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Employee Share Schemes, Etc

Volume 115: debated on Thursday 30 April 1987

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I beg to move amendment No. 4, in page 23, line 7, after 'Schedule', insert

'and the consequential provisions relating to capital gains tax in Part IIA thereof.

It might be helpful if I discuss clause 33 and schedule 4, which have two main purposes. They introduce an improvement to the 1980 and 1984 Finance Acts and share option schemes—[Interruption.] I can understand the puzzlement of the hon. Member for Dagenham (Mr. Gould). I was rather surprised to find myself speaking on this amendment so soon.

Perhaps we could jointly clear up this slight confusion. I had assumed, Mr. Armstrong, that, in accordance with the business motion which the Committee passed yesterday, we were proceeding to deal with clause 160.

That is true. I put the Question, That clause 160 stand part of the Bill, and it was carried. I also put the question on clause 18.

There were no speakers on clause 160. Apparently, no hon. Member wanted to speak to it.

On a point of order, Mr. Armstrong. I came with the intention of speaking on clause 160. I think that we were expecting a speech from my hon. Friend the Economic Secretary. I did not think that it was my place to rise before my hon. Friend had done so. In fact, I had a personal assurance from him that he was about to speak on that subject. I am surprised that the Committee will not be able to debate this important matter.

I understand the hon. Member's disappointment but, when I put the Question that the clause stand part of the Bill, no hon. Member rose. I cannot call hon. Members who do not rise

Clause 33 and schedule 4 have two main purposes. They introduce an improvement to the 1980 and 1984 Finance Acts and share option schemes. This is a new facility to enable employees whose company is taken over to exchange their existing share options under an approved scheme for options over shares in the acquiring company. This meets representations on the point, and I am sure that it will be welcomed. Until now, an employee in this situation has been forced either to realise his existing option with the risk that, if three years have not elapsed, the gain will be liable to income tax, or to maintain the option in a company in which the shares will be mostly held by the new parent. There is to be no statutory obligation on the acquiring company to extend this opportunity to the employees of the target company. However, this factor will certainly become one of many discussed between all the parties concerned at the time of the merger or acquisition.

The intention is that the employees concerned should be no worse off and no better off, technically, than if the takeover had not occurred, and they had simply held on to their original options. To qualify, therefore, the new options must, first, continue to be governed by the rules of the target company's existing schemes — this will ensure, for example, that the employees do not lose any rights attaching to the options which they had hitherto enjoyed or, for that matter, gain any rights that they did not previously have—and, secondly, be equal in value to the old options at the time of the exchange. This is very much a technical matter. This condition will be satisfied where the total market value of the shares under the old and new options at the time of the exchange is the same and the total price payable on exercise of the new option is also the same as the total exercise price under the old option.

The two Government amendments ensure that employees are not faced with an unintended capital gains tax charge as a result of such an exchange. Under an amendment which has not been called, although its purport may be discussed in the debate, there is a suggestion to make the approval of a company's Finance Act 1984 share option scheme conditional upon it also introducing an all-employee 1978 or 1980 Finance Act scheme. We want to encourage the take-up of all three kinds of approved scheme. A restriction of that sort would not help that objective. For many companies, an all-employee scheme may initially be inappropriate—that is why I would not wish to make a restriction.

We would want this change to be available to both 1980 and 1984 schemes at once. For many companies, an all-employee scheme may initially be inappropriate or seem to burden them. There is a danger that a condition of this kind would discourage such companies from introducing any scheme at all—discretionary or all-employee. There is no evidence to suggest that the introduction of the 1984 scheme has had an adverse impact on the other schemes. On the contrary, all three schemes are popular and successful in their own right. For example, in the year to March 1987 a record total of over 200 new all-employee schemes were approved by the Inland Revenue, bringing the total to over 1,250 such schemes, and there are now more than 2,000 approved 1984 schemes.

