Clause 98

Company Law Reform Bill [Lords] – in a Public Bill Committee at 2:15 pm on 22 June 2006.

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Application to court to cancel resolution

Photo of Eric Illsley Eric Illsley Labour, Barnsley Central

With this it will be convenient to discuss amendment No. 38, in clause 98, page 43,line 35, leave out ‘5' and insert ‘10'.

Photo of Jonathan Djanogly Jonathan Djanogly Shadow Minister (Business, Innovation and Skills), Shadow Solicitor General, Shadow Minister (Justice), Shadow Solicitor General

These probing amendments are designed to test the relevance and adequacy of the clause, which is clearly a pressure-valve clause. The situation envisaged would typically be related to a bid for a public company. The acquirer will normally wish to acquire at least 75 per cent. of the shares of the target, because at that level of ownership a resolution can be passed to make the target a private company. That in turn is important, because only private companies can use their own assets to give bank security for the purchase of their own shares. In other words, the purchaser uses the assets of the target to finance the transaction.

The clause—I appreciate that the provision is in the 1985 Act—provides holders of at least 5 per cent. of the company with the right to apply to the court to have the resolution to re-register capital. Does the Minister think that the clause is still necessary? Can she provide us with details of how often it has been invoked and whether any assessment has been made of its effectiveness? Is 5 per cent. still considered the right number of shareholders who need to complain? I have  suggested 10 per cent. on a probing basis, but maybe the figure could be less than 5 per cent. We would be interested to hear her views.

Photo of David Howarth David Howarth Shadow Minister (Energy), Trade & Industry

I want to add a short point in support of what the hon. Gentleman said. Setting the number at 5 per cent. as opposed to 10 per cent. gives rise to a temptation that it might be useful for the law to discourage. If the limit is set at only 5 per cent., people faced with a blocking minority of 5 per cent. might be tempted to use section 429 of the 1985 Act, which, as I understand it, will not be changed. There is a judicial interpretation of that section. It allows, on takeover, those with a 90 per cent. hold of the shares compulsorily to purchase the remaining 10 per cent. It can be used to clear minorities of less than 10 per cent.

Case law from re Bugle Press suggests that that provision cannot be used beyond its original purpose. However, even given that case law, people faced with a blocking minority of less than 10 per cent. might be tempted to use section 429, take their chances with the case law and produce litigation that it would be helpful for the law to avoid. That litigation could be avoided by raising the relevant percentage to 10 per cent., as in section 429.

Photo of Margaret Hodge Margaret Hodge Minister of State (Industry and the Regions)

I have been asked three questions and a supplementary question, although as I listened to the hon. Gentleman’s exposition I saw that section 429 might be consecutive rather than parallel to the issues that we are discussing. I am not sure that its existence prejudges the need for this provision. However, I shall answer the question to see whether I can satisfy him.

When a company is resolved to re-register from public to private, clause 98 enables the dissenting shareholders to apply to the court to cancel the resolution for re-registration. The application must be made within 28 days of the date on which the resolution is passed and the court will only entertain such an application when it is made by a qualifying number of shareholders and, when the company is not limited by shares, a qualifying number of members or, in either case, not fewer than 50 members.

The minimum thresholds for making such an application are set in subsections (1)(a), (b) and (c). When the company that proposes to re-register as private limited company has share capital, the application will be made by a single shareholder or by shareholders with a collective holding of at least 5 per cent. of the nominal value of the company’s issued share capital. The amendment would increase that threshold, and I appreciate that it is a probing amendment. Both amendments leave unchanged the 50 member option and the proposition in clause 98(1) that the members who voted in favour of the resolution for re-registration or consented to it do not count.

The reason behind the clause is that, as I am sure all Members accept, the re-registration of a company from public to private limited is a serious matter which has implications for all the shareholders, members and creditors of a company alike. In view of the  significance of the change of status which will bring with it a lack of transferability for the individual’s share and the reduced marketability that is characteristic of shares in private companies, members should have the opportunity to object, subject, of course, to establishing that they represent a significant interest in the company. We accept that there is nothing magical about the thresholds that we made: all we have done, as hon. Members understand, is mirror those in the 1985 Act.

Photo of Margaret Hodge Margaret Hodge Minister of State (Industry and the Regions)

Yes, I can. The thresholds have stood the test of time. We are not aware that they have caused companies, their shareholders and members any difficulties. In fact, we are advised by the registrar that only three such applications have been made in the previous year, two of which were rejected. In the circumstances, we are not persuaded that the amendments are either needed or helpful. The hon. Member for Cambridge (David Howarth) asked whether clause 98 was still necessary. The answer is yes, it is. As the hon. Gentleman said, there are special provisions on takeovers in section 429 of the Companies Act but the clause goes wider. Someone may have a majority shareholding by other means and the clause provides them with protection.

Photo of David Howarth David Howarth Shadow Minister (Energy), Trade & Industry

The point I was trying to make is that the question is not whether the clause is necessary—I think it is—but how it fits in with the existing law in section 429 of the Companies Act. If one sets up the two statutory provisions in different ways, the temptation will be to use one rather than the other. If they are set up with the same number, one can preserve the use of each.

Photo of Margaret Hodge Margaret Hodge Minister of State (Industry and the Regions)

I suppose that in the interests of protecting minority shareholders, the correct way forward if we want that consistency would be an amendment to section 429. I can take that away and think about it if the hon. Gentleman so wishes. Otherwise the provisions appear to work well. I am told they work in parallel. The one follows from the other, rather than the two having to be consistent overall. There is a lower threshold in section 429 because it covers a takeover so it is a slightly different situation from the one we are discussing. I am happy to reflect further on that and if necessary come back on Report if the hon. Gentleman considers that appropriate.

I hope that I have answered the questions that the hon. Member for Huntingdon (Mr. Djanogly) raised and that he will withdraw his probing amendment.

Photo of Jonathan Djanogly Jonathan Djanogly Shadow Minister (Business, Innovation and Skills), Shadow Solicitor General, Shadow Minister (Justice), Shadow Solicitor General

As the Minister said, this was a probing amendment. The contribution from the hon. Member for Cambridge opened up the debate and was a helpful addition. I must admit that I wandered into the question by looking at the Bill rather than precedent. The existence of the case he mentioned means that we should go away and have another look at the issue. I am not entirely convinced that the answer  will be to amend section 429, particularly in relation to putting in any kind of percentage, but it might be worth looking again at the 5 per cent. threshold in the clause.

I thought that the provision would be used very little in practice, so I was not surprised to hear that it was used three times in the last year, nor was I surprised to hear that the majority of cases have been thrown out. I suppose that it would typically be people having a go. I am pleased that we have had the debate. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made:No. 102, in clause 98, page 44,line 14, leave out ‘alterations in' and insert ‘amendments to'.—[Margaret Hodge.]

Clause 98, as amended, ordered to stand part ofthe Bill.

Clauses 99 to 101 ordered to stand part of the Bill.