Employee ownership and share buy backs consultation: Response form

Transcription

1 Employee ownership and share buy backs consultation: Response form The Department may, in accordance with the Code of Practice on Access to Government Information, make available, on public request, individual responses. Name: Organisation (if applicable): The British Private Equity & Venture Capital Association (Legal & Technical Committee) Address: FAO Simon Horner The British Private Equity & Venture Capital Association 1st Floor North Brettenham House Lancaster Place London WC2E 7EN Telephone: Fax: Please return completed forms to: Darren Walcott Business Environment Directorate 1 Victoria Street London SW1H 0ET Or via employeeownership@bis.gsi.gov.uk Please tick a box below that best describes you as a respondent to this consultation: X Business representative organisation/trade body Central government Charity or social enterprise Individual Large business (over 250 staff)

2 Legal representative Local Government Medium business (50 to 250 staff) Micro business (up to 9 staff) Small business (10 to 49 staff) Trade union or staff association Other (please describe) Question 1 Do you agree that Company Law regulations on share buy backs and treasury shares can act as an impediment to further uptake of employee ownership? If so, to what extent? The appropriate incentivisation of employees of the companies in which our members invest is regarded as an essential part of their business model, and participation in the risk/rewards of the company via a shareholding forms a major part of this. Our members often seek to ensure that shares acquired through these arrangements are released by a departing employee (Leaver) in order that they may be made available to other employees, or a new employee, rather than being retained by the Leaver. In order to achieve this, buybacks are less frequently used. In general, we do not consider the current regulations are the most significant impediment to the use of buy backs so far as leveraged buyouts are concerned (in these structures restrictions on the deployment of the company s cash resources can often be a more substantial obstacle). However, in particular for non-leveraged companies (including companies backed by our members with venture capital), we agree that the current restrictions may to some extent restrict the options available when structuring Leaver arrangements. At present, our members usually employ one of three methods to recover and redistribute a Leaver's shares, each of which presents its own difficulties: The shares can be bought by a new joiner however, this can be problematic to coordinate; The shares can be acquired by the principal investor(s) and warehoused for future employees for a variety of reasons, this is rarely attractive to our members; The shares can be acquired by an employee benefit trust (EBT) and warehoused for future employees, with the EBT being funded by a loan from the company often resulting in significant set-up and on-going costs.

3 Question 2 What estimate do you make of the time or cost of complying with this regulation in your company/ the companies you represent; or of operating alternative arrangements such as an employee trust? There are often significant time and advisory costs involved in structuring suitable incentivisation arrangements for the employees of the companies in which our members invest, including mechanisms to recover and redistribute the shares of a Leaver. The establishment and operation of an EBT invariably requires significant advice from legal and tax professional advisers. The costs and time involved vary considerably, depending on the complexity of the structure and the differing needs of employees. These are often disproportionate where the EBT is being established principally to warehouse shares for future employees. Question 3 a) Do you agree that allowing private companies to arrange share buy backs should be subject to an ordinary resolution rather than a special resolution? b) Would this change simplify the authorisation process, help remove unnecessary costs, and make employee ownership easier to administer? We consider that, to some extent, it may simplify the authorisation process in companies that have a wide shareholder base by requiring less signatories in order to pass a written resolution. In a minority of cases, this could enable the written resolution to be passed more quickly, or avoid the delays associated with holding a general meeting. But in more closely held companies, we believe there will rarely be time or cost savings of any significance. Question 4 Do you agree that this proposal provides shareholders with adequate oversight and discretion over the activities of companies in the respect of share buy backs?

4 On balance, we anticipate that lowering the approval threshold would not cause a problem for our members. Subject to what is said in our reply to Question 5 below, we do not consider that it is necessary that a distinction is maintained between on and off-market purchases of shares. The legislation already provides that a resolution proposed to approve a buyback of shares must be passed without counting the votes attached to the shares being purchased (or in the case of a written resolution, any holder of shares which are to be purchased is not eligible to sign the resolution). There is therefore an independent check on the price paid for the shares. It also remains possible for the statutory controls to be supplemented by additional controls in relation to share capital, via shareholder agreements and/or articles of association. Question 5 a) Are there any potential issues or unintended consequences that could arise from implementing this proposal? b) Are there more effective alternatives? In its October 1999 consultation on capital maintenance the Company Law Review Steering Group recommended retaining stricter safeguards for shareholders in the case of off-market buy backs on the basis that there is no independent check on the reasonableness of the price. However, there are other examples within the Companies Act where the directors of a private company have considerable discretion when it comes to placing a value on the company's shares. For example, when issuing shares for non-cash consideration in a private company, statute does not require an independent check on the reasonableness of the directors assessment of the value of the asset acquired. In addition, as described in the BIS consultation paper, other safeguards exist, including directors duties and the ability of shareholders to impose tighter controls than those provided by law. In addition to these, there are statutory provisions designed to protect the position of minority shareholders. Our members invariably seek to put in place controls that are more convenient to administer in relation to the companies in which they invest, so we do not consider that this proposal is likely to cause them a problem if implemented.

