Scottish Law Commission (Discussion Papers)

Part 5




Part 5 Substantive Improvements 2: Disclosure of Directors' Share Dealings (sections 324-326, 328-329 and schedule 13)

Introduction

5.1      In Part 4 we saw that there are some prohibitions on share dealing by directors. The prohibitions include section 323 which prohibits dealings by directors in options to buy and sell their company's shares.^[1] Dealings by directors in their company's shares on the basis of unpublished price-sensitive information are also prohibited by the Criminal Justice Act 1993.^[2] There are self-regulatory rules which lead to restrictions on the times when a director may deal in company's shares, most notably in the Stock Exchange's Model Code.^[3] But except where these restrictions apply, a director may properly acquire an interest in his company's shares. The law does not seek to prohibit him from doing so^[4] but rather seeks to ensure transparency, more specifically to ensure that members of the company have the requisite information about these dealings and to ensure that where a company's shares are listed the information is made available promptly to the market.
5.2      This part is concerned with sections 324-326, 328-329 and Schedule 13. These provisions deal with the duty of a director to notify interests in shareholdings to his company and impose an obligation on the company to record interests in a register and to disclose them to the relevant exchanges. They can be seen as merely ministerial provisions but they are important because they are the means of achieving the transparency referred to in the preceding paragraph. To achieve their purpose, these provisions involve the successful application of several of the guiding principles which we have provisionally identified, particularly the principle that the law should seek to achieve ample but efficient disclosure (principle 9),^[5] the principle of "enough but not excessive" regulation (principle 8)^[6] and the principle of efficiency and cost-effectiveness (principle 10).^[7] As we see it there are several reasons for the provisions with which this part deals. The interests which a director has in his company and his acquisitions and disposals of such interests convey information about the financial incentives that a director has to improve his company's performance and accordingly these provisions form part of the system put in place by the Companies Acts to enable shareholders to monitor the directors' stewardship of the company. In addition where the shareholdings are substantial the information also conveys important information about the ability of the directors to control the affairs of the company in general meeting. They also have a separate function of providing through disclosure an additional incentive to directors to comply with the prohibitions which the law imposes on directors' share dealings.^[8] The economic importance of these provisions, as Part 3 explains, lies in providing efficient incentives for the sharing of information.^[9] This reduces the costs that shareholders have to incur in monitoring the activities of directors and no doubt by like token in the public interest they make it more likely that the rules are complied with and that the criminal sanctions do not have to be enforced. We do not think that there is any reasonable ground for seeking to remove these provisions from the Companies Act.
5.3      We consider the provisions in turn under the following heads:

The obligation of disclosure in sections 324 and 328^[10] - these deal with the director's duty to disclose interests in shareholdings in his own company. Section 328 is dealt with alongside section 324 because it attributes to a director the interests of his spouse and infant children for the purposes of section 324.

The meaning of "interest" and the mechanics of disclosure - Schedule 13, Parts I- III.^[11] These supplement section 324 and for example amplify the meaning of interest and specify the period within which a director must notify an interest.

The company's register of directors' interests - sections 325 and 326, and Schedule 13, Part IV^[12] - these deal with the register which the company is bound to keep of the interests notified to it by directors.

Notification to the exchanges - section 329^[13] - this deals with the obligation of a listed company to notify interests notified to it by directors to the exchange on which its shares are listed.

5.4      Section 327 extends the prohibition on option dealing and so it is dealt with in Part 4 above.^[14] The criminal sanctions created by section 324(7) and 326 are considered in Part 10 below.
5.5      In August 1996, the DTI issued a consultative document^[15] in which it made proposals for changes to sections 324 and 329, which would be made by secondary legislation using the powers under section 1 of the Deregulation and Contracting Out Act 1994. The proposals are outlined below with a summary of consultees' responses and the DTI's conclusions as communicated to us. As a result, few issues remain. Our review of the sections dealt with in this part has thus been a limited one.

The obligation of disclosure: Sections 324 and 328 - duty of director to notify own and attributed shareholdings in company

324.((1) A person who becomes a director of a company and at the time when he does so is interested in shares in, or debentures of, the company or any other body corporate, being the company's subsidiary or holding company or a subsidiary of the company's holding company, is under obligation to notify the company in writing...

(a) of the subsistence of his interests at that time; and

(b) of the number of shares of each class in, and the amount of debentures of each class of, the company or other such body corporate in which each interest of his subsists at that time.

(2) A director of a company is under obligation to notify the company in writing of the occurrence, while he is a director, of any of the following events...

(a) any event in consequence of whose occurrence he becomes, or ceases to be, interested in shares in, or debentures of, the company or any other body corporate, being the company's subsidiary or holding company or a subsidiary of the company's holding company;

(b) the entering into by him of a contract to sell any such shares or debentures;

(c) the assignment by him of a right granted to him by the company to subscribe for shares in, or debentures of, the company; and

(d) the grant to him by another body corporate, being the company's subsidiary or holding company or a subsidiary of the company's holding company, of a right to subscribe for shares in, or debentures of, that other body corporate, the exercise of such a right granted to him and the assignment by him of such a right so granted;

and notification to the company must state the number or amount, and class, of shares or debentures involved.

(3) Schedule 13 has effect in connection with subsections (1) and (2) above; and of that Schedule...

