Section 124 of the Companies Act 1997 defines “relevant interest” for the purposes of section 126, which requires a director to disclose share dealing.
Section 124(1) — when a director has a relevant interest
(a) is a beneficial owner of the share; or
(b) has the power to exercise any right to vote attached to it; or
(c) has the power to control the exercise of any right to vote; or
(d) has the power to acquire or dispose of the share; or
(e) has the power to control the acquisition or disposition of the share by another person; or
(f) under or by virtue of any trust, agreement, arrangement or understanding relating to the share — whether or not that person is a party to it — may at any time have any of the powers in (b) to (e).
“Whether or not the director is registered in the share register as the holder of it”. Registration is irrelevant. Because section 72 keeps trusts off the register, a director’s real position is often invisible there — and section 124 is what makes the substance disclosable.
Paragraph (f) is the widest: an interest arising under an arrangement or understanding the director is not even a party to, exercisable at any time.
Section 124(2) — interests held through others
(a) that person or its directors are accustomed or under an obligation, whether legally enforceable or not, to act in accordance with the directions, instructions, or wishes of a director in relation to voting, controlling the vote, acquiring or disposing of the share, or controlling another’s acquisition or disposition; or
(b) a director has the power to exercise any right to vote attached to 20% or more of the shares of that person; or
(c) a director has the power to control the exercise of votes attached to 20% or more; or
(d) a director has the power to acquire or dispose of 20% or more of the shares of that person; or
(e) a director has the power to control the acquisition or disposition of 20% or more,
that director has a relevant interest in the share.
Paragraph (a) is a behavioural test — the holder acts on the director’s wishes, whether or not obliged to. Paragraphs (b) to (e) are numerical: a 20 per cent stake in the holder is enough, with no need to show any actual influence.
So a director who holds 20 per cent of a family company that owns shares in the company has a relevant interest in those shares, and must disclose dealings in them.
Sections 124(3) to (5) — the width of “power”
(a) is expressed or implied; (b) is direct or indirect; (c) is legally enforceable or not; (d) is related to a particular share or not; (e) is subject to restraint or restriction, or capable of being made so; (f) is exercisable presently or in the future; (g) is exercisable only on the fulfilment of a condition; or (h) is exercisable alone or jointly.
Section 124(4) adds that a power exercisable jointly is deemed exercisable by either or any of those persons. Section 124(5) goes further still: a reference to a power includes a power that arises from, or is capable of being exercised as the result of, a breach of any trust, agreement, arrangement, or understanding — whether or not legally enforceable.
The definition is drafted to defeat structuring. An option not yet exercisable, a voting understanding with no contract behind it, a joint power shared with a spouse, and even a power the director could only exercise by breaching a trust all count. If you can influence the vote or the disposal of a share, assume you have a relevant interest and disclose.
Section 125 — interests to be disregarded
| Excluded interest | |
|---|---|
| (a) | The person’s ordinary business consists of or includes the lending of money or the provision of financial services, and the interest is held only as security for a transaction entered into in good faith in the ordinary course of that business |
| (b) | The interest arises by reason only of acting for another person to acquire or dispose of the share on their behalf, in good faith in the ordinary course of business of a stockbroker, and the person is a member of a stock exchange |
| (c) | The interest arises solely by reason of being appointed a proxy for a particular meeting, and the instrument is produced before the start of the meeting under Schedule 2 clause 6(4) or by a time specified in the constitution |
| (d) | The person is a trustee corporation or a nominee company and holds the interest by reason only of acting for another in good faith in the ordinary course of that business |
| (e) | The person holds by reason only that the person is a bare trustee of a trust to which the share is subject |
Section 125(2) adds a useful clarification: a trustee may be a bare trustee notwithstanding that he is entitled as a trustee to be remunerated out of the income or property of the trust. Being paid does not take a bare trustee out of paragraph (e).
Paragraph (a) mirrors section 7(d) and section 64(5), which likewise disregard shares held by way of security only in the ordinary course of a money-lending business. The Act consistently declines to treat a lender’s security as ownership.
Where the definition is used
- Section 126 — a director who acquires or disposes of a relevant interest in the company’s shares must, forthwith, disclose to the board the number and class of shares, the nature of the relevant interest, the consideration and the date, and ensure the particulars are entered in the interests register.
- Section 57(3)(b) — the disclosure document for a buy-back must state the nature and extent of any relevant interest of any director in the shares the subject of the offer.
- Section 63(5)(b) — the same for a financial assistance disclosure document.
“Interested” under section 117 concerns a director’s interest in a transaction to which the company is a party, and triggers disclosure under section 118 and possible avoidance under section 119.
“Relevant interest” under section 124 concerns a director’s interest in shares, and triggers the share dealing disclosure in section 126. The two regimes are separate, and a director may be caught by both at once.
Sources
- Companies Act 1997 — ss 7, 57, 63, 64, 72, 117–119, 124–127, 164; Schedule 2
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.