5 Question 6 What estimate do you make of the time or cost of complying with this regulation in your company/ the companies you represent, or of operating alternative arrangements such as an employee trust? We do not think these are likely to be significant, other than perhaps the marginal time savings referred to in our response to Question 3. In relation to employee benefit trusts, please see our response to Question 2. Question 7 Do you agree that payments by instalments are? a) a useful flexibility for companies and shareholders b) an acceptable risk for general creditors c) an acceptable risk for selling shareholders In general, we are in favour of steps that broaden the range of options available when structuring employee incentivisation arrangements, which can then be limited by the imposition of more convenient shareholder controls, if desirable. Given that companies can enter into a wide variety of transactions involving payment by instalments, we do not consider this would impose unacceptable risks for general creditors. As with any transaction, the usual protections would be available in the form of directors duties and requirements for proper disclosure in the company s accounts. So far as risks to the selling shareholder are concerned, we view the choice as to whether payment is made on purchase or in instalments as being a matter for negotiation between the company and the seller, rather than needing to be prescribed by statute.

6 Question 8 a) Do you agree that the maximum time period over which payments may be made should be solely a matter of negotiation between the buying company and the selling shareholder? b) Or should a maximum time period be specified in statute? We consider that there is an argument for leaving the maximum time period over which payments can be made for the buying company and the selling shareholder to negotiate. We think this view is supported by the provisions of the Companies Act in relation to redeemable shares, which allow the directors of a private company to determine the terms of redemption of redeemable shares before the shares are allotted if authorised by ordinary resolution (section 685). The amount payable on redemption may then, by agreement between the company and the shareholder, be paid on a date later than the redemption date (section 686). As the legislation does not impose a long stop date for payment of the redemption amount, we consider that it would be acceptable if equivalent flexibility was available for buy backs paid for in instalments. Question 9 Are the current financing restrictions an unreasonable limitation to companies seeking to buy back shares for the purposes of an employee share scheme? We are in favour of examining alternative methods of financing employee share schemes, although we note that the current restrictions are derived from the principles of capital maintenance enshrined in English law. Changes introduced for the purposes of facilitating employee ownership may therefore need to strike a balance between the removal/lessening of the current procedural hurdles that exist for buy backs out of capital/reductions of capital and the need to provide for the protection of creditors.

7 Question 10 Do you agree that the current restrictions be removed without issues or unintended consequences for the remaining shareholders? The introduction of provisions designed to ease the current restrictions on financing buy backs may impact on shareholders where it involves a return of capital. Other provisions of the Companies Act that involve a return of capital invariably require shareholder approval by special resolution, together with additional procedural steps. As with the protection of creditors, the removal/lessening of these procedural hurdles for the purposes of facilitating employee share ownership would have to be balanced with the need to ensure shareholders are protected. However, statutory protections are generally of less significance to our members given that they usually impose their own bespoke controls. Question 11 Do you agree that private companies should be able to hold shares in treasury? We would welcome this measure. Although a buy back of shares into treasury requires distributable reserves (subject to any new financing options introduced), the ability of a company to restore the distributable reserves deployed in a buy back by subsequently selling the shares out of treasury could be advantageous for employee share schemes. In addition, surplus treasury shares can be cancelled or sold, whereas surplus shares in an EBT must be used for the benefit of the EBT s beneficiaries. We are not aware that the ability of private companies to buy back and hold shares in treasury creates difficulties in the other 17 European member states, where this is possible. We can see no reason why unlisted public companies should not be able to benefit from the new flexibility too. Without this flexibility, the requirement for any treasury shares to be cancelled or disposed of before a private company is re-registered as a public company could be frustrating, particularly where this occurs in preparation for an IPO, and there is a short gap between the company being re-registered and its shares listed. Question 12 If you agree that it would be helpful for private companies seeking to administer employee ownership to have an ability to hold shares in treasury, can you estimate the extent of this benefit?

8 It is difficult to estimate, but, particularly when coupled with the other measures suggested in the consultation paper, we consider the use of treasury shares could to some extent facilitate employee share ownership structures, and in particular, there could be cost savings where it becomes unnecessary to establish an EBT as a result. Question 13 Do you agree that shareholders will have sufficient oversight over private companies if they are able to hold shares in treasury? We do not believe that the ability to hold shares in treasury need give rise to significant additional concerns for private company shareholders compared to listed company shareholders. Where there are concerns, it would be open to shareholders to impose bespoke controls via a shareholder agreement or provisions in the company s articles. How useful has this consultation been? On a scale of 1 to 5, 5 being the highest, grade your overall approval of the consultation Right problems identified Range of options wide enough Preferred options well chosen X X X

9 Do you have any other comments that might aid the consultation process as a whole? Please use this space for any general comments that you may have, comments on the layout of this consultation would also be welcomed. Thank you for taking the time to let us have your views. We do not intend to acknowledge receipt of individual responses unless you tick the box below. Please acknowledge this reply At BIS we carry out our research on many different topics and consultations. As your views are valuable to us, would it be okay if we were to contact you again from time to time either for research or to send through consultation documents? Yes No

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