(a) Part I contains rules for the interpretation of, and otherwise in relation to, those subsections and applies in determining, for purposes of those subsections, whether a person has an interest in shares or debentures;

(b) Part II applies with respect to the periods within which obligations imposed by the subsections must be fulfilled; and

(c) Part III specifies certain circumstances in which obligations arising from subsection (2) are to be treated as not discharged;

and subsections (1) and (2) are subject to any exceptions for which provision may be made by regulations made by the Secretary of State by statutory instrument.

(4) Subsection (2) does not require the notification by a person of the occurrence of an event whose occurrence comes to his knowledge after he has ceased to be a director.

(5) An obligation imposed by this section is treated as not discharged unless the notice by means of which it purports to be discharged is expressed to be given in fulfilment of that obligation.

(6) This section applies to shadow directors as to directors; but nothing in it operates so as to impose an obligation with respect to shares in a body corporate which is the wholly-owned subsidiary of another body corporate.

(7) A person who...

(a) fails to discharge, within the proper period, an obligation to which he is subject under subsection (1) or (2), or

(b) in purported discharge of an obligation to which he is so subject, makes to the company a statement which he knows to be false, or recklessly makes to it a statement which is false,

is guilty of an offence and liable to imprisonment or a fine, or both.

(8) Section 732 (restriction on prosecutions) applies to an offence under this section.

328.((1) For the purposes of section 324...

(a) an interest of the wife or husband of a director of a company (not being herself or himself a director of it) in shares or debentures is to be treated as the director's interest; and

(b) the same applies to an interest of an infant son or infant daughter of a director of a company (not being himself or herself a director of it) in shares or debentures.

(2) For those purposes...

(a) a contract, assignment or right of subscription entered into, exercised or made by, or a grant made to, the wife or husband of a director of a company (not being herself or himself a director of it) is to be treated as having been entered into, exercised or made by, or (as the case may be) as having been made to, the director; and

(b) the same applies to a contract, assignment or right of subscription entered into, exercised or made by, or grant made to, an infant son or infant daughter of a director of a company (not being himself or herself a director of it).

(3) A director of a company is under obligation to notify the company in writing of the occurrence while he or she is a director, of either of the following events, namely...

(a) the grant by the company to his (her) spouse, or to his or her infant son or infant daughter, of a right to subscribe for shares in, or debentures of, the company; and

(b) the exercise by his (her) spouse or by his or her infant son or infant daughter of such a right granted by the company to the wife, husband, son or daughter.

(4) In a notice given to the company under subsection (3) there shall be stated...

(a) in the case of the grant of a right, the like information as is required by section 324 to be stated by the director on the grant to him by another body corporate of a right to subscribe for shares in, or debentures of, that other body corporate; and

(b) in the case of the exercise of a right, the like information as is required by that section to be stated by the director on the exercise of a right granted to him by another body corporate to subscribe for shares in, or debentures of, that other body corporate.

(5) An obligation imposed by subsection (3) on a director must be fulfilled by him before the end of 5 days beginning with the day following that on which the occurrence of the event giving rise to it comes to his knowledge; but in reckoning that period of days there is disregarded any Saturday or Sunday, and any day which is a bank holiday in any part of Great Britain.

(6) A person who...

(a) fails to fulfil, within the proper period, an obligation to which he is subject under subsection (3), or

(b) in purported fulfilment of such an obligation, makes to a company a statement which he knows to be false, or recklessly makes to a company a statement which is false,

is guilty of an offence and liable to imprisonment or a fine, or both.

(7) The rules set out in Part I of Schedule 13 have effect for the interpretation of, and otherwise in relation to, subsections (1) and (2); and subsections (5), (6) and (8) of section 324 apply with any requisite modification.

(8) In this section, "son" includes step-son, "daughter" includes step-daughter, and "infant" means, in relation to Scotland, [person under the age of 18 years].

(9) For purposes of section 325, an obligation imposed on a director by this section is to be treated as if imposed by section 324.

General

5.6      Section 324 requires that, on becoming a director (including a shadow director) of a company, a person must give a company written notice of any interest they have in its shares or debentures or any shares or debentures of any company in the same group or fellow subsidiary of the same holding company.^[16] Under section 324(2), whilst he remains in office, a director is under a continuing obligation to notify the company of any alteration in his interests, together with the entry into any contract for sale or the assignment of a right to subscribe granted to him by the company^[17] or the grant to him by another group company or a fellow subsidiary of a right to subscribe for its shares or debentures. The notification requirements are strict. Not only must the notice be in writing; it must also be expressed to be given in fulfilment of the director's obligation under the section. Failure to notify an interest, or the knowing or reckless making of a false statement in respect of either, is a criminal offence (see subsection (7)), although in England and Wales the prosecution cannot be brought without the consent of the Secretary of State or the DPP. Prosecutions in Scotland are in the hands of the Lord Advocate and of subordinate public prosecutors under his control.
5.7      Section 328 attributes to directors, for the purposes of the disclosure obligations imposed by section 324, the interests held by, and transactions undertaken by, their spouses and minor children who are not also directors of the company concerned. The attribution is limited to these interests and does not cover, for example the interests of cohabitants who are not spouses. We consider these questions under section 346 below, where the same issue arises.^[18] No exception is made for the interests of separated spouses. However, the obligation to give notice does not arise until the director knows of the event which gives rise to the obligation to notify.^[19]

