| Company Law Reform Bill [HL] - continued | House of Lords |
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Clause 530: Validity of allotment etc not affected 877. This clause makes clear that any allotment or sale of securities or any agreement to allot or sell securities is not made void simply because there has been a breach of the prohibition on offers to the public. Equivalent provision was made in section 81(3) of the 1985 Act. CHAPTER 2: MINIMUM SHARE CAPITAL REQUIREMENT FOR PUBLIC COMPANIES 878. Currently a company which is registered as a public company on its original incorporation may not do business or exercise any borrowing powers unless the registrar has issued it with a certificate under section 117 of the 1985 Act (a "trading certificate"). The registrar will only issue a trading certificate if she is satisfied that the nominal value of the company's allotted share capital is not less than the 'authorised minimum', which is defined in section 118 of that Act. Clause 531: Public company: requirement as to minimum share capital 879. This clause replaces section 117(1)(2)(4)(6) and (8) of the 1985 Act. It does not make any substantive changes to those provisions and, like these, only applies to public companies that are formed as such on their original incorporation (as opposed to companies that re-register from private limited to public under the provisions of Part 7 of the Bill). 880. This clause retains the requirement for a trading certificate for such companies. It applies to public companies that are registered as such under the Bill (as opposed to private companies which re-register as public) and to existing public companies, which were formed as such, and which have not obtained a trading certificate at the date that the Bill comes into force. 881. As now, the registrar will only issue a trading certificate if she is satisfied that certain conditions are met: in particular that there is a minimum share capital requirement known as "the authorised minimum" (see subsections (4) and (5)). 882. Where a public company which is required to have a trading certificate enters into a transaction without first obtaining such a certificate, the directors are jointly and severally liable for any loss or damage caused to the other party to the transaction as a result of the company failing to meet its obligations. A director will only be jointly and severally liable with the company if he was a director at the time that the transaction was entered into and if the company has failed to meet its obligations under the transaction in question within 21 days of being called on to do so (see subsection (2)). 883. Notwithstanding the fact that the company should not have entered into the transaction, the transaction itself is valid. 884. A trading certificate has effect from the date that it is issued and is conclusive evidence that the company is entitled to do business as a public company. 885. Where a public company that is formed under this clause, or under section 117 of the 1985 Act, has not obtained a trading certificate within a year of its incorporation, it may be wound up by the court (see section 122(1)(b) of the Insolvency Act 1986). Clause 532: Procedure for obtaining certificate 886. This clause replaces section 117(3) of the 1985 Act. It prescribes the contents of the application for a trading certificate (see subsection (1)), which, amongst other things, must include a statement that the nominal value of the company's share capital is not less than the authorised minimum (see clause 533). 887. The current requirement for a statutory declaration (or "electronic statement") when an application is made for a trading certificate is replaced by a requirement to make a statement of compliance. This statement does not need to be witnessed and may be made in paper or electronic form. In future, it will be for the registrar's rules to specify who may make this statement (and the form of it). Clause 533: The authorised minimum 888. Under section 118 of the 1985 Act the authorised minimum is £50,000, which must be expressed in sterling. This implements Article 6 of the Second Company Law Directive (77/91/EEC) which requires that in order that a public company may be incorporated or obtain authorisation to commence business, a minimum capital shall be subscribed, the amount of which shall be not less than 25000 ECU (expressed in the domestic currency of the Member State). As recommended by the CLR (Completing the Structure, paragraph 7.6), this clause retains the authorised minimum at £50,000. 889. Once a company has obtained a trading certificate under clause 531 (or section 117 of the 1985 Act), there is no requirement for the authorised minimum to remain denominated in sterling and if it wishes a public company may subsequently redenominate all of its share capital (including the authorised minimum) under the provisions in Part 19 (see note on clause 578). 890. The power to alter the authorised minimum contained in section 118 has not been retained. Should the Secretary of State wish to change the authorised minimum in the future, this could be achieved by a company law reform order under Part 31 of the Bill or, if the alteration is required as a result of an amendment to the Second Company Law Directive (77/91/EEC), by regulations made under section 2(2) of the European Communities Act 1972. 891. This Part of the Bill deals with various matters relating to the allotment of shares. It is largely drafted as free-standing clauses which replace corresponding provisions in the 1985 Act. Power of directors to allot shares 892. Generally speaking, the directors of a company may currently only allot shares (or grant rights to subscribe for shares or to convert any security into shares) if they are authorised to do so by ordinary resolution of the company's members or by the articles of association. 893. Such an authority may be general (that is, it may give the directors a general authority to allot shares) or specific (that is, it may, for example, be restricted to a specified allotment, an allotment of shares up to a specified value, or an allotment of shares of a particular class). In either case, the authority must state the maximum number of shares that may be allotted under it and the date when the authority will expire, (which must not be more than 5 years from the date on which the authority is given). The authority may be renewed for further periods not exceeding 5 years. 