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My next comment concerns the moves as regards the rights of creditors to object to a reduction in a company's share capital. Am I right in deducing that it limits creditors' rights-that is, compared with what those rights are now? I understand that this is being done under an EU directive but I have to ask whether the Government really think it wise in the current conditions. Also, when exactly are, for example, France and Germany adopting this directive, or have they done so already?
As regards the length of time for which a company may maintain an extant right to buy in its own shares, I do not particularly object to increasing the period to five years. As regards removing the cap on the proportion
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Lastly, I should also be grateful to hear-perhaps in writing afterwards if that is easier-what the position is as regards the period and the percentage in the other major EU countries.
Lord Razzall: I support these regulations. They are an important continuation of what is required under the Companies Act, with the Government having learnt from what has happened since the introduction of that Act. Having made a slight criticism of the Explanatory Memorandum during debate on the previous statutory instrument, perhaps I may say that I thought that this Explanatory Memorandum was extremely clear and very helpful, putting the pros and cons in a very effective way.
The first change to the Companies Act is aimed at reducing the period of notice for pre-emption rights issues by at least seven days, thereby enabling rights issue processes to be much shorter. One of the benefits not put in the Explanatory Memorandum is the significant cost-saving that will arise to the company. When rights issues are underwritten and sub-underwritten, where the underwriter has to make a commitment for the capital to be available for a period, the longer the period of the rights issue, the larger the fee the underwriter charges. Therefore, in the current climate, anything that facilitates a reduction in those fees, which in turn will facilitate more companies being able to afford a rights issue through the market, has to be commended.
I have no comment on the second element of the Act to be changed. We clearly need to come into line with the relevant European directive.
On the third issue, the noble Lord, Lord De Mauley, made a very good point, which is whether this increases the opportunity for market manipulation and abuse in relation to a company's own shares. I think that the answer that the Minister will probably give is set out on page 23 of the Explanatory Memorandum, which explains that significant other provisions are available to prosecuting authorities, or indeed the City, in the event of suggested manipulation. I think that is the answer. If a company is to have the ability to buy its own shares, it seems a little strange that it should be restricted to 10 per cent and that it can have the resolution for only 18 months. If we are going to accept the principle, we might as well go the whole hog, which these regulations do, and rely on other provisions to give the necessary protection against manipulation or abuse.
Lord Young of Norwood Green: To answer the questions put by the noble Lord, Lord De Mauley, creditors will not be affected by the removal of the limit on treasury shares. Creditors have the protection that their own shares can generally be purchased only out of distributable profits. Once the shares are purchased, the creditors'
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With regard to manipulation, as the noble Lord, Lord Razzall, implied, companies are still required to comply with the insider dealing regime under the Criminal Justice Act, the market abuse regime under the Financial Services and Markets Act 2000 and requirements under the listing rules. We believe that these will be more than sufficient to deter any sensible company from attempting to use treasury shares in this way.
The reduction does not affect the maximum period of notice for rights issues. The notice period is just one part of the rights issue process; for example, the company has to prepare and issue a prospectus. There was broad consensus that at the margin the reduction in the minimum notice period would be helpful.
I shall write to the noble Lord, Lord De Mauley, on whether France and Germany have yet implemented the directive.
The noble Lord, Lord Razzall, asked whether this is the appropriate time to introduce change. These changes are all deregulatory in nature, and there is no reason why introducing them now should cause problems for companies or their members. The majority of companies will not be affected immediately and may never be affected. They will apply only to companies that choose to do one of three things: raise capital through a rights issue, reduce their capital by application to court; or purchase and hold their own shares. None of these things is something that any company does every day, or even every year, so most companies will feel no immediate effect of these changes. However, any company that does one of these things may find that it has more flexibility after these changes are made.
The noble Lord, Lord Razzall, was right when he said that shortening the rights issue period will make underwriting cheaper. Other things being equal, shorter exposure to changes in the market should reduce risk and should, in general, reduce underwriting costs.
I am grateful to noble Lords on all sides for their contribution to this debate and hope that they will agree that this instrument will provide flexibility for companies when managing their capital.
Community Interest Company (Amendment) Regulations 2009
Copy of the Regulation
18th Report from the JCSI
Considered in Grand Committee
5.08 pm
Moved By Lord Young of Norwood Green
That the Grand Committee do report to the House that it has considered the Community Interest Company (Amendment) Regulations 2009.
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The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Lord Young of Norwood Green):We are today debating the draft Community Interest Company (Amendment) Regulations. The community interest company form was created by the Companies (Audit, Investigations and Community Enterprise) Act 2004 and the Community Interest Company Regulations 2005. In passing that legislation, we were creating a new type of company tailored for social enterprises that wanted to use the familiar company form but with the assurance that assets would primarily be used for the benefit of the community.
