Clause 325
Company Law Reform Bill [Lords]
2:30 pm

John Bercow (Buckingham, Conservative)

With this it will be convenient to discuss the following: Clauses 326 to 334 stand part.

Amendment No. 207, in clause 335, page 149, line 34, leave out from ‘website)' to end of line 35.

Amendment No. 246, in clause 336, page 150, leave out lines 8 and 9.

James Brokenshire (Hornchurch, Conservative)

Thus far this afternoon, we have had some interesting debates on quite detailed and narrow issues of law and practice. They have been of interest, but this matter has provoked wider discussion.

This debate relates to clause 325 and subsequent clauses, which will provide a mechanism for shareholders representing not less than 5 per cent. of the voting capital of a quoted company to demand an independent report on any poll taken or to be taken at a general meeting of the company. The request must be made no later than within one week of the poll being taken, and the directors must appoint an independent assessor within one week of the requirement to prepare a report for the company on the poll or polls.

The Institute of Directors said of the arrangement:

“These provisions are onerous and unnecessary. The Government has provided no evidence of any abuse it is trying to redress. They will place increased costs and burdens on companies for no discernable gain. In addition, in spite of the statement that an adverse report on a poll will not affect the validity of a decision, it is likely that companies would delaythe implementation of the decision until the time for a challenge has expired. In the case of decisions taken at EGMs this could have a seriously detrimental effect on companies’ ability to complete major transactions and would undermine the competitiveness of UK companies.

The procedure of calling for an independent report would be open to serious abuse from those who were opposed to a transaction, but knew that they would be defeated on a poll. They would hope to achieve their desired aim by the back door rather than through the legitimate democratic process of the poll”.

That is a long quote from the IOD. The Minister will be pleased to hear that the CBI is somewhat more succinct and to the point in its comments. It says:

“Clauses 325-334 are excessive and unnecessary and will place increased burdens and costs on companies. They are also contrary to the Government’s aim for deregulation and the principles of better regulation”.

The provisions highlight some strong feelings within the business community as to their need, requirement or necessity and the evil that they are seeking to prevent.

One of the points that was raised by the Institute of Directors was the impact of delay. It makes the point that companies may seek to wait a week before implementing a change for fear that a demand for some sort of report may be required. If that were to be the case it may impose some considerable costs and burdens on the companies. I am minded in that regard of companies that may be doing a share offering where the longer the share offering waits to be completed, the more the company may be required to pay in subscription costs or placement charges to agents or underwriters. That could increase the costs associated with companies’ placement of new shares, which is not particularly desirable.

Even if we do not take that point of view, there is another issue: what will be the sanction if a report is received that is unfavourable and says that something has not been done appropriately? As we have already discussed, the chairman’s ruling in relation to a particular matter is fairly conclusive. If a report is called for there may be some further delay to enable it to be undertaken. If a report is called for after the general meeting has taken place it may be difficult for the expert who has been appointed to provide the report to assess it and conclude whether matters were conducted appropriately.

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

Looking at the clause, that is the crux of the matter: I am not sure how the expert could do that if he was not there.

James Brokenshire (Hornchurch, Conservative)

This is clearly an issue. There are provisions that allow the independent assessor to be present if a call for a report has been made before the general meeting, but emphasis is given to the seven-day period after the poll has been taken. I know that that has been stressed by the Government almost as a cooling-off period to allow shareholders to consider  properly what they should do and what is appropriate. I can see that argument from one side, but if one allows that it makes it difficult for the independent assessor to properly assess what has taken place because they were not at the meeting.

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

I presume that in order to make that decision we will have to have someone at the meeting who is qualified to make it, so this will be a regulatory measure and add cost.

