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The Deputy Chairman of Committees (Baroness Hooper): The Committee will adjourn for 10 minutes.
[The Sitting was suspended for a Division in the House from 5.15 to 5.25 pm.]
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Lord Razzall: As I was saying before the Division Bell, the wise heads of the Law Society have come up with five concerns about what seems, on the face of it, to be a simple clause. I had finished two of them and will start again on the third.
By limiting Clause 535 to private companies with a single class of shares only and repealing Section 80A of the Companies Act 1985, the Bill will mean that shareholders of private companies with more than one class of shares will no longer be able to give the directors an authority to allot shares up to a stated maximum for an indefinite period, which they can currently do under Section 80A. This obviously gives private companies less flexibility than at present and nobody can think of an obvious reason why that should be the case.
Fourthly, in general terms, Clause 535 should perhaps be amended to retain the current flexibility of private companies. Otherwise there will, at least, be the need for a transitional provision allowing directors to continue to allot shares, pursuant to an existing Section 80A authority. I have no doubt, in view of the Minister's answers to previous questions, that Amendment No. A272 will be prayed in aid on that point. When we get to that amendment, the myriad advisers behind the Minister will presumably remind him that this is another clause that must be included in the ambit and effect of Amendment No. A272.
Fifthly, those transitional provisions will be needed to deal with references not only to existing articles of association—which are relatively easy to deal with in an amendment to the Companies Act—but to shareholders' agreements and other contractual documents on authorised share capital, which will have been put in place to deal with the regulation of private companies. That is, in practice, a fundamental point to practitioners. We must ensure that there is clarity not only on those articles of association, but on those other agreements and contractual documents—I think that is a home win—on authorised share capital.
I look forward to hearing the Minister's response to those five concerns of practical detail. I beg to move.
Lord McKenzie of Luton: There are a number of elements to this amendment, some of which relate to transitional measures; notably, the effect of a subsisting Section 80 authority on the directors' power to allot shares following the coming into force of the Bill; and others which purport to extend the circumstances in which the power of the directors to allot shares may be constrained. On the former, the question of what happens to any authority given to the directors of an existing company to allot shares under the 1985 Act, and which is subsisting at the date that the Bill comes into force, is important. I am grateful that this point was raised in the context of these provisions.
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5.30 pm
It is important that things done in reliance on provisions in the 1985 Act which are repealed by the Bill continue to have legal effect. As was anticipated, Amendment No. A272 will achieve this; I hope noble Lords will accept that amendment when we come to it. There is therefore no need to carve out an exemption to the general authority conferred on directors under Clause 535 to reflect a subsisting Section 80 authority.
While it is not referred to in the amendment, I will touch on Section 80A of the 1985 Act, as the Government are aware that certain parties are concerned that, in one respect, the regime under the Bill is slightly more restrictive for private companies that have, or will have, more than one class of share after the proposed allotment than is the case under the 1985 Act—one of the five points of the noble Lord, Lord Razzall. Section 80A contains a relaxation for private companies from the requirement in Section 80 to state the date on which an authority to allot shares will expire. Under Section 80(4), the authority may only be given for a period not exceeding five years, although it may be renewed for a further period of up to five years. Section 80A allows private companies to fix a definite date, or grant an authority for an indefinite period. In order to avail themselves of this relaxation, the members must pass an elective resolution under Section 379A of the 1985 Act. Section 80A will be repealed along with Section 80.
The Government accept that, in simplifying the law for companies that have only one class of share, we have lost some of the flexibility currently afforded to private companies that have a more complex share capital structure. This is the quid pro quo for streamlining the rules for the vast majority of private companies on the register, which are likely to be small and have an issued share capital of £1,000 or less. It is unlikely that such companies will have, or want to create, more than one class of share.
Where a private company will have more than one class of share after the proposed allotment, the members of such companies will continue to be able to give the directors an authority to allot shares for a period of up to five years and may extend this authority for a further period of up to five years at a time. The requirement to extend the period of the authority is not especially onerous, and the Government are not convinced that there is a need to reintroduce the relaxation currently contained in Section 80A.
As I have said, Clause 535 confers a power to allot shares on the directors of a private company, but that power is constrained to the extent that the members may restrict or prohibit this power in the company's articles. The noble Lord's amendment would enable the shareholders to prohibit the directors from allotting shares by passing an ordinary resolution to that effect. This would lead to confusion as to the extent of the directors' authority to allot shares. In the absence of a statutory requirement, there is no obligation to file copies of such resolutions with the Registrar of Companies, and so third parties would
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not be put on notice of such a fetter on the directors' power to allot. The consequences which would flow if the directors were to make an allotment in breach of such a resolution are also unclear. The requirement for any restriction on the directors' power to allot to appear in the articles avoids these criticisms, and we do not therefore consider it helpful to permit the directors' authority to allot to be restricted by a simple majority of the shareholders.
The amendment also extends the exception from the directors' general power to allot to cover cases where the allotment would be "inconsistent" with:
This is misconceived. Clause 535, unlike Section 80, is not drafted in terms which require the directors to be given an authority before they may allot. The directors are authorised by virtue of Clause 535, and the only exception thereto is if the articles restrict that power, so the clause approaches the matter from the opposite direction, if you will. Consequently, subject to the point which I made earlier regarding the continuing effect of a subsisting Section 80 authority, the amendment's reference to "authorities" does not fit with the construct of the clause.
That brings me to the end of, I am afraid, a somewhat lengthy explanation, which was necessary in order to deal with the various elements of the amendment. I hope that it has covered the points raised, but, if not, I will be happy to try again or to follow up in writing to the noble Lord. In a sense, the detail of the key transitional provisions is yet to come, but I enunciated the principle behind our position earlier.
Lord Razzall: We are as one on the need for the transitional arrangements, which we can look at when we get to Amendment No. A272. I am still unclear in my own mind why it should not be possible for companies with more than one class of shares to do what is now prohibited. I will read what the Minister has said and, in the mean time, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. A35 not moved.]
Clause 536 [Power of directors to allot shares etc: authorisation by company]:
Lord Razzall moved Amendment No. A36:
The noble Lord said: This is another amendment from the Law Society. Its purpose is to clarify the position of directors—that their authority to allot shares extends to the full amount of a company's nominal amount of share capital rather than the maximum number of shares. Clause 536 deals with the power of directors to allot shares where they are authorised to do so by the company's articles, or by resolution of the company. That authority is related to,
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that may be allotted under the provisions of the clause. This does not take account of the fact that the shares may be of different classes or denominations; you may have £1 shares and 1p shares in issue. It seems sensible to broaden the definition to the maximum nominal amount of share capital rather than the maximum number of shares. That is the purpose of this amendment. I beg to move.
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