The DTI's August 1996 proposals

5.8      The DTI proposed that section 324 should be made less onerous by allowing directors the option of giving aggregate disclosure of small transactions in shares or debentures of companies whose shares were publicly traded, allowing postponement of the aggregate disclosure whilst it remained below a set threshold or until the end of the financial year. Shares listed on a stock exchange in any member state of the European Union or admitted to trading on a market operated by a recognised investment exchange in the UK would be publicly traded for this purpose. The DTI proposed that, in order to qualify for the exemption from disclosure, the aggregated transactions would, if they involved shares, have to be both below a monetary amount (£10,000 was suggested) and below a specified percentage (1% was suggested) of the company's total share capital, whereas if they involved debentures, it would be sufficient if they met a monetary limit of the same amount.
5.9      It was proposed that the aggregate disclosure thresholds should apply to directors' interests in each individual company within a group, provided that this option did not create too much opportunity for avoidance.
5.10      The DTI also proposed that directors should be permitted to "net off"^[20] transactions over the course of a business day, this proposal having received support from consultees responding to its previous paper in relation to the disclosure requirements under Part VI of the Companies Act 1985.
5.11      In addition, it was proposed that directors' non-beneficial interests in company shares and debentures (eg as trustees for pension funds) should be entirely exempted from disclosure. The rationale for the proposal was that disclosure appeared "inappropriate as changes in such non-beneficial interests will not be significant in terms of the director's personal financial interests in the success of the company"^[21] and might even prove misleading. It is important to note that the DTI's proposals were limited to non-beneficial interests strictly so-called, that is where the director did not stand to benefit directly or indirectly, for instance through a close family member, from the performance of the trust fund.
5.12      The DTI's proposals also covered scrip dividends. The DTI did not think that these transactions should be the subject of an outright exemption because this could lead to significant transactions being concealed and to the company's register being inaccurate. However the DTI thought that an intermediate approach would be appropriate. This would exempt transactions from anything other than obligatory year end disclosure. Discretionary PEPs^[22] (where a director has no control over which securities are held) concerning publicly traded companies were also thought appropriate for this approach in order to help reduce disclosure burdens. However, self-selected and single company PEPs were in a different position because of the degree of control a director could exercise when making equities transactions in these cases.

Consultees' response and the DTI's conclusion

5.13      A majority of respondents to the consultation thought that the disclosure threshold, if introduced, should not apply to disclosure by the director to the company. Many respondents argued that aggregation would in practice impose an additional burden on the director, as it would be necessary to keep a running tally to know when the threshold had been reached. Several listed companies also argued that in practice it was essential for company secretaries to have accurate data on directors' interests, and expressed concern that the proposed amendment would make this more difficult.
5.14      In view of the lack of support for the proposal as a deregulatory measure, the DTI is no longer proposing to amend section 324. Taken in conjunction with the retention of the requirement under section 325,^[23] this will also ensure that shareholders and creditors continue to have access to accurate information through the company's register of directors' interests.
5.15      Respondents were split as to whether "netting off" within a business day should be permitted. Many respondents argued that there could be a strong market interest in the different prices at which a director had dealt in the company's shares, and that the market would wish to be aware of occasions where the exercise of share options by a director had been followed by a sale of the company's shares on the same day. In light of these concerns, the DTI is not proposing to permit "netting off".
5.16      A majority of respondents supported the proposal that directors' non-beneficial interests in a company should be entirely exempted from disclosure. However, some respondents argued that there might be considerable market interest if, in cases where the directors are acting as trustees, the holding represented a significant degree of control in the company. The DTI has requested us to invite further views on this issue.
5.17      A majority of respondents supported the proposals that publicly traded companies should be permitted to disclose directors' scrip dividends and directors' interests held via discretionary PEPs only at the end of the financial year.
5.18      There was one aspect of the DTI's August 1996 proposals regarding section 324 which was supported by respondents,^[24] but as we have indicated above the DTI have asked us to seek further views on this, which we do in the next paragraph. Apart from that matter, there are, as we see it, no further questions under this section at this stage,^[25] though we invite consultees below^[26] to inform us if they disagree.

Option for reform: Exempt from disclosure under section 324 directors' non-beneficial interests

5.19      A director may be a trustee of a trust which holds shares or debentures in a company of which he is a director. The effect of section 324 is that (unless he is a bare trustee) he must disclose his interest in those securities and any changes in the holding. There are arguments for saying that this information is not of value. If he has no beneficial interest in the holding whatever, then details of it will not convey any meaningful information about the financial incentives which he has to cause the company's performance to improve. The position is unlikely to be any different if he has a beneficial interest in law (as many trustees do) simply because he is entitled to recover his expenses or remuneration or is entitled to an indemnity for liabitities properly incurred.^[27] We provisionally consider that such limited beneficial interests should not prevent a holding being treated as non-beneficial. The director may indeed not have been involved in the transaction if the company is a listed or AIM company because the Model Code applies to dealings by a director as a trustee as they do where he is dealing on his own account, unless the decision to deal is taken by other trustees acting independently of the director.^[28] However this may be, there will be cases where a director-trustee has an influence on a dealing by a trust and accordingly it would seem likely that the market will be interested in the information unless the transaction is small in value. If an exception is provided for small transactions, it is for consideration whether the aggregate limit proposed above^[29] is appropriate.

