HC Deb 27 May 1968 vol 765 cc1427-40

Motion made, and Question proposed, That this House do now adjourn.— [Mr. Fitch.]

12.36 a.m.

Mr. Stratton Mills (Belfast, North)

I welcome this opportunity to discuss the Government's action regarding the dividend of Lex Garages, Ltd., and I am glad to see that the Financial Secretary is to reply. I do not wish to raise the wider questions of incomes policy or the Government's dividend policy, but prefer to keep to this specific case.

The Government's dividend policy seems to be spread over a number of documents, and it cannot but be repeated that it is voluntary, although the tone of some of the correspondence which I have seen—not in this case but in others —might lead one to think otherwise. The policy is contained in several White Paper, several speeches in the House, a letter to The Times Business News by the Financial Secretary and a Treasury Press statement for the guidance of editors. Since it is spread like this, perhaps the present confusion is not surprising. Consideration should be given to collecting it all in one document or White Paper, and perhaps going into some of the precedents established by Treasury action over the last month or two. This would be very useful.

The Lex case raises important matters of principle. It became clear to the directors of Lex Garages Ltd., that the profits for the year ended 31st December, 1967, would be sharply up. They wanted to take the company out of close company status, and they presumably had to do this before 31st December by selling off a block of shares to bring themselves below the 65 per cent. shareholding requirement. On 27th October, they issued a Press statement—not to make an interim dividend announcement, but it would seem for the sole purpose of announcing a profit increase from £285,000 to an estimate of at least £650,000, for the year to 31st December, 1967, which later turned out ultimately to be £720,000 approximately. The point of the Press statement appears to have been to enable the brokers to place a large block of the directors' shareholding outside the market and at a price which reflected the profit and dividend increase. I emphasise this because it is vital to the argument. I am not arguing that Lex Garages comes within what the Financial Secretary has called the "hopes and expectation class" but, rather, that there was a firmer commitment for this reason and that the Press statement amounted to a clear and firm announcement.

Almost five-sixths of the company's year was over on 27th October and at that time the directors said that there would be a total dividend of "not less" than 24 per cent. This enabled the company's brokers to place this large block of shares outside the market. I imagine that the brokers, in going to the various institutions to place those shares, explained that the directors had to sell to move out of close company status, that there was a firm commitment, as announced in the Press statement, of the total dividend not being less than 24 per cent. as it had been clearly shown that the profits were sharply up. All this information enabled them to place the shares on a realistic basis reflecting the new situation.

I have given the facts in this case. It is interesting to consider the Treasury's arguments. The Treasury's case is prob-baly best stated in the letter of the Financial Secretary to The Times Business Supplement on 18th April of this year. The letter stated: If dividends had been formally recommended by Boards of Directors by March 19, they are treated as firm commitments which ought not to be frustrated. If specific dividend proposals had been given in prospectuses or comparable formal documents before Budget Day in connexion with capital issues, new flotations or takeovers and merger arrangements, these are also regarded as commitments. On the wrong side of the line lie the numerous examples of hopes and expectations expressed before Budget Day which had not been translated into Board recommendations or into the terms of some kind of offer document. That appears to be a general statement of the case by the Financial Secretary. A more particular statement of the case appeared in a Parliamentary Answer on 14th May, when the Chief Secretary said that, in the case of the Lex Company, there was not a firm pre-Budget commitment.

Thus, the real purpose of this debate is to probe the Financial Secretary on the question of the Government's view of a commitment. Have they drawn the line in the right place and have they put Lex on the right or wrong side of the line? From my reading of the Financial Secretary's letter to The Times Business Supplement, I suggest that this is a very tortuous line, an arbitrary one which is both illogical and which gives rise to great anomalies and unfairness. For example, in the Lex case, where the board of directors on 27th October passed, and presumably minuted, this Press statement, the Government say there is no commitment. But had the board passed a formal resolution, instead of the Press statement, recommending a dividend, then, in the view of the Treasury, that would have been satisfactory and there would have been what the Financial Secretary calls a "formal recommendation". This is a fine distinction which appears to operate on the principle of pot luck.

