Non-Public Limited Companies (Appointment of Directors) (Hansard, 10 March 1987)

§ Mr. Bill Walker (Tayside, North)

I beg to move, That leave be given to bring in a Bill to give shareholders who hold in their own name twenty-five per cent, or more of a non-public limited company's shares the right to be appointed a director of the company. In order to present to the House clear and logical reasons for my proposed change in company law, I shall describe the experience of shareholders in a non-public limited company in Tayside. This situation has brought me much personal sadness and it highlights clearly the problems that exist.

The individuals involved are all good friends of mine, and one is a close relative. They are all aware that I shall be outlining their experiences and problems, which they and I believe may be repeated many times throughout Tayside, and many hundreds of times throughout the United Kingdom.

In the late 1960s three young men purchased an aircraft. The objective was to obtain inexpensive flying. They formed a company called Aerosport Ltd. Since that time I have been an unpaid adviser to that company. In 1971 more funds were required and two more flying club members were invited to join the company. At that time, my relative, Mr. Walker, joined the company.

In 1978 a new company was formed with six shareholders. At that time, the main shareholders were part-time executive directors; each of the directors, with one exception were in full-time employment outside the company. The one full-time director was an ex-Royal Air Force flying instructor, who was the chief pilot and chief flying instructor. Those posts are essential under aviation law. The other directors built up the business by devoting summer evenings and weekends to the running of the company; they were working at their hobby.

In 1982 one of the part-time directors, Mr. Fraser, who was also a founder member and chairman of the company, lost his full-time job. The garage firm of which he was managing director had severe financial problems and was closed down. He was out of work and desperate for an income. On my advice, a full-time post was created for him within the company.

Shortly after that the ex-RAF instructor left and the company was left with four shareholders, one of whom was Mr. Fraser, for whom a full-time job had been created, he held just over 33½ per cent, of the shares and was a director. Another person who had a full-time job with Air Service Training was the chief pilot. He held just under 33½ per cent, of the shares; he also was a director.

The third major shareholder, Mr. Walker, devoted every summer evening and summer weekend to the company, and he had done that since 1971. He held about 30 per cent, of the equity and was the third director.

The last shareholder held only a few shares and he had not seen or been near the company for many years.

At the 1984 annual general meeting of the company Mr. Walker — who, as I said earlier, had devoted all his spare time to the company — was, without notice or warning, not re-elected to the board.

The company has never paid a dividend. That was done by agreement, and all the profits were invested in new aircraft and property. The part-time directors had paid 164 themselves only a small director's fee—the perk was cheap flying. The ex-director has now lost his fee and cheap flying.

In the 1984 accounts the three directors' fees, including salary for the full-time director, amounted to £18,400. In the 1985 accounts, the two directors' fees and full-time salary appeared as £22,300. With one director less, that meant a massive increase for the remaining two. In addition, a new item was a £1,100 contribution for a pension for the full-time director.

All of that information is in the public domain. It can be obtained from Company House records. That is why I have no hesitation in disclosing it. What the records cannot show is the way in which the company assets have been built up by voluntary work over many years, while the full-time director has massively increased the expenses of the company, and his wife is also a part-time employee of the company.

The auditor for the company, Mr. J. L. Hope, advises the two remaining directors, acts for them at annual general meetings and prevents the ex-director from obtaining trading accounts and trading information. That can happen to anyone who has massive shares in a private company.

On the advice of the auditor, in 1984 the ex-director was offered the opportunity to sell his shares to the other remaining directors. The offer was made at £3.50 per share. Only a couple of months ago, Mr. Gillespie, the part-time director, who is soon to take up a post with Loganair, offered his shares to the remaining shareholders. The other shareholders—

§ Mr. Walker

I asked permission to introduce this point, Mr. Speaker, and it is an important fundamental matter of law. There must be hard evidence to prove what I am saying—I have discussed this with the Minister—and it is the hard evidence that I am producing.

The part-time director, Mr. Gillespie, offered his shares to the remaining shareholders for £11 per share. He did so via the company auditor. Nothing has happened to improve the value of the shares. In fact, the massive increase in expenses has probably made the company substantially less profitable. The full-time director has said that he will pay £11 per share and retain the former director, Mr. Gillespie, as a part-time director.

The ex-director has the option—this is the important point—of buying half of the shares on offer at £11 per share and still have no seat on the board, no say in the running of the company, no cheap flying and no prospect of ever being paid a dividend, yet he can hold over 45 per cent, of the equity of the company. That is not a realistic situation. His only other recourse under the law is to apply to have the company liquidated, claiming that his minority interests have not been protected. Everyone expects that to happen.

Such an option can be tortuous, expensive and acrimonious. That is why there is a need to provide the opportunity, in situations such as this or in family businesses, for shareholders to find an alternative and viable course of action.

I hope that the House can see the sense in a shareholder who holds over 25 per cent, of the equity of a company, and who holds the shares in his own name, being given the 165 option, because that is what it will be, to demand as of right a seat on the board. The existence of such an option will bring realism into what at present can be unrealistic and often stupid situations. It could prevent the complete bust of a company. It would provide the opportunity for directors to take more account of minority interests; it would make shareholders and directors more responsive to the needs of the company and more aware of the realities of modern trading conditions. Directors would learn to operate within a boardroom where one of the directors asked penetrating and searching questions about expenses.

Public limited company law has had to be changed—this is the important point, and you will be aware, Mr. Speaker, of my interest in public limited company law—to bring the law up to date with modern conditions that are reflected in the City and the problems of the City.

Now is the time to bring non-public limited company law up to date to reflect more properly the conditions where more and more people are setting up small companies and where the law governing the accountability of directors requires a more professional and businesslike attitude in the boardroom.

That is why I ask the leave of the House to bring in my Bill, which may, even now, be too late for the company whose problems I have outlined. Yet its experience could and should be prevented. That can be done if my Bill is accepted.