HL Deb 06 July 1988 vol 499 cc280-98

4.47 p.m.

Consideration of amendments on Report resumed.

Lord Morton of Shuna moved Amendment No. 2: After Clause 3. insert the following new clause:

("Articles of Association of British Steel plc.

. The Articles of Association of the successor company shall be as set out in Schedule (Articles of Association of British Steel plc) while the Company is wholly owned by the Crown. and thereafter until altered under the provision of section 9 of the Companies Act 1985").

The noble Lord said: My Lords, in moving Amendment No. 2, I shall speak also to Amendments Nos. 8 to 15.

Amendment No. 2 is to state after Clause 3 that the articles of association should be printed in the schedule. Amendment No. 8 concerns the articles made available by the Government and lodged in the Library of the House. Amendments Nos. 9 to 15 are amendments to the articles suggested by my noble friend Lord Williams of Elvel. Perhaps I may leave aside any question of commenting on his amendments to the articles until he has moved them.

In principle, the articles should be in the Bill. Without the articles of association Parliament does not know what it is doing. It is a criticism of the way that the Bill has been presented, I think, that it has been through both Houses and reached this stage before we have had a chance to see the articles of association proposed by the Government. The noble Lord, Lord Beaverbrook. no doubt recollects that he had a slightly uncomfortable time in the absence of the articles when we discussed the position in Committee. The Committee made it clear that it was essential for the articles to be made available.

In the discussion on Amendment No. 1, reference was made to promises and assurances being given in the prospectus. With such knowledge of the law as I have, I am of the view that whatever is put in a prospectus does not hind the purchasers of the shares. If one wishes a matter to have any binding force at all it has to be in the articles of association. Therefore one hopes that the assurances given by the Government as regards Scotland and Ravenscraig will appear in the articles when they come forward. No doubt the Minister will give that assurance.

The fact that the articles should be in the Bill is obvious, because when they are just sitting in the Library of the House the Government can change them at any time before bringing the Bill into force. Therefore, we do not know in this House or in another place what it is that the Government are bringing into effect. I fully accept that in the matter of detail the Government may consider it necessary to amend the articles of association before they put the Bill into effect and create this company wholly owned by the Crown. If that is the position I would have no objection to the Government putting forward an amendment giving themselves power by order to make alterations to the articles of association provided that Parliament has a chance to discuss them. That would seem to be the way to deal with the matter.

I suggest that the articles should be part of the statute as long as the company is wholly owned by the Crown. Without that, we do not know on what basis the company is to be privatised. Amendment No. 2 allows the customary power to shareholders to amend the articles by special resolution. That is the reference to Section 9 of the Companies Act. In those circumstances and without boring your Lordships by reading through the short Amendment No. 8, I move Amendment No. 2.

Lord Williams of Elvel

My Lords, the House will be grateful to my noble friend for moving this amendment. It will be more grateful to him that he has not sought to read out the whole of his amendment; otherwise we might have been here well into the early hours of tomorrow morning. I follow my noble friend in speaking to Amendment No. 2 and Amendments Nos. 8 to 15. These amendments and the amendments I have tabled to my noble friend's amendment, allow us for the first time to duscuss what I regard as being the guts of this Bill. As your Lordships may recall, at Second Reading I said that without the articles of association we could not engage in a proper discussion about what the successor company was meant to be doing.

I repeated that assertion when your Lordships were in Committee on this Bill and a number of noble Lords were kind enough to support that. I am grateful to noble Lords opposite because, as a result, last Friday, 1st July I received from the noble Lord, Lord Beaverbrook, a copy of the draft articles which he, as my noble friend said, placed in the Library. I wholly support my noble friend's thesis as regards the main amendment he is moving, that unless the articles of association of the successor company are in the Bill itself, the Government can change their mind at any time between when the Bill is enacted and the time of vesting.

As we at present have it, Parliament has no right at all to comment upon any change of mind that the Government may have. Of course there is a let-out in my noble friend's Amendment No. 2 once the successor company has ceased to be wholly owned by the Crown. It is then quite proper that the shareholders of the company, as they then will be, should be able to pronounce upon any changes in those articles by the normal resolutions under the Companies Act in the manner of shareholders in any public limited company. On the main amendment that my noble friend is moving, he has our wholehearted support.

Your Lordships will see that Amendment No. 8 is a long schedule. In addition to what my noble friend said, I merely add that these are the draft articles produced by the Government. These are not articles drafted by my noble friend Lord Morton of Shuna, skilled as he is in drafting company articles. As I understand from the noble Lord, Lord Beaverbrook, at early stages of the Bill they have been the subject of intense discussion between government lawyers and those of the British Steel Corporation.

In Amendment No. 8 your Lordships have before you today the product of the work of those legal experts. Clearly it will need to be cleaned up before the Bill is enacted. There is a device which lawyers frequently use and it is a perfectly sensible one; that is to have square brackets where the text is not yet finally certain. When the time comes, the square brackets have to be removed and a text, with certainty, has to be produced.

The amendments that I move to my noble friend's amendment are of a more serious nature. I wish to introduce to your Lordships some sub-groupings, because I am speaking to the whole range of amendments. My Amendments Nos. 9 and 10, which your Lordships will find on the last page of this rather long Marshalled List, I shall speak to as one sub-grouping. My Amendments Nos. 11, 12, and 13 I shall speak to next. Amendment No. 14 I shall speak to after that and then to Amendment No. 15.

