New section 280A: Application of rules of law restricting distribution

1007.     New section 280A(1) preserves the existing common law rules on unlawful distributions - which continue to be an essential component in determining what amounts to an unlawful distribution.

1008.     New section 280A(2) makes an exception to this: the lawfulness and amount of distributions in kind are established by the statutory rules and not by any applicable common law rules.

Redenomination of share capital

1009.     Where a public company applies for a trading certificate under section 117 of the 1985 Act it must satisfy a minimum share capital requirement (known as the "authorised minimum"). There is a similar requirement where a private company re-registers as a public company under section 43 of that Act. The authorised minimum is currently set at £50,000 and must be expressed in sterling. This implements Article 6 of the Second Company Law Directive (77/91/EEC) which requires that, in order that a company may be incorporated or obtain authorisation to commence business, a minimum capital shall be subscribed the amount of which shall be not less than 25000 ECU (expressed in the domestic currency of the Member State) and the effect of these provisions is retained in the Bill (see clauses 91: Requirements as to share capital and 538: The authorised minimum).

1010.     Subject to the above qualification (and any restriction in a company's articles) a company is free to allot shares in any currency that it wishes. It may also have its share capital made up of shares of a mixture of denominations, for example, one class of a company's shares may be denominated in sterling, whereas another class may be denominated in dollars, euros or some other currency of the company's choosing.

1011.     What a company cannot currently do is easily redenominate its share capital (or any class of it) from one currency to another, for example, from dollars to sterling or vice versa. The current procedure involves cancelling existing shares under the court approved procedure for capital reductions set out in section 135 of the 1985 Act or, in the case of private companies only, buying back or redeeming shares out of capital under section 171 of that Act, and then issuing new shares in the desired currency.

Clause 586: Redenomination of share capital

1012.     This clause introduces a new procedure that will allow a company limited by shares to easily redenominate its share capital. This requires an ordinary resolution of the company's members. (Unlimited companies having a share capital are already free to redenominate their share capital as they see fit and no change to the legislation is required in respect of such companies).

1013.     Subsection (2) of this clause provides that the spot rate used when converting a company's share capital from one currency to another must be specified in the resolution to redenominate the company's share capital. There is a choice of spot rates and this is set out in subsection (3).

1014.     A company is free to pass a conditional resolution under this clause (see subsection (4)). A resolution will, however, lapse if the redenomination of share capital has not taken effect within 28 days of the date on which the resolution is passed (see subsection (6)). Where a resolution lapses, the company will not be able to redenominate its capital unless it passes a new resolution and redenomination is effected in accordance with the new resolution.

1015.     Subsection (7) makes it clear that, if it wishes, a company may restrict or prohibit a redenomination of the company's share capital by incorporating a provision to this effect in its articles.

1016.     It should be noted that this clause does not make provision for the authorised minimum to continue to be denominated in sterling. This means that once a public company has obtained a trading certificate under section 117 of the 1985 Act or under clause 537 of the Bill (Procedure for obtaining certificate) or where a private company has re-registered as a public company, such a company is free, if it wishes, to redenominate all of its share capital, including the authorised minimum.

Clause 587: Calculation of new nominal values

1017.     This clause explains how the new nominal value of a share which has been redenominated from one currency to another should be calculated.

Clause 588: Effect of redenomination

1018.     This clause makes it clear that a redenomination of a company's share capital (or any class of it) does not affect any rights or obligations that the members may have under the company's constitution or any restrictions affecting members under the company's constitution. In particular, it does not affect entitlement to dividends, voting rights or any liability in respect of amounts unpaid on shares. If, for example, a dividend of 20p was declared on a £1 share prior to a redenomination of that share, and that £1 share is subsequently converted into a $1.5 share, the member who now owns a $1.5 share in the company will still be entitled to a 20p dividend (albeit that the company and the member in question may agree that the 20p dividend can be paid in cents - or indeed in some other currency). Similarly, where a company has issued partly paid shares, the member's liability to the company will remain in the currency in which the share was originally denominated.

Clause 589: Notice to registrar of redenomination

1019.     This clause sets out the requirements as to notice where a company redenominates its share capital (or any class of it). Notice must be given to the registrar in accordance with subsections (1) and (2) of this clause and there is a requirement for a statement of capital (see note on clause 560: Notice to registrar of sub-division or consolidation).

1020.     A copy of the resolution to redenominate the company's share capital must be forwarded to the registrar within 15 days after it is passed (see Clause 30: Copies of resolutions or agreements to be forwarded to and recorded by registrar).

1021.     If a company fails to comply with the procedural requirements as to notice the company and every officer of the company commits an offence. The penalty for this offence is set out in subsection (5).

