26 Formation of public limited liability
companies and the maintenance of their capital
| (26112)
14197/04
+ ADD 1
COM(04) 730
| Draft Directive amending Council Directive 77/91/EEC, as regards the formation of public limited liability companies and the maintenance and alteration of their capital
|
| Legal base | Article 44(1)EC; co-decision; QMV
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| Document originated | 29 October 2004
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| Deposited in Parliament | 10 November 2004
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| Department | Trade and Industry
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| Basis of consideration | EM of 26 November 2004
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| Previous Committee Report | None; but see (24609) HC 63-xxviii(2002-03), para 13 (2 July 2003) and HC-63 xxxi (2002-03), para 12 (10 September 2003)
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| To be discussed in Council | No date set
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| Committee's assessment | Legally and politically important
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| Committee's decision | Cleared
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Background
26.1 The Second Company Law Directive,[80]
adopted in 1976, harmonises national rules relating to the formation
of companies, their minimum capital, distributions made to shareholders
and reduction and increase in capital. The purpose of the Directive
is to ensure that the capital of a company is maintained in the
interests of creditors and that the interests of minority shareholders
are protected by requiring all shareholders to be treated equally.
26.2 As part of the Commission's process of simplifying
the legislation relating to the internal market (SLIM), a Company
Law Working Group issued a report in September 1999 on the simplification
of the First and Second Company Law Directives. The recommendations
of the Working Group were largely accepted by a High Level Group
of Company Law Experts appointed by the Commission and which reported
in 2002. These were in turn incorporated in the Commission's action
plan and were identified as a short-term priority for adoption
by the end of 2005. The Commission's action plan also provides
for a study of a more radical change to the capital maintenance
regime, with work commencing on such study in early 2006.
The draft Directive
26.3 The Commission describes its proposal as "moderately
deregulatory". The proposal seeks to simplify the capital
maintenance regime of the Second Directive so as to make it easier
in terms of time and cost for public limited companies to take
measures affecting the size, structure and ownership of their
capital. The Commission argues that the proposal will enable companies
to react more promptly to market conditions, thereby promoting
business efficiency and competitiveness without reducing protection
for shareholders and creditors.
26.4 The proposal would amend the Second Directive
in six areas. First, it would relax the current requirements for
a valuation where consideration other than cash is provided for
the allotment of shares. Member States would be permitted not
to require such a valuation where a "clear point of reference"
for valuation already exists. This may be the case where the non-cash
consideration consists of securities which already have a market
price, or where the consideration has already been the subject
of a fair-value opinion by a recognised independent expert.
26.5 Secondly, the proposal would relax the current
requirements relating to the acquisition by a company of its own
shares. At present, authorisation for such acquisitions may be
given by the general meeting, but only for a maximum of 18 months,
and the value of shares so acquired may not exceed 10% of the
subscribed capital. The period of authorisation would be extended
to five years, and the value of shares so acquired must not have
the effect of reducing the net assets of the company below the
level referred to in Article 15(1)(a) of the Second Directive.
26.6 Thirdly, the proposal would allow a company
to provide financial assistance to a third party for the acquisition
of its shares. Such assistance must be approved by the company
in general meeting and may not have the effect of reducing the
net assets of the company below the level referred to in Article
15(1)(a) of the Second Directive.
26.7 Fourthly, the present procedure for securing
a waiver of the rights of pre-emption of existing shareholders
will be relaxed by making it no longer a requirement that the
directors first submit a written report to the shareholders. This
relaxation will apply only where the new shares are to be issued
at the relevant market price.
26.8 Fifthly, the rights of creditors to object to
a reduction in capital will be restricted. At present, a creditor
has the right to object to a reduction in capital and to demand
either that security be provided for his claim or that his claim
first be settled, and this applies even where the reduction will
have no impact on the company's ability to meet the claim. The
proposal will limit the right of objection to those cases where
the creditor can demonstrate that the reduction will prejudice
the satisfaction of the creditor's claim and the company has provided
no adequate safeguard.
26.9 Finally, the proposal addresses the question
of "squeeze out" and "sell out" rights. The
majority shareholders holding 90% of the share capital will acquire
a right (a "squeeze out" right) compulsorily to acquire
the shares of the minority, and the minority shareholders will
acquire a corresponding right (a "sell out" right) to
require that their minority shareholding be acquired by the majority.
Such rights are conferred by the Takeovers Directive of 2004,[81]
but operate only in the context of a successful takeover. The
proposal will institute these rights in the case of all companies
traded on a regulated market, even where the threshold of majority
ownership has been passed other than as a result of a takeover.
However, Member States will be permitted to raise the qualifying
thresholds to 95%.
The Government's view
26.10 In her Explanatory Memorandum of 26 November
2004, the Minister for Industry and the Regions and Deputy Minister
for Women, Department of Trade and Industry (Jacqui Smith) explains
that the Government believes that, although the proposal is designed
to be a streamlining measure aiming to reduce burdens on business,
it is not clear that this will be the result in all circumstances.
The Minister adds that the Government would have preferred the
Commission to have omitted the interim step of amending the Second
Directive and to have moved directly to the feasibility study
of a more radical change to the capital maintenance regime which
might deliver more significant benefits for businesses. However,
the Minister notes that some Member States are "heavily wedded"
to the existing capital maintenance regime, which they see as
providing essential safeguards for creditors and shareholders,
and acknowledges that the Commission has been keen to move quickly
to secure any benefits in the short term.
26.11 The Minister comments that the proposed amendments
appear in practice to be unlikely to make a significant difference
to companies in the UK and points out that of 1.8 million companies
registered in the UK, only 11,700 are public companies and hence
covered by the Directive. The Minister states that the proposal
"will not be heralded as a valuable deregulatory measure
by business", but that its impact will, in the main, be to
"reduce and lighten aspects of the administrative processes
connected with alterations in capital structures rather than changing
significantly the nature of the rules governing capital maintenance
and the underlying basis of this approach i.e. creditor protection".
Conclusion
26.12 This is a technical measure with limited
impact, and we note the Minister's assessment that the proposal
is unlikely to make a significant difference to companies in the
UK. We also note that the Commission itself describes the proposal
as only "moderately" deregulatory.
26.13 The limited deregulatory effect of the proposal
is nevertheless to be welcomed, and we are content to clear the
document from scrutiny.
80 Council Directive 77/91/EEC of 13 December 1976,
OJ No. L 26 of 31.1.1977, p.1. Back
81
Directive 2004/25/EC of the European Parliament and of the Council
of 21 April 2004 on takeover bids, OJ No. L 142 of 30.4.2004,
p.12 Back
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