Amendments Nos. 9 and 10 seek to bring the articles of association of the successor company into line with what I understand to be the stated view of the Government. It was stated by Mr. Kenneth Clarke in a press release dated 17th May 1988 and, though the wording is not quite the same as the press release, it was confirmed in a Written Answer which he gave to a Member of another place. The press release states: The Government will hold the "Special Share" for five years from privatization". I remind your Lordships that this is the first occasion upon which we have the real text of the special share provision. In his Written Answer to a Member of another place, the Chancellor of the Duchy of Lancaster said: It is the Government's intention that these arrangements would last for live years from the date of privatization".—[Official Report, Commons, 17/5/88: cols. 383–4.] Perhaps I may refer your Lordships to page 5(E) of the Marshalled List. I shall read out the text for your convenience: The Special Share may be redeemed at par at any time prior to 31st December, 1993 by agreement between the board and the Special Shareholder". This seems to introduce a new concept which Mr. Kenneth Clarke failed to put before the public and before a Member of another place in his reply on 17th May. Either the Government will hold the special share for five years or they may well, with agreement between themselves and the board of directors of the successor company, have that share redeemed. Those two propositions are not consistent one with another.

Under the articles as we have them in my noble friend's amendment, the special share will allow the Secretary of State—I do not mean the Secretary of State in person because I am sure he is an honourable man, but any other Secretary of State to go to the board of the company straight after vesting, and say, "Do we now agree that the golden special share will he redeemed?" If the board and the Secretary of State agree, under the provisions of the articles as we have them the golden share will be redeemed. As I understand it, that is not what Mr. Kenneth Clarke meant when he said: It is the Government's intention that these arrangements would last for live years from the date of privatisation". So my first two amendments, Amendments Nos. 9 and 10, are designed purely to bring the articles of association that we have in front of us into line with what is the Government's stated intention. If the articles are wrong, and if it is not the Government's stated intention to hold this special share for five years, I think your Lordships would wish to know that from the noble Lord the Secretary of State today. If the stated intention is to hold the share for five years, I think your Lordships will agree that my amendments to the articles of association, Amendments Nos. 9 and 10, will be easily acceptable to the Secretary of State as they simply embody what the Government have apparently said.

To date I have simply concentrated on Amendments Nos. 9 and 10 which seek to bring the articles into line with what I believe the Government, if they are not seriously misleading us, have said. I move now to Amendments Nos. 11, 12 and 13. It is an odd proposition that the date on which the special share is to be redeemed should be fixed in time. It is perfectly clear from the way things work that if the articles of association of the company say that on 31st December 1993 the special share will be redeemed, at that point, Article 46, to which I shall come in a moment, falls and at that point the company is available for acquisition by any third party without the protection of the special share and consequential Article 46. That I understand is the intention of the Government.

To put a firm date on this seems to be quite absurd. If there is a date of 31st December 1993 beyond which the ball game is open, any operator will try, prior to 31st December 1993, to accumulate 14.9 per cent. of the company and he will then be in a position to put the company in play as it is known in current jargon. He will have a large shareholding at that point, and when the special share is redeemed he can use that shareholdiong to bargain his way into a takeover. It is a common practice, alas, nowadays, and it would be wrong for your Lordships to ignore it.

The purpose of Amendments Nos. 11, 12 and 13 is not only to ensure that there is a definite five years during which the Government will hold the golden share, but also to ensure that thereafter the redemption of the golden share should be not on a definite date but by agreement between the board and the special shareholder. If the special shareholder and the board agree that an acquisition is desirable in certain interests—we do not know what they will be—the special share can be redeemed and consequential arrangements made.

Amendment No. 14 seeks to provide that, even after the special share is redeemed, Article 46, which prevents any individual shareholder from getting more than 15 per cent. of the company, should continue to operate. I have not moved a consequential deletion of paragraph 46(S) on page 22 of the Marshalled List as I do not want to weary your Lordships with too many amendments. We propose that even though the golden share may be redeemed the company should still have the right to activate Article 46. Only if the shareholders decide through a special resolution, which is defined in Section 378 of the Companies Act, to delete Article 46—in other words, 75 per cent. of the shareholders decide that that is the right thing to do—can an acquisition take place.

We have had many debates in the House about the devices used by various companies—in the United Kingdom, Switzerland, the United States and so on—to ensure that if an acquisition is to be made it is made in proper circumstances and with the proper approval of shareholders. I do not seek in the amendments to defy that. I simply say that if British Steel plc's successor company is to be taken over, it should be taken over with the consent of 75 per cent. of its shareholders. That is the thrust of Amendment No. 14.

Amendment No. 15 is a simple one. It seeks to determine that it is the Secretary of State while he is the special shareholder who is reponsible for finding out all the information rather than the board of the company. If the Government are to hold a golden share in the company it is up to them to find out, on the advice of the board and using all the possibilities outlined in the article, who is doing what in terms of concert parties and so on. It should not be left to the board of the company while the Secretary of State is still the special shareholder. After he ceases to be the special shareholder, it will be for the board of the company to take on that responsibility. That is the object of Amendment No. 15.

I have taken this time because, as I said at the outset, this is the first opportunity we have had to debate the golden share, the consequences that flow from its redemption and the abolition of Article 46, which prevents a takeover by a company without the procedures that are triggered by the articles. I hope your Lordships will recognise that I have been moderate in what I have said. I have not tried to introduce new ideas about how the goldern share might operate. At such a late stage in the Bill it is not appropriate for the Opposition to bring forward ideas other than those which are consistent with what the Government are trying to say. I rest my case on Amendments Nos. 9 and 10, which seek to bring the Government into line with what Mr. Kenneth Clarke said on 17th May. I ask the Secretary of State to accept Amendmnts Nos. 9 and 10 in order to avoid the possibility that the Government could been to be misleading Parliament.

