Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)

I beg to move amendment No. 81, in clause 22, page 9, line 3, leave out paragraph (a).

Eric Illsley (Barnsley Central, Labour)

With this it will be convenient to discuss the following: Amendment No. 8, in clause 22, page 9, line 3, leave out from ‘repealed' to end of line 6.

Government amendment No. 83.

Clause stand part.

Amendment No. 9, in clause 23, page 9, line 18, leave out subsection (2).

Amendment No. 48, in clause 23, page 9, line 22, leave out subsections (3) and (4).

Clause 23 stand part.

Amendment No. 10, in clause 24, page 9, line 28, after ‘articles', insert ‘by unanimous resolution'.

Amendment No. 11, in clause 24, page 9, line 28, after ‘articles', insert

‘by unanimous resolution less one vote'.

Amendment No. 12, in clause 24, page 9, line 28, after ‘articles', insert

‘by a resolution of at least 90% of its members'.

Clause 24 stand part.

Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)

At present, under section 17(2)(b) of the 1985 Act, companies are able to provide that certain provisions of their memorandum can never be changed. As we discussed, under the Bill, the memorandum will contain the bare information that is required to evidence the intention of the founder members to form a company and companies will not need, or be able, to alter their memorandum.

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

Will the Minister explain what part of the memorandum a company cannot change at present? I thought that changes were limited to company incorporation or something similarly limited?

Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)

It is limited. Would it be helpful if I wrote to the hon. Gentleman with the specifics?

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

That is fine.

Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)

Clause 22(1)(a) is an attempt to replicate section 17(2)(b) in the context of new Bill provisions, where all information of constitutional significance will be contained in articles. More generally, clause 22 implements the recommendation of the company law review that companies should be permitted to entrench their provisions and their articles by making the amendment of those provisions subject to the fulfilment of conditions more onerous than the passing of a special resolution. That is what is normally needed to amend articles. If a company wished to do so, it could state that a particular provision could be changed only with the consent of all members.

We were prompted to table amendment Nos. 81 and 83 by similar amendments that were laid in another place by Lord Hodgson, to whom we are grateful for having directed our attention to reconsideration of the provision. I think that the hon. Member for Huntingdon raised these issues on Second Reading too. It seems to us that the absolute entrenchment provided for by section 17(2)(b) and clause 22(1)(a) is not a good idea except in the case of special types of companies, such as charities, for which, in any case, we have separate rules. We cannot see any general benefit in allowing companies to set bits of their constitution in stone and put them beyond the reach of amendment even if they get unanimous agreement of all their members. Inflexibility can, as we all know, be a weakness. More often than not, things that seemed a good idea may turn out to be more trouble than they are worth.

For that reason, I do not wish to accept amendment No. 8, which seems to offer a world in which provisions can only be entrenched absolutely. I am not sure whether that is the purpose of the amendment, but that  is how I read it. Instead, Government amendmentNo. 83 allows for the possibility of change where it is clearly sensible, by saying that any provision for entrenchment can be bypassed if all the members agree.

I turn now to amendments Nos. 9 and 48. If entrenched provisions are to be capable of amendment, it is none the less important that they are amended only in accordance with the provisions for entrenchment that are set out in a company’s articles. Clause 23 aims to create a straightforward mechanism for checking that that has happened. First, we would require the company to notify the registrar when it has included provision for entrenchment in its articles. Secondly, when such a company delivers a document that makes or evidences an amendment to its articles, it is required to deliver, with that document, a statement of compliance. That should state that the amendment has been made in accordance with the company’s articles—in other words, in accordance with any relevant provision for entrenchment. The requirement to file a statement of compliance provides the registrar, and anyone who consults the public register, with an assurance that the company was at least aware that special rules were in force in relation to changes to its articles.

In addition, if the provision for entrenchment has been inadvertently overlooked by the company and the change to the articles is simply filed as a special resolution, without a statement of compliance, the registrar will be able to ask the company to certify whether it has observed all the relevant formalities before registering, what might otherwise be, an unauthorised change to the company’s constitution.

Few companies will take advantage of the entrenchment process. For those that do, it is not a major additional bureaucratic burden. It may help some of them make sure that they have got things right.

Finally, I turn to amendments Nos. 10, 11 and 12. In clause 24, the thrust of the amendments specifies a default threshold for removing a provision for entrenchment. I applaud the creativity of the hon. Member for Huntingdon in providing three thresholds to choose from. However, I fear that I will reject all of them because, in our view, that provision is not necessary.