Clause 33 and schedule 4 also introduce certain technical changes to the close company material interest provisions as applied when determining whether employees may participate in their company's approved share or share option schemes. Some of these changes were announced by my right hon. Friend the Financial Secretary on 13 November last year. All of them —clause 39 deals with a related matter—are designed to help to ensure the smooth running of all three kinds of approved employee share schemes, but there are also some consequential changes in the way in which these provisions apply for close company interest relief purposes.

The main effect of the present provisions will be to ease the position so that trust-held shares may be disregarded in calculating the material interest disqualification where the individual irrevocably disclaims or otherwise surrenders his interest in the trust and he has received no benefit from it. This will help those individuals who might otherwise have been unable to participate in an approved scheme. There are also certain other more technical changes mainly designed to clarify and ensure the smooth running of the existing rules.

6 pm

The spread of share ownership to all levels of a company is, and has been throughout, a major objective of the Government. These modest changes will enhance the employee share ownership movement still further.

We seem to be making very good progress today, Mr. Armstrong, and I thought that in order to facilitate the progress it would be better to talk about clause 33 and schedule 4 in general, but in particular I have referred to the purposes of amendments 4 and 8 and I commend them to the Committee.

In accordance with the lead provided by the Chief Secretary, I propose to speak briefly in a debate which I assume will cover the clause itself and the amendments.

My hon. Friends and I generally support employee share option schemes and welcome the measures in the clause and in the schedule, and indeed in the amendments. It is clearly right to take account of the immense impact that takeovers have had over the last year or two years, and there seems no reason to believe that that impact will be very much reduced in the immediate future. Huge sums have been involved. I will not weary the Committee with a recital of the billions of pounds' worth of assets involved in bids over recent years. We have the prospect of that continuing, although I suppose it is fair to say, judging simply by a reading of newspaper headlines, that there has perhaps been a temporary lull over the last month or two.

But the conditions that prompted the takeover fever and the merger mania still prevail. The deregulation of the City and the cash-rich companies which now, both as victims and as predators, feature in these takeover bids are still there. Those who are victims still continue to offer very attractive targets and those who are predators clearly have the cash and the resources with which to make their predatory raids. They do so and they are likely to continue to do so, largely because the conditions in which investment in new capacity might be attractive are absent.

For those reasons it seems to me that the spate of takeover bids is likely to continue and it is therefore absolutely right, and indeed commendable, that the Government should be legislating to take account of the likelihood that more and more employees will be affected by takeover bids in the future. Indeed, in January 1986 the Transport and General Workers Union estimated that no fewer than half a million people worked for firms which were the subject of or were involved in takeover bids. Therefore, it is, potentially at any rate, a very substantial problem.

In those circumstances, I think it is right that those who are members of employee share option schemes should have the sort of protection that is provided in these new provisions. Nevertheless, the provisions leave open a number of questions, and certainly leave a couple of questions hanging in the air. It is to those questions that I should like to draw the Chief Secretary's attention.

If employees who participate in share option schemes are to be given this protection in the case of a successful takeover bid, why is similar protection not being given to the beneficiaries of pension funds? Why is similar provision not being made for employees in general, simply by virtue of their position as employees? After all, far and away the most important piece of property which is at risk as a consequence of a takeover bid is not a small holding in a share option scheme but the job of a worker, not to mention his or her rights as a beneficiary under a pension fund. Therefore, we are bound to ask what is so special about rights conferred by share ownership. Why should the protection of this provision he made available to those who own bits of paper in respect of their shareholdings but not to employees as workers — in other words, not in relation to their jobs?

The Chief Secretary must surely be aware of the problems. He must know that on almost every occasion on which a takeover bid is mounted the workers, usually the employees of the victim company, are extremely nervous, and often with very good reason, about whether their jobs are going to be placed at risk. It is remarkable that in these circumstances it is the employees whose jobs are most on the line who are often kept most in the dark. It is they who have the fewest rights to information and who, generally speaking, are not consulted about what is going on. They know that rationalisation — which is the term usually applied to the objective of takeovers—is almost always a euphemism for laying people off. Therefore, why is no protection being provided to workers qua employees, quite apart from the question whether they own shares?

