European Monetary Union: re-denomination of share capital by UK companies

European Monetary Union:

Re-denomination of share capital by UK companies

European Monetary Union became a reality on 1 January 1999, with the introduction of the euro as a parallel currency in the eleven Member States which will initially be participating in EMU. During the initial three year transition period most of the companies incorporated in those Member States will voluntarily re-denominate their share capital into euro, and those which do not will face compulsory re-denomination when their national currencies cease to exist at the end of the transition period.

Although the United Kingdom is not joining EMU in the first wave, it is becoming increasingly probable that it will join sooner rather than later. It is also likely that, when it does join, the transition period applicable to the UK will be shorter than the three year period proposed for the initial Member States.

UK companies may therefore need to consider issues related to the re-denomination of share capital at a relatively early stage.

This briefing note gives an overview of timing, the existing UK legal position, and the proposals for legislative change which have been announced by the Department of Trade & Industry.

Timing

It is unlikely that UK companies in general will wish to re-denominate before (i) a decision on UK membership has been made, (ii) legislative changes to facilitate re-denomination have been brought into force, and (iii) (in the case of public companies) abolition of the requirement in section 118 Companies Act 1985 for a minimum allotted share capital of £50,000 denominated in sterling. Most are likely to re-denominate during the UK transitional period, quite probably at the beginning of that period, because by then the sterling/euro exchange rate will be locked, and conversion during the transition period will avoid the uncertainties of compulsory re-denomination.

A small number of UK companies may wish to consider re-denomination at an earlier date. These could include dual listed and other special companies such as Eurotunnel, Shell and Unilever, and companies with euro-denominated assets and earnings which may wish to align their share capital and accounting currency.

The existing UK position

It is well established that a UK company may prepare its accounts in any currency it chooses, may elect for taxation to be assessed in its currency of account, and may issue shares denominated in one or more foreign currencies (which include the euro from January 1999). However, it should be remembered that UK public companies must maintain a minimum allotted share capital of £50,000 denominated in sterling.

No statutory procedure or mechanism exists which would enable a UK company to re-denominate issued share capital into another currency. Under the Companies Act 1985 a company may make certain structural changes to its share capital (by increasing, reducing, sub-dividing or consolidating shares), but this can only re-denominate the nominal amount of each share, not its currency.

It is possible to achieve re-denomination indirectly by replacing share capital, for example by cancelling all existing shares and issuing new shares denominated in euro. However, cancellation or reduction of share capital generally requires not only shareholders' approval but also court approval. That mechanism not only entails an expensive and lengthy procedure, but would be unworkable on any scale. There are over 1.25 million companies on the UK register, and the Companies Court simply could not cope with re-denomination effected by the reduction method.

It is also possible to side-step the requirement for court approval by using the mechanism for purchase of own shares available under sections 159 to 181 Companies Act 1985 and issuing new euro-denominated shares in their place. However, that route would still require the passing of a resolution in general meeting, the acceptance of the buy-in offer by all shareholders, and in many cases an unacceptable stamp duty cost. It would not, however, provide a solution for public companies, because acceptance of a buy-in offer by all shareholders would be virtually impossible to achieve, and the requirement for a minimum allotted share capital of £50,000 denominated in sterling would still remain.

Legislative changes proposed by the DTI

In September 1998, following an extensive consultation process, the DTI announced proposals for legislative change to provide a new statutory mechanism for effecting re-denomination of share capital. Happily the delays associated with primary legislation are to be avoided by using the De-regulation and Contracting Out Act 1994 to amend the Companies Act 1985 by statutory instrument. The DTI proposes a further consultation process early in 1999, with a view to implementing the new legislation by the end of this year.

The proposals at this stage are in outline only, but the final legislation is likely to include the following provisions:

• Prior to the commencement of the UK transition period, companies will be permitted to re-denominate their share capital by shareholders' resolution. They will be able to re-denominate into any recognised currency, including the euro.
• During the UK transition period, companies will also be able to re-denominate by directors' resolution, but this will only apply to re-denomination into the euro (not other currencies).
• Re-denomination would be by the "top down" method, which means that the total issued share capital would be converted, and the resultant euro amount divided by the number of shares in issue to determine the new nominal or par value per share. This is likely to result in the nominal value per share becoming an awkward decimal fraction, and companies may wish to consider subsequent re-nominalisation, that is adjusting the converted par value to a sensible amount.
• Re-nominalisation will involve rounding par values up or down to a specified amount, which will inevitably result in an increase or reduction in total capital. However: -companies will be able to effect that adjustment by ordinary resolution (unless it results in a reduction of share capital, when a special resolution will be needed to comply with the provisions of the Second Company Law Directive) -court approval to the change in total share capital will not be required if that change is compensated by an adjustment to other undistributable reserves of the company.
• The new legislative mechanism would not be available to change the rights of shareholders or third parties if they are linked to the nominal value of shares, without the consent of those affected. Difficulties may therefore arise in relation to options, warrants, convertible debt instruments and convertible shares unless a way is found to address those difficulties in the new legislation.
• The legislation will include provision for the £50,000 minimum share capital requirement for public companies to be expressed and satisfied in sterling, euro or any other national currency.
• The London Stock Exchange has indicated that circulars related to re-denomination of share capital into euro will not require pre-vetting, thus simplifying and reducing the cost of the process for listed companies.
• The DTI was urged during the consultation process to consider ways of introducing the concept of no-par value shares, as has already been done in New Zealand and Australia. However the Second Company Law Directive does not permit true no par value shares, and the DTI is therefore powerless to introduce such a change without changes to the Directive itself.
• A number of potential problem areas have been identified. These include partly paid shares (which are relatively rare these days), if re-denomination increases the liability of the holder to contribute to share capital. In addition, where there are different classes of shares, class consents may be required for re-denomination.

Summary

• UK companies which for special reasons may wish to re-denominate after January 1999, but before any decision is made on UK participation in EMU, may be able to do so by an indirect method.
• Re-denomination is unlikely to be a serious issue for most UK companies until a decision is made on UK participation and the UK transition period commences.
• In general, UK companies are best advised to await the promised new legislation.

Arfon Jones