To give another example of the arbitrariness of this, if the Lex directors had issued a prospectus to acquire a business, and in it had made certain forecasts or had issued a prospectus for the purpose of a rights issue, even if a much smaller numbers of shares were involved, that would, in the Government's view, have been a commitment. But where the Lex directors issue a Press statement to enable them to place a very substantial block of shares outside the market, the Government say that there is no commitment. This is a very artificial distinction.

I question whether the Government are right to take a prospectus as a commitment, because often a prospectus is issued with only a month or two of the year having passed or even before the financial year starts and looking to the future, as against the circumstances where a company such as Lex, where there has been given what the company considered as a promise of a minimum dividend with five-sixths of the company's year completed.

Does Lex come into what the Financial Secretary called the "hopes and expectations" category, or does it come, as I believe, into the commitment category? Having looked at this matter carefully and looked at the precedents in Government policy spread over all these documents, I think it clear that an administrative error was made in this case. I do not expect the Government to go back on their decision. That would be asking too much tonight, but this case shows clearly that dangers of operating a detailed and complex system which has never been considered by Parliament, never collected together in a single document so that it is understood or predictable by people in business and where no reasons are given for a Treasury decision yea or nay.

There is no question of appeal even even against the Treasury decision, which, of course, has no sanction other than a moral sanction. This clearly underlines how unsatisfactory it is to operate a policy in this way and I should like to hear more details of its working from the Financial Secretary.

12.47 a.m.

Mr. J. Bruce-Gardyne (South Angus)

I intervene briefly, not to deny the Financial Secretary adequate time to reply, but because I have been probing a number of decisions made in the application of the Government's voluntary dividend restraint policy since Budget day.

I welcome very much the fact that my hon. Friend the Member for Belfast, North (Mr. Stratton Mills) has raised this case tonight, because there is no doubt that it is most difficult to defend all the various decisions that the Treasury has taken in this instance. I passionately dislike this form of arbitrary government, which is not based on any shred of legal authority given by this House.

We are used to that from this Government, but the Government have an obligation to spell out precisely the sort of rules of thumb they are applying. I do not think that this has been done. The rules of thumb are very difficult to understand in the case of Lex Garages. I was in correspondence with the Financial Secretary about this case. He claimed to make a distinction between what he described as near contractual commitments and other obligations. I cannot see what distinction can exist between commitments which admittedly are not contractual and what he chooses to dismiss as other obligations. It seems that the case of Lex Garages is in clear conflict with other cases—where companies, for instance, which have made rights issues accompanied by dividend forecasts have been allowed to proceed with those forecasts.

I very much dislike what I have seen of the tone of the correspondence the Treasury is conducting with companies which it is attempting to arm-twist in this way. I have not seen the correspondence conducted with the Lex company but in other instances. I noticed that each of the letters from the Treasury is marked "confidential". I do not know why that is. Perhaps the hon. Gentleman can tell us. There is no indication in the exchanges of letters that the policy is voluntary and has no legal authority.

The Financial Secretary to the Treasury (Mr. Harold Lever)

I ought to inform the hon. Gentleman that it is quite out of the question for me to reply tonight to unspecified and unidentified questions of which I have not had notice. I hope that the hon. Gentleman will give time for me to deal with the one instance with which I have come prepared to answer. With the best will in the world it is impossible to deal with the other questions that he has raised.

Mr. Bruce-Gardyne

I do not intend to delay the House for more than a moment. If the Financial Secretary can assure me that in a case such as Lex this type of correspondence did not take place, it would be a considerable relief. The impression I have from correspondence I have seen is that it has been conducted in this manner. This is very much open to objection and strengthens the case that my hon. Friend has made.

12.50 a.m.

The Financial Secretary to the Treasury (Mr. Harold Lever)

I am grateful to the hon. Member for Belfast, North (Mr. Stratton Mills) for raising this point, because it gives me the opportunity, for about the tenth time, to emphasise that this dividend restraint policy is absolutely voluntary and that there is not in the hands of the Government any legal sanction of any kind at all.

