ASSIGNMENT OR RELEASE OF COMPANY'S RIGHT TO PURCHASE OWN SHARES (Hansard, 19 October 1981)

§ Mr. Eyre

I beg to move, That the clause be read a Second time.

New clause 24 deals with two aspects of the power of a company to purchase its own shares which would offer scope for abuse unless provision is made to prevent this.

The clause, first, in subsection (1) prohibits a company from assigning its rights under any contract of purchase authorised under clauses 45 or 47 and any contingent purchase contract authorised under clause 46. In other words, it will prevent a company from transferring any rights of purchase it acquires. If such provision were not made, a company would be able to speculate against its own share price by buying and selling rights to purchase, whether or not the share was traded on the listed or unlisted securities markets of the Stock Exchange. This is something which the Government, in introducing the power to purchase own shares, have sought to prevent. For example, it is to prevent this, as well as for other reasons, that the requirement has been made that shares must be cancelled on purchase, rather than held available for resale. Most respondents to the original Green Paper on this subject thought that this was an abuse which should not be allowed.

The second matter with which the new clause deals is that of a company agreeing to release its rights under a contract of purchase or contingent contract of purchase 63 authorised under clauses 45 or 46. In contrast to the assignment of rights, for which we believe there is no commercial justification and which we have therefore proposed simply to prohibit, we consider there may be good and proper commercial reasons for a company to be permitted to give up its rights of purchase. Circumstances may have changed since the contract was entered into and it may be to the advantage of the company, the shareholder who has granted the right and the other members for the purchase not to proceed. Subsection (2) accordingly allows a company to release its rights under a contract, subject to an appropriate safeguard contained in subsection (3). This safeguard is essentially that the release should be subject to approval by special resolution of the company, with the shareholder who originally agreed to sell the shares in question disqualified from voting in respect of the shares which are the subject of the contract, in the same way that the entry into a contract and any variation of it must be authorised by special resolution. This safeguard is needed because, without it, there would be an obvious means for the company to avoid the prohibition on assignments or to provide funds to a selected shareholder or group of shareholders at the expense of the others by buying a right to purchase their shares and then releasing the right.