Consultees are asked if non-beneficial holdings should be exempt from section 324 and if so:

(i) whether non-beneficial holdings should be defined as excluding any beneficial interests which the director may have by reason of any right to expenses, remuneration or indemnity;

(ii) whether the exemption should apply irrespective of the size of the transaction or only if the transaction (when aggregated with other transactions in non-beneficial holdings) does not exceed a certain size;

(iii) if they consider that the exemption should only apply if the transaction does not exceed a certain size, how should such size be ascertained.

Consultees are also asked if they consider that there are deficiencies in section 324 not considered above.

The meaning of "interest" and the mechanics of disclosure: Schedule 13, Parts I-III

PART 1: RULES FOR THE INTERPRETATION OF SECTIONS 324-326, 328 AND 346

1.((1) A reference to an interest in shares or debentures is to be read as including any interest of any kind whatsoever in shares or debentures.

(2) Accordingly, there are to be disregarded any restraints or restrictions to which the exercise of any right attached to the interest is or may be subject.

2.( Where property is held on trust and any interest in shares or debentures is comprised in the property, any beneficiary of the trust who (apart from this paragraph) does not have an interest in the shares or debentures is to be taken as having such an interest; but this paragraph is without prejudice to the following provisions of this Part of this Schedule.

3.((1) A person is taken to have an interest in shares or debentures if...

(a) he enters into a contract for their purchase by him (whether for cash or other consideration), or

(b) not being the registered holder, he is entitled to exercise any right conferred by the holding of the shares or debentures, or is entitled to control the exercise of any such right.

(2) For purposes of sub-paragraph (1)(b), a person is taken to be entitled to exercise or control the exercise of a right conferred by the holding of shares or debentures if he...

(a) has a right (whether subject to conditions or not) the exercise of which would make him so entitled, or

(b) is under an obligation (whether or not so subject) the fulfilment of which would make him so entitled.

(3) A person is not by virtue of sub-paragraph (1)(b) taken to be interested in shares or debentures by reason only that he...

(a) has been appointed a proxy to vote at a specified meeting of a company or of any class of its members and at any adjournment of that meeting, or

(b) has been appointed by a corporation to act as its representative at any meeting of a company or of any class of its members.

4.( A person is taken to be interested in shares or debentures if a body corporate is interested in them and...

(a) that body corporate or its directors are accustomed to act in accordance with his directions or instructions, or

(b) he is entitled to exercise or control the exercise of one-third or more of the voting power at general meetings of that body corporate.

As this paragraph applies for the purposes of section 346(4) and (5), "more than one-half" is substituted for "one-third or more".

5.( Where a person is entitled to exercise or control the exercise of one-third or more of the voting power at general meetings of a body corporate, and that body corporate is entitled to exercise or control the exercise of any of the voting power at general meetings of another body corporate ("the effective voting power"), then, for purposes of paragraph 4(b), the effective voting power is taken to be exercisable by that person.

As this paragraph applies for the purposes of section 346(4) and (5), "more than one-half" is substituted for "one-third or more".

6.((1) A person is taken to have an interest in shares or debentures if, otherwise than by virtue of having an interest under a trust...

(a) he has a right to call for delivery of the shares or debentures to himself or to his order, or

(b) he has a right to acquire an interest in shares or debentures or is under an obligation to take an interest in shares or debentures;

whether in any case the right or obligation is conditional or absolute.

(2) Rights or obligations to subscribe for shares or debentures are not to be taken, for purposes of sub-paragraph (1), to be rights to acquire, or obligations to take, an interest in shares or debentures.

This is without prejudice to paragraph 1.

7.( Persons having a joint interest are deemed each of them to have that interest.

8.( It is immaterial that shares or debentures in which a person has an interest are unidentifiable.

9.( So long as a person is entitled to receive, during the lifetime of himself or another, income from trust property comprising shares or debentures, an interest in the shares or debentures in reversion or remainder or (as regards Scotland) in fee, are to be disregarded.

10. (A person is to be treated as uninterested in shares or debentures if, and so long as, he holds them under the law in force in England and Wales as a bare trustee or as a custodian trustee, or under the law in force in Scotland, as a simple trustee.

11.( There is to be disregarded an interest of a person subsisting by virtue of...

[(a) any unit trust scheme which is an authorised unit trust scheme within the meaning of the Financial Services Act 1986];

(b) a scheme made under section 22 [or 22A] of the Charities Act 1960 [or section 24 or 25 of the Charities Act 1993], section 11 of the Trustee Investments Act 1961 or section 1 of the Administration of Justice Act 1965; or

(c) the scheme set out in the Schedule to the Church Funds Investment Measure 1958.

12. ( There is to be disregarded any interest...

(a) of the Church of Scotland General Trustees or of the Church of Scotland Trust in shares or debentures held by them;

(b) of any other person in shares or debentures held by those Trustees or that Trust otherwise than as simple trustees.

"The Church of Scotland General Trustees" are the body incorporated by the order confirmed by the Church of Scotland (General Trustees) Order Confirmation Act 1921; and "the Church of Scotland Trust" is the body incorporated by the order confirmed by the Church of Scotland Trust Order Confirmation Act 1932.

13.( Delivery to a person's order of shares or debentures in fulfilment of a contract for the purchase of them by him or in satisfaction of a right of his to call for their delivery, or failure to deliver shares or debentures in accordance with the terms of such a contract or on which such a right falls to be satisfied, is deemed to constitute an event in consequence of the occurrence of which he ceases to be interested in them, and so is the lapse of a person's right to call for delivery of shares or debentures.