894. There is a relaxation for private companies from the requirement to state the date on which the authority will expire and so such companies may, by elective resolution under section 379A of the 1985 Act, give such authority either for an indefinite period or a fixed period of the company's choice. 895. The Bill removes for private companies the requirement for prior authorisation in certain circumstances (described in clause 535). It also abolishes the concept of authorised share capital - a company's constitution will no longer have to contain a ceiling on the number of shares that the directors are authorised to allot. Clause 534: Exercise by directors of power to allot shares 896. This clause replaces section 80(1), (2), (9) and (10) of the 1985 Act. It provides that the directors may not allot shares (or grant rights to subscribe for shares or to convert any security into shares) except in accordance with one of the following two clauses. 897. Subsection (2) of this clause provides that directors may allot shares in pursuance of an employees' share scheme without having to comply with one of the following two clauses. This mirrors the current position (see section 80(2) of the 1985 Act). 898. Similarly, where a right to subscribe for, or to convert any security into, shares already exists, then the directors may allot shares pursuant to that right without having to comply with one of the following two clauses (see subsection 3). 899. A director who knowingly and wilfully allots shares in contravention of the requirements imposed by this clause commits an offence. Such an allotment is not, however, invalid. Clause 535: Power of directors to allot shares etc: private company with only one class of shares 900. In line with the recommendations of the CLR (Final Report, paragraph 4.5), this clause empowers the directors to allot shares (or to grant rights to subscribe for or convert any security into shares) where the company is a private company which will have only one class of shares after the proposed allotment and removes the current requirement (contained in section 80 of the 1985 Act) for the directors to have prior authority from the company's members for such an allotment of shares. In addition, it provides that the members may, if they wish, restrict or prohibit this power through the articles of association. The definition of "classes of shares" is contained in clause 762. 901. This clause renders unnecessary the relaxation for private companies (which is contained in section 80A of the 1985 Act and applies to private companies who have elected to avail themselves of various relaxations for private companies to the statutory regime). Clause 536: Power of directors to allot shares etc: authorisation by company 902. This clause replaces section 80(3) to (8) of the 1985 Act and applies both to private companies which will have more than one class of shares after a proposed allotment and to public companies. It provides that the directors may only allot shares (or grant rights to subscribe for shares or to convert any security into shares) if they have been given prior authorisation for the proposed allotment by ordinary resolution of the company's members or by the articles of association. 903. Subsections (2) to (5) set out details of the way in which prior authorisation (or a renewal of such authorisation) may be given. 904. Subsection (8) makes it clear that an ordinary resolution of the company's members will suffice for the purposes of giving authority to the directors, even where the effect of the resolution is to alter the company's articles of association (which would normally require a special resolution of the company's members). Public companies: allotment where issue not fully subscribed Clause 537: Public companies: allotment where issue not fully subscribed 905. The provisions of this clause relate to the allotment of shares by public companies, and apply where not all the shares offered are taken up. A public company must not allot shares following an offer to subscribe for shares unless all the shares offered are taken up or the offer is made on the basis that it will go ahead even if all the shares offered are not taken up or if other conditions specified in the offer are met. It is not possible for the terms of the offer to override the requirements of this clause (subsection (5)). 906. The purpose of this rule is to protect persons who apply for shares, by ensuring that if the increase in capital is not fully subscribed, the capital will be increased by the amount of the subscriptions received only if the conditions of the issue so provide (Article 28 of the Second Company Law Directive (77/91/EEC)). 907. If 40 days after first making the offer, the offer is unsuccessful because not enough shares have been applied for under the offer, any money or other consideration received from those that did apply for shares under the offer must be repaid or returned (subsection (2)). Interest becomes payable after the expiration of the 48th day after the offer was first made (subsection (3)). The rate of interest will be as specified at the time under section 17 of the Judgments Act 1838 (currently 8%). This is a change from section 84 of the 1985 Act (which this clause replaces) which sets the interest rate at 5% per annum. 908. The 40 day and 48 day time limits imposed by subsections (2) and (3) now run from the making of the offer rather than from the issue of any prospectus (as was the case under section 84 of the 1985 Act) given that the requirement or otherwise for a prospectus is a matter of securities law. 909. The regulation of public offers, especially requirements relating to prospectuses, is generally a matter of securities law. Sections 82 and 83 of the 1985 Act are, therefore, repealed. Clause 538: Effect of allotment in contravention of section 537 910. This clause sets out the consequences where a company goes ahead with an allotment of shares in contravention of clause 537. Subsection (1) gives anyone who subscribed for the shares a right to avoid the allotment, provided that notice of the avoidance is given within one month of the date of allotment. As under section 85 of the 1985 Act (which this clause replaces) any director who knowingly permits or authorises the breach is liable to pay compensation to the company and to the person receiving the shares for any losses resulting from the breach (subsection (3)). Return of allotments Clause 539: Return of allotment by limited company 911. This clause replaces section 88 of the 1985 Act. As now, within one month of an allotment of new shares in a limited company, the company is required to make a return of allotments to the registrar. This return must contain "prescribed information" relating to the allotment. 