Bar Council response to the Employee Ownership and Share Buy Backs Implementation of Nuttall Review Recommendations consultation paper

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1 Bar Council response to the Employee Ownership and Share Buy Backs Implementation of Nuttall Review Recommendations consultation paper 1. The General Council of the Bar of England and Wales (the Bar Council) welcomes the opportunity to respond to BIS consultation paper entitled Employee Ownership and Share Buy Backs Implementation of Nuttall Review Recommendations The Bar Council is the governing body and the Approved Regulator for all barristers in England and Wales. It represents and, through the independent Bar Standards Board (BSB), regulates over 15,000 barristers in self employed and employed practice. Its principal objectives are to ensure access to justice on terms that are fair to the public and practitioners; to represent the Bar as a modern and forward looking profession which seeks to maintain and improve the quality and standard of high quality specialist advocacy and advisory services to all clients, based upon the highest standards of ethics, equality and diversity; and to work for the efficient and cost effective administration of justice. 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? Comments: No. The further uptake of employee share ownership is more significantly impeded by a lack of appreciation of how this might be done and the concerns of existing shareholders over the possible loss of control. We anticipate that any successful attempt to expand employee share ownership will require existing shareholders/investors to be (or become) comfortable that employee shareholders are not, as shareholders, subject to less investment risk or a different regime from those existing shareholders/investors. 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? Comments: We have no available data to answer this question. 1 [BIS] [(2012)] Employee Ownership and Share Buy Backs Implementation of Nuttall Review Recommendations]

2 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? Comments: In the context of private limited companies, where nearly all shares are likely to be held amongst a relatively small number of shareholders, there is likely to be no significant additional cost associated with securing a special resolution, as opposed to an ordinary resolution (especially given the ready availability of the written resolution procedure). Question 4 Do you agree that this proposal provide shareholders with adequate oversight and discretion over the activities of companies in the respect of share buy backs? Comments: We consider that the majority required for a special resolution is appropriate given the likely significance of the share buy back decision to a private limited company. Question 5 a) Are there any potential issues or unintended consequences that could arise from implementing this proposal? b) Are there more effective alternatives? Comments: The process for an own share buy back and the process for approving a reduction of capital (Part 17, Chapter 10 of the Companies Act 2006) can be used to achieve a similar commercial end. It would seem anachronistic that significantly different regimes should exist as between these closely related areas. Our view is that there should be no alteration of the majority required to effect an own share buy back.

3 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? Comments: We have no available data to answer this question. 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 Comments: From the perspective of a departing employee, it is unlikely to be attractive to receive a commitment to pay monies at some future date(s), especially in the context of a company in which they will then have no other involvement. They may well find that any entitlement to future monies is affected in the event of the company s subsequent insolvency (note the terms of Section 735(4) (6) of the Companies Act 2006). From the perspective of general creditors, companies and remaining shareholders, the current obligation to pay for shares in full on purchase represents a clear and definable obligation that can be readily appreciated (and which needs to be dealt with if the buy back is to be lawfully undertaken). In relation to the proposal, there would be an inevitable concern that the company s future prospects were hampered both by a need to make future provision for sums that were unpaid to a former employee shareholder or, from the perspective of general creditors, a risk that a period of subsequent loss making activities by the company concerned might mean that payments to a departing shareholder were then being made out of funds that ought more properly to remain available to satisfy creditor claims. 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?

4 b) Or should a maximum time period be specified in statute? Comments: As noted in the response to Q.7 above, we consider that this proposal is unlikely to be desirable in any event. Those concerns are simply exacerbated if there is some lengthy or undefined period over which payments by instalment can be made. So far as it concerns the principle of purchasing shares by instalment it is already an established (and legitimate) practice for private companies to purchase, over time, a parcel of shares from a particular shareholder authorising each such arrangement appropriately and paying the purchase price for each lot in full upon completion. 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? Comments: Requiring any share purchase price to be paid in cash provides a simple and easily appreciated obligation on the part of the company. Allowing the transfer of other assets in partial or total satisfaction of an obligation to pay a particular price may involve complicated issues of valuation that would risk potential prejudice, depending on the facts, to the departing employee shareholder, other shareholders or even creditors of the company. Question 10 Do you agree that the current restrictions be removed without issues or unintended consequences for the remaining shareholders? Comments: See Comments to Q.9 above. Question 11 Do you agree that private companies should be able to hold shares in treasury? Comments: We do not consider that this is desirable. The issue of new shares by private companies is not a particularly complicated matter nor likely to be a particularly frequent event. We do not consider that the process of cancelling shares and then issuing new shares involves any meaningful cost or burden for private companies. In contrast, such costs and

5 burden are a legitimate concern to listed companies where, but for the ability to hold shares in treasury, they might incur costs in seeking to have new shares admitted to the market. 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? Comments: See Comments to Q.11 above. Question 13 Do you agree that shareholders will have sufficient oversight over private companies if they are able to hold shares in treasury? Comments: We anticipate that it may well be undesirable for the directors of a private company to have under their control an (as yet undefined) proportion of shares that may be issued by them without further reference to pre existing shareholders in the company concerned. Such a prospect is only likely to operate as a considerable deterrent to shareholders being prepared to agree to an expansion in employee share ownership. 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 Comments: 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.

6 The 17 day period for consultation is far too short and is unlikely to assist in achieving a proper input into these proposals. The problems perceived by the Nuttall Review appear to us to be ones that are more apparent than real and the recommendations of the Review may well fail to achieve the suggested benefit of expanding employee share ownership. A longer consultation period would allow an opportunity for wider consideration of the perceived problems and the likely effect of these proposals. 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 Bar Council [November 2012] For further information please contact Jan Bye, Head of Professional Affairs The General Council of the Bar of England and Wales High Holborn, London WC1V 7HZ Direct line: JBye@BarCouncil.org.uk