| Company Law Reform Bill [HL] - continued | House of Lords |
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Redenomination of share capital 1056. Where a public company applies for a trading certificate under section 117 of the 1985 Act it must satisfy a minimum share capital requirement (known as the "authorised minimum"). There is a similar requirement where a private company re-registers as a public company under section 43 of that Act. The authorised minimum is currently set at £50,000 and 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 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) and the effect of these provisions is retained in the Bill (see clauses 531 and 91). 1057. Subject to the above qualification (and any restriction in a company's articles) a company is free to allot shares in any currency that it wishes. It may also have its share capital made up of shares of a mixture of denominations, for example, one class of company's shares may be denominated in sterling, whereas another class may be denominated in dollars, euros or some other currency of the company's choosing. 1058. What a company cannot currently do is easily redenominate its share capital (or any class of it) from one currency to another, for example, from dollars to sterling or vice versa. The current procedure involves cancelling existing shares under the court approved procedure for capital reductions set out in section 135 of the 1985 Act or, in the case of private companies only, buying back or redeeming shares out of capital under section 171 of that Act, and then issuing new shares in the desired currency. Clause 578: Redenomination of share capital 1059. This clause introduces a new procedure that will allow a company limited by shares to easily redenominate its share capital. This requires an ordinary resolution of the company's members. (Unlimited companies having a share capital are already free to redenominate their share capital as they see fit and no change to the legislation is required in respect of such companies). 1060. Subsection (2) of this clause provides that the spot rate used when converting a company's share capital from one currency to another must be specified in the resolution to redenominate the company's share capital. There is a choice of spot rates and this is set out in subsection (3). 1061. A company is free to pass a conditional resolution under this clause (see subsection (4)). A resolution will, however, lapse if the redenomination of share capital has not taken effect within 15 days of the date on which the resolution is passed (see subsection (6)). Where a resolution lapses, the company will not be able to redenominate its capital unless it passes a new resolution and redenomination is effected in accordance with the new resolution. 1062. Subsection (7) makes it clear that, if it wishes, a company may restrict or prohibit a redenomination of the company's share capital by incorporating a provision to this effect in its articles. 1063. It should be noted that this clause does not make provision for the authorised minimum (see notes on clauses 531 to 533) to continue to be denominated in sterling. This means that once a public company has obtained a trading certificate under section 117 of the 1985 Act or under clause 531 of the Bill or where a private company has re-registered as a public company, such a company is free, if it wishes, to redenominate all of its share capital, including the authorised minimum. Clause 579: Calculation of new nominal values 1064. This clause explains how the new nominal value of a share which has been redenominated from one currency to another should be calculated. Clause 580: Effect of redenomination 1065. This clause makes it clear that a redenomination of a company's share capital (or any class of it) does not affect any rights or obligations that the members may have under the company's constitution or any restrictions affecting members under the company's constitution. In particular, it does not affect entitlement to dividends, voting rights or any liability in respect of amounts unpaid on shares. If, for example, a dividend of 20p was declared on a £1 share prior to a redenomination of that share, and that £1 share is subsequently converted into a $1.5 share, the member who now owns a $1.5 share in the company will still be entitled to a 20p dividend (albeit that the company and the member in question may agree that the 20p dividend can be paid in cents - or indeed in some other currency). Similarly, where a company has issued partly paid shares, the member's liability to the company will remain in the currency in which the share was originally denominated. Clause 581: Notice to registrar of redenomination 1066. This clause sets out the requirements as to notice where a company redenominates its share capital (or any class of it). Notice must be given to the registrar in accordance with subsections (1) and (2) of this clause. This notice must be accompanied by a statement of capital (see note on clause 552), and a copy of the resolution to redenominate the company's share capital. 