That legislation came into force in July 2005 and, since then, over 3,000 social entrepreneurs or social enterprises have chosen to register as community interest companies. The original legislation also created the office of the regulator of community interest companies as an independent officeholder with responsibility to oversee the sector and maintain public confidence in this new company form.
Before introducing the community interest company, we consulted widely on both the principle of this new form and how it should work in practice. One of the principles was that the community interest company would offer more flexibility and choice to the social enterprise sector. It was intended to complement the existing and well established forms, such as charities or industrial and provident societies, which are also commonly used in the sector.
Although the community interest company has not been in existence long, there have been a number of related legislative changes over that time. We have also learnt from the experience of the companies and their advisers, as well as the regulator, how some aspects of the regulations work in practice. The draft amendment regulations will therefore update the regulatory framework for community interest companies to take account of these developments.
As I have said, the original intention was that the community interest company would sit alongside other legal forms in the sector, and we consider that enterprises should have the option to move between the various legal forms available where this is appropriate. So, the 2004 Act permitted community interest companies to convert to become English or Welsh charities or vice versa. The original legislation also anticipated that we would use regulations to permit conversions both from Scottish charities and to the community benefit form of industrial and provident society, once provisions relating to those two forms were in place. The office of the Scottish charity regulator has since been established and a statutory asset lock is now available to community benefit societies. With those provisions now in place, the draft regulations now permit Scottish charities to convert to community interest companies and permit community interest companies to convert to the asset-locked form of community benefit society.
The draft amendment regulations make a number of other changes in the light of experience or to seek to improve the original drafting. These include, for example, clarification of the community interest test to provide more certainty to the regulator in her decision-making. There are also a number of amendments
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Finally, the draft regulations implement consequential amendments to the regulations arising from the Companies Act 2006. In particular, the 2006 Act introduces changes to the information contained within a company's memorandum and articles which need to be reflected in the regulations governing community interest companies. In summary, therefore, the draft regulations aim to update the community interest regulations for the benefit of existing and prospective community interest companies. I beg to move.
Lord De Mauley: I thank the Minister for explaining the regulations, which I do not believe are particularly controversial. However, perhaps I could ask a few questions. As set out in the Explanatory Memorandum, according to the Department for Business, Innovation and Skills:
"To minimise the impact ... on firms employing up to 20 people, the approach taken is to maintain a light touch regulatory framework for CICs".
Can the Minister kindly explain how the office of the regulator of community interest companies achieves that? Is it, for instance, subject to regulatory budgets and sunset clauses? How does it interact with the Better Regulation Executive?
Secondly, how many people does the office of the regulator of community interest companies employ and how much does it cost to run each year? How is its performance assessed? Lastly-a relatively minor question-I believe that the order will remove the right of a community interest company chairman to cast a deciding vote in a boardroom ballot. There was an apparently valid reason for the chairman having a casting vote. Can the Minister, therefore, explain what happens if the board is split equally on an issue?
Lord Razzall: I am happy to support these regulations. I have one question about paragraph 8 on page 2 of the Explanatory Memorandum, which states:
"In two instances, where there were mixed views raising significant concerns, these provisions have been removed".
Is the Minister in a position to say what those provisions were?
Lord Young of Norwood Green: If the board is split equally, any proposal put to the board falls, so there is no deadlock. Those are the usual rules of debate: if there is no majority and there is no casting vote, the proposal falls.
Some proposals were dropped in the light of the responses. I was asked what those proposals were and what the concerns about them were. One proposal was to permit the regulator to take into account the impact of a prospective community interest company's activities on the wider community and public interests. Several respondents felt that this would fundamentally alter the role of the regulator, involving her in potentially
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Of the two other proposals, the first was to commit public or regulatory bodies-for example, local authorities that may have set up a community interest company-to make representations to the regulator for a share of any residual assets in the event of a winding up. The final one was to deal with the consistency of the regulator, requiring the regulator's consent to a transfer of assets for less than full value to an asset-locked body, but not requiring consent when the company makes a transfer for the benefit of the community. In both cases, while there was support for the aims of the proposals, practical issues were raised, which we felt needed further consideration with stakeholders.
The noble Lord, Lord De Mauley, asked how many people were employed by the regulator, the answer to which is eight. The cost in the current financial year is £515,000. We will write to confirm details of the regulatory framework. There may have been a question about performance, as well. I believe that I have covered all the questions and commend the order to the Committee.
Companies Act 2006 (Consequential Amendments) (Uncertificated Securities) Order 2009
Copy of the Order
18th Report from the JCSI
Considered in Grand Committee
5.17 pm
Moved by Lord Young of Norwood Green
That the Grand Committee do report to the House that it has considered the Companies Act 2006 (Consequential Amendments) (Uncertificated Securities) Order 2009.