Clause 590: Reduction of capital in connection with redenomination

1022.     Following a redenomination of a company's share capital, it is likely that the company will be left with shares expressed in awkward fractions of the new currency, for example, 0.997 dollars or 1.01 euros. The company may therefore wish to renominalise the value of the shares affected (that is, alter the nominal value of these shares) to obtain share values in whole units of the new currency. It can do this in one of two ways: if the company has distributable reserves it may capitalise those reserves to increase the nominal value of the shares affected; alternatively, it may reduce its share capital using the procedure set out in this clause.

1023.     This clause enables a company to renominalise the value of its shares by cancelling part of its share capital. This requires a special resolution of the company's members but there is no need for the directors to make a solvency statement or for the company to go to court (as required where a company reduces its share capital under amended section 135 of the 1985 Act).

1024.     Under subsection (3), a resolution to reduce capital in connection with a redenomination must be passed within 3 months of the resolution to redenominate the company's share capital.

1025.     Subsection (4) provides that the amount by which a company can reduce its share capital using this new provision is capped at 10% of the nominal value of the company's share capital immediately after the reduction (this 10% cap is required by the Second Company Law Directive (77/91/EEC) and applies to any reduction of capital in a public company which is not approved by the court).

1026.     Where a company reduces its share capital under this clause, the amount by which the company's share capital is reduced must be transferred to a new non-distributable reserve (see clause 592: Redenomination reserve).

Clause 591: Notice to registrar of reduction of capital in connection with redenomination

1027.     This clause sets out the requirements as to notice where a company reduces its share capital in connection with a redenomination of its share capital (that is, to renominalise the value of its shares). Notice must be given to the registrar in accordance with subsection (1) of this clause. This notice must be accompanied by a statement of capital (see note on clause 560: Notice to registrar of sub-division or consolidation).

1028.     The resolution to reduce the share capital must be filed with the registrar in accordance with clause 30 (Copies of resolutions or agreements to be forwarded to and recorded by registrar).

1029.     The reduction of capital will not take effect until the documents that are required to be delivered to the registrar under subsections (1) and (2) are registered by the registrar (see subsection (5)).

1030.     In addition to delivering the above documents to the registrar, within 15 days of the date that a resolution to reduce capital in connection with a redenomination is passed, under subsection (6) the company must also deliver to the registrar a statement made by the directors confirming that the reduction of share capital was made in accordance with subsection (4) of clause 590 (Reduction of capital in connection with a redenomination).

1031.     If a company fails to comply with the procedural requirements as to notice the company and every officer of the company commits an offence. The penalty for this offence is set out in subsection (8). In addition, where the statement made by the directors under subsection (6) is misleading, false or deceptive in a material particular, the directors are liable to an offence under clause 764 (General false statement offence).

Clause 592: Redenomination reserve

1032.     Where a company reduces is share capital under clause 590 (Reduction of capital in connection with redenomination) it must transfer an amount equal to the value of the reduction to a non-distributable reserve known as the redenomination reserve.

1033.     This clause provides that amounts transferred to the redenomination reserve may be used by the company in paying up shares to be allotted to existing members as fully paid bonus shares. Subject to this, the provisions of the 1985 Act relating to the reduction of share capital, apply to the redenomination reserve as if it were paid-up

share capital. These provisions mirror those contained in section 170 of the 1985 Act in relation to the capital redemption reserve.

PART 20: DEBENTURES

1034.     This part relates to the register of debenture holders. It provides for a company's debenture holders to have the same protection against requests for access to the register which are not sought for a proper purpose as Part 8 provides for its members.

Clause 593: Register of debenture holders

1035.     This clause replaces section 190 of the 1985 Act. There is no requirement on a company to keep a register of debenture holders. However, if such a register is kept, then the company must comply with this clause, which requires the register to be kept available for inspection either at its registered office or at another place in the part of the UK in which the company is registered and to notify the registrar of where it is so kept. It mirrors the requirements for the company's register of members (see clause 113(1) to (3), (5) and (6)).

Clause 594: Register of debenture holders: right to inspect and require copy

1036.     This clause replaces part of section 191 of the 1985 Act. It modifies the existing right of public access to any register of debenture holders kept by a company. The changes mirror similar requirements in Part 8 relating to the register of members. Subsections (3) and (4) require those seeking to inspect or to be provided with a copy of the register to provide their names and addresses, the purpose for which the information will be used, and, if the access is sought on behalf of others, similar information for them.

