PRE-EMPTION RIGHTS (Hansard, 27 February 1980)

§ Sir Graham Page
I beg to move amendment No. 350, in page 22, line 5, leave out his right to their allotment and insert the benefit of the offer". Clause 17 gives pre-emption rights to shareholders when a company is proposing to allot equity shares. Subsection (1) provides that the company shall not allot any of those securities on any terms to any person unless it has made an offer to each person who holds relevant shares or relevant employee shares to allot him on the same or more favourable terms a proportion of those securities". Subsection (3) provides that if a company makes an offer to allot any securities to such a holder, and…he or anyone in whose favour he has renounced his right to their allotment accepts the offer, Subsection (1) does not apply. The words his right to their allotment seem a little inappropriate here.
The order of events will be that the company will offer to allot securities to an existing shareholder in that same group of class of shares and then renounce. He will not at that stage have had the shares allotted to him or even have secured 1502 the right to their allotment. But he will be transferring or renouncing in favour of someone else the benefit that he is gaining from this allotment by the company. I suggest in this amendment that the right words are "the benefit of the offer" which is being made by the company. It is that which he is renouncing and not "his right to their allotment". It is a simple drafting point.

§ Mr. Eyre
My right hon. Friend correctly described the circumstances in which the view that he has advanced about the use of the words "the benefit of the offer" come into account. This is essentially a drafting amendment put to us by the Law Society. We are grateful to my right hon. Friend for raising a point of some technicality with a view to improving the Bill.
The Bill describes renunciation as a renunciation of the right to the allotment. It is this terminology that has been criticised by the Law Society and by my right hon. Friend on the ground that the shareholder has no right in such circumstances as he has described but only the benefit of an offer. Although this point has been carefully considered and there may be room for more than one opinion, the Government are firmly of the view that the Bill is best left as it stands. I am advised that there can be no doubt about the effect of the Bill as it is.
It is not a misnomer to describe the shareholders as having a right in circumstances where their entitlement to be offered the shares is conferred upon them by the articles. Describing them as having the benefit of an offer may be positively misleading. They have a right, although a contingent right, to the allotment of the shares. While I am, therefore, grateful to my right hon. Friend for raising this point, I hope that, in the light of this explanation, he will feel able to withdraw the amendment.

§ Sir Graham Page
Although I disagree with my hon. Friend's interpretation of the words in the Bill, he has put on record the way in which they can be interpreted. In those circumstances, I beg to ask leave to withdraw the amendment.

§ Mr. Eyre
I beg to move amendment No. 24, in page 22, line 17, at end add— '(4A) Subsection (1) above shall not apply in relation to the allotment of any securities which 1503 would apart from a renunciation or assignment of the right to their allotment be held under an employees' share scheme.'. The purpose of this amendment is to add a new subsection that protects companies and third parties from undesirable consequences when the right to relevant employee shares is renounced or assigned. Under the Bill as it stands, a company is free to allot relevant employee shares without offering them pre-emptively. If the employee or trustee on his behalf sells the rights before the shares are allotted, they would cease to be relevant employee shares and become relevant shares. When the company came to allot the shares to the person to whom the employee had renounced his right, the company would find that it could not allot them to him because they would be relevant shares and would not have been offered preemptively as clause 17 (1) requires.
The amendment makes clear that in such a case the allotment of the securities can go ahead, despite the absence of a pre-emptive offer, since they would but for the renunciation have been held under employee share schemes. Thus, the amendment ensures that clause 17 does not make the rights under employee share schemes unrenounceable and therefore of less value to those entitled to them.

§ Sir Graham Page
I beg to move amendment No. 351, in page 23, line 5, leave out "the company, and".
This amendment is on the same subject as that which we have been discussing on the last two amendments on the subject of the pre-emption rights of shareholders when the company is issuing or allotting equity securities. This is little more than a drafting amendment, and it has some serious implications if the Bill is left unamended.
If a company is allotting equity securities and it fails to give the pre-emption rights that it is required to give to existing shareholders, under subsection (9) the company, and every officer of the company who knowingly authorised or permitted the contravention, shall be jointly and severally liable to compensate any person to whom an offer should have been made". It then deals with damages that those persons may have suffered through their not getting that benefit. I question that 1504 the company should be made liable. I agree that officers of the company who have knowingly contravened the clause should be liable, but if we make the company liable surely it means that all the shareholders have to compensate perhaps a class of shareholders, some shareholders or even one shareholder who has not had a benefit that he ought to have had. Meanwhile, someone who ought not to have had that benefit has gained it.
That is the simple point, but as the Bill is drafted all the shareholders—that is, the company—should, out of the assets of the company, compensate perhaps a class of shareholders who have not had the benefit. Those who benefited from one shareholder being denied that benefit are the ones to whom the shares have been allotted when they ought to have been shared out between everyone. I still cannot see why the company should be made liable, because in those circumstances someone who has no responsibility for this matter will be penalised.

§ Mr. Eyre
This is an important matter, but I believe that I can show my right hon. Friend that the Bill should be left as it is.
The question is whether, when a shareholder suffers loss because he has not received a pre-emptive offer to which he was entitled, he should have a right to claim damages against the company as well as against any officer in default. It may well be that there is no officer in default, as, for example, when a junior clerk has failed to post a letter to the shareholder. The shareholder has undoubtedly lost the benefit of the preemptive offer, and is worse off to that extent compared with the other shareholders. In the circumstances, it seems to me reasonable that he should have a remedy against the company. The company may have a claim against the individual who failed to make the preemptive offer, but that is another matter to be settled under the general law.
As to ordering compensation from the person who benefited by the contravention, that would make sense only if he had been a party to a deliberate evasion by someone acting on behalf of the company's statutory duty. In such a case, the company would have a remedy against that defaulting employee or officer, and 1505 also an action in conspiracy against the recipient of the shares who was a party to the wrong. That position seems to me to be entirely right. I therefore hope that my right hon. Friend, on considering my explanation, will not press his amendment.

§ Sir Graham Page
In this case I disagree so much with my hon. Friend in his making the company liable that I will not ask the leave of the House to withdraw the amendment. If my hon. Friend wishes to negative it, he can do so.

§ Mr Eyre
I beg to move amendment No. 25, in page 23, line 44, leave out "either" and insert "both".

Mr. Deputy Speaker
With this it will be convenient to take Government amendment No. 26.

§ Mr. Eyre
The Law Society suggested to us that as presently drafted the phrase either as respects dividends or as respects capital in the last lines of clause 17(10 was ambiguous. Shares will confer relevant rights or non-rights as respects both dividends and capital. What we wanted to achieve was that where the rights conferred on shares were the same as respects distribution by way of dividends and as respects distribution by way of a capital and also as respects voting, they must be treated as being in the same class. However, where the rights were different in any of these respects the shares were to form separate classes.
The amendments propose to change the reference from "either" to "both". I think that this makes the intention clear and I hope that the House will accept these small amendments.