If the hon. Member for South Angus (Mr. Bruce-Gardyne), whose zeal in this matter I fully respect, as he knows, will keep on misconstruing the language of officials on dividend restraint into some sort of implication that we are purporting to exercise a power that we have not in fact got, he comes up against the very firm repudiation of any such power by Government spokesmen over and over again. I repeat it tonight. This is a voluntary programme. We have no legal sanction whatever for it. I hope that there is no letter which contains any implication of any such power.

If the hon. Gentleman, instead of making generalised assertions of this kind, would submit to me any case where there is anything to be objected to in the style of language used, I can assure him that I will look at it and I will ensure that all correspondence takes place on the clear understanding that it is a voluntary restraint for which we depend upon the co-operation of business people, co-operation which, without exception, we have had.

I have also taken note of what the hon. Member for Belfast, North has said, that we perhaps ought to consider collect-ing into one document in simple form the rules which are applied.

To do justice to the one case which is before the House tonight, I shall restrict myself to answering the case which I am equipped to answer tonight, namely, that of Lex Garages. I hope that the hon. Member for South Angus will acquit me of discourtesy to himself if I do so. It has been stated, as I would say with complete clarity, that in operating guidance to companies who ask for it in relation to their dividends a very distinct dividing line has been drawn between what are near-contractual obligations, in the way of dividend intentions related to the placing and issue of shares by companies, and the expressions of expectations or intentions, however clearly expressed, other than formal recommendations by directors.

Mere expressions fall on the wrong side of the line. There is a very simple reason for this. A good many companies tend to forecast their dividends. One of the matters which was required of the dividend restraint was that it should be effective at the same time as the incomes policy restraints to which it is related. If we had had to wait until all these forecast dividends had, as it were, run out and had allowed these forecasts to go forward without expressing a desire that companies should obey the general wish as to dividend restraint, precisely in the crucial period when incomes policy is operating there would have been dividends vastly in excess of the 3½ per cent. ceiling, not as rare exceptions, but all too frequently.

I understand and respect it when hon. Members say that they are not in favour of the incomes policy, but the Government are in favour of the policy, and, in their view, on the basis of an incomes policy, it is unthinkable that we should not call for some comparable restraint in the form of dividend restraint. I think that this has been universally recognised in the City and among business people.

I would assert that there is not one representative voice in the City which has spoken against the contention that, on the basis of the incomes policy, it is inevitable that there be some form of dividend restraint. If we are to have it, and have it effectively at the relevant period, which means starting approximately with the incomes policy, one must draw a line which excludes a host of forecasts and invite those who had made them to take into account the new circumstances of the Government's attitude to dividends.

Starting with that general principle, we recognised that to apply it universally over the whole field of expressions of intention would, in certain circumstances, be unfair. We recognised that, where people had issued prospectuses, or the equivalent of a prospectus in the form of a letter of commitment at the time when the company placed new shares, it would be unfair not to exclude such cases from the dividend restraint. That we have done.

Which side of the line does the Lex Garage case fall? The hon. Member for Belfast, North said—and his hon. Friend the Member for South Angus made much the same point—that it falls not on the general intention side of the line, but ought to be treated in the same way as a formal recommendation, because, he said, the directors placed some shares at the time of the forecast and, perhaps, the market took account of the forecast. The market takes account of all forecasts which are made by companies, whoever sells the shares, and what hon. Members are saying is that in any case where a forecast is made, if shares are sold by anyone and the market price has been affected by the forecast, we ought to take that into account.

That is tantamount to rebutting the case which I have just made, the convincing case, that we want the dividend restraint to come into operation immediately, which is the relevant period for its purpose.

Mr. Stratton Mills

The hon. Gentleman has misunderstood my point. It is not in the general hopes and expectations category. What I have argued is that in this case, because the special announcement was made—and it was made for no other purpose, and there was no interim dividend or anything like that— it was made purely for the purpose of enabling the placing to take place, reflecting the increased dividend and it comes into the other category.

Mr. Lever

I have taken the hon. Gentleman's point. He keeps using the expression "hopes and expectations". My case is not that hopes and expectations alone fall on the wrong side of the line. It is hopes, expectations and expressions of intention, other than by formal recommendation by the board, other than by a specific written expression related to the issue of shares by the company itself.