Provision for entrenchment may itself set out the conditions in which that entrenchment can be removed. That is the prudent course. As with any of the other articles, if it does not, it can be removed by a special resolution, which may not be what was intended.

It is not appropriate or desirable for the statute either to prevent companies from setting their own laws about conditions in which a provision for entrenchment can be removed or by imposing a condition, other than the passing of an existing special resolution when companies have not made their own rules on that point.

It could be argued that the default position should be unanimity, rather than allowing for removal by special resolution where the provision for entrenchment is not itself entrenched. That is more likely than not to cause inconvenience in some cases, particularly in companies with many members.

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

What the Minister called inconvenience, I would call shareholder democracy.

Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)

Shareholder democracy can be entrenched in other ways—through other existing provisions—to enable shareholders to raise issues through resolutions in meetings of shareholders, but is it appropriate to involve 100 per cent. of them? Is the hon. Gentleman suggesting that 100 per cent. of shareholders should be involved if a rule is changed?

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

No, I am saying that we should keep things as they are, which is that 75 per cent. are needed to change the articles of a company.

Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)

Yes, indeed. Under a special resolution, if there are no provisions around entrenchment, a special resolution would be the way in which articles are changed. I am not sure how that75 per cent. fits with the point about 100 per cent., which is what I was addressing when he suggested that we would only have true shareholder democracy through 100 per cent. participation.

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

I am not sure about participation, because that would involve encouraging people to vote rather than percentages required to pass resolutions. However, in terms of passing resolutions, we will be maintaining that the status quo is appropriate. Notwithstanding that, we have provided the Minister with some fallback positions to take away the pain that she is going to be leading companies into through her proposed clause.

Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)

No doubt the hon. Gentleman will make it clear when responding to my contribution where he thinks the pain is. In our view, we are protecting shareholders appropriately by leaving it to them to decide what threshold to set rather than setting it in statute.

The other point that I ought to make is that the special resolution provision allows a resolution to be passed with a 75 per cent. shareholder vote. In a proper shareholder democracy or, indeed any democracy, minorities must be looked after as well. I hope that the hon. Gentleman will accept that.

I was arguing that unanimity less one vote and 90 per cent. of members seem rather arbitrary options. What if a company has thousands of members, or one member who holds 90 per cent. of the voting rights? Anomalies could arise because of the way that the hon. Gentleman has framed his amendments. Well advised companies will provide a threshold for removing provisions for entrenchment to suit their own circumstances with regard to the shareholding composition of each particular company. We cannot see that a default threshold other than the passing of a special resolution makes sense.

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

Companies can, indeed, set thresholds, either in their articles or through contract, but the ability to prevent the articles from being changed by requiring more than a 75 per cent. majority is not permitted. At 75 per cent., the articles can be  changed. Therefore, when people talk about entrenchment, it is within that remit.

Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)

I understand that, but I hope that the hon. Gentleman will also accept that we should enable companies to set their own walls around how they want to deal with entrenchment. That is all that the clauses try to do.

I have given a lengthy explanation. The hon. Gentleman is shaking his head from a sedentary position. I shall listen to what he says and then respond. I hope that he will agree to withdraw his amendments, which we believe to be undesirable.

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

Given the way that the clause and amendments are structured, the Chairman’s decision to merge them was a wise one. I shall start with clause 23, move to clause 24 and then discuss clause 22, which I hope will provide clarity and structure in what I say.

I begin with amendment No. 9. Clause 23 provides for a notice of entrenchment to be filed, but if an entrenchment resolution is passed, surely the resolution file at Companies House plus the revised version of the articles filed should be adequate. I cannot think of other such compliance provisions—perhaps the Minister could name some—so I ask the purpose of the extra piece of paper. Furthermore, the measures will increase regulation. The director will need to ask a lawyer to confirm whether the new notice is compliant. Even if it is blatant, he might want to do so as a belt-and-braces safeguard.

I turn to amendments Nos. 10 to 12. If the entrenchment clauses remain in the Bill—I shall argue in the stand part debate that they should not—better provision should be made for removing them. As the Minister pointed out, I have provided three possibilities for probing purposes. The first, in amendment No. 10, is a unanimous resolution. I note that, at last, the Government have accepted that concept and introduced their own amendment to that effect, so that is at least a move in the right direction, and we are pleased.

