Considered in Grand Committee
That the Grand Committee do report to the House that it has considered the Companies (Share Capital and Acquisition by Company of its Own Shares) Regulations 2009.
Relevant document: 18th Report from the Joint Committee on Statutory Instruments.
The draft statutory instruments that we are to debate this afternoon are an important part of our implementation of the Companies Act 2006. The Act reformed and clarified company law in many areas and brought company legislation together in one place. The Act makes it easier to set up businesses, gives investors greater information and confidence, and promotes shareholder engagement and effective dialogue between business and investors. The Act has been implemented in stages, and these statutory instruments relate to provisions which are due to come into force in October 2009. This staged approach gave companies time to prepare, allowed us to implement changes in parallel with EU requirements and allowed Companies House to update its systems to support the new measures.
The Companies (Share Capital and Acquisition by Company of its Own Shares) Regulations 2009 are the first of these regulations to be debated. These regulations amend three aspects of the Companies Act 2006 and they will be commenced on 1 October 2009. The first is to reduce from 21 to 14 days the minimum period of notice that a company can give its shareholders when it makes a rights issue. This change is being introduced in response to concerns that the time taken to raise capital by selling new shares could expose companies to market abuse and volatility. Fourteen days is the shortest minimum period allowed by the second company law directive.
The second of the three changes is a minor change in the rights of creditors of a company when the company reduces its capital by applying to the court. The regulations will change the Companies Act 2006 so that it is explicit that a creditor who wants to object to the reduction will have to demonstrate that the reduction would create a real likelihood of his or her not being paid. This simply brings the 2006 Act into line with a corresponding change already made to the Companies Act 1985 last year.
The third aspect of company law addressed by these regulations is the rules on the purchase by a company of its own shares, where there are two changes. The regulations will remove the current 10 per cent cap on a company holding its own shares, and they will extend the maximum period for which authorisation can be given for the company to purchase its own shares from 18 months to five years. Until 2003, when a company purchased its own shares, it had to cancel them. In 2003, the law was amended to allow a company to hold its own shares in treasury up to a maximum of 10 per cent of its share capital, in line with the maximum permitted by the second company law directive. That directive has now been amended to remove that limit, and these regulations would remove the limit from UK law, increasing the flexibility for companies to hold their own shares. The only significant dissent from these proposals when we last consulted was to this removal of the 10 per cent cap. One respondent argued that there was no evidence that any company needed this extra flexibility, and that there might be some risk of abuse. Other respondents supported the relaxation.
We considered the objection carefully. Shareholders have a number of other protections in this area; their approval is needed for any purchase of own shares, and they have pre-emption rights when treasury shares are resold. Taking these into account, we decided that it made sense to give companies more flexibility by removing the arbitrary 10 per cent limit. No concerns were raised in respect of the other change in relation to purchase of own shares—the extension of the period for which authorisation can be given.
In conclusion, I should make it clear that the amendments made by these draft regulations are minor adjustments to the rules on capital and shares but, at the margin, they will provide companies with some additional flexibility to manage their capital, without removing any necessary protection for creditors or shareholders. I beg to move.
I thank the Minister for introducing the regulations, which seem to contain rather a jumble of consequential changes in the law with regard to company shares and their creditors. I defer to the noble Lord, Lord Razzall, who is the only noble Lord present who was fully involved in debates on the Bill and who may be able to shed some more light on this. However, I shall make a few observations and ask a few questions.
These are subjects with which I have some rather dated familiarity. I am a chartered accountant and, among other things, I practised in the insolvency area in the late 1970s and early 1980s and, subsequently, through the 1980s and 1990s I advised companies as an investment banker in, among other things, raising money in rights issues.
So, first, as regards the reduction in the minimum period during which a rights issue may be left open, am I right in thinking that this does not affect the maximum period for which it may be left open? I do not think that there is a maximum period. Assuming that that is correct, and although I do not particularly object to what is being done here, I think that the Government’s complaint seems to have been directed primarily at the longer rights issues, such as those of HBOS and Bradford & Bingley. I cannot quite see how this move will improve things, and I suspect that this whole area is a bit more complicated than the Government think it is, but I very much look forward to hearing what the Minister has to say about it and indeed to seeing what difference it makes in practice.
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 of its share capital that a company may hold in treasury, I think I am right in saying that the position that we are moving to is the one that has operated in the US for many years. However, I wonder whether the Government have fully thought through the extent to which this risks increasing the opportunities for a company to manipulate its share price. Perhaps the Minister can say what the Government’s thought process has been on this. I hope that he can reassure me.
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.
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.
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’ interests are not affected by whether the shares are cancelled or held. Shareholders’ agreement will still be needed to authorise the purchase of owned shares, and if and when treasury shares are resold, the shareholders will have a pre-emptive right to purchase shares pro rata to their existing holdings.
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.