§ 157 After Clause 105, insert the following new clause:
§ 'Membership of holding company.
§ . —(1) In Chapter I of the Companies Act 1985 (company formation), for section 23 (membership of holding company) substitute —
§ 23. —(1) Except as mentioned in this section, a body corporate cannot be a member of a company which is its holding company and any allotment or transfer of shares in a company to its subsidiary is void.
§ (2) The prohibition does not apply where the subsidiary is concerned only as personal representative or trustee unless, in the latter case, the holding company or a subsidiary of it is beneficially interested under the trust.
993§ For the purpose of ascertaining whether the holding company or a subsidiary is so interested, there shall be disregarded—
- (a) any interest held only by way of security for the purposes of a transaction entered into by the holding company or subsidiary in the ordinary course of a business which includes the lending of money;
- (b) any such interest as is mentioned in Part I of Schedule 2.
§ (3) The prohibition does not apply where the subsidiary is concerned only as a market maker.
§ For this purpose a person is a market maker if—
- (a) he holds himself out at all normal times in compliance with the rules of a recognised investment exchange other than an overseas investment exchange (within the meaning of the Financial Services Act 1986) as willing to buy and sell securities at prices specified by him, and
- (b) he is recognised as so doing by that investment exchange.
§ (4) Where a body corporate became a holder of shares in a company —
- (a) before 1st July 1948, or
- (b) on or after that date and before the commencement of section (Membership of holding company) of the Companies Act 1989, in circumstances in which this section as it then had effect did not apply.
§ (5) Where a body corporate becomes a holder of shares in a company after the commencement of that section in circumstances in which the prohibition in subsection (1) does not apply, but subsequently falls within that prohibition in respect of those shares, it may continue to be a member of that company; but for so long as that prohibition would apply, apart from this subsection, it has no right to vote in respect of those shares at meetings of the company or of any class of its members.
§ (6) Where a body corporate is permitted to continue as a member of a company by virtue of subsection (4) or (5), an allotment to it of fully paid shares in the company may be validly made by way of capitalisation of reserves of the company; but for so long as the prohibition in subsection (1) would apply, apart from subsection (4) or (5), it has no right to vote in respect of those shares at meetings of the company or of any class of its members.
§ (7) The provisions of this section apply to a nominee acting on behalf of a subsidiary as to the subsidiary itself.
§ (8) In relation to a company other than a company limited by shares, the references in this section to shares shall be construed as references to the interest of its members as such, whatever the form of that interest.".
§ (2) In Schedule 2 to the Companies Act 1985 (interpretation of references to "beneficial interest"), in paragraphs 1(1), 3(1) and 4(2) for "as respects section 23(4)" substitute "as this paragraph applies for the purposes of section 23(2)".'.
§ The Lord Advocate (Lord Fraser of Carmyllie)My Lords, I beg to move that the House do agree with the Commons in their Amendment No. 157. The amendment makes two distinct changes to Section 23 of the 1985 Act; that is, the section of the Act which prevents unauthorised reductions in a company's capital by prohibiting the holding of shares by a subsidiary company in its holding company. The changes relate to the exceptions to this general rule.
First, the amendment clarifies the position where a company becomes the subsidiary of another 994 company in which it has a pre-existing shareholding. It does so by permitting a subsidiary which was a member of its holding company before it became a subsidiary to continue to be a member, but provides in that event that the subsidiary has no right to vote in respect of such shares.
We have looked at the point afresh since the Bill was first introduced in the light of outside comment and have concluded that we should make the changes recommended over 25 years ago by the Jenkins Committee. The amendments were introduced and discussed in Commons Standing Committee.
The second change clarifies the effect of Section 23 where a market maker makes a market in the shares of its holding company. New Section 23(3) makes clear that it is permissible for such a subsidiary to hold shares in its holding company for the purposes of making a market in those shares on a recognised investment exchange. Some doubt had been expressed on this point, which has clearly assumed some importance since the securities industry was restructured in 1986.
Moved, That the House do agree with the Commons in the said amendment. —(Lord Fraser of Carmyllie.)
§ Lord Williams of ElvelMy Lords, I have only two relatively small points, apart from welcoming the noble and learned Lord the Lord Advocate to our discussions on Commons amendments. The first point concerns the new Section 23. Am I right in thinking that under French corporate law a subsidiary may hold shares in its parent and that that is also true under German and Italian company law? This is my recollection of the position when I dealt with practical business in these matters. If so, is there anything the noble and learned Lord can tell us about the consolidation of company law arrangements within the Community which may lead to a modification of this arrangement in the future? Is it going as it were, our way or their way?
Secondly, the definition of what is a market maker is fraught with problems, as I am sure the noble and learned Lord will be aware. If I were to be cynical I could suggest that in order to get around the restrictions imposed under new Section 23 it would be open to a holding company to form a subsidiary which became a market maker—recognised as a market maker by the appropriate supervisory body, the investment exchange, and indeed making markets in shares—but whose primary function could be to hold shares in its parent company, trade them and, indeed, vote them. That is obviously an impossible assumption in the case of large companies. But in the case of small companies, which have a market capitalisation of, say, £5 million to £6 million and are listed on the Stock Exchange, that is not inconceivable as a gateway. Is the noble and learned Lord satisfied that that will not occur under this Bill if the Commons amendment as drafted is accepted by this House?
§ Lord Fraser of CarmyllieMy Lords, as regards the latter point made by the noble Lord, the exemption will apply only to the extent that the subsidiary concerned is a market maker in a recognised 995 exchange. The exemption will not be available if the purchases are made for other purposes. Moreover, such market makers are already strictly regulated and I hope I can be confident that the relevant regulatory bodies will be in a position to prevent the sort of abuse that is hinted at as being there at least potentially. The noble Lord turns down the corner of his mouth, but I hope I can be confident that that is covered.
Finally, it will be well known to the noble Lord that market manipulation is in any event a serious criminal offence under Section 47 of the Financial Services Act. If a company were set up with the primary purpose of holding its parent's shares it would not get the benefit of Section 23(3).
On the European question, I cannot give the noble Lord an answer. It is a very wide-ranging question.
§ On Question, Motion agreed to