Secondly, amendment No. 11 allows for the fact that public companies always have more than one shareholder and private companies pre-1989 had to have at least two. Many still do because they never got rid of the spare shareholder post-1989. The way in which public holding companies got round that was to find an individual, normally one of the company’s directors, who would hold the second share subject to a declaration of trust, whereby that director promised to act in accordance with the holding company’s wishes. Such declarations of trust were in practice sometimes not made, depending on how efficient the company secretary was; sometimes they have been lost in the mists of time; or sometimes directors leave a company and old forms get thrown away. That means that getting unanimity can often be tough, which is why I suggest that articles should be removed by unanimous resolution less one vote. There may be other ways to get round the problem, and I would be grateful to hear them from the Minister.

Thirdly, amendment No. 12 puts back into play an amendment tabled by Lord Hodgson to reduce to90 per cent. the level of agreement required for the removal of articles. Lord Hodgson said that a figure of 90 per cent. would tie in with the amount required to buy out a minority in a takeover situation. I add that10 per cent. is the level needed to call a general meeting. Those amendments represent our three fall-back positions.

I now come on to amendment No. 8, amendment No. 7, which has not been selected, and clause stand part. As I have said, their provisions were discussed in Grand Committee and on Report in the Lords. The more I look at it, the more concerns I have about the company law review proposal both in mechanical and, increasingly, conceptual terms. Will the Minister explain clause 22(1)(b), which as often as I have read it, I simply do not understand? I note that she has tabled an amendment to delete paragraph (a), and I was not sure what that meant either. Perhaps it does not have to be explained now that it has been deleted. Why is there a reference to procedures “more restrictive” than those applicable to a special resolution, particularly as such resolutions can themselves be passed conditionally?

The Minister said that one reason for including these clauses is that some items in a memorandum of association cannot currently be changed. I intervened to ask about that, and she confirmed that the only current absolute entrenchment provision relates to the country of incorporation. With respect, that is not a strong point. I note that in the Lords Ministers explained that the mechanism in question will be useful now that there is to be no memorandum of association, and I appreciate that while a company can currently change its articles, it can only amend its memorandum. Other than that one provision, however, it can be amended with 75 per cent. agreement. I am not sure what the Government’s point was. Will the Minister elaborate on it?

One hears talk of investors, particularly venture capitalists, wanting to entrench rights. That is normally done by inserting veto provisions into the articles of association, usually relating to the management of the company. The same items are also typically agreed through consent clauses in contracts, with a shareholders’ agreement. However, because changing articles requires a 75 per cent. vote, the entrenchment aspect is liked by venture capitalists. As the articles are publicly filed, the entrenchment also acts as notification of the special arrangements to third parties. To what extent is the situation improved by extending those entrenchment provisions to 100 per cent. of a vote, rather than 75 per cent., which currently exists and will still exist, as the Minister rightly said, after we agree the Bill?

I am not entirely in the know about why we need this provision. What is worse is that a single shareholder—a holding company, say, or a group of manager-owners—could use this entrenchment procedure as an effective poison pill, for instance, to entrench their rights to named individuals being paid huge or index-linked salaries. If the company were taken over or purchased, it would presumably need to be wound up to get round the entrenching procedures in the Bill. What if that company held other assets? The situation could become messy.

David Howarth (Shadow Minister (Energy), Trade & Industry; Cambridge, Liberal Democrat)

The hon. Gentleman is making an interesting point, but surely the answer to it is that under clause 23 the entrenchments can only be made at the start when the company is formed or by unanimous consent. I do not see how the poison pill can be created later.

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

If two owners were to set up a company and they owned 100 per cent. of it, they could put in place whatever provisions that they wanted at the outset. That is my point and my concern.

The Government said that they would review this matter on Report, but we heard nothing on Third Reading in the Lords. Now the Minister comes up with a compromise, saying that 100 per cent. of shareholders can end the entrenchment. That is an improvement but hardly, we would maintain, most people’s idea of democracy. It is interesting that, in opposition, Labour was happy to attack company director fat cats at every opportunity, but now it is proposing a method of entrenching fat cats’ rights and attacking shareholder democracy. The Government need to answer conceptually how they got to this position.

The Institute of Directors said in its June 2005 brief:

“In response to ‘Modernising Company Law’ we stated: ‘Entrenching provisions need to be approached with care. In commercial companies they could be dangerous as a company could be held to ransom by a single shareholder holding one share (if he has a genuine grievance, his remedy will normally be to apply to the courts). We think it is essential to make it explicit in the legislation that any entrenching provision (and any entrenched provision) may be changed by a scheme of arrangement approved by the court regardless of absence of unanimity (or other level of approval stipulated in the constitution). We consider that this will reduce the impact of companies happily introducing a requirement for unanimity then living to regret it when the business cannot move on. We also think that there should be no encouragement for commercial companies to adopt entrenching provisions—for instance, any model form of constitution for such a company should not include wording for entrenching provisions (even as an optional extra).’”

