they convert to a LTD,
availed of during the transition period until the   the company will have unlimited capacity to
company has converted to that new company           carry on any business the directors decide
type. Otherwise, the law applying to the DAC        to pursue. However, such restrictions on the
will apply to all private companies limited by      nature or scope of a company’s business could
shares until the end of the transition period.      generally be achieved by way of a shareholders

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COMPANIES ACT 2014 - PRACTICAL IMPLICATIONS FOR IRISH COMPANIES




OTHER COMPANY TYPES
Aside from the private company limited by                               These companies may wish to review                                         Guarantee companies and unlimited companies
shares, all other company types - for example,                          their existing memorandum and articles                                     will be obliged to change their name, and
public limited companies (PLCs), guarantee                              of association to assess whether optional                                  therefore their memorandum and articles of
companies (CLGs) and unlimited companies                                provisions in the new Act should be disapplied                             association (as set out below), unless they have
(UCs) will continue in their current corporate                          by the company3  and also update references to                             been granted an exemption.
form following the commencement of the Act                              the old Companies Acts.
without the need to convert to a new company
type.


The following are the main features of those other company types:


            PUBLIC LIMITED COMPANIES                                                    GUARANTEE COMPANIES                                                       UNLIMITED COMPANIES


                  Will retain objects clause                                               Will retain objects clause                                               Will retain objects clause


                 No name change required                                       Name change may be required (see below)                                  Name change may be required (see below)


               Can now have single member                                              Can now have a single member                                              Can now have single member


                   Minimum of 2 directors                                                   Minimum of 2 directors                                                   Minimum of 2 directors


               Can offer shares to the public                            Can now avail of audit exemption, provided company                           Can be a private unlimited company (ULC), a
                                                                                       falls within thresholds                                         public unlimited company (PUC) or a public
                                                                                                                                                     unlimited company with no share capital (PULC)


  3
     For example, provisions of the Act on the automatic rotation of directors, shareholder approval of director remuneration and voting by directors on matters in which s/he is interested will apply by default to PLCs
     and CLGs if these provisions are not disapplied or modified by the constitution of the company. For some PLCs, these provisions will already have been disapplied by existing articles of association.

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WILLIAM FRY




FOREIGN                                               COMPANY
COMPANIES                                             CONSTITUTIONS
The Act abandons the concept of ‘place of             The new LTD company will have a simplified
business’ in the context of foreign companies         one-document constitution. All other company
with a presence in Ireland. The CRO has               types will retain a memorandum and articles
confirmed that the registration numbers of            of association, with these documents being
existing places of business will be cancelled         collectively referred to as a ‘constitution’.
upon commencement of the Act.
                                                      The Act differentiates between mandatory
Existing foreign companies with a place of            and optional provisions. Optional provisions
business registration in Ireland may wish             are ones which can be disapplied or modified
to consider whether they would be more                in the constitution of a company, for example
appropriately registered as a branch, provided        provisions contained in the Act in relation to
they meet the registration requirements. Only         how board meetings are to be conducted. A
limited liability companies may register as           mandatory provision is one which cannot be
a branch. Companies should be aware that              disapplied or modified by the company in its
a foreign company registered as a branch in           constitution, for example the requirement for
Ireland must file whatever financial statements       directors to keep minutes of their meetings.
it is required to file in its home country with the   Following commencement, any provisions
CRO, unlike a company registered as a place of        in the constitution of a company that are
business.                                             inconsistent with a mandatory provision of the
                                                      Act will be invalid.




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COMPANIES ACT 2014 - PRACTICAL IMPLICATIONS FOR IRISH COMPANIES




PARTICULAR ISSUES FOR DIRECTORS
The following changes introduced by the Act are of particular relevance to company directors.

                                   • The Act codifies directors’ duties, bringing together duties from the common law, equity and statute for the first time in a concise
                                     manner. The duties listed are non-exhaustive.

                                   • On taking up office, both directors and company secretaries are now required to make a statement acknowledging their duties under
                                     the law.

                                   • The duty of ensuring the company complies with company law now rests with the director(s) alone and is no longer the obligation of
                                     the company secretary.
      DIRECTORS’
      DUTIES                       • The duties of the secretary are those which are delegated by the board of directors, in addition to any other statutory and legal duties.