Lord Hughes

My Lords, I am certain that what I am about to say will not in any way divert the attention of the Secretary of State from the admirable remarks of my noble friends Lord Morton of Shuna and Lord Williams of Elvel. During the discussion on the previous amendment I spoke about the profits of the British Steel Corporation being in excess of £400 million. I added that a substantial part of those profits came from disposing of assets in the same way as the Government have been doing. The Secretary of State did not contradict me other than to shake his head.

The shake of his head caused me to look again at today's Evening Standard. I find that I was wrong. I was quoting not from the profit statement of British Steel but from that of British Rail. I therefore wish to take this opportunity to correct a misleading statement and hope that nothing else I said fell into that category.

Lord Ezra

My Lords, the amendment moved by the noble Lord, Lord Morton of Shuna, and supported by the noble Lord, Lord Williams of Elvel, raises some very important issues. The noble Lord, Lord Morton of Shuna, said that so long as the company remains in the ownership of the Government the articles—that is, the conditions under which the company should operate—should form part of the Bill. As he pointed out, there is a risk that if that is not so, then we could be passing a Bill which could become law, and the articles (which lay down the basis upon which the company should operate) could be altered at will. We are entitled to know precisely what the basis is upon which the company should operate so long as it is owned by the Crown. Therefore. I fully support the first contention.

I also support what the noble Lord, Lord Williams, said about the special share. The position as regards the special share should be much clearer than it is. The fact that there is a special share, but that that special share could be done away with at will at any time seems to me to negate the whole principle. The noble Lord, Lord Williams, in his inimitable style, presented some most cogent arguments whereby we should be much clearer about the status and importance of the special share. It cannot be something which is introduced on the one hand and then is capable of being abrogated, at will, on the other hand, so that we would not know where we stand. Thus, on those two issues, I fully support the amendment which has been put forward.

5.15 p.m.

The Secretary of State for Trade and Industry (Lord Young of Graffham)

My Lords, I am most grateful to the noble Lord, Lord Morton of Shuna, for introducing these amendments. However, I fear that I shall have cause to correct the noble Lord on just one point which I am sure he will regard as merely a point of detail. Careful perusal of Hansard shows that during the Committee stage on the Bill in your Lordships' House there were many who requested that the articles be produced. However, from the record, the amendment was put to the vote and subsequently lost. Nevertheless, I still felt that since there were one or two noble Lords who wished to see the articles that we should have an opportunity to examine them today.

I must start by pointing out that the articles which have been provided are in draft form and will of course he subject to change. They have been drawn up by the corporation and its legal advisers, in consultation with my department. With the exception of Articles 5 and 46, which deal with the special share and the limit on shareholdings, the articles are intended to be similar to those of any other large private sector company. Further, I am given to understand that they reflect the best private sector practice of the day.

Articles 5 and 46 are intended to implement the arrangements announced by my right honourable friend the Chancellor of the Duchy of Lancaster in another place on 17th May, to which the noble Lord, Lord Williams of Elvel, referred. Article 46 restricts individual shareholdings in the company to a maximum of 15 per cent. of the equity. That provision is protected by the special share in the company that will be held by the Government under the terms of Article 5. The drafting of these articles is based on the precedent of similar articles used in the case of other privatised companies such as the British Airports Authority.

Before turning to the detailed points made in this debate about the articles (and in particular about the terms of the special share), I should like to respond briefly to the amendment that has led to this debate. The amendment would have the articles of association set out in a schedule to the Bill until after privatisation has taken place. I have to say that that would be unacceptable to the Government. As I have said, the articles at this stage are only a draft. They have for example yet to be submitted to the Stock Exchange for approval prior to the admission of British Steel shares to the official list. It would be an unnecessarily time-consuming and cumbersome procedure if every amendment to the articles had to be cleared by Parliament in the run up to privatisation and could, at an extreme case, lead to privatisation itself being delayed. For the most part, the articles are uncontroversial, and largely a matter for British Steel—and, ultimately, its shareholders. So far as the articles dealing with the special share are concerned, to which I shall turn in a moment, our policy is very clearly on the record, and I believe is reflected in the current draft of the articles.

The noble Lord, Lord Williams, has tabled a number of amendments to the two draft articles that contain the provisions relating to the special share and the limitation on shareholdings. The amendments are largely concerned with the five year time limit placed on the two articles. They would result in the special share and the limitation of shareholdings continuing indefinitely, unless the board of the company consented to the special share being redeemed.

So in considering these amendments, I should like to start by reminding the House that these particular articles place certain rules on the operation of the company which do not in general apply to companies operating in the private sector. Such special rules may, on occasion, be justified, and have been applied, on a case-by-case basis, in a number of previous privatisations. But they should not be imposed lightly. The purpose of privatisation is to put the company on all fours with other private sector companies so far as possible. It would be quite wrong in principle for the Government to retain powers for itself over privatised companies without very good reason, merely because there was the opportunity to impose such rules prior to privatisation.