Clause 595: Register of debenture holders: response to request for inspection or copy

1037.     This clause provides a procedure by which the company can refer the matter to the court if it considers the request is not for a proper purpose. It specifies a 5-day period within which the company must either comply with the request or apply to the court for relief from the obligation. If the company opts for the latter, then subsections (3), (4) and (5) apply. Under subsection (3), if the court is satisfied that the access to the register of debenture holders is not sought for a proper purpose, it will relieve the company of the obligation to meet the request and may require that the person who made the request pays the company's costs. Under subsection (4), the court may also relieve the company of the obligation to meet other requests for similar purposes. If the court does not make an order under subsection (3), or the proceedings are discontinued, then, under subsection (5), the company must immediately comply with the request.

Clause 596: Register of debenture holders: refusal of inspection or default in providing copy

1038.     This clause retains the existing sanctions under section 191 for failure to comply with a request. They do not apply if the court has directed that the company need not comply with the request.

Clause 597: Register of debenture holders: offences in connection with request for or disclosure of information

1039.     This is a new provision. It creates two offences. First, in relation to the new requirement in clause 594 to provide information in a request for access, it is an offence knowingly or recklessly to make a statement that is misleading, false or deceptive in a material particular. Second, it is an offence for a person having obtained information pursuant to an exercise of the rights in section 594 to do anything or fail to do anything which results in that information being disclosed to another person knowing or having reason to suspect that the other person may use the information for a purpose that is not a proper purpose.

Clause 598: Time limit for claims arising from entry in register

1040.     This clause replaces section 191(7) of the 1985 Act. It amends the existing time limit for claims arising from errors in the register from twenty years to ten years. This mirrors equivalent provisions applicable to the register of members (see clause 127).

Clause 599: Right of debenture holder to copy of deed

1041.     This clause retains the existing right, provided by section 191 of the 1985 Act, for a debenture holder on payment of a fee to be provided with a copy of the debentures deed. If default is made in complying with a request, an offence is committed by every officer of the company who is in default

PART 21: TRANSFER OF SECURITIES

BACKGROUND

Section 207 of the Companies Act 1989 and the Uncertificated Securities Regulations

1042.     Under section 207 of the Companies Act 1989 the Secretary of State is able to make regulations, using the affirmative procedure, "for enabling title to securities to be evidenced and transferred without a written instrument". This is a broad power which can be used either to modify or exclude company law provisions or to make provision for sub-delegation and the detailed operation of new transfer systems and procedures.

1043.     Since 1996 regulations made under section 207 have enabled a large number of (mostly listed) companies to issue shares without providing paper share certificates, and the holders of such "dematerialised" or "uncertificated" shares have been able to transfer them without a paper instrument of transfer. The current regulations are the Uncertificated Securities Regulations 2001 (SI 2001/3755).

1044.     At present, all dematerialised shares are held and transferred through the electronic CREST systems maintained by CRESTCo (now part of the Euroclear group). However, although some 85 per cent by value of shareholdings in UK listed companies are now held and traded in CREST, some nine million "retail" shareholders in such companies still hold their shares in certificated form, giving rise to about 10,000 paper-based share transfers each day.

Possible scope of changes to the existing law using the extended power

1045.     Shareholders who hold their shares in certificated form are subject to section 183 of the 1985 Act and the other general rules on paper-based transfers when they transfer their shares. If they hold their shares in uncertificated form, they are not subject to these rules, which are disapplied by the current regulations, but they can only transfer their shares by means of the CREST system.

1046.     In order to do this they must either be "personal members" of CREST or hold their shares indirectly in a nominee account with an institution that is a member of CREST. Personal membership means that the individual investor's name appears on the CREST registers of the companies whose shares he or she holds, but does not give individual investors direct access to the CREST infrastructure, so that they must still use their broker or some other authorised intermediary to transmit the CREST messages by which they may transfer shares. Holding shares indirectly means that the name of a nominee, rather than the individual investor, appears on the CREST registers of the companies, so that the individual investor may have a beneficial interest in the shares, but is not the legal owner of them.

1047.     An industry working group has suggested that it should be made compulsory for all transfers of shares in quoted companies to be "paperless". It believes that this will relieve the industry of the burden of dealing with the rump of 10,000 or so paper transfers each day, and should reduce the costs and complexity of various "corporate actions", such as rights issues.

1048.     The group has suggested that the key objectives of any legislation which replaces or supplements the current regulations should be:

• that the rump of paper-based transfers are removed from the system (other than by all the individual shareholders concerned deciding to become personal members of CREST or hold their shares indirectly);

• that this is done in a way which does not diminish either the security of individual transactions and shareholdings, or the efficiency or authoritativeness of the CREST system; and

• that no individual shareholder is compelled to hold shares through a nominee (i.e. to be deprived of the right to have his or her name on the company's register of members and enjoy in full the rights which come with legal ownership of shares).