More particularly, what about the rights of pension fund beneficiaries? Again, the Chief Secretary must be aware—I know that his Department is, because it has taken some small action already — of the abuses and scandals which have disfigured so many takeover bids with respect to the rights of beneficiaries and the treatment of pension funds. All too often we have seen instances in which pension fund surpluses, which are truly the property of the beneficiaries, have been traded away as part of the assets of the target company or in other circumstances have been the target of the predator company, which has got its hands on those surpluses and in some cases actually used them to pay off part of the purchase price of the company which it has acquired, or even to make redundancy payments to the workers whom it then proceeds to lay off.

For all those reasons, it seems remarkable to me, and remiss of the Government, that they should have rushed to legislate—quite rightly and commendably, as I have said — in this area, but not in respect of those many thousands, indeed millions, of workers who have rights under occupational pension schemes.

The Chief Secretary may perhaps remark that these matters do not arise directly under the clause, but I think he will accept that they are legitimate questions in this context. We make the point very strongly that if we are to legislate to take account of the impact on employees of the current and projected spate of takeover bids, we must pay attention to the matters that I have sought to raise.

The next Labour Government will certainly take steps to provide new rights of consultation and information for employees. We will also provide appropriate new rights for the beneficiaries of pension funds so that they too can be protected when their interests are affected by takeover bids.

I think it would be right for me to reply briefly to the point made by the hon. Member for Dagenham (Mr. Gould). One answer, as I think he recognises, is that clause 33 is entirely about employee share schemes and not about anything else. Secondly, it is designed simply to remove a technical tax difficulty that had arisen.

On the third point, I think that the most important answer to his question is that what is being proposed under clause 33 is not to make it obligatory for the acquiring company to extend the opportunity of having a share option to those in the target company who already have share options. There is no new statutory obligation being imposed as a result of this clause. It is up to the acquiring company to decide whether it wants to extend to those employees with share options in the target company the possibility of having share options in the new company. What the clause does is to remove a technical tax obstacle to that. In that sense there is a difference between this and the extension of statutory obligations, in the case of a merger on the acquiring company.

In the case of the jobs of the employees, which was one of the examples that the hon. Gentleman gave, where employees become employees of the acquiring company because it wishes them to remain in their jobs, their tax position is not adversely affected. But if we had not made this change it is possible that those who had share options and were given the opportunity of new share options would have found that their position had been adversely affected, because if, for example, three years had not elapsed since they acquired the option the gain would have been liable to income tax. All we are doing is removing an obstacle, to enable the acquiring company to make that offer. That is probably the crucial difference. That is why I put such stress on the fact that employees should be technically no worse off as far as their share options are concerned and no better off had the takeover not occurred, but it is still available to them not to have the share option at all.

I am not seeking to argue that the points I made are on all fours with the precise problem addressed by this clause. I take the point entirely that it follows, therefore, that the mechanism for removing an obstacle in this case may not be appropriate in the cases that I have sought to raise. I am asking the Chief Secretary to address the principle that lies behind this provision—a principle that we endorse and welcome—and the absence of any consideration, so it seems, in the Government's mind of the rights of employees in a more general sense on the occasion of a takeover and. in particular, of the precise rights of beneficiaries under pension funds. At present, as he knows, beneficiaries often have to rely on perhaps badly drawn-up trust instruments of some sort that have very little protection from statutory law.

We are at one on this clause. The hon. Gentleman is raising much wider issues. Off the top of my head I do not see that there are any obstacles that we are removing here in relation to the straightforward job position of an employee being taken over, because the similar tax obstacles are not there. The question of information goes rather wider than we might be able to discuss on the Finance Bill.

On the pensions issue, again the hon. Gentleman raised much wider issues that should be debated on other occasions. The clause and amendments are fairly narrow but I believe beneficial, and I hope that I have answered the points that the hon. Gentleman raised.

Amendment agreed to.

