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CHAPTER 2: FINANCIAL ASSISTANCE FOR PURCHASE OF OWN SHARES

986. The following sections replace Chapter 6 of Part 5 of the 1985 Act which contains a prohibition on the giving of financial assistance (broadly defined) by a company or any of its subsidiaries for the purpose of the acquisition of shares in itself. There are exceptions which apply to all companies, contained in section 153 of the 1985 Act, and a relaxation of the general rule for private companies in sections 155 to 158 of that Act.

987. As recommended by the CLR (Final Report, paragraph 10.6), the Act abolishes the prohibition on private companies giving financial assistance for a purchase of own shares and, as a consequence, the relaxation for private companies (sometimes referred to as the “whitewash” procedure) is no longer required. The provisions in sections 155 to 158 have therefore been repealed and are not carried forward in the Act.

Section 678: Assistance for acquisition of shares in public company

988. This section replaces section 151(1) and (2) of the 1985 Act and restates section 153(1) and (2) of that Act. The key change is that the prohibition on private companies providing financial assistance for a purchase of own shares is not carried forward.

989. The general prohibition on the giving of financial assistance by a public company is required by the Second Company Law Directive (77/91/EEC) and this prohibition is retained in subsection (1). As under the current law, the prohibition extends to post-acquisition assistance (see subsection (3)).

990. The prohibition on the giving of post-acquisition assistance only applies if the company in which the shares were acquired is a public company at the time that the assistance is given (see subsection (3)). It follows that where a company has re-registered as a private company since the shares were acquired and is a private company at the time the postacquisition assistance is given, the prohibition in this section will not apply. However, if at the time the shares were acquired the company was a private company, but at the time the post-acquisition assistance is given it has re-registered as a public company, the prohibition will apply.

991. The provisions of section 153(1) and (2) of the 1985 Act are retained in subsections (2) and (4) which carry forward the current exemption from the prohibition on the giving of financial assistance: namely, that such assistance is not prohibited if the principal purpose of the assistance is not to give it for the purpose of an acquisition of shares, or where this assistance is incidental to some other larger purpose of the company and (in either case) where the assistance is given in good faith in the interests of the company. As now, in these circumstances no offence is committed by the company or its officers (see section 680). The changes introduced by section 678 also give statutory effect to the decision in Arab Bank plc v. Mercantile Holdings Ltd [1994] 2 All ER 74: namely, that the statutory prohibition on a company giving financial assistance for the purpose of acquiring its own shares or shares in its holding company does not apply to the giving of assistance by a subsidiary incorporated in an overseas jurisdiction.

992. In the Arab Bank case, Millett J considered the geographical scope of section 151 of the 1985 Act and concluded that this had inadvertently been altered during the consolidation of UK companies legislation in 1985. In particular, the 1985 Act appears to go further than the 1980 Act and, in interpreting the current provision, Millett J applied the presumption that, in the absence of a contrary intention, section 151 could not have extra-territorial effect. The difficulty with the 1985 Act provision arises as a result of how the prohibition is framed: in particular, the prohibition applies “to the company or any of its subsidiaries” and “subsidiary”, as defined in section 736 of the 1985 Act, includes foreign companies. The prohibition in the Act is restricted to UK public companies and their UK subsidiaries as a result of the definition of “company” in section 1. Subsection (1) of that section makes it clear that, unless the context otherwise requires, “company” means a company which is formed and registered under the Act or a former UK Companies Act.

Section 679: Assistance by public company for acquisition of shares in its private holding company

993. This section replaces sections 151(1) and (2) and 153(1) and (2) of the 1985 Act.

994. Like section 678 this section does not carry forward the prohibition on private companies providing financial assistance for a purchase of own shares, but the current prohibition on the giving of financial assistance by a public company subsidiary for the purpose of an acquisition of shares in its private holding company is retained. Section 679 also retains the prohibition on the giving of post-acquisition assistance by a public company subsidiary.

CHAPTER 3: REDEEMABLE SHARES

995. Under section 159 of the 1985 Act a company that is limited by shares, or limited by guarantee and having a share capital, may, if authorised to do so by its articles, issue shares which may be redeemed at a future point in time at the option of the company or the shareholder. The provisions of section 159 are carried forward in the following sections but there are changes to the ways in which companies may issue redeemable shares and redeem such shares (see below).

Section 684: Power of limited company to issue redeemable shares

996. This section replaces section 159(1) of the 1985 Act and restates section 159(2) of that Act.

997. For private companies only, it removes the requirement for prior authorisation in the company’s articles for a proposed allotment of redeemable shares. If they wish, the members may, however, restrict or prohibit the authority given to a company by this section, by including a provision to this effect in the company’s articles (see subsection (2)).

Section 685: Terms and manner of redemption

998. This replaces section 160(3) of the 1985 Act (which provides that the terms and manner of redemption must be set out in the company’s articles) and existing section 159A (also entitled “terms and manner of redemption”), which was inserted into the 1985 Act by section 133 of the Companies Act 1989 and remains uncommenced.

999. As recommended by the CLR (Final Report, paragraph 4.5), this section enables the directors of both private and public companies alike to determine the terms, conditions and manner of a redemption of redeemable shares. The power conferred on the directors by this section requires prior authorisation by the company’s members, either by resolution of the company or through the articles (see subsection (1)). As recommended by the CLR (Final Report, paragraph 7.30) the terms and conditions of redemption will have to be stated in the statement of capital required to be filed under section 555. If the directors are not authorised to set the terms of the redemption, then they must be set out in the company’s articles (see subsection (4)).

1000. Where the directors exercise this power they must do so before the shares in question are allotted (see subsection (3)).

Section 686: Payment for redeemable shares

1001. This section replaces section 159(3) of the 1985 Act (which requires that where a company issues redeemable shares, the terms of redemption must provide for payment on redemption). It removes the current requirement, in section 159(3), that the terms of redemption must provide for payment on redemption. This means that the terms of redemption may provide for the company and the holder of the shares to agree that payment may be made on a date later than the redemption date.

Section 688: Redeemed shares treated as cancelled

1002. This section restates section 160(4) of the 1985 Act but with the exception of the reference to the impact of the redemption on the authorised share capital of the company – the concept of which is not replicated under the Act.

Section 689: Notice to registrar of redemption

1003. This section restates section 122(1)(e) and 122(2) of the 1985 Act and Schedule 24 to that Act but there is a new requirement for a statement of capital where a company gives notice to the registrar of a redemption of redeemable shares (see subsections (2) and (3) and the note on section 619).