James Brokenshire (Hornchurch, Conservative)

The cost and burden issue is clearly of concern to the industry groups. The comments of the CBI and the Institute of Directors are germane to and support my hon. Friend’s point. It is difficult to assess what evil the provision is designed to cure. Is there a huge demand outside the House for an independent right to make a challenge in this way? It appears to be regulatory and burdensome, particularly as we have debated the operation of section 459 of the Companies Act 1985 in relation to unfair prejudice. That civil remedy may be available if something is prejudicial to minority shareholders. It is difficult to understand what lies behind this provision; what problem it is designed to solve.

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

It might be difficult for a public company or a company in which it is easy for members to sell their shares to obtain a remedy under section 459. That route would not really help in such a case.

James Brokenshire (Hornchurch, Conservative)

I am grateful for that intervention, but the problem is that there is no remedy under this provision either. It does not lead anywhere. There is the right to an independent report, and that is it. It could be open to people to take the reverse approach to the approach that I highlighted initially, when I talked about a delay occurring and companies not implementing a transaction or share offering. People could say, “Well, we’ve got the shareholder consent. We can rely on the fact that the chairman’s view is conclusive and binding. Therefore, we are going to complete the transaction.” It cannot be unscrambled after the event, because no remedy underlies the calling for a report in any event. It is therefore difficult to understand how the provision will operate in practice.

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

In practice, if the meeting is going to be a difficult one, with a lot of points made and many people speaking, people will be put on notice of that, so the registrars will probably send a better team than they would have sent otherwise. The chairman will be on notice, and there will probably be lots of lawyers in the room, who will ensure that things happen. I just do not see how the provision adds anything.

James Brokenshire (Hornchurch, Conservative)

My hon. Friend makes a valid point. In practice, for most plcs, the registrars will normally be present at a general meeting in any event to check in shareholders and to check the holding of shares that they have. Therefore, to an extent, there is someone external to the company ensuring that the appropriate procedures are adopted in respect of the way in which votes are undertaken at the general meeting.

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

My hon. Friend is very kind to allow me to make so many interventions. The converse is that if it is a small company, it probably will not have any of that, but it also will not have someone who, under this clause, will be good enough to check on whether things are being done. Therefore, there will be an extra cost, because the company will have to bring such a person in. In effect, it will probably have to bring the registrars in, whereas in the past it would not have had to do that.

James Brokenshire (Hornchurch, Conservative)

There is the issue of cost. That point has been made clearly by the groups that I cited at the outset. The noble Lord Sainsbury of Turville said in Grand Committee that

“we believe that the clauses provide sufficient flexibility to avoid imposing unnecessary burdens on companies and that the benefits to be gained in investor confidence justify the new requirements.”—[Official Report, House of Lords, 1 March 2006; Vol. 679, c. GC135.]

I just do not see that. I do not believe that there is the real issue of investor confidence suggested by Lord Sainsbury to justify the provision. It seems too burdensome and bureaucratic and not to have any clear outcome. We believe that, as such, it is unnecessary and should be removed from the Bill. As a consequence, our amendments would delete clauses 325 to 334. Amendments Nos. 207 and 246 would make consequential changes to clauses 335 and 336 respectively.

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

This is the fourth time that the Opposition have sought to remove these provisions from the Bill. There were three debates on this precise issue that were designed to test opinion in the other place. After the last debate, there was a division that, even though it was in the other place, was lost by the resounding margin of 175 to 128. Nevertheless, the Opposition want to revisit the point again today.

James Brokenshire (Hornchurch, Conservative)

I should make it clear that, since that debate, we have received further representations from the Institute of Directors and from the CBI, emphasising that they were deeply unhappy with these provisions. It is entirely appropriate, therefore, for the Opposition to listen to those concerns and reflect them in today’s debate.

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

Indeed. It is odd how representations go, however, because the Government too have had representations—from active institutional shareholders’ groups, in whose interests these provisions are included in the Bill. Those groups included the Co-operative Insurance Society and Pensions and Investment Research Consultants, who argued that the clauses were appropriate. As Members of Parliament and as members of the Committee, all of us are lobbied on a whole range of issues.