1067. If a company fails to comply with the procedural requirements as to notice the company and every officer of the company commits an offence. The penalty for this offence is set out in subsection (5). Clause 582: Reduction of capital in connection with redenomination 1068. Following a redenomination of a company's share capital, it is likely that the company will be left with shares expressed in awkward fractions of the new currency, for example, 0.997 dollars or 1.01 euros. The company may therefore wish to renominalise the value of the shares affected (that is, alter the nominal value of these shares) to obtain share values in whole units of the new currency. It can do this in one of two ways: if the company has distributable reserves it may capitalise those reserves to increase the nominal value of the shares affected; alternatively, it may reduce its share capital using the procedure set out in this clause. 1069. This clause enables a company to renominalise the value of its shares by cancelling part of its share capital. This requires a special resolution of the company's members but there is no need for the directors to make a solvency statement or for the company to go to court (as required where a company reduces its share capital under amended section 135 of the 1985 Act). 1070. Under subsection (3), a resolution to reduce capital in connection with a redenomination must be passed within 3 months of the resolution to redenominate the company's share capital. 1071. Subsection (4) provides that the amount by which a company can reduce its share capital using this new provision is capped at 10% of the nominal value of the company's share capital immediately after the reduction (this 10% cap is required by the Second Company Law Directive (77/91/EEC) and applies to any reduction of capital in a public company which is not approved by the court). 1072. Where a company reduces its share capital under this clause, the amount by which the company's share capital is reduced must be transferred to a new non-distributable reserve: the redenomination reserve (see clause 584). Clause 583: Notice to registrar of reduction of capital in connection with redenomination 1073. This clause sets out the requirements as to notice where a company reduces its share capital in connection with a redenomination of its share capital (that is, to renominalise the value of its shares). The resolution to reduce the share capital must be filed with the registrar in accordance with clause 31. Notice must be given to the registrar in accordance with subsections (1) and (2) of this clause. This notice must be accompanied by a statement of capital (see note on clause 552). 1074. The reduction of capital will not take effect until the documents that are required to be delivered to the registrar under subsections (1) and (2) are registered by the registrar. 1075. In addition to delivering the above documents to the registrar, within 15 days of the date that a resolution to reduce capital in connection with a redenomination is passed, under subsection (6) the company must also deliver to the registrar a statement made by the directors confirming that the reduction of share capital was made in accordance with subsection (4) of clause 582 (reduction not to exceed 10%). 1076. If a company fails to comply with the procedural requirements as to notice the company and every officer of the company commits an offence. The penalty for this offence is set out in subsection (8). In addition, where the statement made by the directors under subsection (6) is misleading, false or deceptive in a material particular, the directors are liable to an offence under clause 719. Clause 584: Redenomination reserve 1077. Where a company reduces is share capital under clause 582 (that is, in connection with a redenomination of its share capital), it must transfer an amount equal to the value of the reduction to a non-distributable reserve known as the redenomination reserve. 1078. This clause provides that amounts transferred to the redenomination reserve may be used by the company in paying up shares to be allotted to existing members as fully paid bonus shares. Subject to this, the provisions of the 1985 Act relating to the reduction of share capital, apply to the redenomination reserve as if it were paid-up share capital. These provisions mirror those contained in section 170 of the 1985 Act in relation to the capital redemption reserve. PART 20: TRANSFER OF SECURITIES BACKGROUND Section 207 of the Companies Act 1989 and the Uncertificated Securities Regulations 1079. Under section 207 of the Companies Act 1989 the Secretary of State is able to make regulations, using the affirmative procedure, "for enabling title to securities to be evidenced and transferred without a written instrument". This is a broad power which can be used either to modify or exclude company law provisions or to make provision for sub-delegation and the detailed operation of new transfer systems and procedures. 1080. Since 1996 regulations made under section 207 have enabled a large number of (mostly listed) companies to issue shares without providing paper share certificates, and the holders of such "dematerialised" or "uncertificated" shares have been able to transfer them without a paper instrument of transfer. The current regulations are the Uncertificated Securities Regulations 2001 (SI 2001/3755). 1081. At present, all dematerialised shares are held and transferred through the electronic CREST systems maintained by CRESTCo (now part of the Euroclear group). However, although some 85 per cent by value of shareholdings in UK listed companies are now held and traded in CREST, some nine million "retail" shareholders in such companies still hold their shares in certificated form, giving rise to about 10,000 paper-based share transfers each day. Possible scope of changes to the existing law using the extended power 1082. Shareholders who hold their shares in certificated form are subject to section 183 of the 1985 Act and the other general rules on paper-based transfers when they transfer their shares. If they hold their shares in uncertificated form, they are not subject to these rules, which are disapplied by the current regulations, but they can only transfer their shares by means of the CREST system. 