In relation to the latter point, I should be grateful if the Minister confirmed that the model articles that we have previously debated will not hold an automatic entrenching provision.

The clause is unnecessary, will lead to trouble and I suggest that the Minister considers dropping it. We should be considering ways to improve shareholder democracy, not restricting it with entrenchment provisions. I do not know what Cedric the Pig is up to these days, but the Government are looking more like “Animal Farm” every day. I shall recommend that my colleagues vote against the clause.

David Howarth (Shadow Minister (Energy), Trade & Industry; Cambridge, Liberal Democrat)

I find myself in the odd position of opposing both the Government’s amendments and those tabled by the hon. Member for Huntingdon and supporting the original draft of Bill. Perhaps I should be sitting elsewhere.

The argument against entrenchment seems to go against one of the fundamental ideas of company law, which is that members of the company should be able to set up their business as they wish. If they want to set it up with entrenched clauses and rights, that is up to them. If they want to set it up with entrenched clauses  and rights, that is up to them. If that puts off other investors, which it might, that is their problem, because they could set it up in a different way. The basic problem that the hon. Gentleman put forward seems not to exist.

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

Using the hon. Gentleman’s rationale, presumably companies can ignore not only future shareholders, but creditors, stakeholders and anyone else they like so long a couple of directors get together at the start to say, “This is what we will do; we will entrench it forever and a day. That is fine.” I do not buy that.

David Howarth (Shadow Minister (Energy), Trade & Industry; Cambridge, Liberal Democrat)

When we get on to clause 105 we will have a debate about the balance between creditors and shareholders. If a company is set up in a way that puts off people from dealing with it, that is the problem of the people who set it up, not the problem of the law. This is an unnecessary restriction on what people can do with their own companies.

Getting rid of the possibility of entrenchment undermines a particular use of entrenchment that has not been properly considered yet. I am thinking of joint venture situations, where two companies or organisations come together to set up a company to undertake a joint venture for a limited purpose. It is important for such deals that they cannot be changed or undermined for the period of the deal. Entrenchment is an important aspect of that.

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

Again, I am afraid that I must disagree. A venture capitalist may want to entrench through a 75 per cent. proceeding but they will always be keeping in mind the next round of investment and the appreciation that additional investors will come into the company and therefore there must be an element of fluidity.

David Howarth (Shadow Minister (Energy), Trade & Industry; Cambridge, Liberal Democrat)

The hon. Gentleman is discussing a different point about venture capital. I was going to move on to that, so we might as well talk about it now. Again, it seems to me that if venture capitalists are prepared to put with various risks, that is up to them. An entrenched section of a company’s constitution obviously affects the business risk faced by investors in that company in particular ways. As long as everything is open and up front, people will be able to make their own judgments about whether investments are worth making.

My point was not about venture capitalists; it was about joint ventures and organisations coming together to create a special-purpose company to carry out a particular joint project between two organisations. In those sorts of situations, entrenchment becomes commercially important. Someone might ask why one would want an entrenchment under which people cannot agree to get out of it—

James Brokenshire (Hornchurch, Conservative)

I am listening carefully to the point the hon. Gentleman is making about joint ventures. Does he accept that in practice it is possible, by way of contract, to have a class A share and a class B share and therefore for decisions to be made for the class A share for one joint-venture party and the class  B share for the second joint-venture party to have to vote together. They are able to create such an arrangement by way of contract, rather than having to rely on a statutory provision that may not be able to be undone.

David Howarth (Shadow Minister (Energy), Trade & Industry; Cambridge, Liberal Democrat)

Yes, indeed. As the hon. Gentleman undoubtedly knows, there are other ways of doing things, connected with deadlocking companies in various ways. Those ways of undertaking joint ventures have grown up as a way of getting round the problem of not being able to entrench. It would be far simpler to be able to entrench provisions in the first place as part of a company’s constitution.

