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Lord Razzall moved Amendment No. A51:
The noble Lord said: I rise to move the amendment standing in my name and that of my noble friend Lord Sharman. I suppose en passant that this week we ought to avoid references to the walls of Jericho tumbling down. That was perhaps slightly unfortunate in the circumstances. The walls of Jericho, or parts of the buildings, have been shot down in the course of the last few days.
This is a small amendment, which could only occur to the eagle eyes of the lawyers who advise me. The clause deals with restrictions on the amounts of commissions, discounts and allowances that can be given for the issue of shares in a company. Subsection (5) reads:
"It is immaterial how the shares or money are so applied, whether by being added to the purchase money of property acquired by the company or to the contract price of work".
The phrase "purchase money of property" is infelicitous drafting. The purpose of the amendment is to substitute "price" for "money" in that line, not only because of the infelicity of the drafting but also because money, to the extent that it has a meaning, implies a cash payment, and, as the Minister will be aware, there is no reason why this purchase price of property would not be satisfied other than in cash. Clearly, the intention of the legislation is to catch that as well. I hope the Minister can agree that this is a sensible amendment. I beg to move.
Lord Sainsbury of Turville: Clause 548 prohibits a company from applying its shares or capital money in payment of any commission, discount or allowance for subscribing or agreeing to subscribe, or procuring or agreeing to procure subscribers, for shares in the company. There are exceptions for the payment of commission satisfying the conditions set out in subsection (2) and for the payment of lawful brokerage.
In determining whether the transaction involves the payment of commission, the court will look at the substance of the transaction; for example, if the
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company tries to hide the commission by agreeing to pay a higher price for the goods or services it buys from the person subscribing for its shares.
The amendment would replace the reference to "purchase money" in the second line of subsection (5) with a reference to "purchase price". This is because the company's payment for the property might not be in cash. Subsection (5) is not intended to be comprehensive, as the words "or otherwise" at the end of the subsection make clear. It does not attempt to set out all the ways in which a commission might be given. It simply reinforces the need to look at the substance, rather than the form, of any transaction which may involve a commission, discount or allowance.
This particular wording of subsection (5) can be traced all the way back to Section 8 of the Companies Act 1900, and we are not persuaded that there is any need to change it. Try and beat that for an argument!
Lord Razzall: I think that the Minister has answered his own question. When company lawyers of the next decade look at a section that refers to "purchase money of property acquired", their eyes will immediately gloss over and they will immediately go three lines down to "or otherwise". I am not sure what "purchase money of property" means. I know that the Minister has made the argument as to why this should not be a consolidation of company law, but to pray in aid the fact that something has been there since 1900 seems to carry his principle a little far. In the mean time, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 550 [Alteration of share capital of limited company]:
Lord Hodgson of Astley Abbotts moved Amendment No. A52:
The noble Lord said: We now move to Part 19 on share capital. I fear that the amendments we have here are no less technical than the ones we have trawled through for these past couple of hours. The first two in the group are Amendments A52 and A57. They concern Clause 550, entitled,
It is noted that those clauses do not explicitly authorise a conversion of issued shares of one class into issued shares of another class with the same nominal value—for example, 100 A shares of 10p each to be converted into 100 B shares of 10p each. The Companies Act 1985 did not allow this either, and questions have often arisen as to how to best achieve this within, or—perhaps a better phrase—in the absence of, a statutory framework.
The practitioners we have talked to seem to follow two different routes. Some follow the framework set out in Sections 121 and 122. So, using the example
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I have just given, they pass a resolution to consolidate the 100 10p shares into 10 £1 shares, and then sub-divide the 10 £1 A shares into 100 10p B shares. So it is up and then down again.
Other practitioners seem to argue that this is unnecessary and advise on an ordinary resolution to convert the A shares into B shares of the same nominal value, which has no statutory basis in the Companies Act 1985. Conversion of shares from one class to another is common, particularly in private companies and private-equity backed companies, for example, to reallocate the apportionment of exit proceeds in an agreed manner.
So these two amendments would insert a statutory basis for this useful procedure. It is argued to us that it may have become a common practice to do it in that way, but, actually, the law requires a much more elaborate raising up and then sub-dividing down again, and the opportunity should be taken in the Bill to simplify things. These two amendments are intended to do that. I therefore beg to move.
Lord McKenzie of Luton: I shall deal with Amendments Nos. A52 and A57. Amendment No. A52 concerns Clause 550. The clause prohibits a limited company from altering its share capital, except in the ways permitted under the Bill and under those provisions in the 1985 Act relating to alterations to a company's share capital that are retained.
Clause 550 is not concerned with alterations in the rights attaching to shares, but with acts that affect the level and nominal value of the company's share capital, whether that is by way of increased reduction, subdivision, consolidation or otherwise. It is not concerned with the rights. Subsection (3) points forward to Clause 551, which is the subject of Amendment No. A57. Clauses 551 and 553 are concerned with alterations to the nominal value of the company's share capital, in the sense of its subdivision into shares of a smaller nominal amount or its consolidation into shares of a larger nominal amount, or the reconversion of stock into shares. Those provisions restate in part Section 121 of the 1985 Act.
The proposed amendment to Clause 550(3)—Amendment No. A52—would enable a company to convert shares of the same nominal value from one class to another, being shares of the same nominal value, subject to the procedure in Clause 551. That is by ordinary resolution of the company's members. Amendment No. A57 would enable companies to vary the rights attached to their shares using the procedure in Clause 551. I am picking up on the noble Lord's example of A and B shares. I think that just calling shares by another name is one thing, but if it involves a change of rights, I am not sure why you would have A and B shares without there being different rights attached to them in some way. That would not be permitted under these arrangements.
Clause 551 prescribes how a company may subdivide or consolidate its shares into shares of a different nominal amount. It does not deal with a variation of class rights. The procedure for varying class rights attaching to shares is set out in Clause 556,
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which inserts a new Section 125 into the 1985 Act. I do not propose to go into the detail of the provision, but I should explain that under the new Section 125, the rights attached to shares in a particular class may be varied if the holders of three-quarters in nominal value of the issued shares of that class consent in writing, or a special resolution is passed by the holders of shares at that class. A requirement for the consent of a three-quarters majority of the class in question operates to protect the members of the class against changes which would have a significant impact on their position.
The procedure laid down in Clause 556 is necessarily detailed, as a variation of class rights may result in a change of the relative power of one class of shareholders vis-à-vis another.
In conclusion, the Government consider the amendments to be misconceived. Currently, shares of one class may not be converted to another simply pursuant to an ordinary resolution of all the members. Such a measure would severely undermine the current protections afforded to holders of different classes of shares.
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