                                   • There is now an obligation on the directors of private companies to ensure that the individual (or company) acting as company
                                     secretary has the skills or resources necessary to carry out the role. While a person can still act as both a director and secretary of a
                                     company, the same person cannot hold both these roles in a single director LTD.

                                   • For more information on directors’ duties under the new Act, see our publication on the topic on our website.


                                   • If a loan has not been documented, the following will be presumed to apply:-
      LOANS                                                                                                      4
                                          -  Loans to a director from a company will bear interest and be repayable on demand; and
      TO/ FROM
      DIRECTORS                           -  Loans from a director to a company will be considered not to be a loan and will not bear interest.


  4
     Interest is calculated at the “appropriate rate”, such rate being 5% per annum or such other rate as may be specified by the Minister by way of order.




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WILLIAM FRY




PARTICULAR ISSUES FOR DIRECTORS, continued.
                                                                                                                    5
                                     • Requirement for directors of all PLCs, in addition to ‘large’ private companies and guarantee companies to produce a compliance
                                       statement on an annual basis. Unlimited companies and investment companies are not required to produce such a statement.

                                     • Compliance statement must acknowledge the directors are responsible for securing the company’s compliance with its ‘relevant
                                       obligations’.

                                     • ‘Relevant obligations’ means the company’s obligations under the Act where a breach of those obligations is considered to be a
                                       serious offence (including Market Abuse and Prospectus offences), in addition to the company’s obligations under tax law.
         DIRECTORS’
                                     • In the statement, directors must confirm that:-
         COMPLIANCE
         STATEMENT                          (i)   the company has a compliance policy statement;

                                            (ii)  appropriate arrangements or structures are in place to ensure compliance with the company’s obligations; and

                                            (iii) a review of these arrangements or structures has taken place during the previous year.

                                     • If the directors cannot provide these confirmations, they must explain why the specified actions have not been carried out.

                                     • Failure to include a compliance statement in the director’s report of a company where required to do so is a criminal offence.
                                     • Directors to make a statement confirming there is no relevant audit information not disclosed to the company’s statutory auditors.

         AUDIT                       • Each director must confirm that he/she has taken all the steps they ought to have in order to make himself or herself aware of any
         INFORMATION                   relevant audit information and to establish that the company’s statutory auditors have that information.

                                     • This provision is new, but a similar statement is, in practice, often required by audit firms.

     5
       ‘Large’ in this context means where the balance sheet total for the year exceeds €12,500,000 and the turnover for the year exceeds €25,000,000




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COMPANIES ACT 2014 - PRACTICAL IMPLICATIONS FOR IRISH COMPANIES




CORPORATE TRANSACTIONS
The Act sees the introduction of a number of changes to procedures for certain corporate transactions as part of an overall drive to make it
easier for companies to do business.

                         • There is a new streamlined procedure known as the Summary Approval Procedure involving a director’s declaration and shareholder
                           approval (and an independent auditor’s report in certain circumstances) which can be used to authorise a number of ‘restricted
                           activities’.
   SUMMARY
                         • ‘Restricted activities’ include the provision of financial assistance for acquisition of own shares, reductions of company capital, the
   APPROVAL                provision of loans to directors, the treatment of pre-acquisition profits in a holding company’s financial statement as profits available
   PROCEDURE               for distribution and the completion of a merger.

                         • It is no longer necessary to obtain court approval for certain restricted activities (for example, reduction of capital) where the
                           Summary Approval Procedure is used.

                         • Prohibition in current law on the provision of financial assistance for the acquisition of own shares often causes problems in banking
   FINANCIAL               transactions.
   ASSISTANCE
   FOR                   • Act eases the prohibition so that the restriction will only apply to financial assistance used ‘for the purpose of’ the acquisition of
   ACQUISITION             shares, and not financial assistance used merely ‘in connection with’ such a transaction.
   OF OWN
   SHARES                • In addition, there are a number of new exemptions from the prohibition, for example, where the giving of the financial assistance is
                           only an incidental part of some larger purpose.


                         • New optional two-stage registration for charges created by a company designed to ‘lock-in’ priority at an earlier date.
   REGISTRATION
   OF CHARGES            • Will provide increased certainty for lending institutions as regards priority of charges.

                         • Act introduces statutory framework for mergers and divisions between private companies in a purely national context for the first
                           time under Irish law.
   MERGERS
   AND DIVISIONS         • Currently, mergers between private companies may only be implemented if there is a cross-border element to the transaction and by
   OF PRIVATE              obtaining court approval.
   COMPANIES
                         • Summary Approval Procedure (see above) can be used to carry out a merger of private companies under the Act, without the need for
                           court approval.