There is a point against absolute entrenchment: why should there be a situation in which the two parties come together and agree a situation where there is entrenchment even against their own agreement to give up the deal? That is because there is a commercial possibility that the two partners might wish to put themselves in a position where they cannot agree to call off the deal. They might wish to do that because they fear that they might give in to the blandishments of the other party at some later stage, so they set up a deal that cannot be called off. If we do not allow absolute entrenchment, we make such a deal impossible.

That arrangement contrasts with the deal that we were discussing a few moments ago, which can be called off by the parties by agreement. The two deals are quite different. Someone cannot set up a contract that cannot be called off by the parties, whereas entrenchment can go one step further.

The company law review team thought about a much wider set of commercial possibilities than the Government and the Opposition did. By removing the possibilities for entrenchment, we are removing commercial possibilities that might be valuable in future.

James Brokenshire (Hornchurch, Conservative)

The hon. Gentleman says that it is impossible to entrench through contract, but surely it would be possible to entrench an understanding or agreement through contract using the sort of mechanisms to which we have alluded.

David Howarth (Shadow Minister (Energy), Trade & Industry; Cambridge, Liberal Democrat)

Not in the absolute way that the clause allows. Under a contractual arrangement, the two parties can get together to agree to end the contract. The entrenchment provision in the Bill goes one stage further and allows an entrenchment that can apply even if the parties agree to remove the entrenchment. There is a commercial reason why that might be desired: parties might not want to be put in a position in which the other side tries to persuade them to change their minds.

I suppose that the illustration to give is the story of Ulysses and the Siren. Members will remember that Ulysses—Odysseus—was travelling on his ship and heard about the beautiful song of the Sirens, but he knew that the song would attract his sailors and make them leave their ships, and they would be killed on the rocks. He got his sailors to bind him to the mast, so  that he could listen to the song of the Sirens and not be destroyed. The entrenchment provisions are an attempt to allow that possibility in commercial circumstances. They mean that the only way out of the problem of disagreement or people changing their minds is not agreement by the parties, but by action by the court under section 459 of the 1985 Act or by winding up on just and equitable grounds. That is what the parties in this kind of deal want; they want the deal to be so heavily entrenched that the only way out of it includes the supervision of the court. I ask the Minister to reconsider her amendment, and I hope that the hon. Member for Huntingdon will not press his amendment to a vote.

Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)

We sit in the middle of the two arguments, and that is probably the right place to be. I shall deal with some of the detailed issues before discussing the point of principle.

I was asked why notice needs to be given to the registrar. I have already given the answer, but I shall repeat it, if that helps the hon. Member for Huntingdon. In clause 23, we are trying to create a straightforward mechanism for checking that that has happened. First, we require the company to notify the registrar when it concludes provision for entrenchment in its articles. Secondly, when such a company delivers a document making or evidencing an amendment in its articles, we require it to deliver with that document a statement of compliance, stating that the amendment has been made in accordance with the company’s articles—that is, in accordance with any relevant provision for entrenchment.

I was asked what clause 22(1)(b) is about. It enables companies to set a higher threshold than that required to pass a special resolution. That is, in fact, the essence of entrenchment. Companies are also currently permitted to entrench provision in their memorandums.

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

Will the Minister explain the purpose of deleting paragraph (a)?

Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)

We are deleting that paragraph because we accept—this is why I said that we sit in the middle of the two arguments—that there may be circumstances in which it is right to give a provision that enables people to review whether the entrenchment should hold. Clearly, leaving in clause 22(1)(a) would not enable that to happen.

It was alleged that directors could use the entrenchment mechanisms to give themselves permanent rights to, say, excessive salaries; that was one of the things that the hon. Gentleman alleged that we were doing. Directors are not able to enforce rights that are given to them as directors under a company’s articles, so that would not be an effective way for directors to guarantee their level of remuneration. The articles are a contract between a company and its members as members.

In the short time that I have had to get to grips with the Bill, I have, as a non-lawyer, learned a lot—Imight even get a degree out of it—about the case of Hickman v. Kent or Romney Marshes Sheep Breeders Association, and the provisions reflect that. If  companies want to entrench provisions about directors’ remuneration, or anything else in the articles, they may do so; we are not preventing that from happening. However, the amendments seek to ensure that any entrenchment should be capable of being removed if a company’s members change their minds.

Why have a concept of entrenchment? Why go beyond the special resolution? That is the nub of the argument. We have to look back at the Companies (Audit, Investigations and Community Enterprise)Act 2004, which introduced new provisions that make it difficult to entrench provisions in articles. There was a demand for us to do so, particularly from social enterprise and community interest companies. Not every company will want to be eligible, or to be a community interest company. We agree with the CLR that the facility should be available generally, so that people can avail themselves of it if they wish to do so.