As my noble friend Lord Beaverbrook explained during the debate on this issue in Committee, the Government consider that mergers and acquisitions can exert a beneficial effect, and are inevitable in a competitive economy. Unless the possibility of takeover existed, a company's management could become complacent and inefficient. We recognise that the transition of a nationalised industry to the private sector imposes heavy burdens on management in the early years. That is why we have put in place the time-limited anti-takeover provisions that are being debated today. We do not, however, consider that there is any reason to afford the company indefinite protection from takeover. We judge that five years is adequate. Beyond that time, it should be a matter for the shareholders of the company to judge the merits of any takeover proposal, bearing in mind the performance of the existing management.

I turn now to Amendments Nos. 9 and 10 which are tabled in the name of the noble Lord, Lord Williams of Elvel. The provision that the share may be redeemed early is subject, as the articles state, to the agreement of the Government and the board of the company. The Government's present intention is, as stated, that the special share will remain for five years from the date of privatisation. It is, however, desirable to retain a degree of flexibility in the matter. The board of the successor company may at some time consider it desirable before the end of the five-year period for the special share to be redeemed. For example, to take a fanciful—

Lord Williams of Elvel

My Lords, I am sorry to interrupt the noble Lord. However, how does he square what he is saying now with the detailed press release, which says: The Government will hold the "Special Share" for five years from privatisation"?

Lord Young of Graffham

Very simply, my Lords. What we are saying is that the Government will hold the special share from privatisation. All we are doing is giving a certain amount of flexibility if the board deems it desirable to allow—if the noble Lord will permit me to finish the point—a shareholder to hold more than 15 per cent. of the shares. What we want it a flexible future wealth and not an inflexible future wealth. For example, it is quite possible—I presume—as the Government is the holder of the golden share to consent to any takeover within the five-year period; it is not an inviolate bar. That will allow the situation to take place at the request of the board. I believe that that is surely something which all Members of your Lordships' House would accept is a sensible and prudent arrangement in order to allow flexibility for the board of the newly-privatised company—should they so wish it—within the first five years.

As regards the other amendments tabled in the name of the noble Lord, Lord Williams of Elvel; namely, Amendments Nos. 11, 12 and 13, of course the date of 31st December 1993 does give any predator the opportunity to build up a holding—should there be such a predator. But the noble Lord, Lord Williams of Elvel, has little confidence in the management of the newly-privatised company always to assume that there are predators about. However, surely any predator can take the date of privatisation, add five to the number of the year, and work out when that five-year period will expire. It will make little difference if we set a certain date in the Bill or if we set five years as being five years from the date of privatisation, assuming of course that there is privatisation within a reasonable period after 1st December 1988.

Lord Williams of Elvel

My Lords, I apologise if I am contravening the rules of Report, but I hope that the noble Lord understands that this is the first time we have had a debate and if I resort slightly to Committee procedures I hope that he will forgive me. Amendments Nos. 11, 12 and 13 are designed to remove that five-year fixed date. It is five years definite and after that it is optional. There is no fixed date before which there could be a removal of the special share.

Lord Young of Graffham

My Lords, I am grateful for the explanation given by the noble Lord, Lord Williams. It removes my final doubt that Amendments Nos. 11, 12 and 13 should be resisted. We have clearly given a five-year period for the board to mark the transition from the public sector to the private sector. After that, it is in the interests of the company and the shareholders to ensure that the possibility of take-over exists for fear, as I have already said, that any company's management in protected circumstances could be complacent or inefficient.

I fear that the noble Lord has related Amendment No. 15 to the wrong definition. He may have intended to relate it to the definition of "a relevant person" on the following page. That is properly a matter for the directors of the company who hold the share register; it is not an issue for the Government. I shall have a more detailed look at that point and write to the noble Lord. I will have a copy of the letter placed in the Library. If the noble Lord wishes to continue with that point and fails to agree with our version, I am sure that we can consider it again.

I hope that in the light of all my comments the noble Lord will withdraw his amendment. If not, I fear that I shall have to ask the House to resist it.

Lord Morton of Shuna

My Lords, it may come as little surprise to your Lordships if I say that I found the amendments tabled by my noble friend Lord Williams to my Amendment No. 8 convincing and that I am minded to accept them.

It is also perhaps of little surprise that I find the Secretary of State's answers wholly unconvincing. I confess that I remain utterly astonished that Parliament agreed to discuss the Bill right through to this stage without seeing the articles of association. It is clear that Parliament was being asked to buy-in a pig in a poke, carefully wrapped up and tied in its sack, and that the Government were determined that we should not see what was happening.

Now that we have the articles of association, the Government resist the idea of putting them into the Bill so that they can alter them at will. I confess that I find it difficult to understand how, if the Government insist that they will hold a special share for five years, they take power in the articles of association to sell it within 12 hours of the company's formation, which is precisely what 5e of the articles of association does.

The Secretary of State made a valiant attempt to persuade the House that black was white and white was black, and failed utterly. In addition, from the discussion on a previous amendment, it seems that the articles are where the references to the assurances that the Government have given as to Scotland and the obligations to take account of the effect of the steel industry on the economy of Scotland should be place. They are not there. We have had assurances that they will be in the prospectus. I fail to see that the prospectus will bind the shareholders. Without going into Guinness or any of the other undertakings that may have been given, the only way to give effect to those assurances is to put them into the articles of association.

I repeat the submission I made to the House earlier: the articles should be part of the statute so long as the company is owned by the Crown. Nothing that we have heard in any way alters the position I attempted to put, and I press the amendment.

5.25 p.m.

On Question, Whether the said amendment (No. 2) shall be agreed to?

Their Lordships divided: Contents, 88; Not-Contents, 115.