PART II - PERIODS WITHIN WHICH OBLIGATIONS IMPOSED BY SECTION 324 MUST BE FULFILLED

14.((1) An obligation imposed on a person by section 324(1) to notify an interest must, if he knows of the existence of the interest on the day on which he becomes a director, be fulfilled before the expiration of the period of 5 days beginning with the day following that day.

(2) Otherwise, the obligation must be fulfilled before the expiration of the period of 5 days beginning with the day following that on which the existence of the interest comes to his knowledge.

15.((1) An obligation imposed on a person by section 324(2) to notify the occurrence of an event must, if at the time at which the event occurs he knows of its occurrence and of the fact that its occurrence gives rise to the obligation, be fulfilled before the expiration of the period of 5 days beginning with the day following that on which the event occurs.

(2) Otherwise, the obligation must be fulfilled before the expiration of a period of 5 days beginning with the day following that on which the fact that the occurrence of the event gives rise to the obligation comes to his knowledge.

16.( In reckoning, for purposes of paragraphs 14 and 15, any period of days, a day that is a Saturday or Sunday, or a bank holiday in any part of Great Britain, is to be disregarded.

PART III - CIRCUMSTANCES IN WHICH THE OBLIGATION IMPOSED BY SECTION 324 IS NOT DISCHARGED

17.((1) Where an event of whose occurrence a director is, by virtue of section 324(2)(a), under obligation to notify a company consists of his entering into a contract for the purchase by him of shares or debentures, the obligation is not discharged in the absence of inclusion in the notice of a statement of the price to be paid by him under the contract.

(2) An obligation imposed on a director by section 324(2)(b) is not discharged in the absence of inclusion in the notice of the price to be received by him under the contract.

18.((1) An obligation imposed on a director by virtue of section 324(2)(c) to notify a company is not discharged in the absence of inclusion in the notice of a statement of the consideration for the assignment (or, if it be the case that there is no consideration, that fact).

(2) Where an event of whose occurrence a director is, by virtue of section 324(2)(d), under obligation to notify a company consists in his assigning a right, the obligation is not discharged in the absence of inclusion in the notice of a similar statement.

19.((1) Where an event of whose occurrence a director is, by virtue of section 324(2)(d), under obligation to notify a company consists in the grant to him of a right to subscribe for shares or debentures, the obligation is not discharged in the absence of inclusion in the notice of a statement of...

(a) the date on which the right was granted,

(b) the period during which or the time at which the right is exercisable,

(c) the consideration for the grant (or, if it be the case that there is no consideration, that fact), and

(d) the price to be paid for the shares or debentures.

(2) Where an event of whose occurrence a director is, by section 324(2)(d), under obligation to notify a company consists in the exercise of a right granted to him to subscribe for shares or debentures, the obligation is not discharged in the absence of inclusion in the notice of a statement of—

(a) the number of shares or amount of debentures in respect of which the right was exercised, and

(b) if it be the case that they were registered in his name, that fact, and, if not, the name or names of the person or persons in whose name or names they ere registered, together (if they were registered in the names of 2 persons or more) with the number or amount registered in the name of each of them.

20.( In this Part, a reference to price paid or received includes any consideration other than money.

General

5.20      Schedule 13, Part I, contains complex provisions for determining when a person is interested in shares for the purposes of section 324-326 and other sections.^[30] Schedule 13, Parts II and III, deal with when and how an interest is to be notified. Although section 324(3) gives the Secretary of State the power to introduce exceptions to Schedules 13, Parts I and II^[31] there is at present no power to enlarge the provisions of Schedule 13.
5.21      The primary purpose of the provisions of Schedule 13, Part 1 is to extend the meaning of interest: for example under paragraph 2 a beneficiary is taken to be interested in shares held on trust even if as a matter of property law he would not normally be deemed to be so, for example because the beneficiary has only a discretionary interest. In this context however it is not clear whether the term "trust" includes a statutory trust such as that arising in English law on an intestacy, bankruptcy or insolvency. In these cases the beneficial interest is not vested in the beneficiary or creditor until the process of administration, winding up or bankruptcy is complete.^[32] Again paragraph 3 makes it clear that a person is taken to be interested in shares as soon as he enters a contract to acquire them. It is not necessary to comply with any formalities or (where the shares form part of a larger holding) to wait until the shares to be sold have been identified.^[33] Paragraph 4 attributes the interest of a body corporate in which a person has one-third or more of the voting power to that person. Paragraph 6 covers put and call options in shares and this is particularly important if the prohibition on option dealing in section 323 is removed.
5.22      Schedule 13, Part I appears to be very comprehensive but it is likely that from time to time it will be found that there are cases which it does not cover but ought to cover. It is for consideration whether the Secretary of State should have power to vary the provisions of Part I of Schedule 13 by regulation so as to alter the rules as to what is to be treated as an interest in shares. A similar power is conferred by section 210A of the Companies Act 1985 in relation to the meaning of interests in shares required to be notified under Part VI of the Act.^[34]

Consultees are asked whether the Secretary of State should be given power by regulation to vary the rules in Part I of Schedule 13 for determining whether a person has an interest in shares or debentures for the purposes of sections 324-326, 328 and 346.

