§ Mr. EyreI beg to move amendment No. 57, in page 66, line 26, leave out clause 56.
This amendment amends the definition of distributable profits provided in clause 57 for the purpose of part III of the Bill, and provides an additional definition of distribution—
§ Mr. Clinton DavisAre we on amendment No. 57?
§ Mr. EyreYes. The amendment has the effect of ensuring that all the provisions of part III of the 1980 Act, which determines the legality of a distribution, apply to any payment in connection with the purchase or redemption of own shares or any financial assistance which is required by the Bill to be paid out of distributable profits.
§ Mr. Clinton DavisI am sorry for interrupting. Perhaps I am mistaken, but amendment No. 57 seeks to leave out clause 56 and so far I do not think that the Minister has addressed himself to that point.
§ Mr. EyreI apologise to the hon. Gentleman. My hon. and learned Friend the Minister for Trade was to deal with the precise terms of the amendment that the hon. Gentleman has in mind, but it may be for the convenience of the House if I turn to the argument that my hon. and learned Friend would have developed. 7.15 pm
The amendment that the hon. Gentleman has in mind proposes the deletion of clause 56. The clause prevents any company, with power to alter its memorandum or articles so as to require the transfer of a share to the company or any other person, from exercising such a power in relation to any share allotted before such an alteration is made, subject to two exceptions. First, a company may exercise such a power with the consent of the Secretary of State. Secondly, a company is permitted to take a power of pre-emption requiring a member proposing to transfer shares to offer them first to the company or another member on the same or more favourable terms as those of the proposed transfer.
The clause has been the subject of continuing consultations with outside bodies, both on the need for it in principle and on the difficulties of drafting satisfactorily an exception for powers or pre-emption while preserving the basic safeguard for shareholders against compulsory purchase of shares that the clause is intended to provide. In the light of the further representations received since Committee stage, the Government have concluded that on balance the clause should best be deleted.
§ Mr. Clinton DavisI do not blame the Minister for speaking to the wrong amendment. I always find Amendment Papers extremely confusing. One must look all over the place for the amendment and the consequential amendments that are being discussed. While talking about 223 changes in our procedures, perhaps we should consider doing something about the way in which amendments are printed.
The hon. Gentleman has said that representations have been made to him to delete the clause. Perhaps he will be more specific as to what motivated those who made this challenge to clause 56. What sort of representations were made and where did they come from?
§ Mr. EyreI want to be as helpful as I can. It may assist the hon. Gentleman to know that our original purpose in introducing this provision was to safeguard holders of shares issued on terms which did not envisage the possibility of compulsory sale to the company. We thought this a valuable complement to the power of a company to purchase its own shares. A company may already take powers by amendment to its articles to compel a sale to another person, and the existing case law indicates that the exercise of such a power will be upheld by the court if it is in good faith, in the interests of the company as a whole.
The availability to companies of a power to purchase their own shares seemed to us to give rise to the likelihood of similar powers being taken to compel sale to the company. Where someone was willing to purchase shares issued on such terms we saw no reason to prevent it, but we thought objectionable the imposition of such a power by a majority on a minority shareholding that had not been applied on such terms. We therefore sought to prohibit alteration of rights attaching to shares so as to compel sale to the company.
It was illogical to prohibit only a transfer to the company, and the clause as drafted also prohibits an amendment to rights that would require transfer to any other person. It was, however, apparent to us that the clause should allow for an exception for cases in which the alteration of rights was in the national interest. Subsection (1) provides for this in permitting alteration with the consent of the Secretary of State. It was also clear that it was desirable for us to exempt a right of pre-emption exercisable by the company or any other person when a shareholder was proposing to transfer his shares, so long as the effect was not to make the shareholder incur some disadvantage as compared with his proposed sale. Subsection (2) attempted to provide for this.
We have identified a number of defects in the clause. However, the extensive consideration that the clause has received, both within the Department and outside it, has failed to suggest a satisfactory way of defining the circumstances in which a pre-emption right should be permitted and which would strike a proper balance between the legitimate rights of the company and the shareholder. Those words go to the root of the difficulty.
The choice is, therefore, between enacting the basic prohibition or deleting it. The balance of opinion among those whom we have consulted is strongly in favour of deletion. The Law Society of England and Wales, for example, has expressed itself strongly in favour of deletion and the Government have been persuaded that this is the right course. A shareholder who is aggrieved by the rights attaching to his shares will be able to have recourse to the courts to protect his interest under section 75 of the 1980 Act, which specifically provides for a member of a company to seek relief from any proposed act done by the 224 company on the basis of unfair prejudice or under common law, on the ground that it was not bona fide in the interests of the company as a whole.
I hope, as a result of that information, that the hon. Gentleman will now be better able to understand the difficulties. I believe that the consultation with the Law Society is persuasive as to why the difficult decision to delete the clause was made by the Government.
§ Mr. Clinton DavisThe knight in armour—less than shining armour—has arrived a little late, but we are glad to see the Minister for Trade, and I think that I speak for hon. Members on both sides of the House.
This experience shows how valuable consultation is. However, the Minister will also recognise that I was left uncertain as to why this was happening. I am grateful to him for expressing so clearly the reasons why the Government felt impelled to make the change.
Perhaps the Minister might be encouraged to use his red pencil a little more liberally on the rest of the Bill. I say that as one who might be asked to advise upon it from time to time. No doubt when he ceases to be a Minister he will be in the same position and he will then have viewed his failure to use the red pencil with concern. However, I am grateful to him for his explanation and I believe that his conclusion is right.
Amendment agreed to.