A consultation paper on the group's proposals was published by the Institute of Chartered Secretaries and Administrators on 6 April 2006. The provisions of this Chapter would enable these, or other similar proposals, to be implemented by further regulations under section 207 of the Companies Act 1989 as extended by Part 21.

Clause 600: Transfer of securities: power to make regulations

1049.     This clause provides for the power to make regulations under section 207 of the 1989 Act to be exercisable by the Secretary of State or the Treasury. Responsibility for section 207 of the 1989 Act and the regulations passed from the Department of Trade and Industry to HM Treasury by virtue of article 2(1) of the Transfer of Functions (Financial Services) Order 1992 as part of a general transfer of responsibility for financial services matters. Dual responsibility is considered more appropriate for the making of regulations under the extended power as the extension of paperless holding and transfer to new classes of shares or other securities involve matters which are part of company law.

Clause 601: Transfer of securities: extension of powers

1050.     This clause extends the existing power relating to transfer of securities under section 207 of the 1989 Act so that it could be used to require, as well as to permit, the paper free holding and transfer of quoted company shares. Exercise of the power will continue to be subject to the affirmative procedure.

1051.     The effect of subsections (1) and (2) is that regulations made under section 207 may:

• enable the members of companies generally, or of designated classes of company, by ordinary resolution, to adopt a new form of paperless holding and transfer of shares and abandon paper-based forms of holding and transfer in relation to all existing and new securities of that company, or to specified types of securities; or

• make the adoption of a form of paperless transfer and the abandonment of paper-based forms of transfer mandatory for all securities, or specified types of securities, issued by companies generally or by designated classes of company.

1052.     Subsection (3) is designed to protect the right of individual investors to continue to hold shares in their own names rather than through nominees. It ensures that the new arrangements prescribed in the regulations will not be such as to cause:

• people with rights over or interests in shares of a company which, but for those arrangements, would have entitled them to have their names entered in the company's register of members as the holder of those shares, to lose that entitlement; or

• people with interests in shares of a company which, but for those arrangements, would have entitled them to give instructions in respect of those shares, to lose that entitlement.

1053.     Subsection (4) provides that the regulations will be able to:

• prohibit the issue of share certificates by relevant companies. Shareholders in such companies would lose the option of continuing to hold certificates and transfer their shares by paper-based methods;

• ensure that such shareholders are sent periodic statements of their shareholdings;

• deprive existing share certificates of any evidential status.

Clause 602: Transfer of securities: order-making power

1054.     This clause provides additional flexibility by enabling Ministers to designate, by order (subject to negative resolution procedure), companies or classes of company to which the regulations are to apply, or to modify the effect of the regulations (or disapply them) in relation to a designated class of companies or specified companies.

Clause 603: Transfer of securities: supplementary provisions

1055.     Ministers will be obliged under subsection (1) to consult such persons as they consider appropriate before making regulations or designating a class of companies by order under the new power. This obligation reflects the breadth of the proposed new power, as well as the technical nature of some of the regulations which could be made under it.

1056.     Subsection (2)(a) repeals the second sentence of section 207(4) ("But the regulations shall be framed so as to secure that the rights and obligations in relation to securities dealt with under the new procedures correspond, so far as practicable, with those which would arise apart from any regulations under this section."). Electronic contracts were more of a novelty in 1989 than they are now and it is considered that this provision is no longer appropriate.

PART 22: INFORMATION ABOUT INTERESTS IN COMPANY'S SHARES

BACKGROUND

1057.     The provisions of this Part concern a public company's right to investigate who has an interest in its shares. They replace equivalent provisions in Part 6 of the 1985 Act. These are purely domestic provisions, and are not required by European Law.

1058.     The automatic disclosure obligations currently contained in sections 198 to 211 of Part 6 of the 1985 Act are to be repealed and replaced by regulations under the Financial Services and Markets Act 2000, as amended by clause 895, in implementation of the Transparency Directive. In the regulations, a different concept of "interest in voting rights" will be adopted in order to implement the Transparency Directive.

1059.     This Part re-enacts, with certain modifications, the disclosure obligations pursuant to a notice issued by the company contained in sections 212 to 219 of the 1985 Act. There is no change to the definition of "interest in shares" for this purpose.

1060.     The main changes to section 212 and related provisions are:

• making clear that notices are not required to be in hard copy, and therefore can be given in electronic form, (clause 606 read in conjunction with the provisions in Part 31 on the sending or supplying of documents or information);

• providing for how information is to be entered on the register when the name of the present holder of the shares is not known or there is no present holder (clause 615);

• removing the requirement on the company to verify third party information supplied in response to a clause 606 notice before putting it on the register (clause 624);

• removing the requirement for a company to keep information on the register in relation to notices issued more than 6 years previously (clause623).