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Lord McKenzie of Luton: In speaking to Amendment No. A32, I shall speak also to Amendments Nos. A35 and A214 and to the Clause 535 stand part debate. I will take Amendment No. A32 first and then turn to the clause stand part debate on Clause 535 and the proposed amendment to that clause; finally, I shall speak to Amendment No. A214.
Amendment A32 is concerned with Clause 534, which provides that the directors of a company may allot shares only in accordance with the provisions of Clauses 535 and 536. The proposed amendment seeks to take private companies out of the statutory controls on the allotment of shares completely, unless the company decides to opt into the regime.
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The Government are committed to removing unnecessary burdens on business, particularly in respect of small private companies. Clause 535 therefore removes—for private companies that will have only one class of share after a proposed allotment of shares—the current requirement for the directors to obtain prior authorisation for the allotment from the company's members, whether through the articles of association or by resolution of the company. The power given to directors in Clause 535 is, however, subject to any contrary provision in the articles of association. This means that, if they wish, the members may restrict the power given to the directors in Clause 535, or prohibit the directors from making a specific allotment of shares, or allotments generally, pursuant to this power, by inserting an appropriate provision in the company's articles.
The proposed amendment to Clause 534 starts from the premise that private companies are not subject to the statutory regime governing the directors' power to allot shares unless they opt in, either by provision in the articles or by resolution of the company. Thus, where a private company did not opt in—which may be a deliberate decision or, more worryingly, due to inadvertence—the directors of any private company would be free to allot shares, or grant rights to subscribe for, or to convert any security into, shares, without first obtaining an authority from the company's members. It is proposed that this general rule should apply irrespective of the fact that the company may have several classes of share or may have provisions in its articles restricting the power of the directors to allot shares.
The Government consider that this is a step too far. There is a balance to be struck between the interests of the company, its directors and individual members. We believe that the Bill strikes the right balance in requiring the directors to seek prior authorisation from the members where the proposed allotment may affect the balance of rights between different classes of shareholder. In short, we have to draw the line somewhere. Clause 536, therefore, requires the directors to obtain prior authority for a proposed allotment of shares where the company is a private company which will have more than one class of share after the proposed allotment or where the company is a public company. This carries forward the requirements of subsections (1) and (3) to (8) of Section 80 of the 1985 Act in respect of such companies. The requirements in Clause 536 are not particularly onerous for the relatively small number of private companies having more than one class of share. The Government consider that the provisions in this clause do not impose a major burden on business.
On whether Clause 535 should stand part of the Bill, I have already mentioned that this clause empowers directors of a private company to allot shares or to grant rights to subscribe for, or convert any security into, shares if certain conditions are met. The provisions in the clause are new. This change recognises that there are benefits to be gained from empowering the directors to allot shares in certain
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circumstances, as this saves members and directors alike valuable time when the company is seeking to raise new capital.
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There is, as I have said, a balance to be struck between empowering the directors to make key decisions about when and how a company raises new capital and protecting the rights enjoyed by existing shareholders—for example, any voting rights or right to receive dividends that may exist. The Government believe that the clause strikes the right balance between those competing interests by enabling the members to restrict or prohibit the power given to the directors in Clause 535 through the company's articles of association. In addition, the power given to the directors by Clause 535 is subject to the proviso that the exercise of the power should not jeopardise the relative power of shareholders in different classes, vis-à-vis one another: thus it applies only where the company has one class of share and will continue to have only one class of share after the proposed allotment.
I should add that the provisions in Clause 535 implement a recommendation of the Company Law Review that has been welcomed by the vast majority of interested parties. The clause recognises that, in the case of the vast majority of private companies that have an issued share capital of £1,000 or less, there is no need for the safeguards that rightly apply to public companies and private companies with more complex share capital structures. I therefore hope that the noble Lord is persuaded that the clause is beneficial to the members and directors of private companies alike and that he can agree that Clause 535 should stand part of the Bill
Amendment No. A35 is intended to ensure that where the members have seen fit to restrict or prohibit the power given to the directors to allot shares under Clause 535, by making provision to that effect in the company's articles of association, such a restriction or prohibition should stand, notwithstanding any common-law rule that may override the articles. As I mentioned, Clause 535 is a new provision and the intention is that a private company with only one class of share may restrict or prohibit the power given to the directors in this clause through the company's articles.
The Government consider that any such restriction or prohibition would be effective in accordance with its terms in the same way as any other restriction on the powers of the directors contained in the articles. Moreover, we are not aware of any common-law rule that would have the effect of overriding the articles in this way. The noble Lord mentioned the Russell case, I think. I have no detailed briefing on that, so perhaps we can peruse it outside the Committee and write further on it, if that is the particular issue that he is probing. We are not aware of any common-law rule that would override the effectiveness of the articles. In the circumstances, the Government see no need to make the amendment to Clause 535.
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Finally, Amendment No. A214 would add to the definition in Clause 762 of what is meant by "shares of one class", which applies for the Companies Acts and is therefore relevant to Clause 535. Clause 762(1) states that shares are of one class,
Amendment No. A214 would add a further layer to that definition by stating when shares will be deemed to be of a "separate" class—that is, where a company has more than one class of share. It provides that shares would be deemed to be of a separate class if they were allotted with rights requiring registration under Section 128 of the Companies Act 1985.
We do not consider this amendment to be necessary in determining what is a class of share for the purposes of the Companies Acts. First, the requirement to file particulars of share rights under Section 128 should not be regarded as being determinative of whether there is more than one class of share, as the requirement applies only if the company allots shares with rights that would not otherwise be notified to the registrar of companies—for example, by virtue of an alteration to the articles or by a resolution requiring to be registered with the registrar. Secondly, the obligation to register such particulars under Section 128 does not apply,
This follows the wording in Clause 762.
In our view, it is already implicit in Clause 762(1) that, if the rights attached to shares are not in all respects uniform, the company does not have one class of share and must necessarily have more than one class of share. We therefore do not consider it necessary to go further and specify the circumstances in which shares will be deemed to be of a separate class by reference to Section 128.
In summary, the Government are not minded to accept Amendments Nos. A32, A35 and A214. However, I hope that the Committee is persuaded that Clause 535 is beneficial to the members and directors of private companies and that in the circumstances it will agree that the clause should stand part of the Bill. We will doubtless have the chance to revisit the issue of separate classes of shares when—or if—we reach Clause 762 in due course.
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