I beg to move amendment No. 5, in page 23, line 7, at end insert—

'(1A) In paragraph 15(1) of Schedule 10 to the Finance Act 1984 for the definition of "qualifying employee" there shall be substituted the following words "qualifying employee" in relation to a company, means an employee of the company (other than one who is a director of the company or, in the case of a group scheme, of a participating company) who is required, under the terms of his employment, to work for the company for—
  • (a) at least twenty hours a week where the employee has been employed continuously by the company for not more than one year, or
  • (b) at least sixteen hours a week where the employee has been employed continuously by the company for more than one year but not more than three years, or
  • (c) at least twelve hours a week where the employee has been employed continuously by the company for more than three years but not more than five years, or
  • (d) at least eight hours a week where the employee has been employed continuously by the company for more than five years.'.
  • With this it may be convenient to take amendment No. 6, in page 23, line 7, at end insert—

    '(1A) in paragraph 15(1) of Schedule 10 to the Finance Act 1984 for the definition of "qualifying employee" there shall be substituted the following words—"qualifying employee" in relation to a company, means — an employee of the company (other than one who is a director of the company or, in the case of a group scheme, of a participating company) who is required, under the terms of his employment, to work for the company for at least twenty hours a week; and any other employee provided that in such a case the number of shares which he is granted the right to acquire bears the same proportion to the number of shares which he would have been granted the right to acquire had he worked for twenty hours per week as the number of hours he is required to work bears to twenty.'.

    I do not think that I need detain the Committee for long. The share option scheme has been a great success. All parties have welcomed it because the practicality of it and the benefits it gives employees are beyond doubt. It is a great asset and is of great benefit to employees. In the legislation, only employees who work at least 20 hours per week for a company are entitled to participate in share option schemes. Most economic pundits would agree with me that the number of part-time workers will increase in the future. Accordingly, I wonder whether 20 hours per week is the right figure or whether we should reduce it.

    Amendment No. 5 proposes that, where an employee does not work at least 20 hours a week but only works 10 hours, 16 hours or whatever, the number of hours worked plus the length of service should entitle an employee to participate in a share options scheme. If the Government do not like that proposition, amendment No. 6 proposes an equation based on the figure of 20 hours a week. If an employee who worked 20 hours a week under a share option scheme was entitled to 100 shares, an employee who worked only 10 hours a week should be entitled to 50 shares. That is the idea behind amendment No. 6.

    I hope that my right hon. Friend the Chief Secretary will not dismiss this out of hand. It is absolutely essential that we give the benefit of share option schemes to regular employees who work, albeit part-time. In the retail trade, in which I have no vested interest, part-time employees who work on a Friday or a Saturday quite obviously do not work 20 hours a week, but they are still regular employees. They may work only 14 hours or 16 hours a week, but the Government should give some thought to including in this legislation those sorts of employees.

    The purpose behind my amendment, with which I am sure my right hon. Friend will agree, is that I do not want any loopholes on the matter of share option schemes. Many of these part-time workers, particularly married women, have worked for up to 20 years for a particular employer. Consequently, they should have similar benefits to their colleagues who work 20 hours a week or more. They should not get the same benefits as employees who work 20 hours a week, but, depending on the number of hours they work per week, and upon their length of service with the particular employer, they should receive some benefit. I hope that my right hon. Friend will give sympathetic consideration to both those amendments and I ask the Committee to accept them.

    6.15 pm

    I support what my hon. Friend the Member for Croydon, South (Sir William Clark) has said. My name is attached to amendments Nos. 5 and 6. I think all hon. Members agree that the employee share scheme legislation first introduced in the Finance Act 1978, which has been improved in two succeeding Finance Acts, has been an enormous success. I do not know what the numbers are today of employees who participate in Finance Act 1978 schemes, but I believe that not only do a very large number of schemes now qualify but that there are a large number of employees who now hold shares in the companies which employ them as a direct result of this legislation. That is welcome.

    It has been possible for any company with a stock exchange listing to set up a scheme of this kind to enable most, but not all, employees to participate. The concern that my hon. Friend and I have is that this should be widened a little. There is no doubt that part-time employment is growing all the time. That is to be welcomed. The object of the two amendments is to achieve some sensible and equitable way of ensuring that part-time employees can participate in these schemes.