912. A return of allotments made under this clause must be accompanied by a statement of capital. A statement of capital is in essence a "snapshot" of a company's total subscribed capital at a particular point in time (in this context, the date to which the return of allotments is made up). 913. The requirement for a statement of capital when an allotment of new shares is made is new; (at the moment a company is only required to provide information pertaining to the shares to which the return of allotments relates when it makes a return under section 88 of the 1985 Act). It is based on a recommendation by the CLR (Final Report, paragraph 7.30) and for public companies, this implements a requirement in the Second Company Law Directive (77/91/EEC) which states: "the statutes or instruments of incorporation of the company shall always give at least the following information..(c) when the company has no authorized capital, the amount of the subscribed capital..". "Statutes" and "instruments of incorporation" equate to the articles of association and memorandum and the need to disclose information pertaining to the aggregate of a company's subscribed capital flows from the abolition of the requirement for a company to have an authorised share capital. 914. Whilst this directive only applies to public companies, the requirement to provide a statement of capital, here and elsewhere in the Bill, has been extended to private companies limited by shares. This will mean that the public register will contain up-to-date information on a company's share capital (the requirement for a statement of capital supplements existing provisions which require a company to give notice to the registrar when it amends its share capital in any way). 915. The information which will in future be set out in the statement of capital includes prescribed particulars of the rights attached to each class of shares. Such information is currently required to be filed under either section 123 of the 1985 Act (which relates to increases in authorised share capital) which is repealed by the Bill or section 128(1) and (2) of that Act (which relates to allotments of a new class of shares) which will be repealed as a consequential amendment. 916. Currently, if shares are allotted as fully or partly paid up otherwise than in cash, the company must deliver the contract that it has with the allottee (or details of this contract if it is not in writing) to the registrar. Such a contract may contain commercially sensitive information which the company would not normally want to disclose. This clause does not reproduce this requirement. It should be noted, however, that the Secretary of State has the power to prescribe the information which must be included in the return of allotments, and such information may include details of any consideration received in respect of shares which are allotted as fully or partly paid up otherwise than in cash. Clause 540: Return of allotment of new class of shares by unlimited company 917. This provision requires unlimited companies to make a return of allotments to the registrar where the directors allot a new class of shares. This reflects the current law (section 128(1) and (2) of the 1985 Act). Clause 541: Offence of failure to make return 918. This clause replaces sections 88(5) and 128(5) of the 1985 Act. Where a company fails to comply with the requirements to make a return of allotments to the registrar, every officer of the company who is in default commits an offence. 919. As now, where there is a default in making a return of allotments within the specified time (one month after the allotment) a person who is liable for the default may apply to the court for relief (see subsection (3)). Time for accepting pre-emption offer Clause 542: Time for acceptance of pre-emption offers 920. Subject to some exceptions, under section 89(1) of the 1985 Act, a company that is proposing to allot equity securities must offer them to existing shareholders first (that is, on a pre-emptive basis). The basic principle (which is unchanged by the Bill) is that a shareholder should be able to protect his proportion of the total equity of a company by having the opportunity to subscribe for any new issue of equity securities. Section 90(6) of that Act provides that the offer to shareholders must state a period of not less than 21 days during which it may be accepted and it may not be withdrawn before the end of that period. 921. This clause gives the Secretary of State the power to vary the period of 21 days (but not so as to reduce it to fewer than 14 days). Disapplication of pre-emption rights 922. Clauses 543 to 547 deal with the circumstances in which the directors of a company may disapply or modify the operation of the statutory pre-emption requirements in section 89(1) of the 1985 Act. They will be entitled to do so only if they are given power by the articles or by special resolution in accordance with the detailed rules in these clauses. The rules replace equivalent provisions in section 95 of that Act. Clause 543: Disapplication of pre-emption rights: private company with only one class of shares 923. This clause sets out how members of a private company with only one class of shares may authorise the directors to allot shares without complying with the statutory pre-emption provisions. Clause 544: Disapplication of pre-emption rights: directors acting under general authorisation 924. This clause sets out ways in which members may give the directors power to allot shares without complying with the statutory pre-emption provisions. It applies where the directors are generally authorised to allot shares for the purposes of clause 536. Clause 545: Disapplication of pre-emption rights by special resolution 925. This clause also sets out a way in which members of a company may give the directors power to allot shares without complying with the statutory pre-emption provisions. If members authorise directors under this clause they are able to exercise control over the way in which or the occasions on which the power can be exercised. It applies where the directors are authorised (whether generally or otherwise) for the purpose of clause 536. 