Airedale, L. Hatch of Lusby. L.
Amherst, E. Houghton of Sowerby, L.
Ardwick, L. Howie of Troon, L
Barnett, L. Hughes, L.
Bleasc. L. Irvine of Lairg, L.
Bonham-Carter, L. Jacques, L.
Boston of Faversham, L. Jay, L.
Bottomley, L. Jeger, B.
Broadbridge, L. Jenkins of Hillhead, L.
Bruce of Donington, L. Jenkins of Putney, L.
Carmichael of Kelvingrove, L. John-Mackie, L.
Carter, L. Kagan, L.
Chitnis, L. Kennet, L.
Cledwyn of Penrhos, L. Kilbracken, L.
Davies of Penrhys, L. Kirkhill, L.
Dean of Beswick, L. Leatherland, L.
Donaldson of Kingsbridge. L. Listowel, E.
Dormand of Easington, L. Lovell-Davis, L.
Elwyn-Jones, L. McIntosh of Haringey, L.
Ewart-Biggs, B. Mackie of Benshie, L.
Ezra, L. McNair, L.
Falkender, B. Mason of Barnsley, L.
Falkland, V, Meston, L.
Gallachcr, L. Molloy, L.
Galpern, L. Morton of Shuna. L.
Gladwyn, L. Mulley, L.
Graham of Edmonton, L.[Teller] Nicol, B. [Teller.]
Oram, L.
Grimond, L. Parry, L.
Hampton, L. Perry of Walton, L.
Hanworth, V. Peston, L.
Harris of Greenwich, L. Pitt of Hampstead. L.
Ponsonby of Shulbrede. L. Taylor of Gryfe., L.
Prys-Davies, L. Taylor of Mansfield, L.
Raglan, L. Underhill. L.
Rea, L. Wallace of Coslany. L.
Robson of Kiddington, B. Wedderburn of Charlton. L.
Rochester, L. Wells-Pestell, L.
Sefton of Garston. L. Whaddon. L.
Scrota, B. White. B.
Shackleton, L. Williams of Elvel, L.
Shepherd. L. Willis, L.
Stedman, B. Winchilsea and Nottingham. E.
Stewart of Fulham, L.
Stoddart of Swindon. L. Winterbottom, L.
Abinger, L. Macleod of Borve. B.
Alport, L. Malmesbury, E.
Ampthill, L. Mancroft, L.
Arran. E. Margadale. L.
Astor. V. Marley, L.
Auckland, L. Marsh. L.
Beaverbrook, L. Merrivale, L.
Belhaven and Stenton, L. Mersey, V.
Belstead, L. Middleton, L.
Blatch, B. Montgomery of Alamein. V.
Blyth, L. Mottistone, L.
Bolton, L. Mowbray and Stourton. L.
Borthwick, L. Moyne. L.
Brahazon of Tara. L. Murton of Lindisfarne, L.
Brougham and Vaux, L. Newall, L.
Buxton of Alsa, L. Norfolk, D.
Caccia, L. Norrie. L.
Caithness, E. Orkney. E.
Campbell of Croy, L. Orr-Ewing, L.
Carnegy of Lour, B. Pender, L.
Carnock, L. Pennock. L.
Chelwood, L. Platt of Writtle, B.
Clitheroe, L. Plummer of St. Marylebone, L.
Coleraine, L.
Colwyn, L. Portland, D.
Cornwallis, L. Rankeillour, L.
Cox, B. Reay. L.
Craigavon, V. Rippon of Hexham, L.
Cross, V. Rodney, L.
Davidson, V. [Teller.] Russell of Liverpool. L.
Denham, L. [Teller.] Saint Brides. L.
Derwent, L. St. Davids, V.
Elliot of Harwood, B. Sanderson of Bowden, L.
Elliott of Morpeth, L. Selkirk, E.
Faithfull, B. Skelmersdale, L.
Fanshawe of Richmond, L. Slim, V.
Fencers, E. Somers, L.
Gardner of Parkes, B. Stodart of Leaston, L.
Glenarthur, L. Strange. B.
Gray of Contin, L. Strathcona and Mount Royal, L.
Gridley, L.
Hardinge of Penshurst, L. Sudeley, L.
Havers, L. Swansea, L.
Hayter, L. Swinfen, L.
Hesketh, L. Swinton. E.
Hives, L. Terrington, L.
Holderness, L. Thomas of Gwydir. L.
Hunter of' Newington, L. Thurlow, L.
Hylton-Foster, B. Trafford, L.
Johnston of Rockport, L. Ullswater, V.
Kaberry of Adel, L. Vaux of Harrowden. L.
Killearn, L. Wedgwood, L.
Kinloss, Ly. Westbury, L.
Lauderdale, E. Wise, L.
Lawrence, L. Yarborough, E.
Layton. L. Young, B.
Long, V. Young of Graffham, L.
Luke, L. Zouche of Haryngworth, L.
McAlpine of Moffat, L.

Resolved in the negative, and amendment disagreed to accordingly.

5.33 p.m.

Clause 6 [Target investment limit,for Government shareholding]:

Lord Williams of Elvel moved Amendment No. 3: Page 4, line 48, at end insert— ("( ) Notwithstanding any of the provisions of this section, the provisions of section 8 of the Industrial Development Act 1982 shall continue to apply.").

The noble Lord said: My Lords, I beg to move Amendment No. 3 standing in my name. In discussion in Committee on Clause 6 we touched on the interaction between the Industrial Development Act 1982 and the Bill which is at present before your Lordships. As a result of that discussion, the noble Lord, Lord Beaverbrook, was kind enough to write to my noble friend Lord Morton of Shuna confirming what he had said in Committee, that the operation of Clause 6 did not vitiate the operation of Sections 7 and 8 of the Industrial Development Act 1982, which would continue to apply.