    My hon. Friend will correct me if I am wrong, but amendments Nos. 5 and 6 suggest alternative schemes to enable part-time employees to participate. Clause 5 proposes reducing the qualifying number of hours in accordance with the number of years that a part-time employee has worked for his company and clause 6 tackles the problem in another way by reducing the number of shares that a part-time employee is able to take in any one year. When my right hon. Friend the Chief Secretary replies, I hope that he will look at the principle underlying the amendments sympathetically.

    I am grateful to my hon. Friend the Member for Croydon, South (Sir William Clark) and my hon. Friend the Member for Beaconsfield (Mr. Smith) for raising these amendments. I certainly agree with both of them about the great importance of employee share schemes and I share with them the delight about the way in which they have grown and the way in which benefits have been extended to so many more employees over recent years. I also agree with both of them 'about the importance of part-time employment. In no sense in what I am about to say are any of my remarks directed against that.

    As my hon. Friend the Member for Croydon, South made clear, the purpose of the amendments is to admit part-time employees to Finance Act 1984 approved employee option schemes. His amendments give us a choice. We considered this carefully when the 1984 scheme was first introduced. Indeed, we modified our original proposals to reduce the qualifying limit for employees who are not directors from 25 hours to 20 hours a week. However, we felt then, and we continue to feel, that it would not be right to go any further, certainly at this stage, and perhaps I can explain why.

    My hon. Friend referred to part-timers in a retail shop. Of course, those part-timers can benefit under the schemes in the Finance Act 1978 and the Finance Act 1980. Both those schemes must be available to all the company's employees on similar terms and there are relatively low limits on the level of benefits. Therefore, they are available to part-timers but the scope for abuse in respect of part-timers is limited.

    By contrast, the benefits under the Finance Act 1984 schemes can be much greater. Those schemes are discretionary. They do not have to be available to all employees. The point on which one has to reflect is that the scheme in the Finance Act 1984 offers generous tax reliefs and it is aimed particularly at improving the motivation of key employees who can contribute substantially to their company's success. Part-time employees, such as those in a retail shop to whom my hon. Friend referred, may, of course, have an important contribution to make — indeed they do — but by definition it is unlikely to be as substantial or capable of enhancement by improved incentives as in the case of full-time workers. Of course, as with any such limits, some individuals will always find themselves on the wrong side, wherever a dividing line may be drawn. As a matter of judgment we believe that the present rules strike a reasonable balance of 20 hours a week.

    It is possible for companies to grant share options to their part-time employees in other ways. For example— I do not float this as particularly likely—they could do so under an unapproved scheme. That would mean there would not be any special tax relief for the employee's gain on exercising the option. More importantly, they could set up a Finance Act 1980 approved savings-related share option scheme. As I said, that would allow part-time employees and directors to take part.

    My hon. Friends the Members for Croydon, South and Beaconsfield have made their point succinctly. I agree with both of them on the objective of achieving as wide a spread of share ownership as possible. I have no doubt that my hon. Friends will continue to watch the progress of the 1984 schemes and may return to the matter in future debates. We can consider it again then. For the reasons I have given, I cannot recommend the Committee to accept the amendments.

    Under the Finance Act 1978 scheme, what is the qualifying period for participation? I am not clear whether any employee can participate, regardless of the number of hours per week they work or whether there is a minimum number of hours per week that one has to work before participating in a 1978 scheme.

    My recollection—if I am wrong I shall write to my hon. Friend—is that, since the scheme has to be available to all employees, it covers part-time employees of any sort.

    I understand from the response of my right hon. Friend that he will keep the matter under review and that we can come back to it at some time in the future. I am convinced, as is my hon. Friend the Member for Beaconsfield (Mr. Smith) and I am sure other right hon. and hon. Members, that wider share ownership should be extended. In view of the fact that my right hon. Friend has promised to keep it under review and that we can come back to it in the future, I beg to ask leave to withdraw the amendment.

    Amendment, by leave, withdrawn.

    Clause 33, as amended, ordered to stand part of the Bill.