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

What sort of things might community interest companies want to see entrenched?

Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)

I suppose that they might want to entrench in their articles things such as the activities that they undertake and the purposes to which their profits might be put.

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

I am pleased to hear that. However, if the driver of the provision is community interest companies, why can provisions not be put in place for community interest companies only? Why should they affect all other companies as well?

Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)

If these are just provisions of which companies can avail themselves, why limit it? I cannot, off the top of my head, think of other circumstances in which a company might wish to entrench its provisions. We might go back to what we were saying earlier about a specialist company wanting to limit itself to its specialist activity. There is a range of things—[Interruption.] I am being assisted with ideas. It might be, as the hon. Member for Cambridge said, a joint venture. There are all sorts of situations in which companies might seek to entrench, and we should not try, in this Bill, to limit their ability to do so.

Shailesh Vara (North West Cambridgeshire, Conservative)

By way of clarification, can the Minister give any indication as to roughly how many community interest companies there are?

Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)

About 300—[Interruption.]

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

The Minister looks at me in astonishment. The reason for my astonishment is the news that the driver for destroying company shareholder democracy is 300 community interest companies.

Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)

I have two things to say to the hon. Gentleman. I did not say that that was the driver for destroying company shareholder democracy—I do not think that it is—and community interest companies are pretty new. We passed the legislation to facilitate their development only a year ago. They might well grow over time. However, other bodies—joint venture companies  could be one, and those who are better versed in these matters might be able to think of further examples—might want entrenchment provisions.

Jim Cousins (Newcastle upon Tyne Central, Labour)

Under the Government’s building schools for the future programme, there is provision for local education partnerships to operate the programme in company format. My local authority is doing that, and it will have a 10 per cent. shareholding. It might well—indeed, it might be well advised to—entrench a limitation on how the company might operate to protect its interests in future.

Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)

That is an excellent example, and I thank my hon. Friend for it. I am somewhat puzzled as to why there is an objection to such a facility, because without it we would limit the ability of companies to pursue their objectives in the way that they would wish.

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

Is it not the case that the proposal is to remove CICs from the consolidated Bill into a stand-alone Bill? If that is the case—the Minister may wish to elaborate on that—would it not be wise to put the provisions into that separate piece of legislation?

Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)

It would be if we wanted to limit the provisions to CICs, which we do not necessarily need to do. The hon. Gentleman keeps saying that he believes the provisions to be an attack on shareholder democracy. All I can say is that it is up to members of a company to decide for themselves how they wish to deal with such issues in the articles that they themselves agree. We are not compelling them to go down a particular route.

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

I do not think that to be the case in practice. What if, as the Minister said, that decision was taken at the outset by, say, the original two members. By the time lots more members come along, under the Government’s proposal—at least we have that—they cannot change anything unless 100 per cent. of them agree. It is entrenched.

Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)

There will be facilities. That is why we have a middle route. We are not saying what the hon. Gentleman sets out, although it is what the hon. Member for Cambridge would like us to say. He would like the entrenchment to be permanent.

On reflecting on the debate in the House of Lords, we understood the argument that there may well be situations in which people want to challenge the entrenchment and override it. Therefore, we have provided that companies can set the rules under which they will decide whether to lift the entrenchment.

In the course of the debate, I have agreed rather more with the hon. Member for Cambridge than with the hon. Member for Huntingdon. We have had a pretty considered view on how to deal with entrenchment. I hope that I can convince the Committee that we have listened to the debate, which has taken place both in the House of Lords and outside with various stakeholder interests. We have produced a sensible compromise. It is a way forward that provides for entrenchment but ensures that it is not for ever.

Quentin Davies (Grantham & Stamford, Conservative)

I am a little concerned. I strongly believe that legislation in general, particularly company law, should be permissive. We should try to ensure that we provide the greatest degree of flexibility for the future, and that we allow people to run their businesses and order their lives in whatever way they want, subject only to ensuring that the rights of other people are defended.

It may well be that there are a limited number of cases when somebody wishes to entrench the articles of association of a company. What is clear is that one cannot entrench by contract for the simple reason that a contract under common law can always be varied by agreement of the two parties. If one wants to have a genuine sense of entrenchment—of something being absolutely permanent and irrevocable except only when it is overridden by a court decision—then one has to have the entrenchment provisions in company law, which we already have. Before we remove them, we ought to be careful, because we will be taking away one specific option that currently exists. I do not always have a lot of sympathy with the Liberal Democrats, but I do in this case.