The noble Lord's letter raised one or two consequential questions and I have therefore tabled an amendment which I ask your Lordships to accept as being of a probing nature. Clause 6, in allowing the Secretary of State to set a target investment limit for the Government shareholding, becomes difficult to operate, as I argued in Committee, when and if British Steel plc, when privatised, wishes to turn to the Government for financial support and wishes that financial support to be given in the form of government subscription to new ordinary shares—in other words, subscription to equity rather than a straightforward loan. I understand from the letter of the noble Lord, Lord Beaverbrook, that this would not be impeded by any measure which is in the present Bill and that, under the Industrial Development Act 1982, the Government would be able to subscribe to shares if the provisions of Sections 7 or 8 of that Act applied in the successor company.

The consequential questions which I have are these. The Industrial Development Act demands the agreement of the company in question. In other words, the Government cannot give financial assistance to a company in difficulties unless there is agreement between the Secretary of State and the company. Yet the Act refers to financial assistance in the form of guarantees by the Government of facilities provided by third parties to give finance, perhaps in the form of the purchase of new ordinary shares.

We therefore have the possibility that an institution—perhaps we should say a bank—might be invited by the company to take up shares, the bank being perfectly properly guaranteed by the Government under the Industrial Development Act. The company and the Government agree that that is the right way to do it. My question is, what then happens if the result is in breach of Article 46 of the Articles of Association which we have just been discussing and the bank ends up with more than 15 per cent. of the company?

A consequential question is, how does the company actually agree to this formula? The Industrial Development Act simply says that there is agreement between the company and the Government. Does that mean that we have to have an ordinary resolution of shareholders? Does it mean that the board has to take powers from shareholders? Does it mean that we have to have some amendment to Article 46, which we know cannot be waived—it either has to be in place or not in place? What are the consequential problems which may arise if British Steel plc, as it will then be, gets into financial difficulties? All things are possible, we can never tell what will happen in this world, so let us suppose that the company gets into difficulties and asks the Government for support and decides that the way which I have just described is the way in which that support should be given. It seems to me that there is an area here which is somewhat less than clear. For that reason I have tabled this amendment. I beg to move.

Lord Young of Graffham

My Lords, I am grateful to the noble Lord, Lord Williams of Elvel, for constructing a rather hypothetical situation, if the noble Lord will allow that description. It provided for an outside body, a bank if you please, secured by a guarantee under the Industrial Development Act. As I understand it, the bank would acquire, directly or indirectly, a number of shares in a company. Then perhaps by virtue of exercising that guarantee it would actually attempt to take ownership of those shares. How would that affect the position, if the shares were more than 15 per cent. of the share capital?

The Government could give its consent as a special shareholder to a holding of more than 15 per cent. If the circumstances—hypothetical as they may be—were as the noble Lord describes, then presumably that guarantee under the Industrial Development Act would have been given with the consent of the Government. No doubt the Government would, in the fullness of time, give its consent to a shareholder for more than 15 per cent. in those circumstances. This is a hypothetical situation. The Government are free to use their powers under the Industrial Development Act 1982 to acquire the share capital, or part of the share capital, of the successor company with its consent. But the significant difference is that in that case it is with the consent of the board of the successor company.

Lord Williams of Elvel

My Lords, the noble Lord has just said that it is with the consent of the board of the successor company. That is the answer to one of my questions: it is not the consent of the company; it is the consent of the board. I hope that I did not misunderstand the noble Lord. The board, of course, is not the company.

Lord Young of Graffham

My Lords, I was describing two hypothetical situations which the noble Lord advanced. I repeat again that they are hypothetical. One was where an outside body, a bank, gave guarantees and as a result of exercising those guarantees it acquired more than 15 per cent. of the shares, or could acquire more than 15 per cent. of the shares. The noble Lord asked me how they could be registered. The answer is that they can only be registered with the consent of the special shareholder.

The other situation occurs under the Industrial Development Act 1982 where the Government would be free to use their powers under that Act to acquire share capital of the successor company with its consent. That is normally taken to be the consent of the board, but it may well be the consent of the shareholders. The Government are not now in the process of renationalising the old privatised industries. I find those circumstances to be somewhat fanciful but, as the noble Lord said, they were hypothetical.

Lord Williams of Elvel

My Lords, I am grateful to the noble Lord for what I think is a partial explanation of my problem. I shall read what he has said, and I hope that he in turn will read what I have said. I hope that if the noble Lord has any comments he will kindly let me have them in writing.

I was not suggesting particularly that this Government, with the noble Lord as Secretary of State, would wish to renationalise British Steel unless if found itself in the same position as Rolls-Royce found itself under a previous Conservative Administration. In those circumstances the noble Lord might change his mind. I was simply trying to point up certain problems that arise when legislation is drafted and consequential problems arise as a result of other legislation which has already been passed.

I do not think that this is an easy problem in the way in which the noble Lord seems to think it is. I do not necessarily believe that although the situation is hypothetical at this stage it may not become actuality. As we know, the steel industry is a cyclical industry and will always remain so. But in the light of what the noble Lord has said—I shall want to read rather carefully what he has said in the Official Report—I beg leave to withdraw the amendment.

Amendment, by leave, withdraw.

Clause 7 [Financial structure of the successor company]:

5.45 p.m.