Crispin Blunt (Whip, Whips; Reigate, Conservative)

I am reflecting on the logic of the right hon. Lady’s argument. It seems extraordinary that the House of Commons and a House of Commons Committee should be precluded from examining issues because they have been considered up the other end. If the Government accepted every amendment that was made up the other end, I am quite  sure we could come to some sort of arrangement, but I am sure that the hon. Lady is not suggesting that.

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

One reason why the Bill was considered first in the House of Lords was that we recognised, as I hope Opposition Members accept, that this was a detailed and technical Bill, and that there was an enormous amount of expertise in the other place that could properly be applied to examining the necessary detailed amendments. It behoves us, however, to use our time sensibly. On Second Reading the key issue raised by hon. Members from all parties, and on which we want to spend time—though we are getting close on time—was directors’ duties. The more we revisit issues that have been debated, not once but on three separate occasions in the House of Lords, the less time we shall have to deal with the non-technical, fundamental issues that have been raised and which hon. Members from all parties wish to debate.

Mr. Shailesh Vara (North-West Cambridgeshire) (Con) rose—

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

I am not tempted to give way any further because I want to proceed. I accept that the amendments are properly tabled, but I am not going to debate procedure. There is just a difference of view between the Government and the Opposition on how the time should be used. I hope that Opposition Members will recognise that when sensible amendments are tabled we consider them.

Shailesh Vara (North West Cambridgeshire, Conservative)

Will the Minister give way on that point?

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

No I will not. The arguments put forward by the Opposition simply do not stack up. First, they have said that there is no mischief that needs remedying, but that is not so. The company law review recommended a new right for shareholders to acquire an independent report on a poll, and for a good reason. The review received evidence to suggest that the registering and counting of votes was accident prone, and that there were problems between institutional investors executing votes and registrars recording and counting them on behalf of companies.

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

Will the Minister give way on that point?

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

I will on that point.

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

The Minister makes an important point, but I am not sure that it relates to the way in which the meeting is conducted. There is a problem in the way institutions vote—by the time that votes go through the levels of people who would actually turn up and cast a vote, there can be a problem. That is a different issue, however, from attending and taking the poll at the meeting itself.

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

That may be the case in some instances. However, an example that was drawn to my attention was the much-publicised vote at GlaxoSmithKline to approve the directors’ remuneration report, which  was defeated by just half a per cent. Those circumstances do not really reflect the way in which institutional investors cast their votes, but it might have been sensible to have had a poll.

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

On that point, the Minister will appreciate that if the vote had gone the other way, it would only have been indicative.

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

Yes; I accept that. Nevertheless, there may have been a shareholder interest in having a poll on the outcome of that vote. That is my point about shareholder engagement.

Paul Myners’ report, “A Review of the Impediments to Voting UK Shares”, which was published in January 2004 and fully endorsed by a City-wide group of institutional investors, registrars, issuers and other industry bodies, noted the continuing concern that the system for recording proxy votes in company meetings was not as efficient as it should be. The report highlighted a problem with lost votes at Unilever plc, when institutional investors were given instructions to vote and the issuer never received them.

I have mentioned the GlaxoSmithKline case, and there was the case of a directors’ remuneration report at BAE Systems, which Institutional Shareholder Services recommended voting against. The concern was about whether the company had voted the shares, held in American depository receipts where no voting instructions had been given, to ensure that the report was approved.

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

All the Minister’s examples appertain not to the meeting itself but to the passing of votes from the institution to the person who turns up at the meeting. She needs to find better evidence to prove her point.

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

I do not accept that assertion. The issue that we are debating is whether there ought to be a right to ask for a report on a poll. How that poll is taken, how individuals vote, or whether they vote on behalf of other shareholders are secondary points. The point is whether shareholders in the round are satisfied about the accuracy of the poll-taking.