   WRITTEN
                         • Both a DAC and a LTD will be permitted to pass majority written resolutions of shareholders under the Act.
   RESOLUTIONS


                                                                                                                                                                       11
WILLIAM FRY




ACCOUNTS
The following changes will apply to the preparation and filing of financial statements:
                                        • Small companies will only be required to meet two of the three size criteria (turnover of under €8.8m, balance sheet of under €4.4m
                                          and less than 50 employees) to qualify for an audit exemption.
         AUDIT
         EXEMPTION                      • Audit exemption extended to qualifying group companies, dormant companies and qualifying guarantee companies.



         MEDIUM                         • Increase in the thresholds to qualify as a medium sized company for the purposes of filing abridged accounts.
         SIZED
                                        • New thresholds are turnover of under €20m (currently €15.24m), balance sheet total of under €10m (currently €7.62m) and less than
         COMPANIES                        250 employees (no change). The company need only meet two of the three thresholds.


         APPROVAL OF
         FINANCIAL                      • Only necessary for the directors to sign the balance sheet and not the profit and loss account.
         STATEMENTS


         DEFECTIVE
         FINANCIAL                      • Will be permitted to revise defective financial statements already filed with the CRO.
         STATEMENTS


                                        • Company may now only change its financial year once every 5 years.
         FINANCIAL
         YEAR                           • However, a company may change its financial year end by 7 days either side without being affected by this restriction.


                                                                   6
         AUDIT                          • Large companies and all PLCs must put in place an audit committee or explain why
                                                                   7
         COMMITTEES                          they have not done so.


                                        • It is expected that certain provisions in the Act in relation to financial statements will
         COMMENCE-                           only apply to financial years beginning on or after 1 June 2015.
         MENT
                                        • This is subject to confirmation.
     6
         Large company in this context means where, in both the most recent financial year and the preceding financial year, the balance sheet total exceeded €25,000,000 and the turnover exceeded €50,000,000.
     7
         Currently, ‘public interest entities’ (i.e. banks, insurance undertakings and listed companies) must have an audit committee in place.

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COMPANIES ACT 2014 - PRACTICAL IMPLICATIONS FOR IRISH COMPANIES




ACTION REQUIRED
The Act is expected to come into effect on 1        required changes to the memorandum and             Companies should assess whether they will
June 2015, with an 18 month transition period       articles of association of a company and file a    be affected by the provisions of the Act dealing
designed to provide private limited companies       new constitution with the CRO.                     with the establishment of audit committees.
with an opportunity to decide whether to                                                               Large companies and all PLCs will be obliged
convert to a LTD or a DAC. However, companies       All company types should examine their             to decide whether to establish an audit
should be aware that, aside from the                existing memorandum and articles of                committee and to explain the basis of their
requirement for such companies to convert to        association. Companies should determine            decision. See footnotes 6 and 7 on page 12 for
a new company type, most of the new law will        whether such documents are still fit for           more information.
come into effect immediately on 1 June 2015.        purpose and identify if any provisions contained
                                                    in them conflict with mandatory rules in the       Companies should examine whether they will
Therefore, we would recommend that                  new legislation. It would also be preferable to    be in a position to avail of the extended audit
companies give some consideration to the            update any references to the prior Companies       exemption. Companies that do not currently
following matters:-                                 Acts in such documents. Consent from third         qualify for the audit exemption may qualify in
                                                    parties (e.g. banks) may be required to convert    future given the amended provisions in the
For existing private companies limited by           to a new company type and make changes to          Act increasing the thresholds and extending
shares, a decision should be made as to             constitutional documents.                          the exemption to qualifying group companies,
whether to convert to a LTD or a DAC. We                                                               dormant companies and qualifying guarantee
recommend that a company be proactive in            Companies should look to document any              companies.
this regard, rather than relying on the default     existing loans to and from directors. This
conversion provisions in the Act. If a company      will ensure the disapplication of the new          Certain companies will be required to change
is deemed to convert to a LTD at the end of         presumptions in the Act highlighted above and      their name before the end of the transition
the transition period, the memorandum and           ensure that the terms of the loans actually        period.
articles of association on the public record will   reflect the intention of the parties.
be deemed not to include an objects clause                                                               - The name of a DAC must end with the
or provisions inconsistent with mandatory           Directors should determine whether they will           words ‘designated activity company’ (or
provisions of the Act. However, those provisions    be obliged to produce a directors’ compliance          the Irish language equivalent or permitted
will not be physically redacted from the            statement. The company should also assess              abbreviations thereof).
constitution as available on the CRO register,      whether the appropriate compliance policies
and this may cause confusion.  It would             and structures are in place to satisfy the new
therefore be sensible to proactively make the       requirements under the Act.


