PAYMENTS APART FROM PURCHASE PRICE TO BE MADE OUT OF DISTRIBUTABLE PROFITS (Hansard, 19 October 1981)

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

Mr. Deputy Speaker
With this it will be convenient to take Government amendments Nos. 44, 45 and 51.

§ Mr. Eyre
New clause 25 requires that any payment made by a company in consideration of acquiring a right to purchase its own shares, a variation of an existing contract of purchase, or in a release from any of its obligations with respect to a purchase, must be found from 64 distributable profits. If this requirement is not satisfied, the clause makes the related purchase of shares unlawful in the case of an option or variation and makes the release from an obligation void.
The Government recognise that it is in the interests of companies and shareholders that it should be possible for companies to acquire options to purchase their own shaes or for contracts of purchase to be varied or companies to be released from their obligations. Such facilities are consistent with the overall objective in permitting companies to purchase their own shares of promoting investment in companies, and provision is made for them, subject to appropriate procedural safeguards, in clauses 45 and 46 of the Bill. As the new clause recognises, a company may also obtain a release from an obligation arising under a contract of purchase made under the authorisation procedure for market purchases laid down in clause 47. Such contracts may not, however, be varied under Stock Exchange practice. The purchase of options on the market is excluded by the requirements imposed by clause 46.
The Bill also enables a private company to deplete capital reserves to pay the price for purchase of its own shares, subject to safeguards involving quite elaborate procedures. We see no commercial justification for allowing a company similarly to reduce its capital reserves to make a payment for an option, variation or release. The clause accordingly requires that any payments made in these circumstances may be made only from those funds which may be distributed to shareholders under part III of the 1980 Act, which safeguards the interests of creditors as regards the distribution of a company's assets.
Amendments Nos. 44, 45 and 51 are consequential on the introduction of new clause 25. The first two amendments delete provisions in clause 46 which lay down the requirements in respect of contingent purchase contracts and are now included in new clause 25.

§ Mr. Anthony Nelson (Chichester)
On Second Reading I referred to the part of the Bill dealing with the right of companies to purchase their own shares. I expressed some concern that burdensome and unnecessary restraints were being introduced on the ability of companies and shareholders to decline in size. I sought at that time to introduce a greater degree of flexibility to enable a company to purchase its own shares because the provisions in the Bill as drafted—and the same is true of the amended form—were more restrictive than I should have liked to see.
The law in this area is based on common rather than statute law, and the attitude of Parliament and commentators to companies purchasing their own shares has always been that it is rather unclean and that there is something incestuous about companies purchasing their own shares. The provisions have therefore been tightened to prevent companies from effectively exercising an important aspect of their rights; an important area of provisions that should enable money to be invested more easily and enable companies to change their shareholdings more easily. This should result in more free enterprise as companies that are redundant either decline or go out of business, which is as important as allowing new companies to spring up.
No substantial change was made in Committee. I do not press too hard for this, because I think that it is right to see 65 how these provisions work out, but will the Minister assure the House that if the legislation proceeds satisfactorily and if there is no abuse of the new rights that companies will have to purchase their own shares he will consider making the rules concerning purchase more flexible?
It seems that the requirements for genetral meetings and resolutions by companies are unnecessarily costly, but, most of all, the source of finance for the purchase of shares or associated rights of purchase seems to be artificially restrictive. The definition of disposable income is an accounting one because net disposable funds left with a company, if not distributed to shareholders in the form of a dividend, for example, will be reinvested as reserve in the company and so acquire the status of capital. In a subsequent year that same money, even if it is held in a deposit or current account, cannot be utilised for the purchase of shares because it is no longer classified as undistributed profit and it then becomes part of the capital reserves of the company.
I do not feel that we should have this plethora of restrictions on being able to purchase shares. I believe that a company that considers it wise to do so should be able to borrow money as much for working capital and investment requirements as for the purchase of its own shares if it considers that to be in the interests of shareholders.
I understand that creditors' interests have been of paramount consideration in the drafting of the legislation. I have made my point. I hope that the Minister can offer a gleam of hope that if the legislation is not abused, and if the number of companies buying their own shares is minimal, he will consider introducing more flexible and encouraging arrangements that the present provisions allow.

§ Mr. Clinton Davis
I urge the Minister to exercise caution when considering the advice of the hon. Member for Chichester (Mr. Nelson). If the hon. Gentleman had said that the legislation was unduly convoluted, I should have agreed. Having embarked on an experiment, the Minister is right to take great care. Abuses could spring to light, but they might not emerge fully for a considerable time.
The Minister should wait upon events. He should examine the position in due course although probably by then he will not be the Minister. He should try to ensure that unnecessary bureaucracy is avoided. The hon. Member for Chichester is asking the Minister to be too uncaring of the consequences that could emerge. Basically, I support the Minister's view in this matter.

§ Mr. Eyre
I am grateful to my hon. Friend the Member for Chichester (Mr. Nelson). I understand his desire for flexibility. I appreciate his argument that perhaps we have been too restrictive. I might be able to help my hon. Friend with some clarification.
I understand that distributable profits will be available for purchases even if they have been carried to reserves. My hon. Friend is incorrect in believing that the Bill carries them to reserves and therefore makes them unavailable for the purchase of own shares. Free reserves are available for that purpose.
I acknowledge the danger of hastening too slowly in certain circumstances. However, we have tried to strike a reasonable and proper balance. As the hon. Member for 66 Hackney, Central (Mr. Davis) said, in certain circumstances dangers are involved in breaking legislative ground too quickly. We have tried not to make that mistake. Nevertheless, it is reasonable to ask for a proper degree of flexibility if no improper advantage is taken of the opportunities offered under the legislation.
I hope that my hon. Friend will suspend his judgment, because when I move new clause 26 I shall set out proposals to provide for the greater flexibility that my hon. Friend believes should be made available. I ask him to bear with us in the caution with which we advance along this road, because it involves new areas of judgment and responsibility. I am sure that the provisions in new clause 26 will meet the general principles so reasonably expressed by my hon. Friend.