Lord Williams of Elvel moved Amendment No. 4: Page 5, line 1, leave out subsection (1).

The noble Lord said: My Lords, the amendments that I have tabled to Clause 7 are, to a great extent, technical and of a probing nature. I beg to move Amendment No. 4 standing in my name on the Marshalled List. The question of the reserve which is being set up under the Bill has caused a certain amount of comment both in Committee in this Chamber and also in another place. It has been represented that this reserve is analogous to a share premium account. A number of Ministerial statements have been made to that effect.

The share premium account in a public company cannot take revaluation deficits. If property values fall or production lines or plant are written down due to obsolescence or loss of market or for whatever reason, under normal company rules the write-down would be charged to revaluation reserve, if there is a temporary loss of value. However, if there is a permanent loss of value it would pass through the profit and loss account: The effect of it passing through the profit and loss account under the Companies Act is to reduce the company's ability to pay a dividend. It cannot pay a dividend until it has cleared up any deficit on its profit and loss account.

I should like the Secretary of State's comments on this. The effect of what the Government are trying to do, as I understand it, is to make sure that even if there is a revaluation of the assets of British Steel and that shows a substantial deficit, calculated we know not how, and that is charged against the reserve, the successor company to British Steel will start off in a dividend paying situation. That is my understanding of what this part of the Bill means. It seems to me rather odd that we should be allowing a revaluation—what amounts to a devaluation—of asset values, writing asset values right down, without that having any consequential effect on the profit and loss as would be the case in any normal public company. For that reason I beg to move the amendment.

Lord Young of Graffham

My Lords, my noble friend Lord Beaverbrook explained in some detail in Committee why a statutory reserve was provided for under subsection (1) of Clause 7. It is required to ensure that the balance sheet of the successor company to BSC balances after the assets and liabilities of BSC have been vested into the new public plc. As the Bill makes clear, it will be equal to the difference between the amount of public dividend capital extinguished under subsection (3) of Clause 2, and the total nominal value of securities issued to the Government under Clause 3.

As your Lordships will be aware, a balance sheet has two sides—on the one hand are the total assets and on the other are the capital and reserves—and the two have to balance. The net assets of British Steel will be unchanged by vesting. All that will be different is the mix of capital and reserves on the other side of the balance sheet—the total of the capital and reserves will remain the same.

The creation of a reserve is inevitable if the balance sheet is to balance. That is because the nominal value of the securities issued to the Government will be less than that of the public dividend capital being extinguished. It is common practice for the sale price of shares to be set at a level significantly higher than their nominal value. For example, it would not be unusual for shares with a nominal value of 25 pence to be sold for £1, and so a company seeking to raise £1 million might issue shares with a total nominal value of only £250,000. In the case of British Steel we shall have to decide, nearer to the time of flotation, what value investors are likely to place on the business, and then how many shares of what nominal value to issue, bearing in mind the price at which we hope to sell them. It is those decisions that will determine the size of the statutory reserve.

The reserve is also necessary during the period in which British Steel remains wholly Government owned, again to ensure that the balance sheet balances. During that period British Steel is likely to have only a fairly small amount of share capital until close to the date of privatisation, when further shares may be issued under the provisions of Clause 3 to make up the number that it is decided to sell to investors. Again the balance will be provided by the statutory reserve.

It has not yet been decided whether any revaluation will be undertaken. If it is, as the Government explained when this clause was debated in another place, it is not expected that there will be any material change in the basis on which British Steel's fixed assets are recorded. It is therefore unlikely that the revaluation would have any material effect on its total asset values.

Any revaluation will have to be conducted by professional valuers who will assess the value of all the company's fixed assets to conform with Section 275 of the Companies Act 1985, if it is to lead to an unrealised loss that can subsequently be written off against the statutory reserve. I can assure your Lordships' House that it is not the Government's intention to make large and unjustified write-offs under this provision, as the noble Lord, Lord Williams of Elvel, may fear. Any reduction in asset value is likely to be relatively small and will be fully in accordance with normal accounting procedures. For those reasons I hope that the noble Lord's mind is set at rest.

Lord Williams of Elvel

My Lords, I am grateful to the Secretary of State, particularly for the last 90 seconds of his intervention. For the first few minutes, he simply repeated what the noble Lord, Lord Beaverbrook, said in Committee. If I may say so, I understood what was said at that time because I understand balance sheets and I understand that they must balance.

The point which I believe I succeeded in making to the Secretary of State is that under normal circumstances any revaluation of a nature described in the Bill, if it is a permanent loss in value will go through the profit and loss account and will diminish the ability of the company to pay dividends. It is not a question of a balance sheet; it is a question of where the profit and loss reserve will be. However, I hear what the noble Lord says. He has given us an assurance that revaluation, if that occurs, will not be consequential and will not have a material effect either on the reserve or, were it treated in a proper accounting manner as any plc would have to treat it, a consequential effect on the dividend paying capacity through the company's profit and loss. I shall read what the noble Lord said in the last 90 seconds of his intervention. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Williams of Elvel moved Amendment No. 5: Page 5, line 23, at end insert ("or if the interests of creditors are thereby damaged.").

The noble Lord said: My Lords, this is a technical amendment. Under the Bill as drafted, the Secretary of State has the right to reduce the capital of the successor company by direction. I regard that procedure as being parallel to a reduction of capital in a normal plc which is supervised by the courts. Under a reduction of capital which is supervised by the courts, there are measures which are taken to ensure that the creditors of the company are not damaged by the capital reconstruction. There is no such safeguard in the Bill as it is presently drafted. The Secretary of State can write down the capital without regard to the interests of the creditors. It is for that reason that I introduce the amendment. I beg to move.