1083. In order to do this they must either be "personal members" of CREST or hold their shares indirectly in a nominee account with an institution that is a member of CREST. Personal membership means that the individual investor's name appears on the CREST registers of the companies whose shares he or she holds, but does not give individual investors direct access to the CREST infrastructure, so that they must still use their broker or some other authorised intermediary to transmit the CREST messages by which they may transfer shares. Holding shares indirectly means that the name of a nominee, rather than the individual investor, appears on the CREST registers of the companies, so that the individual investor may have a beneficial interest in the shares, but is not the legal owner of them. 1084. An industry working group has suggested that it should be made compulsory for all transfers of shares in quoted companies to be "paperless". It believes that this will relieve the industry of the burden of dealing with the rump of 10,000 or so paper transfers each day, and should reduce the costs and complexity of various "corporate actions", such as rights issues. 1085. The group has suggested that the key objectives of any legislation which replaces or supplements the current regulations should be:
These proposals are subject to consultation. The provisions of this Chapter would enable these, or other similar proposals, to be implemented by further regulations under section 207 of the Companies Act 1989. Clause 585: Transfer of securities: power to make regulations 1086. This clause provides for the power to make regulations under section 207 of the 1989 Act to be exercisable by the Secretary of State or the Treasury. Responsibility for section 207 of the 1989 Act and the regulations passed from the Department of Trade and Industry to HM Treasury by virtue of article 2(1) of the Transfer of Functions (Financial Services) Order 1992 as part of a general transfer of responsibility for financial services matters. Dual responsibility is considered more appropriate for the making of regulations under the extended power as the extension of paperless holding and transfer to new classes of shares or other securities involve matters which are part of company law. Clause 586: Transfer of securities: extension of powers 1087. This clause extends the existing power relating to transfer of securities under section 207 of the 1989 Act so that it could be used to require, as well as to permit, the paper free holding and transfer of quoted company shares. Exercise of the power will continue to be subject to the affirmative procedure. 1088. The effect of subsections (1) and (2) is that regulations made under section 207 may:
1089. Subsection (3) provides additional flexibility by enabling Ministers to designate the classes of company to which the regulations are to apply by order as well as in the regulations themselves. 1090. Subsection (4) is designed to protect the right of individual investors to continue to hold shares in their own names rather than through nominees. It ensures that the new arrangements prescribed in the regulations will not be such as to cause:
1091. Subsection (5) provides that the regulations will be able to:
Clause 587: Transfer of securities: supplementary provisions 1092. Ministers will be obliged under subsection (1) to consult such persons as they consider appropriate before making regulations or designating a class of companies by order under the new power. This obligation reflects the breadth of the proposed new power, as well as the technical nature of some of the regulations which could be made under it. 1093. Subsection (2)(a) repeals the second sentence of section 207(4) ("But the regulations shall be framed so as to secure that the rights and obligations in relation to securities dealt with under the new procedures correspond, so far as practicable, with those which would arise apart from any regulations under this section."). Electronic contracts were more of a novelty in 1989 than they are now and it is considered that this provision is no longer appropriate. PART 21: INFORMATION ABOUT INTERESTS IN COMPANY'S SHARES BACKGROUND 1094. The provisions of this Part concern a public company's right to investigate who has an interest in its shares. They replace equivalent provisions in Part 6 of the 1985 Act. These are purely domestic provisions, and are not required by European Law. 1095. The automatic disclosure obligations formerly contained in sections 198 to 211 of Part 6 of the 1985 Act are to be repealed and replaced by regulations under the Financial Services and Markets Act 2000, as amended by clause 861, in implementation of the Transparency Directive. 1096. This Part re-enacts, with certain modifications, section 212 of the 1985 Act and related provisions. There is no change to the definition of "interest in shares" for this purpose, even though for the purposes of the automatic disclosure provisions in the regulations replacing section 198 and related provisions, a different concept of "interest in voting rights" will be adopted in implementation of the Transparency Directive. 1097. The main changes to section 212 and related provisions are:
Clause 588: Companies to which this Part applies 1098. This clause provides that this Part only applies to public companies. It re-enacts section 198 of the 1985 Act. Clause 589: Shares to which this Part applies 1099. This clause re-enacts the definition in section 198(2) of the 1985 Act of the type of shares concerning which a clause 590 notice may be issued, namely shares carrying the rights to vote in all circumstances at general meetings. Shares held "in treasury" following a purchase of own shares, (as an alternative to cancelling such shares on purchase) are excluded. Clause 590: Notice by company requiring information about interests in its shares 1100. This clause re-enacts section 212 of the 1985 Act. It allows a public company to require a person who it knows, or has reasonable cause to believe, has an interest in its shares (or to have had an interest in the previous 3 years) to confirm or deny the fact, and, if the former, to disclose certain information about the interest, including information about any other person with an interest in the shares. 1101. Subsections (3) and (4) require details to be given of a person's past or present interests and to provide details of another interest subsisting in the shares. This provision allows the company to pursue information through a chain of nominees by requiring each in the chain to disclose the person for whom they are acting. Under subsection (6), where the addressee's interest is a past one, a company can ask for information concerning any person by whom the interest was acquired immediately subsequent to their interest. Particulars may also be required of any share acquisition agreements, or any agreement or arrangement as to how the rights attaching to those shares should be exercised (clauses 612 and 613). 1102. This clause serves a different purpose to the automatic disclosure obligations currently contained in sections 198 to 211 of Part 6 of the 1985 Act. As well as enabling companies to discover the identity of those with voting rights (direct or indirect) that fall below the thresholds for automatic disclosure, it enables companies (and members of the company) to ascertain the underlying beneficial owners of shares. 1103. The notice is not required to be in hard copy (under the general provisions on sending or supplying documents or information in Part 28 of the Bill). Notices, and responses thereto, may be given in electronic form. A response must be given in a reasonable time. What is reasonable has not been defined so as to allow flexibility according to the circumstances, but if the time given is not reasonable, the company will not have served a valid notice. Clauses 591 and 592: Notice requiring information: order imposing restrictions on shares 1104. These clauses re-enact section 216 of the 1985 Act. They specify the penalties for failure to provide information within the specified time when served with a section 212 notice. There are criminal penalties, (although a person does not commit an offence if he can show that the requirement to give information was frivolous or vexatious). 1105. Additionally, application may be made to the court for a direction that the shares in question are to be subject to the restrictions of Part 15 of the 1985 Act. These prevent the exercise of voting rights, and preclude any transfer of the shares, or the issue of any further shares in right of them, or the payment of any dividend in respect of them. The court may protect the rights of third parties who would be unfairly affected by the order. Clause 593: Notice requiring information: persons exempted from obligation to comply 1106. This clause re-enacts section 216(5) of the 1985 Act. It provides that the Secretary of State may exempt a person from complying with a notice. The Secretary of State must consult the Governor of the Bank of England, and must be satisfied that there are special reasons for exempting the person (taking account of any undertaking given). Clause 594: Power of members to require company to act 1107. This clause re-enacts section 214(1) and (2) of the 1985 Act. It requires a company to exercise its powers under clause 590 on the request of members holding at least 10% of such of the paid up capital of the company as carries the right to vote at general meetings (other than voting rights attached to shares held in treasury). This provision, which is rarely used, recognises that members of a company may have a legitimate reason for wanting the company to exercise its statutory powers to demand information even if the management does not want to. For example, the members might want to act where they suspect that the directors are involved in building a holding from behind the shelter of nominees. 1108. Provision is made as to the form and the procedure in relation to requests. Those making a request must not only specify the manner in which they require the powers to be exercised, but must also give reasonable grounds for requiring the company to exercise the powers in the manner specified (subsections (3)(b) and (3)(c)). Clause 595: Duty of company to comply with requisition 1109. This clause re-enacts section 214 (4) and (5) of the 1985 Act. It specifies the criminal penalties arising if the company fails to act as required. |
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| © Parliamentary copyright 2005 | Prepared: 17 November 2005 |