5.23      Schedule 13, Part II deals with the time which a person has to fulfil his obligation to make disclosure under section 324. The obligation does not arise unless the director has knowledge of the interest and the time period is generally five days. If the company is a listed company, the rules of the exchange may require notification within a shorter period.^[35]
5.24      There is one instance where the obligation to give notice to the company is dependent not only on knowing that the event giving rise to the duty to notify has arisen, but also on knowing that there is a legal obligation to give notice and that is where section 324(2) applies and the director is aware of the event when it actually happens. Paragraph 15(1) provides that this is the case where section 324(2) applies. Section 324(2) includes the situation where a director or his spouse or child ceases to be interested in shares, or enters into a contract to purchase shares. It is not clear why there should be a special rule in paragraph 15(1).
5.25      Part II makes no provision for the time within which a company must fulfil its obligations under section 325(2)-(4). We invite consultees' views on whether a time period should be specified and what that period should be.

Consultees are asked whether the company should be obliged to comply with section 325(2),(3) and (4) within a specified period and if so whether that period should be the expiration of five days beginning with the day on which the event in question occurs or some other and if so what period.

5.26      We have no observations on Schedule 13, Part III. This makes it clear for instance that the director's notice must include details of the price under a contract which he has entered into.

Consultees are asked if there are any other issues for reform arising under Schedule 13, Parts I-III.

The company's register of directors' interests: Sections 325 and 326 and Schedule 13, Part IV

325. ((1) Every company shall keep a register for the purposes of section 324.

(2) Whenever a company receives information from a director given in fulfilment of an obligation imposed on him by that section, it is under obligation to enter in the register, against the director's name, the information received and the date of the entry.

(3) The company is also under obligation, whenever it grants to a director a right to subscribe for shares in, or debentures of, the company to enter in the register against his name...

(a) the date on which the right is granted,

(b) the period during which, or time at which, it is execrable,

(c) the consideration for the grant (or, if there is no consideration, that fact), and

(d) the description of shares or debentures involved and the number or amount of them, and the price to be paid for them (or the consideration, if otherwise than in money).

(4) Whenever such a right as is mentioned above is exercised by a director, the company is under obligation to enter in the register against his name that fact (identifying the right), the number or amount of shares or debentures in respect of which it is exercised and, if they were registered in his name, that fact and, if not, the name or names of the person or persons in whose name or names they were registered, together (if they were registered in the names of two persons or more) with the number or amount of the shares or debentures registered in the name of each of them.

(5) Part IV of Schedule 13 has effect with respect to the register to be kept under this section, to the way in which entries in it are to be made, to the right of inspection, and generally.

(6) For purposes of this section, a shadow director is deemed a director.

326. ((1) The following applies with respect to defaults in complying with, and to contraventions of, section 325 and Part IV of Schedule 13.

(2) If default is made in complying with any of the following provisions...

(a) section 325(1), (2), (3) or (4), or

(b) Schedule 13, paragraph 21, 22 or 28,

the company and every officer of it who is in default is liable to a fine and, for continued contravention, to a daily default fine.

(3) If an inspection of the register required under paragraph 25 of the Schedule is refused, or a copy required under paragraph 26 is not sent within the proper period, the company and every officer of it who is in default is liable to a fine and, for continued contravention, to a daily default fine.

(4) If default is made for 14 days in complying with paragraph 27 of the Schedule (notice to registrar of where register is kept), the company and every officer of it who is in default is liable to a fine and, for continued contravention, to a daily default fine.

(5) If default is made in complying with paragraph 29 of the Schedule (register to be produced at annual general meeting), the company and every officer of it who is in default is liable to a fine.

(6) In the case of a refusal of an inspection of the register required under paragraph 25 of the Schedule, the court may by order compel an immediate inspection of it; and in the case of failure to send within the proper period a copy required under paragraph 26, the court may by order direct that the copy be sent to the person requiring it.

SCHEDULE 13, PART IV: Provisions with Respect to Register of Directors' Interests to be Kept Under Section 325

21.( The register must be so made up that the entries in it against the several names appear in chronological order.

22.( An obligation imposed by section 325(2) to (4) must be fulfilled before the expiration of the period of 3 days beginning with the day after that on which the obligation arises; but in reckoning that period, a day which is a Saturday or Sunday or a bank holiday in any part of Great Britain is to be disregarded.

23.( The nature and extent of an interest recorded in the register of a director in any shares or debentures shall, if he so requires, be recorded in the register.

24.( The company is not, by virtue of anything done for the purposes of section 325 or this Part of this Schedule, affected with notice of, or put upon enquiry as to, the rights of any person in relation to any shares or debentures.

25.( The register shall...

(a) if the company's register of members is kept at its registered office, be kept there;

(b) if the company's register of members is not so kept, be kept at the company's registered office or at the place where its register of members is kept;

and shall … be open to the inspection of any member of the company without charge and of any other person on payment of [such fee as may be prescribed].

26.((1) Any member of the company or other person may require a copy of the register, or of any part of it, on payment of [such fee as may be prescribed].

(2) The company shall cause any copy so required by a person to be sent to him within the period of 10 days beginning with the day after that on which the requirement is received by the company.

27.( The company shall send notice in the prescribed form to the registrar of companies of the place where the register is kept and of any change in that place, save in a case in which it has at all times been kept at its registered office.

