Companies Act 2006 (Amendment of Part 18) Regulations 2013
Viscount Younger of Leckie
That the Grand Committee do report to the House that it has considered the Companies Act 2006 (Amendment of Part 18) Regulations 2013.
Relevant document: 22nd Report from the Joint Committee on Statutory Instruments
The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Viscount Younger of Leckie)
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.
Lord Stevenson of Balmacara
My Lords, how we are changed from the heady days of only a few days ago when we were in the Chamber debating the ERR Bill and voting on this and that, to be reduced to only three people here for this purpose, although two seem to have drifted in for other reasons, and we are outnumbered by those in the Box. That is the reality of so much of the work that we do here, which is of course of very good quality and great importance but does not reach the heights of some of the other things that we do.
The Nuttall report is interesting. As the Minister said, it argues forcefully for an increase in the employee share ownership arrangements and makes its case with some verve. It is, however, short on detail on costs. The Minister kindly said that he thought that the outcome of what is in this modest proposal, to which I do not object, by the way, is that administrative burdens would be reduced, there would be more flexibility inside companies to provide shares for employees and that it would help growth.
Can the Minister explain how he arrives at that conclusion, because the impact assessment statement which accompanied the measure, which I have read, contains remarkably little about the costs? The assertion made early on is that there is simply no way to identify the various costs one way or the other. I do not disagree that it would be difficult, but it does seems rather odd to base an argument on the benefits that will flow to businesses if you cannot identify them in cash terms. Perhaps the Minister can reflect on that point and give me any update that he may have received.
Secondly, I note that the intention is that there will be a post-implementation review three years after enactment. Paragraph 56 of the government response to consultation, on pages 15 and 16, covers the issues and explains what areas will be looked at. Once again, it does not come up with anything tangible in cash terms. It just states that the review,
“will also look at any available evidence of monetised or non-monetised costs or benefits from the changes that have been made”.
Again, I would be grateful if the Minister would reflect on whether the post-implementation review goes far enough. It would be helpful, when government measures of this nature are being brought forward which strike at the heart of the legal structure within which companies operate, if some cost consequences were provided.
My third point is on whether this will achieve any lasting value. The general view that I have read in the comments about the Nuttall review is that it may have some effect but, as the impact assessment states, there are unlikely to be many benefits from employee ownership if it is not combined with enhanced engagement practices to reap the full benefits. There is a lot of literature that says that this should do a lot. The Minister said that he thought that staff would be happier, that turnover might be up and profitability greater. I am not saying that I am sceptical, but it would be interesting to know on what he bases that argument. Clearly, none of that will happen if more work is not done to introduce the benefits of employee ownership. Can the Minister explain what the department and the Government are doing to promote employee share ownership more widely so that people are happier, that turnover goes up and profitability is increased?
My final point is that employee share ownership affects significant tax issues. The Minister did not mention that, partly because it is obviously not for his department. However, for example, tax rules say that where a company buys back shares from a former employee within five years of that employee leaving, all the income paid to the person who is leaving has to be taxed as though it is a dividend. Is that to continue? If it does not change, it does not seem that there is much benefit in making sure that the shares of a former employee are bought back, whether or not it is done with sequential permissions under the articles. If the tax is going to be so great that no one is interested in doing it, it seems that that will vitiate what is being applied. However, there are ways around that in the sense that the scheme that seems to apply most to companies in this area is the creation of employee share ownership trusts, because sales to the trusts are taxed only as capital gains and, in the present environment, that is quite reasonable.
All those issues are ignored in this report. Therefore, as I said, my final point concerning tax is that it would be helpful if, in carrying out the post-implementation review, an additional point could be made that the taxation implications should be considered, perhaps with a view to looking again more widely at the whole way in which employee share ownership taxation takes place. If one could correct that, I think that there would be more take-up of the scheme and it would have an impact. However, until that time, it will not have much effect.
Viscount Younger of Leckie
My Lords, first, I thank the noble Lord, Lord Stevenson, for his earlier comments. I hope that this will be a short sitting, in marked contrast to the rather livelier sittings that we experienced in the main Chamber together last week. I also thank him for his comments and questions about this issue. Just to reassure him, where concerns have been expressed, we will keep matters under review and evaluate them at the time of the post-implementation review. This will include implications for taxation, which is an important point raised by the noble Lord, Lord Stevenson.
While the regulations have merit in themselves, they are part of a wider package of measures that implement the recommendations of the Nuttall review of employee share ownership. They simplify the company law provisions on the buy-back of a company’s own shares in a manner which reduces administrative burdens and increases the flexibility available to companies to administer and finance buy-backs in a way that best suits their needs. The proposals in the regulations were endorsed and enhanced by the consultation process, and, as I mentioned earlier, are mainly targeted at private limited companies that undertake buy-backs pursuant to, or for the purposes of, an employee share scheme. The measures are not only deregulatory but enabling.
Picking up the point about costs raised by the noble Lord, Lord Stevenson, he may be reassured that the independent Regulatory Policy Committee, the RPC, confirmed that these changes are deregulatory and impose little or no cost to business. Having said that there are no costs to Government from the measures, I can make no other substantive comments on costs, but it may help the noble Lord if I also mention the question of savings. It is not possible to quantify the potential savings to business, as these will vary greatly depending on a range of factors, including the size of the business, the scale of the share scheme and the quantity of the shares bought back over a given period of time.
For example, a company which has several buy-backs during the course of a year could benefit from being able to approve these buy-backs in advance, rather than having to focus on approval each time the buy-back is effected individually. I regret that it is not as yet possible to quantify this.
Lord Viscount Stevenson of Balmacara
I am sorry to press the noble Viscount on this, but I remind him that paragraph 18 of the impact assessment states:
“In the current consultation … an attempt has not been made to monetise any of the costs and benefits associated with the policy”.
This is an alarming point. If this is going to be standard practice for the department, what is the department there for? These are not major changes. I accept the Minister’s point that everybody seems to welcome them, but some evaluation of what they cost and of the benefits would have been helpful. The impact assessment goes on to state:
“The intention is to utilise the consultation period as an opportunity to obtain further information from stakeholders”.
However, the report from the consultation states that it was not possible to obtain any information on costs or benefits from the consultation. One has to ask: what sort of consultation was that?
Viscount Younger of Leckie
The noble Lord makes a fair point, but it remains the fact that there are no costs to define or describe. It was looked at in great detail. However, given that the noble Lord has raised the issue twice, if I can produce further information to satisfy him, I will certainly do so in a letter.
The noble Lord, Lord Stevenson, also asked what else the Department for Business, Innovation and Skills is doing to promote employee ownership. There has been much discussion in the Chamber about this matter. BIS is developing a programme of work, overseen by my honourable friend in the other place, Jo Swinson, including developing model articles for employee ownership of companies. To respond to the question raised by the noble Lord, Lord Stevenson, about the tax implications, I can also confirm that work is ongoing on capital gains tax relief. I will be pleased to write to him with further details—in the same letter, I hope, rather than in a separate one. Further questions were raised and I will be more than delighted to round them up afterwards and be sure that there is a full response to the noble Lord, Lord Stevenson.
In conclusion, the Government state that these regulations meet the requirements of the Act and I commend them to the Committee.