Company Law Bill [HL]

moved Amendment No. A67A:"Page 268, leave out lines 5 to 7." The noble Lord said: We are working down page 268 of the Bill and we remain on Clause 561, which concerns the circumstances in which a company may reduce its share capital. This is another probing amendment. As I have explained, Clause 561 replaces most of Section 135 of the Companies Act 1985. Section 135(1) states:"““Subject to confirmation by the court, a company limited by shares or a company limited by guarantee and having a share capital may, if so authorised by its articles, by special resolution reduce its share capital in any way””." The Bill would alter this provision to require that a company may reduce its share capital only provided that, as a result of the reduction, at least one member of the company would hold shares other than redeemable shares or shares held as treasury shares. This would represent a significant obstacle if left as currently drafted. At present, it is a common form of reduction to reduce the share capital to zero before immediately increasing it to its previous size or larger. We have had representations that as many as seven out of 10 of every reduction of capital involves this exercise. However, this Bill would prevent companies from doing that, as they would no longer be able to reduce the share capital to zero by virtue of new Section 135(1B), at the top of page 268. Perhaps I could illustrate the usefulness of the current provisions with a couple of examples. The first concerns a takeover. Say a target company with a number of ordinary shares is approached by another company. The company seeking to make the takeover may want to give shares in itself in place of the target company to the target company’s existing members post-takeover. To do this, the target company’s share capital must be reduced to zero, which the court would sanction. The members of the target company would be allotted shares in the acquiring company and the target company would then increase its share capital with all the shares being allotted to the acquiring company. This is a very common mechanism, which the Bill as it stands would defeat. A second example would be where a company wished to simplify its capital structure. Say a company had, for historic reasons, A shares, B shares and C shares—as is not uncommon—all with slightly differing rights and entitlements. The company reached the conclusion that it wished to simplify its capital structure to bring itself up to date and to create a single class of shares. To achieve this, each of the classes of share—A, B and C—would have to be reduced to zero before being re-allotted with the new class of share. This procedure, too, would be prohibited by the present wording. Why have the Government used the present drafting? It appears that the parliamentary draftsmen have lifted the wording from the clauses of the Bill dealing with companies buying in their own shares. But this is an entirely different matter, because clearly a company could not be allowed to gobble up 100 per cent of all its own shares. There seems to be no reason for making the change, which will only prove to be a hindrance to companies. This amendment is therefore necessary and desirable to maintain the law as it currently stands. I understand that the Law Society is having second thoughts on the issue and I hope that, even if the Minister cannot accept this amendment today, his officials and the Bill team will be able to have a word with the Law Society to get its up-to-date thinking on this rather technical but nevertheless important and significant area. I beg to move.