28.(Unless the register is in such a form as to constitute in itself an index, the company shall keep an index of the names inscribed in it, which shall...

(a) in respect of each name, contain a sufficient indication to enable the information entered against it to be readily found; and

(b) be kept at the same place as the register;

and the company shall, within 14 days after the date on which a name is entered in the register, make any necessary alteration in the index.

29.( The register shall be produced at the commencement of the company's annual general meeting and remain open and accessible during the continuance of the meeting to any person attending the meeting.

General

5.27      Section 325 requires companies to maintain a register for the purpose of recording those notifications made to them by their directors under section 324. They must also inscribe in the register particulars of rights to subscribe for shares or debentures of the company granted to a director: he is not required to notify particulars of these. Part IV of Schedule 13 lays down additional requirements for the maintenance and inspection of this register, including the right of the public to require the company to provide a copy of the same for a prescribed fee.

The DTI's August 1996 proposals

5.28      The DTI proposed the retention of the section 325 register. The DTI's proposal that section 324 should be amended by the introduction of a disclosure threshold would, however, have meant that a company's register of directors' interests would not necessarily have accurately reflected the extent of a director's interests at all times.

Consultees' response and the DTI's conclusion

5.29      In light of the view of consultees that section 324 should not be amended, section 325 will not be affected by the DTI's proposals.

Remaining issues for consideration

5.30      It should be noted that issues relating to the impact of information technology on company registers will form part of the DTI's recently announced long-term review of corporate law.^[36]

Consultees are asked whether section 325 and Schedule 13, Part IV raise any other issues for reform.

Notification to the exchanges: Section 329

329.((1) Whenever a company whose shares or debentures are listed on a [recognised investment exchange other than an overseas investment exchange within the meaning of the Financial Services Act 1986] is notified of any matter by a director in consequence of the fulfilment of an obligation imposed by section 324 or 328, and that matter relates to shares or debentures so listed, the company is under obligation to notify [that investment exchange] of that matter; and [the investment exchange] may publish, in such manner as it may determine, any information received by it under this subsection.

(2) An obligation imposed by subsection (1) must be fulfilled before the end of the day next following that on which it arises; but there is disregarded for this purpose a day which is a Saturday or a Sunday or a bank holiday in any part of Great Britain.

(3) If default is made in complying with this section, the company and every officer of it who is in default is guilty of an offence and liable to a fine and, for continued contravention, to a daily default fine.

Section 732 (restriction on prosecutions) applies to an offence under this section.

General

5.31      This section requires companies whose shares are listed or admitted to trading on a UK recognised investment exchange ("RIE") (within the meaning of the Financial Services Act 1986 and other than an overseas investment exchange) to pass the notifications they receive from directors under sections 324 or 328 to the relevant exchange for the listing or trading of those shares. The relevant exchange must be notified by the end of the day following the day of notification.
5.32      The obligation imposed by this section extends only to information of which the company is itself notified by the director. It does not therefore cover, for example, the grant of options to subscribe for securities to a director, which the company is obliged to put into the register but which the director is not bound to notify.^[37] Listing Rule 16.13^[38] of the Stock Exchange takes account of this but it is for consideration whether the section itself should be amended to make it clear that the company should transmit this information also.^[39] Then the criminal sanctions would be available, but this may be a factor of decreasing significance if the Financial Services Authority are given power to impose civil penalties for breach of such requirements.^[40]

The DTI's August 1996 proposals

5.33      The DTI proposed that section 329 might be amended in isolation so as to exempt from immediate disclosure to exchanges those transactions proposed as suitable subjects for the "disclosure threshold" scheme envisaged for section 324 as well as those suggested for outright exemption (as an alternative to reform of the whole disclosure process via reform of section 324 and Schedule 13, which it explicitly favoured). It was noted that if section 329 alone was amended:

it would only result in a relaxation of the requirements in relation to the information that must be passed to the exchange on which the company's shares or debentures are listed or admitted to trading. It would thus benefit companies and the relevant stock exchanges, but not directors who would still be required to disclose each transaction to the company as it occurred.^[41]

5.34      In addition, it was proposed that the section be amended to make it clear that companies need only notify one exchange of changes in directors' interests in the company where its shares or debentures were quoted on more than one domestic exchange.
5.35      The problem here identified was that, as a result of the section having been drafted at a time when the Stock Exchange was the only relevant recognised investment exchange, the drafting thus failed to anticipate the recognition of, for example, Tradepoint as an RIE (the requirements also now cover the AIM). This had led to speculation that the section could be interpreted as requiring companies to notify all RIE's on which their shares were quoted, even if without their knowledge.

Consultees' response and the DTI's conclusion

5.36      Many respondents argued that, although the objectives of the DTI's proposals were to be commended, aggregation would not reduce the overall burden on companies because of the complexity of the thresholds which would have to be monitored. In view of this, many major companies said they would continue to disclose all transactions to the Stock Exchange immediately. They also expressed the view that the aggregation proposals might lead to administrative errors and therefore the failure properly to notify and disclose directors' interests.
5.37      Some consultees argued that the purpose of notifications under section 329 should be only to ensure the timely disclosure of price-sensitive information. They took the view that the very large number of current disclosures obscures significant transactions which are of interest to investors and shareholders. In light of these concerns, the DTI has concluded that certain types of transactions, including transactions relating to discretionary PEPs and scrip dividends, should be exempted from the section 329 disclosure requirements; all ordinary sales and purchases of the company's shares and other non-exempted types of transaction would, however, have to be disclosed rapidly to the relevant investment exchange. The DTI has suggested that the Secretary of State would have a new power to designate by order the types of transactions which should be exempt. The DTI has relayed these conclusions to us with the request that we take them forward in the context of our wider study.
5.38      Consultees strongly endorsed the proposal to amend the section to make it clear that companies need only notify one exchange of changes in directors' interests.
5.39      In these circumstances it seems to us that the only specific question that we need to ask of consultees is the one identified above regarding options to subscribe.

