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Lord Razzall: I am happy to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Hodgson of Astley Abbotts moved Amendment No. A63:
Page 265, line 26, at end insert "whether more or less onerous than the requirements of these sections, or to any provision of a company's articles which exclude the requirements of these sections"
The noble Lord said: The noble Lord has been good enough to withdraw his amendment. I now come to Amendment No. A63, which would add additional words to Clause 556(3). It is not clear from the drafting of new Section 125(3) whether it will be possible for a company in its articles, or by means of a shareholders agreement, to contract out of the requirements of Section 125 of the Companies Act 1985, or to provide for less onerous requirements for class consents. We are advised that companies often wish to do this in practice. It would be helpful if the statute could make it clear that that is possible. The amendment proposes wording that is intended to clarify that issue and to give companies the flexibility so to act. I beg to move.
Lord McKenzie of Luton: This amendment is concerned with the conditions that should apply to a variation of class rights in companies having a share capital. New Section 125 of the 1985 Act, inserted into that Act by Clause 556, provides that the rights attached to a class of a company's shares may be varied if, and only if, the holders of at least three-quarters in nominal value of the shares in that class consent to the variation or the class members pass a special resolution. It prescribes the minimum requirement for a variation of class rights, but the provisions of new Section 125 are subject to the qualification contained in subsection (3) that this statutory scheme is without prejudice to any other restriction on the variation of rights.
The qualification in subsection (3) has two important effects. First, if and to the extent that a company has adopted a more onerous regime in its
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articles—for example, by requiring the consent of the holders of 90 per cent of the class—the company must comply with the more onerous regime. Secondly, if and to the extent that the company has protected the rights attaching to any class of shares—for example, by making provision for the infringement of those rights in its articles under Clause 23—that protection cannot be circumvented by a variation of class rights under new Section 125.
The amendment proposed by the noble Lord would amend the qualification in subsection (3) of new Section 125. It would enable the members of a company to make provision for less as well as more onerous conditions to apply to a variation of class rights than those prescribed in a statutory scheme. Thus the amendment would, for example, allow a company's articles to require the consent of a simple majority of the class. While I note that existing Section 125 permits a company to adopt in its articles less onerous provisions regarding the variation of class rights—a 75 per cent majority of the class—the circumstances in which it can do so are somewhat constrained. For example, if the rights are attached to the memorandum, the provision must have been included in the articles at the time of the company's original incorporation and the variation may not be connected with the giving of an authority under Section 80 or with a reduction of share capital under Section 135.
When considering the subject of variation of class rights, we took the view that the provisions of Section 125 were unduly complicated, in that they set out a number of permutations which depend on: first, the origin of the class rights, whether they are contained in the memorandum, the articles or elsewhere; and, secondly, whether any specific provision has been made for their alteration. We therefore sought to simplify the provisions and, in doing so, considered that there should be imposed a minimum requirement for a 75 per cent majority of the class in question. We are conscious of the fact that, according to legal commentators, companies which opt to include provisions in their articles prescribing the mechanism for a variation of class rights tend in any event to replicate the statutory requirement, which means that the option to adopt less onerous requirements is rarely taken.
We consider that a variation of class rights is a serious matter. Such a variation may reduce the power of one class of a company's shareholders in comparison with another and, in the worst-case scenario, may amount to a fraud on minority shareholders. I hope therefore that noble Lords will agree that it would not be desirable to reduce the protection offered by new Section 125. I hope that that addresses specifically the inquiry of the noble Lord.
Lord Hodgson of Astley Abbotts: I thank the Minister for his detailed and very specific response. What he is saying is that in this age of flexibility you can be flexible, so long as it is more onerous. It cannot be less onerous than the statutory minimum. Our advice is that—and it is not because of malice
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aforethought—the structures of private companies and so forth want to have less onerous requirements agreed between them. We shall bring forward specific examples if we can; we would probably like to come back on this. However, now having the Government's position on the record, for which I am extremely grateful, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord McKenzie of Luton moved Amendment No. A64:
The noble Lord said: In moving government Amendment No. A64, I shall speak also to Amendments Nos. A66 and A200. At present, where a company does not have a share capital, the question of how members' rights may be varied will depend to a large extent on whether provision for this has been made in the memorandum or articles of the company. In future, where it is proposed that there should be a variation of members' rights, it will be possible for this to be done in accordance with the provisions of new Section 125A of the 1985 Act. As for the existing provision for variation of shareholders' class rights, this new section provides a comprehensive code for the variation of class rights in companies without a share capital. This new section is inserted into the Act by Clause 557.
The procedure for varying members' rights under new Section 125A is comparable to the procedure for varying class rights in companies with a share capital. In particular, there is a minimum requirement as to members' consent. As a general rule, members' rights may be varied under new Section 125A only if three-quarters of the members of the class affected consent in writing or if a special resolution of that class is passed. Provision similarly needs to be made for members to object to the variation by analogy with the provision for shareholders. The clause inserted into the Bill by Amendment No. A66 inserts new Section 127A into the 1985 Act and amends Section 127 of that Act. New Section 127A sets out the procedure that must be followed where there is an objection to a variation of members' rights. It enables members amounting to not less than 15 per cent of the members of the class affected to apply to the court to have the variation cancelled and it gives the court the power to confirm or disallow the variation if the court is satisfied that it would unfairly prejudice the members of that class.
Amendment No. A64 is a paving amendment for Amendment No. A66. Noble Lords will realise that this is a complex area of the law, but I have tried to outline some of the considerations that apply where there is a variation of members' rights. I trust that noble Lords will agree that, where there is a possibility that a class of members may be unfairly prejudiced by a variation of their class rights, the members affected by the change should have the right to object.
I turn finally to Amendment No. A200. This amendment is consequential on the restatement introduced by Amendment No. A66. In particular,
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paragraph 6 of Schedule 4 to the Bill has been replaced by new Section 127B, which is introduced by Amendment No. A66. I beg to move.
On Question, amendment agreed to.
Clause 556, as amended, agreed to.
Clause 557 [Variation of class rights: companies without a share capital]:
Lord McKenzie of Luton moved Amendment No. A64A:
The noble Lord said: In moving government Amendment No. A64A, I shall speak also to Amendment No. A64B. Clause 557 extends the statutory provisions on variations of class rights which currently apply only to companies having a share capital to companies without a share capital. Companies limited by guarantee, which since December 1980 cannot be formed with a share capital, may for example have different classes of members with different voting rights. Currently there is no statutory provision governing the variation of such rights, which will therefore depend to a large extent on whether provision has been made either in the memorandum or articles for their variation. Subsection (2) refers erroneously to "holders of shares" and not to members, as it should. Similarly, subsection (5) should refer to the rights of a class of members rather than to "rights attached to a class of shares". The proposed amendments are clearly required to make it clear that Clause 557 applies to companies that do not have a share capital. I beg to move.
On Question, amendment agreed to.
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