                                                                                                                                                     13
WILLIAM FRY




     - The name of a guarantee company must
       end with the words ‘company limited
       by guarantee’ (or the Irish language
       equivalent of permitted abbreviations
       thereof).

     - The name of an unlimited company must
       end with the words ‘unlimited company’
       (or the Irish language equivalent or
       permitted abbreviations thereof).

     - Companies changing their name will
       be obliged to update their company
       stationary, company seal and signage etc.
       to reflect their new name.

     - Certain exemptions are available from the
       above requirements for all three company
       types.

Foreign companies registered as a place of
business in Ireland should bear in mind that
their registration will lapse on 1 June 2015.
Such entities may wish to consider whether
it would be more appropriate to register as
a branch, if the requirements for branch
registration are met.




14
COMPANIES ACT 2014 - PRACTICAL IMPLICATIONS FOR IRISH COMPANIES




TIPS
Group companies may wish to take the opportunity to review their general group structure to
assess whether there are any dormant or unnecessary companies in the group which could be
wound up or struck off the register before the end of the transition period. This will avoid the time
and cost of converting such companies to a LTD or a DAC.

Where companies are considering undertaking a restricted transaction (for example, a reduction
of company capital) that is not time critical, it might be advisable to delay the transaction
until after commencement of the Act. In this way, the company may be able to avail of the new
Summary Approval Procedure (as outlined above) to validate the transaction, which would be less
costly and time-consuming than the procedure available under the current law.

Guarantee companies should consider whether they are in a position to apply for an exemption
from using the words “company limited by guarantee” after their name. If an existing guarantee
company has already obtained an exemption from the requirement to use the word “limited”
following its name, this exemption will be carried over under the Act.

The Act envisages a specified scope to be given to the company secretarial function on its role,
stating that the duties of a secretary (in addition to statutory and legal duties) are those which
have been delegated by the board of directors. This should be an item for consideration by the
board of directors, in order that it can be described and delegated appropriately.



EXPECTED TIMELINE
    23 Dec 2014               01 Jun 2015               31 Aug 2016               30 Nov 2016

   ENACTMENT               COMMENCEMENT               DEADLINE FOR                  END OF
                                                     CONVERSION TO                TRANSITION
                                                          DAC                       PERIOD

                                                                                                                                                 15
HOW WILLIAM FRY
CAN HELP
The William Fry team is happy to help on any
queries arising from this briefing.

In particular, we can:

     • Advise on conversion options for existing
       private companies limited by shares

     • Provide new constitutional documentation
       where required

     • Draft the necessary shareholder
       resolutions to convert to a new company
       type and deal with Companies Registration
       Office filings

     • Review existing memorandum and articles
       of association

     • Advise directors on their new obligations
       under the Act

     • Assist with the annual compliance           IMPORTANT NOTE
       statement process
                                                   This document represents a high level summary
William Fry will shortly be publishing a more      of the changes brought about by the Companies
extensive booklet on the Act which will examine    Act 2014. It does not present a comprehensive
the new law in greater detail. This will be        summary of the Act or its implications and
available on the Companies Act 2014 section of     does not constitute specific legal advice for any
our website in due course.                         particular client or company.


16
DUBLIN • LONDON • NEW YORK • SILICON VALLEY

                              Tel: +353 1 639 5OOO • E- mail: info@williamfry.com

                                                   www.williamfry.com
         This publication is for general information purposes only and does not constitute and should not be regarded
 as a substitute for taking legal advice. While every care has been taken in the preparation of the information in this publication,
  readers are advised to seek specific legal advice in relation to any decision or course of action. The information does not take
account of specific circumstances and is not legal advice. Please contact any of the individuals listed or your regular William Fry
                          contact if you require legal advice on any of the issues raised in this publication.

                                           WF-L.FID830665 / Published by William Fry

                                        Copyright © 2015 William Fry. All rights reserved.
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