Consultees are asked if section 329 should be amended so that a company is bound to transmit to the relevant exchange details of information which the company is bound to enter into the register of directors' interests without notification by the director pursuant to section 325(3) and (4).

Consultees are also asked if section 329 raises any issue for reform not mentioned above.

Note 1   See para 4.214 above.     [Back]

Note 2   See para 4.219 above.    [Back]

Note 3   See para 4.223. There is a similar Model Code for AIM listed companies: see Appendix 12 of the AIM rules.    [Back]

Note 4   Indeed many would argue that benefits flow from directors owning shares in their own companies.    [Back]

Note 5   See para 2.17(9) above.     [Back]

Note 6   See para 2.17(8) above.     [Back]

Note 7   See para 2.17(10) above.     [Back]

Note 8   See para 5.1 above.    [Back]

Note 9   See paras 3.34, 3.41-43 and 3.64 above.    [Back]

Note 10   See paras 5.6-5.19 below.     [Back]

Note 11   See paras 5.20-5.26 below.     [Back]

Note 12   See paras 5.27-5.29 below.     [Back]

Note 13   See paras 5.31-5.39 below.     [Back]

Note 14   Para 4.216.     [Back]

Note 15   Disclosure of Directors' Shareholdings - Proposal for an Order under the Deregulation and Contracting Out Act 1994.    [Back]

Note 16   There is an exception for interests in the shares of wholly-owned subsidiaries: s 324(6). Such interests could only be interests held as nominee for some other group company.    [Back]

Note 17   A director need not notify the company of a right to subscribe which it grants to him, and the company automatically comes under an obligation to insert particulars of any such option in the register maintained under s 325. But a director must give notice of rights to subscribe granted to persons whose interests are attributable to him under s 328: see s 328(3)(a).     [Back]

Note 18   See Part 8 below.    [Back]

Note 19   Sched 13, para 14(2).    [Back]

Note 20   Ie where directors undertook buy and sell transactions on the same day, those transactions could be offset and disclosure only required in relation to the net purchase or sale.    [Back]

Note 21   DTI consultative document, para 4.33, p 15.    [Back]

Note 22   Ie Personal Equity Plans.    [Back]

Note 23   See paras 5.27-5.29 below.    [Back]

Note 24   See para 5.16 above.    [Back]

Note 25   As indicated above, we deal with the question of the persons whose interests should be attributed under s 346 in Part 8 below and the question whether the section should be decriminalised in para 10.37 below.    [Back]

Note 26   See the questions following para 5.19 below.    [Back]

Note 27   Compare Companies Act 1985, Sched 2, para 4(1).    [Back]

Note 28   See the Model Code in Appendix E, para (10).    [Back]

Note 29   See para 5.8 above.    [Back]

Note 30   Sections 328 and 346.    [Back]

Note 31   This power has been exercised: see the Companies (Disclosure of Direectors' Interests) (Exceptions) Regulations 1985 (SI 1985/802).    [Back]

Note 32   See Commissioner of Stamp Duty (Queensland) v Livingston [1965]AC 694; Ayerst v C & K (Construction) Ltd [1976] AC 167. A similar doubt may arise in the Scots law of intestate succession. It is thought unlikely that in Scots law a creditor in a sequestration or in a corporate insolvency would be regarded as a trust beneficiary in terms of para 2 of Sched 13; the creditor would not have the interest of the trust beneficiary which takes the form of the rights of action set out in Inland Revenue v Clark's Trustee 1939 SC 11.     [Back]

Note 33   See also para 8. Under the general law, such appropriation is not required for a trust to be completely constituted: Hunter v Moss [1993] 1WLR 934.    [Back]

Note 34   A similar power in relation to Sched 13 might enable the rules in Pt I of Sched 13 to be brought closer to those governing the disclosure of interests in shares under Pt VI of the Act if that is thought desirable. Pt VI is outside this project.    [Back]

Note 35   Under Listing Rule 16.13, the notification must be made to the Stock Exchange without delay (see Appendix E below).    [Back]

Note 36   See the DTI's Consultative Paper, para 3.4.    [Back]

Note 37   See ss 324(1), 325(3) and 328(3).    [Back]

Note 38   See Appendix E.    [Back]

Note 39   This would be consistent with the approach taken in relation to Sched 7. Sched 7, which sets out the requirements for the directors' report to be annexed to the annual accounts states that in addition to the information shown the register of directors' interests details of options to subscribe should also be given (para 2B).    [Back]

Note 40   Financial Services and Markets Bill: A Consultation Document (July 1998), para 13.4. See para 1.25 n 28 above, and para 10.34 nn 65 and 67 below.    [Back]

Note 41   The DTI's Consultative Paper, para 4.44, p 18.    [Back]