Companies Act 2006 (Amendment of Part 18) Regulations 2015

Lord Young of Norwood Green Excerpts

Monday 9th February 2015 Grand Committee

[The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Baroness Neville-Rolfe) (Con)]

My Lords, these regulations propose small changes to legislation that will simplify company law in the area of buying back shares for private companies with employee ownership—a form of mutual in which a meaningful proportion of a company’s shares are owned by the employee. Examples of private companies with direct share ownership include the Arup Group, Mott MacDonald, Unipart, PA Consulting Group and the Childbase Partnership. The new regulations clarify the operation and accounting treatment of share buy-back procedures, which were first introduced in 2013, by addressing minor omissions in the original legislation.

The independent Nuttall review of July 2012 set out the economic and social benefits of employee ownership. The review identified three types of barrier to its growth: lack of awareness, lack of resources and legal barriers. I am pleased to say that all the review recommendations have now been addressed, and most of them implemented. For example, the Government have helped to raise awareness of employee ownership with active support for the UK’s Employee Ownership Day, held each year on 4 July. Last year, there were more than 100 events countrywide to celebrate and promote the benefits of employee ownership. I mention this because I know that noble Lords opposite have shown an interest in communication.

We have also worked with industry to produce model documents and guidance on employee ownership for employees, employers and their business advisers. Most importantly, the Government introduced new tax incentives for companies that wish to adopt indirect employee ownership, when shares are held in trust for the benefit of all employees. We believe that this will be of particular benefit to small and medium-sized enterprises grappling with succession planning, as these incentives make selling your company to your employees via a trust an attractive and viable option. The new tax provisions also introduced more generous allowances for employees of companies with employee benefit trusts that share their profits with employees—for example, the John Lewis Partnership.

Since the review in 2012, we have seen growing awareness of employee ownership. According to the Employee Ownership Association, the trade association for the sector, the number of employee-owned companies nationally is still increasing at an annual rate of 10%. One of the review’s specific recommendations was that legislative changes were needed to simplify procedures for buying back shares in employee-owned companies. Therefore, in 2013 changes were introduced that would improve the operation of internal share markets and support private companies with direct share ownership models.

I make it clear that today we are speaking about changes that allow private companies to buy back their shares more easily. Private companies that wish to encourage their employees to hold shares directly—that is, without the use of a trust—often seek to buy back shares from employees who exit the company to redistribute them to new employees. This allows the company to avoid the risk that, over time, shares earmarked for allocation to employees become predominately owned by former employees, or others outside the company.

Prior to 2013, companies were obliged to comply with a number of company law provisions that regulate this process. The legislation that we passed in 2013 streamlined it. However, our attention was drawn at a very late stage to a couple of small details within the legislation which lacked sufficient clarity. We were unable to make the necessary changes at the time but committed to addressing them in due course. The regulations presented for the Committee’s consideration today address these issues. In addition, we are taking the opportunity to present a further minor amendment to the 2013 legislation, which is also deregulatory.

It was found sufficient to consult informally on these changes. A formal consultation would have been disproportionate to their small scale and likely effect. However, a full post-implementation review of the substantive changes made in the 2013 regulations, as well as the amendments we are proposing today, will be carried out in 2016. This is in accordance with the commitment given in the impact assessment for the 2013 regulations.

I will not repeat the detail set out in the Explanatory Memorandum to the SI but I assure noble Lords that the new regulations ensure that the Government’s intention of improving the operation of internal share markets, started in 2013, can now be fully met. These proposals are purely enabling. They impose no costs to business and familiarisation costs will be minimal. Given the small, technical nature of the changes, it would have been disproportionate to try to explicitly quantify their likely costs and benefits. Nevertheless, the analysis provided in the impact assessment for the 2013 regulations, which also covers some of these amendments, indicated clearly that the policy overall is anticipated to result in a net reduction in the costs to business.

I hope that noble Lords will support these reforms, and I commend the regulations to the Committee.

[Lord Young of Norwood Green (Lab)]

There is a select group of noble Lords present today. We have no reason to oppose these regulations. I am happy to say that the Minister answered a question that I was going to ask, which was whether we have seen an increase in the number of companies. She pointed out that there had been an increase of 10% per year. I do not know what the distribution is in terms of SMEs and large companies. If the noble Baroness has that information, it would be interesting to know the breakdown.

The Minister referred to the internal share markets. I presume that we are not talking about things such as the Royal Mail share sale but that the regulations include companies like the John Lewis Partnership. I can see the need to buy back those shares to prevent a dilution of current employees owning shares in the company. Other than that one question, we are happy to give our assent to this statutory instrument.

[Baroness Neville-Rolfe]

My Lords, as always, we seem to have a good understanding of what will interest noble Lords on some of these regulations, and it is refreshing that we have largely been able to answer the questions which naturally arise when putting through an instrument of this kind. I can confirm that these regulations do not cover the Royal Mail. I do not have with me the breakdown of the figures for smaller and larger companies but I will obviously ensure that I get that to the noble Lord.

I think we can conclude that these regulations meet the requirements of the Act and I commend them to the Committee.