The right hon. Lady is possibly on the wrong lines, because amendment No. 83 will provide for something less than entrenchment in our company legal system. It will mean that something is only entrenched to the extent that all the shareholders involved did not agree to change it. That is not strictly speaking entrenchment.

I am not familiar with the Bill’s form before it arrived in this House, but in the form in which it appears before us now it genuinely provides for entrenchment. It is clear from clause 22 that entrenchment can only take place either at the outset, when a company is formed, when, by definition, all members agree to it because otherwise they would not be joining the company, or subsequently by unanimous agreement. So the concern of my hon. Friend the Member for Huntingdon on shareholder democracy is fairly met in that provision, because the people forming the company are voluntarily binding themselves to an irrevocable arrangement.

If we go down the Government’s road and provide for such entrenchment subsequently to be capable of relaxation by agreement, there will not be an irrevocable arrangement and we shall deprive people of being able to reach such irrevocable agreements in future. It is not clear to me that the interests of third parties might be unreasonably damaged by entrenchment—I do not follow the argument that there will be damage to the company’s creditors or to other stakeholder interests.

Those people will know when they start to deal with the company concerned that they are dealing with a company that was formed in such a fashion. So, unless I am persuaded that there is some third party whose interests the House of Commons ought to have at heart and who will not be properly protected, I shall be very reluctant indeed to vote to destroy the possibility of forming a particular type of company and a particular type of arrangement between people who want to form a company.

The arrangement is provided for in the law and has not, so as far I know, produced any great scandals or difficulties. If we abolish it, we will restrict the scope of company law in this country.

Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)

I thank the hon. Gentleman for that contribution—I have a lot of sympathy with it. I am not sure how people will vote if we divide, but he might vote with the hon. Member for Cambridge, and perhaps with us. The provisions that will be made in company articles on entrenchment will be freely entered into, so if on establishing its articles the company wishes to make entrenchment irrevocable, it can do so freely. Our amendments simply provide, in response to the debate in another place, the facility for companies to choose how to tackle the issue of entrenchment. We want to provide that choice for them.

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

The Minister says that people can freely decide to enter entrenchment and that therefore it is justified. Hon. Members can agree freely to vote and pass whatever law they want, but they cannot bind future Parliaments; they cannot entrench legislation such that future Parliaments never have the right to change laws again. That is what we are talking about here.

Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)

That is nonsense, if I may say so. It is always open to any party to change company law. Through the facilities that we propose, we are trying to provide some certainty for the operation of companies.

The hon. Gentleman has banged on and on and on about shareholder democracy. If we do nothing, however, the special resolution provisions will be the only ones that determine how changes can take place and they will be a challenge for minority shareholders—the 25 per cent. who will not be needed.

Shailesh Vara (North West Cambridgeshire, Conservative)

If the Minister will not accept the shareholder democracy argument, will she accept the argument that other legislation will impact on companies? For example, there are numerous blocks of flats around this Palace, and the owner of each flat is a shareholder in a company for that block—the management company. The Commonhold and Leasehold Reform Act 2002 provided for leasehold enfranchisement by allowing leaseholders to purchase the freehold, and clearly the mentality and thought process of each shareholder were completely changed in light of the legislation. If that company was entrenched and, as is the case for many of the flats around here, people were overseas, it would be impossible to wind it up and to adapt to new legislation. Flexibility is needed. We cannot account for other legislation that will have an impact on companies.

Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)

I understand that, and it is precisely the purpose of the amendments we have tabled today. They will ensure that when the company forms itself in the first instance, the people who freely come together and decide to form a company can decide whether they wish to entrench themselves. Members of a company in the situation described by  the hon. Gentleman could take the option of winding up the company if they so wished, if it became irrelevant to them.

Shailesh Vara (North West Cambridgeshire, Conservative)

If those companies cannot get each of the shareholders, they cannot wind themselves up. What might be freely entered into today does not take into account the circumstances that might exist in five or10 years in a fast-moving commercial world.

The whole company law structure has had to be consolidated and reconsidered in the 20 years following the passing of the 1985 Act. We are in an international world, technology is fast-moving, there are booms and the economy is fluctuating. The life of companies will alter with the economic cycles. To entrench companies in such a fast-moving economic reality does not help the business world.

Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)

To be honest, we have been going round the houses on this argument long enough.

