My Lords, the purpose of the regulations is to facilitate employee ownership by simplifying company law in the area of share buy-backs.
The independent Nuttall review of July last year set out the economic and social benefits of employee ownership, including improved business performance, increased economic resilience and greater employee engagement and commitment. The review also made a series of recommendations to the Government about how to increase the uptake of employee ownership in the private sector and what barriers needed to be removed to enable that.
One of Graeme Nuttall’s conclusions was that the company law provisions on share buy-backs are overly burdensome. The Nuttall review recommended that the Government consult on improving the operation of internal share markets to support companies with
direct share ownership models. Companies that wish to encourage their employees to hold shares directly—that is, without the use of a trust—will often seek to buy back shares from employees who are leaving, or have left, the company to redistribute them to new employees. That allows the company to avoid the risks that, over time, shares earmarked for allocation to employees become predominately owned by former employees or others outside the company. Buy-back arrangements will depend on the departing shareholder, the seller, and the company, the buyer, mutually agreeing a price, inter alia. Once a buy back is agreed, companies must comply with a number of company law provisions that regulate the process.
Having accepted this recommendation to examine company law about buy backs, the Government held a consultation to obtain views and evidence on: the extent to which company law rules on buy backs are an impediment to employee ownership; changes to the rules on the authorisation and financing of share buy backs; the holding of shares in treasury; and potential problems or unintended consequences.
The regulations for the Committee’s consideration contain provisions that address the concerns raised in the consultation by reducing the administrative burden faced by companies when administering share buy-backs; increasing the flexibility available to companies in how they fund share buy-backs; and allowing companies to select the most suitable arrangements for their particular needs. Specifically, the proposals will, first, allow shareholders in any company to approve off-market share buy-backs by an ordinary resolution—that is, by a simple majority vote—and, where such buy-backs are connected with an employee share scheme, allow for approval to be granted in advance. This will reduce the need for multiple resolutions, saving companies both time and money.
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Secondly, the proposals will give greater freedom for private limited companies, so that they can, if the seller agrees, pay in instalments for the shares that they buy back in connection with an employee share scheme, but we do not foresee that that option will be used frequently.
Thirdly, the proposals will make it simpler for private limited companies to finance share buy-backs for employee share schemes out of capital, using a solvency statement and a special resolution. That removes onerous requirements such as an auditor’s report and for a notice to be placed in the London Gazette. Experience elsewhere in company law has shown that that works well.
Fourthly, the proposals will enable shareholders to authorise directors of private limited companies to pay for shares out of cash without having to identify it as distributable reserves. That will allow small share purchases of less than £15,000, or equivalent to less than 5% of share capital, whichever is lower, each year. That will give private companies greater flexibility in how they fund buy-backs.
Lastly, the proposals allow all companies limited by shares to be able to hold them in treasury so that they may be issued to new employees or share scheme
joiners. At the moment when a private limited company or unlisted public company buys back shares, the shares have to be cancelled. The company must then get shareholder approval if it wants to create new shares to issue to new employees.
Let me remind the Committee of the key benefits of the regulations. Reducing administrative burdens and increasing flexibility as to how share buy-backs may be conducted will reduce the disincentives to adopting employee ownership and ultimately contribute towards making employee ownership more attractive and thus more widespread in the economy. This in turn will help growth.
Given the economic and social benefits of employee ownership, such as a happier workforce, less staff turnover and higher productivity and profitability, that is something that we should all welcome.
The proposals are purely enabling, impose no costs on business, and the familiarisation costs are likely to be small. There are no legal pitfalls associated with the measures. Key regulatory protections will remain. Those include directors’ duties and the ability of shareholders to alter a company’s articles of association to prevent or set conditions on share buy-backs. In addition, most of the changes require specific shareholder approval. I commend the regulations to the Committee.