I accept that there was here an expression of intention. The hon. Gentleman says that the intention was related to the furtherance of the placing of shares by certain shareholders. Here I must point out that the company itself has not made that case. The first I have heard of it came from hon. Gentlemen oppos-site. Although there was a fairly comprehensive correspondence with the company, at no point did the company itself make that case. Had that case been raised, one would have looked at it.

I do not want to pronounce finally upon it. I have not seen all the facts and circumstances, and I cannot act or purport to express an opinion in relation to this company—it would not be fair to do so—upon generalities and expressions of view made by hon. Gentleman, such as, "I take it that the purpose was such-and-such", or, "I feel reasonably sure that the purpose was that". The company has made no such representations.

Mr. Stratton Mills

At the end of the statement of 27th October the company says that it is taking steps—I think the phrase is—to move out of the close company status.

Mr. Lever

It would not follow that I would have to infer that the company had placed shares on the basis of that statement. I would have to look at the whole of the circumstances. What I emphasise is that in making the application the company did not raise this point.

While it would be wrong of me to pronounce finally on this point on the basis of the comment from hon. Members opposite, it is right that I should say— and I am not prejudging any other facts that might be submitted to me—that even on the facts as they have submitted them the placing by individual shareholders, whoever they may be, and for whatever purpose, cannot necessarily come within the scope of a firm recommendation or a near-contractual obligation which relates to the issue of a company's own shares, because, in general, where a director places shares on the basis of a statement of intention as opposed to a formal recommendation it is in principle no different from any other shareholder placing his shares through the market or privately on the basis of a forecast that has been made by directors.

It is difficult for me to see why the hon. Member supposes that a director should be in any better position, or that anybody who bought from a director should be in any better a position than anybody who bought from any other shareholder. The person who is placed in a different and more favourable position is the person who has contracted with the company and the company has issued shares. Thereby anything it said in relation to that issue we believe takes on a near-contractual, near-prospectus type validity. We think that it would be wrong not to allow that near-prospectus type commitment to be honoured.

I repeat that I do not pronounce finally on this case until I have had the whole facts submitted by the company. But on the basis of the facts supplied by the hon. Gentleman I must emphasise that all he has disclosed is the statement of intention to pay a dividend by the directors, and that some shareholders—possibly directors of the company, but not the company itself—have on the basis of that forecast been able to market their shares. I can see no difference in principle between directors doing this for whatever purposes and any other shareholder doing it. I can see a vital difference between a company which issues shares where every statement it makes in connection with the issue of capital is of a prospectus-like character. It would be wrong not to allow it to honour those prospectus-like assurances.

Mr. Bruce-Gardyne

Surely the hon. Gentleman would agree that there must be some difference between placing by ordinary shareholders and placing by controlling shareholders, as this was, who were making forecasts at the same time.

Mr. Lever

On the basis of what has been said in the House, I cannot make any such difference in principle.

All these decisions are taken with the greatest care. Every effort is made to be helpful. We make no effort to purport to possess powers which we do not possess. If there is any difficulty, it is looked at by one official, who does all these cases, so that there is consistency in the policy. If there is any further difficulty, Ministers are consulted. I assure the House that nothing in this policy is motivated by anti-business sentiment or anything of that kind, still less is it operated in that spirit.

I am glad publicly to recognise the co-operation which we have received from all the responsible City authorities and the company affected. I can see that it is not easy always to accept the point at which the dividing line is drawn. But for the reasons which I have given, I believe that the line has been drawn in a sensible way and in the only way which would make the policy work in the relevant time. Yet, on the other hand, we have made exceptions when the morality of the matter compelled those concessions to be made.

I hope that, on reflection, the hon. Gentlemen will realise that the case has been looked at with complete sympathy and understanding for the difficulties of the directors. The dividing line has been sensibly drawn and must be maintained.

The debate having been concluded, the Motion for the Adjournment of the House lapsed, without Question put.

Mr. SPEAKER suspended the sitting of the House at five minutes past One o'clock till Ten o'clock this day, pursuant to Order.