The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Lord Young of Norwood Green): The final debate concerns three draft consequential amendments orders: the Companies Act 2006 (Consequential Amendments, Transitional Provisions and Savings) Order 2009; the Companies Act 2006 (Consequential Amendments) (Taxes and National Insurance) Order 2009; and the Companies Act 2006 (Consequential Amendments) (Uncertificated Securities) Order 2009.
The Companies Act 2006 updates company law to ensure that it reflects modern needs. The Act, which received Royal Assent in November 2006, has been implemented in phases over the past three years and these draft orders relate to the provisions which are being commenced as part of our final implementation of the Act on 1 October 2009. An earlier consequential amendments order was made in 2008 relating to those provisions, commencing on 6 April 2008 and 1 October 2008. A number of consequential amendments have also been made in two commencement orders made under the Companies Act 2006.
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The Companies Act 2006 (Consequential Amendments, Transitional Provisions and Savings) Order 2009 makes consequential changes to many different pieces of legislation, going as far back as the Newspaper Libel and Registration Act 1881. The amendments can be broken down into three broad areas. First, there are the consequential amendments to existing company law-for example, the remaining parts of the Companies Act 1985 relating to company investigations. Secondly, there are the amendments to insolvency legislation, which are required because the 2006 Act removes the link between the Companies Act 1985 and the Insolvency Act 1986. Finally, this order makes consequential amendments to other primary legislation that refers to, or includes concepts from, the Companies Act 1985 or the Companies Act 1989. In many cases, we have simply updated references to provisions in the 1985 Act.
The taxes and national insurance order similarly amends legislation for which Her Majesty's Revenue and Customs is responsible which uses Companies Act references, definitions and concepts.
The uncertificated securities order makes consequential amendments to the uncertificated securities regulations 2001. These set out the legislative structure for CREST, the computerised system that transfers shares, gilts, corporate bonds and money market instruments electronically without using paper certificates. In all but two areas- refusal to register a transfer of shares and information about the state of the register of members-the order simply replaces old references to various definitions and provisions of the Companies Act 1985 with new ones relating to the Companies Act 2006.
All three orders make two types of consequential amendment. The first type relates to references to company law in other Acts which are changed to refer to the equivalent provisions and definitions in the 2006 Act. These are purely mechanical amendments. For example, a reference to "the Companies Act 1985" is simply changed to "the Companies Act 2006".
The second type of amendment relates to a change in the substance of company law. For example, some of the information contained in the old-style memorandum is now contained in the articles of association. That change must be reflected in other legislation. The overall intention of all these consequential amendments is to ensure that the legislation which is amended continues to operate in an effective way and is easy for the reader to use. I commend these orders to the Committee.
Lord De Mauley: Yet again, I thank the Minister for his continuing dedicated work this afternoon in explaining these orders. They do not sound earth-shattering or controversial, but perhaps I have allowed myself to be worn down by the seemingly unending stream of statutory instruments that we have debated this afternoon. At least these are the last. I restrict myself to asking two questions. First, according to the Treasury, the uncertificated securities regulations are likely to undergo further significant change in the course of 2009-10. Will the Minister give any indication as to what those changes will be? Finally, will 1 October 2009 see all
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Lord Razzall: I also welcome these orders. The only point that I would make is more for the publishers of legal textbooks than for the Government. I appreciate that this is an attempt to have a user-friendly document, but one of the problems of not consolidating legislation is that practitioners have to trail through the books to trace how the regulation fits in. As the Minister will be aware-certainly, his department will be-I argued strongly when the original legislation came in that it should be consolidated, and eventually the Government agreed.
It is quite difficult to see how this could have been done in a consolidated way because we are talking about other pieces of legislation that are not necessarily only about company law. However, as legislation and regulations become more and more complicated for the practitioner to follow, I often say that it is really only for the benefit of Butterworths.
Lord Young of Norwood Green: To answer the noble Lord, Lord De Mauley, one further change will incorporate the settlements of shares and the open-ended investment of companies into the CREST system. He asked whether these were to be the last instruments to be made as part of the implementation of the Companies Act 2006. I am sure that he will be pleased to know that we expect to lay two further draft affirmative instruments relating to sensitive company names. We also expect to make further instruments, subject to negative resolution, by early September, including the registrar company fees regulations.
On consolidation, the noble Lord, Lord Razzall, is correct that we will make further amendments. I take his point about complexity. We have to make consequential amendments because the law that they amend would no longer work properly without them. In other cases where legislation refers to provisions of the Companies Act 1985, which has been repealed, the consequential amendments will help those using the legislation-that is what it says here. Without the amendments, the reader may not be aware of relevant changes to company
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Companies Act 2006 (Consequential Amendments) (Taxes and National Insurance) Order 2009
Copy of the Order
18th Report from the JCSI
Considered in Grand Committee
5.26 pm
Moved by Lord Young of Norwood Green
That the Grand Committee do report to the House that it has considered the Companies Act 2006 (Consequential Amendments) (Taxes and National Insurance) Order 2009.
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