Lord Young of Graffham

My Lords, the provisions of subsection (2) of Clause 7, to which this amendment would apply, are concerned with the application of the statutory reserve, at the direction of the Government, for two specific purposes. Under paragraph (a) of the subsection, it may be applied in writing off unrealised losses of the company arising from a revaluation of fixed assets. I hope that the noble Lord, Lord Williams of Elvel, will be satisfied on that point. Under paragraph (b) of the subsection it may be applied as if it were profits available for distribution—in other words, it may be, to the extent directed, placed in a revenue reserve.

My noble friend Lord Beaverbrook explained at Committee stage why this provision is in the Bill. So far as the creation of a revenue reserve is concerned, British Steel is now a very profitable company and would have been able to credit its recent profits to a revenue reserve had it been able to carry out the capital reduction provided for under Clause 2 of this Bill at an earlier stage, as a private sector company certainly would have done. As my noble friend said, any revenue reserve authorised under this clause will do no more than reflect the profits the corporation has earned in recent years.

That will have no effect on the position of creditors. The creation of reserves does not affect the amount of the assets of the company. The revenue reserve is not a pool of cash and will not enable the successor company to pay dividends out of capital or borrowing. In any case, that would be illegal under the Companies Act 1985. British Steel will only be able to pay dividends out of cash arising from retained profits. It will be subject to the provisions of Part VIII of the Companies Act like all other Companies Act companies. The provision under subsection (3) of Clause 7 which the amendment relates to is not concerned with the reduction of capital, which comes under Clause 2(1).

Lord Williams of Elvel

My Lords, may I have a clear assurance from the noble Lord that if the Secretary of State directs a reduction in capital, he will do so having regard to the interests of creditors at the time of the direction?

Lord Young of Graffham

My Lords, I have no doubts at all about giving that undertaking.

Lord Williams of Elvel

My Lords, I am grateful to the noble Lord. That is the assurance which I sought. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Williams of Elvel moved Amendment No. 6: Page 5, line 24, leave out ("no part or).

The noble Lord said: My Lords, in moving the amendment I shall, with the leave of the House, speak to Amendment No. 7. I am perplexed by Clause 7(4). I understand that it continues the dividend theme. However, the statutory reserve will not, in the language of the dividend rules contained in the Companies Act 1985, be a reserve, the distribution of which is restricted by another Act or clause in the memorandum and articles. There are, for instance, property companies which frequently restrict the treatment of gains in property values by stating that such profits must be transferred to a capital reserve rather than being credited to a profit and loss account and thus made available for dividends.

The reference to the memorandum and articles in the Companies Act which is reflected in the Bill before us is presumably intended to clarify that it would not be possible for a successor company, on its own initiative and by amending its memorandum and articles, to release the statutory reserve for payment of dividend. I hope that my understanding is correct. While removing those restrictions, for reasons which I do not quite understand the clause reimposes another restriction by stating that, to the extent that it is not changed into distributable profit by a specific direction from the Secretary of State, it will be treated as an unrealised profit. I cannot understand why the Government have chosen that particular very convoluted formula to establish what seems to me to be a very simple principle which is enshrined in the Companies Act. I shall be most grateful for any help which the Secretary of State can give me on that matter. I beg to move.

Lord Young of Graffham

My Lords, I shall endeavour to give what help and comfort I can to the noble Lord. Subsection (4) of Clause 7 is a largely technical provision that follows the precedents of previous privatisation Acts. Its purpose is to define how that part of the statutory reserve which is not applied in the ways specified in subsection (2) of the clause is to be regarded for Companies Act purposes.

Section 264 of that Act, in subsection (3), sets out four categories of undistributable reserve—a share premium account; a capital redemption reserve; accumulated unrealised profits so far as they exceed unrealised losses; and any other reserve which a company is prohibited from distributing. Subsection (4) of the Bill specifies that the statutory reserve is, for the purposes of Section 264, to be treated as unrealised profits rather than simply as a reserve that the company is prohibited from distributing.

As I have said, that is in accordance with precedent, and is largely to provide a clear definition of the statutory reserve and the uses to which it can be put. Apart from my power to direct certain applications under subsection (2) that we have just discussed, the reserve is very similar to a share premium account, but offers the additional facility of being able to offset unrealised losses arising, for example, from revaluations.

The statutory reserve cannot, as the noble Lord's amendments suggest, be defined by relation to two alternative Companies Act categories at once. But I can assure him that, except to the extent directed under subsection (2)(b) of this Bill, it will be an undistributable reserve falling into subsection (3)(c) of Section 264 of the Companies Act 1985. I hope that in the light of that very clear explanation the noble Lord will feel able to withdraw the amendment.

Lord Williams of Elvel

My Lords, the explanation was extremely clear. It set out what I knew already. The only new element in what the noble Lord has said is that it has happened before and therefore it will happen again. I always take a slightly suspicious view of precedent when it comes to the drafting of new Bills on privatisation.

Before the noble Lord explained it, I understood what the clause said. I remain unconvinced that this is the right way to achieve the objective, and I think that the department ought to have another look at whether this is the right way. It makes all kinds of twists in what I regard as a relatively simple situation. There is no particular difference between me and the noble Lord on this particular issue. However, I have no doubt that he and his officials will read what I have said and I shall read what he has said. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 7 to 15 not moved.]