David Howarth (Shadow Minister (Energy), Trade & Industry; Cambridge, Liberal Democrat)

There are two problems. The first is a false analogy between politics and business. An unamendable constitution in politics might lead to terrible problems; revolution might end up as the only way to change the constitution. In business, the company merely gets wound up.

The second problem is that those who have spoken do not appear to have remembered that the court can wind up a company on the just and equitable ground, or minority shareholders can effectively be bought out on fair grounds under section 459 of the 1985 Act. It is not the same in principle or in practice.

Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)

That is a helpful intervention. We shall support the amendments that stand in our name and resist those tabled by the Opposition.

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

We have had an interesting debate, although I cannot say that I am happy with how it has gone, and the hon. Member for Cambridge has been logical in some of his thought processes, but not in his conclusions. Are we really saying that if shareholders cannot get on and have entrenchments, the way to bring it all to an end is to wind the company up?

David Howarth (Shadow Minister (Energy), Trade & Industry; Cambridge, Liberal Democrat)

That is not what anyone is saying. A company that is set up with an entrenchment takes that risk, but it is a risk taken by the people who form the company. It is up to them whether they wish to take that risk or not.

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

But companies evolve. The Committee is here to produce, formulate and enhance a framework so that companies can thrive and move forward as members come in and out, not to wind up those companies.

David Jones (Clwyd West, Conservative)

Does my hon. Friend share my concern about the adverse effects that entrenchment might have on the families and successors in title to the original shareholders? It is all very well for the hon. Member for Cambridge to refer to contractual obligations freely  entered into, but there may be successors in title who do not have that freedom and might be adversely affected by the provision.

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

My hon. Friend makes a fair point, as did my hon. Friend the Member for North-West Cambridgeshire when he mentioned mansion blocks. The proposals will have serious practical implications for small family-owned companies or the blocks of flats in which people live, let alone for commercial companies, and that will lead to trouble.

I simply do not accept, as the hon. Member for Cambridge suggested, that winding up would be the logical conclusion. Of course, it might be, but we want to encourage companies to sort out their problems, not wind themselves up.

The hon. Gentleman also seemed to justify the entrenchment provisions and the possible impact of undermining minority shareholders by saying that they have access to other parts of the law. He mentioned just and equitable winding-up and section 459 of the 1985 Act. It is true that those existing measures provide for the protection of minorities, but I cannot make the jump to saying that we should take away shareholders’ right to vote just because those provisions exist.

My hon. Friend the Member for Grantham and Stamford made some important points about the importance of flexibility, and the most interesting aspect was when we asked the Minister clearly to identify what led us to this clause and what happened to suggest that entrenchment should be considered. There is no interest in entrenchment, or demand for it, from large companies, small family companies or venture capital companies, but 300 CICs apparently liked the idea. I do not know how many companies we have in this country, but perhaps the Minister can advise me. Tens of thousands of commercial companies—

David Howarth (Shadow Minister (Energy), Trade & Industry; Cambridge, Liberal Democrat)

The hon. Gentleman has just defeated his own argument. If a large number of companies do not want to entrench because of the commercial consequences of doing so, the dangers he is talking about will not follow.

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

With respect to the hon. Gentleman, that is a weak argument. The vast majority of companies respect and appreciate the framework in which they have been operating and have no wish for change. The Institute of Directors made that clear, and referred to its points earlier.

I am sure that CICs are being set up for valid charitable and voluntary objectives, and if they want certain elements in their constitution to be entrenched, that perhaps is the way we should go, but it should be a matter for CICs.

I think that the Minister agreed that CICs will have separate legislation, and they will form their own separate group as we move to consolidate the provisions. Conservative Members have argued for consolidation for three or four years, so none of us will argue against it. If the Minister wants to present arguments for entrenchment in relation to CICs, that is the place to do it.

As it happens, we shall have a formula for entrenchment that no companies seem to want, and the justifications that I have heard are very weak. I do not see how shareholder democracy will be enhanced by these provisions; indeed, quite the opposite—it will only be damaged. It might seem like a great idea to have entrenchment provisions when companies are first set up, but those companies that do will regret it, and there will be a dispute among the shareholders.

Shailesh Vara (North West Cambridgeshire, Conservative)

Does my hon. Friend agree that companies that think entrenchment provisions a good  idea in principle might subsequently find them barrier? A bank that is looking to give a loan might say that it is unhappy with the restrictions imposed by the constitution and might be reluctant to give the loan to assist further business.

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

My hon. Friend makes a very good point.