The independent report of a poll seeks to remedy real mischiefs. The Opposition have asked what value the provisions will add. As many have noted, polls are increasingly used at general meetings, particularly those of listed companies. The provisions enable members to require the company to commission an independent report on the poll. Most polls are conducted by the registrar who acts on behalf of the issuer, so it is important that shareholders in their own right can require that the report on the poll be conducted by a third party. As Paul Myners set out in his report, if we are to have shareholder confidence, a comprehensive action programme is required to address the inefficiencies and obstacles in the process by which votes are transmitted.

The provisions are an important part of that programme, enhancing the confidence in the integrity and effectiveness of the voting process in quoted companies.

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

Who does the Minister think that the third party would be in practice?

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

Somebody who was appointed and whose business it would be. The appropriate person might be another registrar—not the registrar to the company—with the sort of qualifications to which we have referred. It might be somebody such as a third party with appropriate experience in the conduct of polls.

I get the feeling that in this context, although we will have different debates later, Opposition Members’ concerns are more with the boardroom than the rights of shareholders. That is the strong feeling I get in this fourth attempt to strike out the clauses before us. The Opposition contend that the potential burdens of the provisions outweigh the possible benefits, but it is quite the opposite: the provisions empower shareholders with an additional tool to hold the directors to account. Shareholders are not an external body; they own a share in the company. Those interested in stronger shareholder participation cannot have it both ways. If they support moves to help shareholders exercise their rights, they must also support the right of those shareholders to challenge if it is appropriate.

There is no burden on a quoted company unless the shareholders exercise the right to require an independent report. The cost-benefit analysis in the regulatory impact assessment, to give an indicative cost across the range of companies, suggested a cost of between £350,000 and £4.2 million per annum. That is not an enormous cost across the board.

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

How does the Minister know?

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

It is obviously an assessment.

Shailesh Vara (North West Cambridgeshire, Conservative)

On what basis does the Minister come up with those figures?

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

That is an assessment and an estimate based on one or two independently assessed polls—

Shailesh Vara (North West Cambridgeshire, Conservative)

Will the Minister give way?

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

No, I will answer the question. It is an estimate based on one or two independently assessed polls for between 50 and 100 per cent. of the AGMs of the 1,400 or so quoted companies at a cost of £500 to £3,000 per report. I suggest that the hon. Gentleman ought to look at the regulatory impact assessment, which we provide, if he wishes to question whether those costs are accurate. Those costs were laid out when we produced the 2005 White Paper and consulted on the specific issue.

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

The debate so far turns on the accuracy of a cost-benefit analysis that has to be to some extent speculative, because we have never had a provision like this before. The Minister is right that there is a feeling that there is a mischief to be addressed. She has given some examples, although they were perhaps not exactly on the point. However, there is an accurate feeling that there is a problem with polls and with investor confidence which might grow,  especially because the use of polls appears to be increasing. The Government are right on that point.

The Opposition have a legitimate point about precisely how much this will cost. It is legitimate to raise the potential problem of the abuse of the rights that are put forward in these clauses. It seems to me that the only rational way forward is for the Government to undertake to keep the area under review and to come back after an appropriate number of years. The Department should study what happens after four or five years and undertake to come back to Parliament to remove or amend these provisions if they turn out to have caused a higher cost than the cost-benefit analysis has suggested.

This is a perfect occasion to raise the issue of post-legislative review. In these debates in Committee we are bound to make a decision now, but it is always possible to come back to those decisions later. If the Minister could give us an assurance along those lines, I would be happy not to oppose the clauses.

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

I am grateful for that intervention. All good legislation needs to be constantly reassessed and reviewed; there are a number of new provisions in the Bill, including those that we will come to when we consider shareholder voting rights—the contentious issue that we have kept to the end. If we are proposing anything new, it makes sense to review it. We always keep new provisions under review to test whether they meet their purpose.

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

The Minister is making a point that the clauses are there to right a wrong. Can she explain how the provisions will right the wrong?

