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Lord McKenzie of Luton: Generally speaking, the directors of an existing company—that is, a company formed prior to the date on which the Bill comes into force—may allot shares, or grant rights to subscribe for shares or to convert any security into shares, only if they are authorised to do so by ordinary resolution of the company's members or by the articles of association.
As has been explained, the requirements for any authority to allot shares are currently set out in Section 80 of the 1985 Act. This provides, among other things, that an authority given under Section 80 must specify the date on which it will expire. This date may not be more than a period of five years from the date on which the authority is given, although the authority may be renewed for further periods of up to five years. In addition, Section 80A of the 1985 Act contains a relaxation for private companies from the requirement to state the date on which the authority given under Section 80 will expire. Where a private company has
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availed itself of this relaxation, the directors may be given an authority to allot shares for an indefinite period or for a fixed period of the company's choice.
Clause 534 replaces the provisions in subsections (1), (2), (9) and (10) of Section 80 of the 1985 Act. It provides that the directors of a company may allot shares, or grant rights to subscribe for shares or to convert any security into shares, only in accordance with Clauses 535 and 536, as has been recognised. A director who knowingly and willfully allots shares in contravention of the provisions of Clause 534 commits an offence. The allotment will, however, remain valid. For completeness, I should explain that Clause 535 deals with the power of directors to allot shares in a private company that will have only one class of share after the proposed allotment, and Clause 536 deals with the power of directors to allot shares in all other cases.
The question has been posed as to what happens to an authority to allot shares given under Section 80 of the 1985 Act when the Bill comes into force. It will clearly be important to make transitional arrangements for existing companies in certain circumstances. In particular, there will be a need to make provision for companies that are conducting their affairs in reliance on provisions in the 1985 Act which are repealed by the Bill. I am grateful to the noble Lord for raising this matter, and, indeed, to the Law Society for considering the issue.
The Government are not, however, convinced that we need to make arrangements such as those proposed in the amendment. Noble Lords will see that the Government have tabled an amendment to Part 36 of the Bill, which will address these concerns. Amendment No. A272 will ensure that there is continuity of the law and that existing companies are not left in any doubt about what is required of them. Therefore, while I have sympathy with the intention behind the proposed amendment, I think that we should address any remaining concerns that the noble Lord may have when we reach Part 36. I reiterate the point made earlier in Committee that the general principle behind the Government's thinking on the issue of transitional arrangements is that, wherever possible, we want to avoid existing companies suffering unnecessary disruption to the way they currently operate as a result of the Bill.
Lord Razzall: I am grateful to the Minister. I understand him to say two things: first, that this matter should be dealt with under Amendment No. A272, after Clause 882, which stands in the name of the noble Lord, Lord Sainsbury; and, secondly, that he accepts the general principle on this point that Section 80 authorities should continue through. When we look at Amendment No. A272 on this point, we need just to ensure that the transitional arrangement is in place. I have not yet looked at Amendment No. A272. On current progress, I had assumed that I would have to do that after my summer holidays; I thought that it would be a bit premature to do so now, because I might have forgotten it by then. In the mean time, I beg leave to withdraw the amendment.
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Amendment, by leave withdrawn.
Lord Hodgson of Ashley Abbots moved Amendment No. A32:
(c) otherwise, if the company is a private company, unless either the company's articles or a valid resolution of the company provides expressly that it is to apply, whether in respect of a particular allotment or generally to allotments of shares by the company"
The noble Lord said: In moving Amendment No. A32, I shall speak also to Amendments Nos. A35 and A214, and propose that Clause 535 should not stand part of the Bill. These amendments relate to Clause 534, which concerns the,
That is an important aspect of the point that I wish to make, along with "Classes of shares" as set out in Clause 762. Once again, I express the hope that one day we shall reach Clause 762; it is nice to think that it exists out there in the distance and that one day we shall get to it.
This issue has been raised with us by Travers Smith. We are putting forward two alternatives. I thought about degrouping them, but going over the same issue twice would be unhelpful to the Committee and would slow matters down. So Amendment No. A32 and the motion whether Clause 535 should stand part fit together, as do Amendments Nos. A35 and A214. Both sets seek to achieve the same goals, but as mini-groups they are mutually exclusive and are being put forward as alternatives for the Government to consider. Either Clause 534 should be amended and Clause 535 struck out, or Clauses 535 and 762 should be amended.
The carve-outs in Clause 535 from the requirement for shareholders to approve share allotments under Clause 536, and under Clause 543 from the statutory pre-emption rights, are both based on a private company having only one class of shares both before and after the allotment. We have been advised that the "one class of shares" test has been introduced probably in order to deregulate share issues for private companies with simple share structures and without a diverse shareholder profile. But we wonder whether this is the right approach.
First, we see no reason why a company with, for example, ordinary and preference shares should not be prevented from issuing more ordinary shares without specific shareholder approval if the issue would not be prohibited under the terms of the rights attaching to the preference shares or otherwise by the company's articles. Equally, there are many private companies—for example, private equity-backed companies—that ostensibly have a single class of shares, but where complex additional rights for particular shareholders may be set out in the shareholders' agreement or attached to debt instruments. We accept that by virtue
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of Sections 128(1) or 380 of the Companies Act 1985 such rights may of themselves give rise to a separate class of shares, but it is often unclear in practice whether rights attach to a shareholder personally or to the shares that he holds. That is particularly true in the case of private equity companies. In future, it would be necessary to look to the tests set out in Clause 762 to determine whether a separate class exists, but this test as drafted is very general and would not be of much assistance in cases of doubt.
We argue that a more sensible approach is to deregulate in their entirety share issues for closely held private companies and to permit all private companies to elect into the current shareholder approval regime, as now replicated in Clause 536, if the shareholders wish to prevent dilutive share issues. If the test in Clause 762 is to retain its importance in terms of the rules on allotment and pre-emption in spite of the observations that I have just made, it would be helpful if Clause 762 were more explicit about the circumstances in which a separate class of shares will be deemed to arise, perhaps by reference to rights notified under Section 128 of the 1985 Act, as amended.
Also, Clause 535, in combination with the abolition of authorised share capital, will mean that for private companies with only one class of shares there will be no statutory limitation on the powers of the directors to allot shares other than the pre-emption conditions. In order to avoid dilutive share issues, some companies will wish to introduce some limitation on the directors' powers to allot shares. A query arises as to whether, if such a limitation were to appear in the company's articles as envisaged by Clause 535, or in a shareholders' agreement to which the company itself was a party, the limitation would constitute an unlawful fetter on the company's statutory powers following the Russell v Northern Bank Developments case. It would be helpful if the provision could make clear that such a restriction will be valid, notwithstanding the outcome of the Russell case. These are two alternative options for tackling a problem that we have been told exists, and therefore in the first instance I beg to move Amendment No. A32.
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