926. The members may only pass a special resolution to disapply pre-emption rights under this clause if the directors have made a recommendation that this power should be given to them (subsections (5) to (7)). The directors must set out (in writing) their reasons for making such a recommendation and provide details of the amount payable in respect of the proposed allotment (which must be justified by the directors). A copy of the directors' statement must be circulated to every member who is entitled to vote on the proposed resolution in sufficient time for him to consider it before he exercises his right to vote. These rules are carried forward from section 95(2) of the 1985 Act. Clause 546: Liability for false statement in directors' statement 927. This clause reproduces the effect of section 95(6) of the 1985 Act. Where material contained in a statement to the members of a company under clause 545(7) (disapplication of pre-emption rights by special resolution) is misleading, false or deceptive in a material particular, any person who knowingly or recklessly authorised or permitted the inclusion of that material commits an offence (see subsection (2)). Clause 547: Disapplication of pre-emption rights: sale of treasury shares 928. Where a company buys back its own shares, it is normally required to cancel those shares (see section 160(4) of the 1985 Act as applied to purchases of own shares by section 162(2)). Certain companies (principally those which are listed or those which are traded on the Alternative Investment Market and equivalent companies in the EEA) may elect not to cancel shares which have been bought back but may hold the shares "in treasury". A share which is held in treasury may be sold at a future point in time and this facility enables such companies to raise capital more quickly than they would otherwise be able to do so, as the directors do not have to obtain prior authority from the company's members before selling treasury shares. However, the provisions of section 89 of the 1985 Act (offers to shareholders to be on pre-emptive basis) do apply to sales of treasury shares as they apply to allotments of shares (see section 94(3A)). 929. This clause applies to a sale of shares which have been held in treasury by the company. It reproduces the effect of section 95(2A) of the 1985 Act. It enables the company's members to give a general power to the directors (through the company's articles or by special resolution of the company's members) to sell such shares as if section 89(1) of that Act did not apply, or applied with modifications. 930. This clause also permits the members to confer upon the directors (by special resolution) a specific power which enables them to allot equity securities under this clause as if section 89(1) of the 1985 Act did not apply to a specified allotment, or applied with modifications. Commissions, discounts and allowances Clause 548: Commissions, discounts and allowances 931. This clause applies to all companies that pay commission in connection with the subscription of shares in the company. The payment of any commission must be authorised in the company's articles, must not exceed the amount authorised by the articles and must not exceed 10% of the share issue price. The purpose of the clause is to prohibit the payment of large commissions amounting to the issue of shares at a discount. As in sections 97 and 98 of the 1985 Act (which this clause replaces) the payment of brokerage (commission to stockbrokers, bankers and the like) continues to be lawful to the extent that it has previously been allowed. 932. This clause does not retain the provisions of section 97(2)(b), (3) and (4) of the 1985 Act as the contents of prospectuses is a matter for Prospectus Rules made under Part 6 of the FSMA 2000. Share capital and how it may be altered 933. The initial clauses in this Part are about the fundamentals of share capital and will be of general relevance to all limited companies having a share capital. They are drafted as freestanding clauses in the Bill which replace equivalent provisions in the 1985 Act. Clause 549: Shares of limited companies to have fixed nominal value 934. Currently, section 2(5)(a) of the 1985 Act (requirements with respect to memorandum) requires that, in the case of a company having a share capital, the memorandum of a limited company must state the amount of the share capital with which the company proposes to be registered and the division of that share capital into shares of a fixed amount. This capital figure as stated in the memorandum (known as the "authorised share capital") acts as a ceiling on the amount of shares that a company may issue. Such authorised share capital may, however, be increased by ordinary resolution under section 121 of that Act. The CLR recommended that the requirement for a company to have an authorised share capital should be abolished (see Final Report, paragraph 10.6) and so this provision of the 1985 Act will be repealed. 935. This clause is required as a consequence of this repeal. It does two key things:
936. Where a company purports to allot shares without a fixed nominal value, every officer of the company who is in default commits an offence and is liable to a fine (see subsections (4) and (5)). Moreover, such a purported allotment is void (see subsection (2)). 937. Clause 549 needs to be read alongside clause 9, which requires the application for registration of a company that is to be formed with a share capital to include a "statement of initial shareholdings". The contents of this statement are prescribed in clause 10 and this includes a requirement to set out the number and nominal value of the shares which are to be taken by the subscribers to the memorandum on formation. |
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| © Parliamentary copyright 2005 | Prepared: 17 November 2005 |