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

I was going to come to that point. The Opposition’s only valid question is whether the procedure is a sufficient sanction when we are also trying to meet another objective of our company law framework, which is to avoid creating uncertainty for companies. We do not want resolutions passed in meetings to be open to challenge; we want companies to have certainty. However, openness is useful in so much of life and in so much legislation. In this case, the facility to make a challenge and have an independent report will provide one vehicle, if not an entirely failsafe one, for the threat of accountability to ensure proper practice in the exercise of polls so that reports on them will rarely be required. Often, opening up to public account and ensuring public accountability is in itself a powerful weapon in ensuring the proper conduct of business.

I say to the hon. Gentleman that without these provisions there is a problem when there is unhappiness and a challenge is made. He might not accept that, but there is certainly a problem of perception. Alternative remedies such as section 459 of the 1985 Act, which was brought to our attention by the hon. Member for Cambridge (David Howarth), would be far more difficult for shareholders to exercise. They would be costly routes—not ones that shareholders would want to take. We are trying to balance shareholder engagement and the interests of a company, and I think that we have got it about right. It is not perfect and I accept that the remedy is  not as strong as we would like, but opening up to public account is a sensible way to ensure that companies act appropriately.

The provisions are intended to deliver greater transparency and enhance shareholder engagement, which are corporate governance objectives that we should surely all support. Voting is the bedrock of corporate governance and the means by which companies’ boards are held to account. If we want to encourage more people to exercise their votes we need to empower them with the tools to ensure that their votes really count. I therefore urge hon. Members to allow the clause to stand part of the Bill and I urge the hon. Member for Hornchurch (James Brokenshire) not to press the amendments.

James Brokenshire (Hornchurch, Conservative)

This has been an interesting debate. The Minister makes assertions about the Opposition’s contention. It is not the Opposition but the Institute of Directors and the CBI that contend that the provisions are burdensome and unnecessary. The key question was asked by my hon. Friend the Member for Huntingdon (Mr. Djanogly) when he asked the Minister how the clauses on independent reports will right wrongs.

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

That was my slight concern. I understand that the IOD and the CBI have raised the matter again, which is presumably why there were three debates on it in the House of Lords. Shareholder groups—the Co-operative Insurance Society, Pensions Investment Research Consultancy and others—have expressed the opposite view. The hon. Gentleman has often said that he is in favour of shareholder interest. Is he in fact putting the boardroom before the shareholder?

James Brokenshire (Hornchurch, Conservative)

I hear the Minister’s reference, but it is interesting that, as far as I am aware, none of the groups that she has mentioned have made representations to us on the matter. If they felt as strongly as the Minister suggests, I would have thought that they would have done so to explain why they feel the provisions are required. I respect their point of view and the fact that they have made representations to the Department. However, I remain unconvinced that the wrong that has been identified by the groups that I mentioned will be addressed by the cumbersome, expensive system proposed.

The Minister has given an assurance that the system will be kept under review. The problem is that once something like that is in place, it is virtually impossible to take it out. As far as I can see, the provisions will not really cure anything, because at the end of the day there is no remedy and nothing to stop a company from implementing the transaction that might be under question as a consequence of the provisions of the poll. On the contrary, the clause might also lead to delays and uncertainty, and therefore cost to the company.

I would be interested to know whether the additional subscription and placement costs that might be charged to a company for delaying the closing or implementation of the placement were taken into account when the Minister arrived at the figure of £4.2 million in the regulatory impact assessment. I suspect that the figure relates only to the direct cost of having somebody there  at the meeting or of conveying a report on the conduct of the poll, and does not take account of the indirect costs that could arise as a consequence of the delay that might be occasioned by a company wishing to await the outcome of the meeting.

I am not persuaded that, on the balance of probabilities and risk, the clause will promote and enhance shareholder participation—which I believe in—and on that basis it is appropriate to test the Committee’s view by pressing the matter to a Division.