Division 7 of Part VI of the Companies Act 1997 is one section long, and it closes off a way of manufacturing control out of nothing.
Section 64(1) to (3) — the prohibition
(1) Subject to this section, a subsidiary shall not hold shares in its holding company.
(2) An issue of shares by a holding company to its subsidiary is void and of no effect.
(3) A transfer of shares in a holding company to its subsidiary is void and of no effect.
There is no discretion and no ratification. An issue or transfer within subsections (2) or (3) simply does not happen: no shares are created, no title passes, and any entry in the share register is liable to be rectified under section 71.
That makes this a genuine due diligence point. Before any share issue or transfer within a group, check the definitions in sections 5 to 7 and confirm that the recipient is not a subsidiary of the issuer.
Why the rule exists
Three problems arise if a subsidiary holds its parent’s shares.
- Circular capital. The parent’s capital is invested in the subsidiary, which invests it back in the parent. Money goes round in a circle and the group’s assets are overstated.
- Self-perpetuating control. The parent’s board controls the subsidiary, which votes the parent’s shares — so the board votes itself into office using shareholders’ money.
- Indirect capital reduction. A subsidiary buying parent shares is, in substance, the group buying its own shares — which section 56 permits only under sections 57, 89 and 91 to 93, with solvency testing and disclosure.
Section 64 removes all three at source. Compare section 57B, which suspends the rights attaching to shares a company holds in itself — the same policy, applied to the treasury share regime.
Section 64(4) — the grandfathering rule
Where a company that holds shares in another company becomes a subsidiary of that other company —
(a) the company may, notwithstanding subsection (1), continue to hold those shares; but
(b) the exercise of any voting rights attaching to those shares shall be of no effect.
This deals with the case where the relationship changes after the shares were lawfully acquired — typically after an acquisition or restructure. Forcing a sale could be commercially destructive, so the Act permits the holding to continue. But it strips out the mischief: the votes are of no effect.
Note what subsection (4) does not suspend. Unlike section 57B, it says nothing about distributions — so dividends on those shares continue to be payable, which is a point to check when modelling group cash flows and preparing group financial statements under sections 181 and 182.
Because the votes are of no effect rather than the shares being cancelled, the shares remain on the register and remain issued. That affects the arithmetic for a special resolution, for a buy-out calculation, and for a quorum. A chair who counts those votes will produce an invalid resolution.
Section 64(5) — the trustee exception
Nothing in this section prevents a subsidiary holding shares in its holding company in its capacity as a personal representative or a trustee — unless the holding company or another subsidiary has a beneficial interest under the trust, other than an interest that arises by way of security for the purposes of a transaction made in good faith in the ordinary course of the business of lending money.
The reasoning matches section 7, which disregards shares held in a fiduciary capacity and shares held by way of security in a money-lending business when deciding whether a company is a subsidiary. A trustee company in a group may hold parent shares for outside beneficiaries; it may not use a trust as a device to hold them for the group itself.
Section 64(6) — nominees
This section applies to a nominee for a subsidiary in the same way as it applies to the subsidiary.
So the prohibition cannot be avoided by having the shares registered in the name of a third party who holds for the subsidiary. This mirrors section 7(b), under which shares held by a nominee for a company are treated as held by that company for the purposes of the subsidiary test.
Because section 72 prohibits entering trusts on the share register, a nominee holding will appear on its face as a beneficial holding. Section 64(6) means the substance still governs — and it is why group structures should be documented clearly enough to identify who really holds what.
Practical points
- Test the relationship before the transaction. Under section 5, a subsidiary relationship arises from control of the board, more than half the votes, more than half the issued shares, or entitlement to more than half of every dividend — and it runs down the chain under section 5(1)(b).
- Check nominees and trusts, not just registered names — section 64(6) and the section 7 attribution rules.
- On an acquisition, identify any existing cross-holding and plan for section 64(4): the shares survive, the votes do not.
- Do not count disabled votes in resolutions, quorums or threshold calculations.
- Consider selling or cancelling a grandfathered holding as part of a group tidy-up — a non-voting parcel of parent shares held by a subsidiary is an awkward asset.
- If you need the group to hold its own shares, use the proper routes: a buy-back under section 57, treasury shares under sections 57A to 57C within the 5 per cent limit, or an amalgamation.
Sources
- Companies Act 1997 — ss 5–7, 56, 57, 57A–57C, 64, 71, 72, 88, 91–93, 181, 182
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.