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Lord Razzall moved Amendment No. A42:
The noble Lord said: I suspect that I know the answer to this amendment. This concerns transitional arrangements. As in the case of the amendment proposed to Clause 534, there will need to be transitional arrangements in relation to the new pre-emption right regime under Clause 545. Any disapplication of the statutory pre-emption rights will need to be pursuant to an allotment authority under Clause 536. Again, a general disapplication of pre-emption rights pursuant to an old Section 80 authority should survive until such time as the company is able to put in place a new disapplication pursuant to Clause 545, within an allotment authority pursuant to Clause 536.
I suspect that the answer is this will be dealt with by Amendment No. A272, if I have the right number, and I suspect that the eager band of advisers will be making a note of this to ensure that when we reach that amendment we have included this in the transitional provisions. I beg to move.
6.30 pm
Lord Sainsbury of Turville: The noble Lord is getting too good at answering his own questions.
We anticipated the concern behind the amendment proposed by the noble Lord—that appropriate transitional arrangements should be made for existing companies. In particular, there are concerns about what happens to authorities given to the directors under Section 80 of the 1985 Act, which are still in effect when this section is repealed by the Bill.
Amendment No. A42 raises the question about what is to happen to a general disapplication of pre-emption rights pursuant to an old Section 80 authority obtained under Section 95 of the 1985 Act, prior to its repeal and replacement by Clause 545. I am grateful to the noble Lord for raising this issue in the context of Clause 545. These are valid concerns, but, as the noble Lord anticipated, we believe that the concerns are addressed by government Amendment No. A272. We will come to that amendment later in Committee, but it is suffice to say that this amendment makes provision for continuity of the law. We will ensure that anything done by existing companies in reliance on an authority given pursuant to Section 80 of the 1985 Act will continue to have legal effect.
Lord Razzall: I understand the Minister's comments, and I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Hodgson of Astley Abbotts moved Amendment No. A43:
The noble Lord said: Amendment No. A43 concerns Clause 545, "Disapplication of pre-emption rights: directors acting under general authorisation". This is a probing amendment; a search for information. It is noted that Clause 545(5) to (7)—the subsections that our amendment seeks to leave out—preserve the requirements currently set out in Section 95(5) of the Companies Act 1985 for the directors to circulate a written statement justifying a non-pre-emptive issue of shares. The European Commission is understood to be close to introducing amendments to the Second Company Law Directive, Council Directive 77/91/EEC, by means of a directive published in final form on 21 September 2004, to withdraw the obligation on directors of public companies to circulate such a written resolution. Presumably, the requirement for a written statement in Clause 545(5) to (7) will be excluded if Directive 77/91/EEC is amended before these provisions come into force. I seek confirmation from the Minister that this interpretation is correct. I beg to move.
Lord Sainsbury of Turville: Where the directors of a company have been given an authority to allot shares under Clause 536, they must have regard to the statutory pre-emption provisions, which require companies to offer their shares to existing members first; that is, on a pre-emptive basis. As I said, statutory pre-emption rights provide important protection to existing shareholders. They enable such shareholders to protect their proportionate investments in the company by giving them the right to subscribe for any new issue of shares for cash. The Bill, like the 1985 Act, recognises that there are circumstances where it would not be in the company's interests—in the interests of the company's members as a whole—to offer shares to existing members first. The company may, for example, need to raise capital quickly. Therefore, there may be insufficient time to observe the formalities which are laid down under the statutory pre-emption requirements. That is particularly so where the directors are aware that the existing shareholders do not wish to subscribe for further shares. Following the approach taken in the 1985 Act, the Bill, therefore, carves out a number of exceptions to the general rule that existing members must be given the first bite of the cherry.
Clause 545 is an example of one such exception. It enables the members of a company to resolve to empower the directors to make a specified allotment of shares as if the statutory pre-emption provisions did not apply. A special resolution of the company's members is required, but the resolution may not be proposed unless the directors have made a recommendation that this power should be given to them. The directors are required to set out their reasons for making such a recommendation in writing and must provide details of the amount payable in respect of the proposed allotment, which must be justified by the directors. Moreover, a copy of the directors' statement must be circulated to every
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member of the company with the notice of the meeting or, if the resolution is to be passed in written form, with the written resolution.
The latter provision restates the provisions of Section 95(5) of the 1985 Act. As the noble Lord anticipated, it also implements the requirements of Article 29(4) of the Second Company Law Directive which provides that the right of pre-emption may be restricted or withdrawn by decisions of the general meeting, in which case the administrative or management body shall be required to present to such a meeting a written report indicating the reasons for restriction or withdrawal of the right of pre-emption and justifying the proposed issue price. The amendment would remove the requirement for a directors' report. As I have explained, the requirement for a directors' report stems from EU law. Although the Second Company Law Directive applies only to public companies, it would not be beneficial to have two regimes, one for public companies and one for private companies, running in tandem.
Moreover, Section 91 of the 1985 Act, which is retained by the Bill, permits a private company to exclude the operation of Section 89(1), Section 90(1) to (5) or Section 90(6) to allotments of equity securities by providing for the exclusion of the operation of those provisions in the company's memorandum or articles of association. That is, a private company may exclude the requirement to have a rights issue under Section 89(1); the requirement to make an offer in the manner dictated by Section 90(1) to (5); and the requirement to keep the offer open for the period dictated by Section 90(6). That option means that a private company wishing to disapply Section 89 need not rely on, and therefore will not have to comply with, the provisions of subsections (5) to (7) of Clause 545 where it has excluded the relevant provisions on the application of statutory pre-emption rights in their articles.
I should say that a proposal is being considered by the European Parliament. It appears that amendments to Article 29, from which the provision is derived, have been dropped. I hope that that reassures the noble Lord that the conditions prescribed in subsections (5) to (7) of Clause 545 are necessary for public companies, but do not pose any particular problems for private companies, for the reasons that I have outlined.
Lord Hodgson of Astley Abbotts: I am grateful to the Minister. We are slightly guilty in this; we should probably have talked to officials about the purpose of our inquiry, which was rather narrower than that which they have now addressed in the Minister's speaking note. I could have spared them the trouble of responding in detail to subsections (5) to (7), when our point was a narrower one about whether the provision has any future because of potential changes to the Second Company Law Directive. We are now told that it does because the directive will not be changed in the way that our information, published in final form on 21 September 2004, suggested. If that is now dead, the provision will have a long life and, as such, we are content with it. I beg leave to withdraw the amendment.
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Amendment, by leave, withdrawn.
Clause 545, as amended, agreed to.
Clauses 546 and 547 agreed to.
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