Clause 155
Company Law Reform Bill [Lords]
2:15 pm

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

I beg to move amendment No. 158, in clause 155, page 69, line 7, at end insert

‘or require that the meeting be adjourned to a date not earlier than 14 days after his representations have been circulated.’.

The amendment was tabled by Lord Freeman in Grand Committee in the Lords, and I have to say that it deserves further consideration. Company law changes because the requirements of companies’ shareholders and other stakeholders change over time; it is not a static process. The concept of shareholder democracy is one advance that has had the full support of those on the Opposition Benches. It means strengthening the power of institutional shareholder activism.

Those provisions were adopted many years ago, but it is important to note that in the United States shareholders still cannot vote on directors, let alone on a simple majority. So, the provisions are still far-thinking, and certainly were when they were put in place. In practice, however, those statutory provisions have been little used, although their presence should not be underestimated, particularly as they provide for the ability gently to persuade directors to go at the appropriate time, with the nuclear option of a resolution available if required—if the director refused to go.

Shareholder activism, however, is becoming more attractive to institutional shareholders as generally it gets plaudits from the media and smaller investors for delivering value to shareholders. One institutional investor employee whom I spoke to recently explained that investors who take a proactive approach invariably receive higher returns than those who do not. I do not have any statistical analysis with which to back that up, but it seems to point towards increased shareholder activism. We welcome that.

If, however, powerful shareholders are to be given the power of the order of the boot—a good thing—it is important that, at the same time, the director concerned has the right to defend himself. As Lord Freeman pointed out, in practice, the director might not have access to the share register and no means by which to explain his position to other shareholders.

In effect, there could be a rather dirty power fight in the company, and the Bill provides that if the director’s representations are not sent out to shareholders, he has the right to have them read out at a meeting. But as anyone who has operated in this area knows, very few shareholders normally turn up to general meetings, preferring normally to vote by proxy—by post—before the meeting. That means that the aggrieved director would be reading out his representations to a meeting where most of the people had already voted, if there were many people in the room at all.

That seems unfair, and the amendment attempts to right the wrong by stating that in such circumstances the director should have the right to prevent a vote from being taken at a meeting and to have the meeting adjourned until such time as his submissions have been circulated to the membership, which would not be earlier than 14 days after circulation.

Lord McKenzie said in the Lords that that was not relevant as that provision was not much used in practice. That response is inadequate. I have said why I think that the previous practice is not an indicator of what is likely to happen. Lord McKenzie also said that the amendment could be used as a delaying tactic. I am not sure I understand that, and I would be grateful if the Minister explained what he was getting at.

We consider the balance in terms of rights to get rid of directors and directors’ rights to defend themselves not quite struck. The amendment would address the imbalance.

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

I have some sympathy with the amendment, but there is a slight difficulty with it on which I would appreciate comment from the hon. Gentleman—the power it would grant to the agreed director who asked for an adjournment would come in not only when the company had been in default in failing to circulate the director’s case, but when the documentation had merely arrived too late.

My slight worry is that such lateness in arrival might, in certain circumstances, be the fault of that director. For example, that person might fail, perhaps deliberately, to put enough stamps on an envelope to ensure that it arrived too late. That is an example of a delaying tactic that might be used.

I fully agree with the idea of allowing an adjournment when it is the company’s fault that the information has not been circulated, but not in other circumstances. While I am on clause 155, may I make a small clause stand part point, which has been irritating me ever since I read the clause? The clause is entitled, “Director’s right to protest removal”. That is not English; it is American. It should read, “Director’s right to protest against removal”. At some point, can that be changed?

John Bercow (Buckingham, Conservative)

I entreat the Minister not to be drawn into a clause stand part debate. I am sure that she will not be, notwithstanding the temptations offered by the hon. Member for Cambridge.

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

I have listened to the hon. Member for Huntingdon and I have read the Lords debate. I have to say that I am not persuaded by his arguments in this instance. We have just heard from the hon. Member for Cambridge that lawyers are the best people at thinking up delaying tactics. Whether it is putting second-class stamps on letters or putting No. 11 Downing street instead of No. 10—[Interruption.] Or the other way round. One can think of endless delaying tactics that might be employed by people wishing so to do.

As Lord McKenzie said in the House of Lords, there are safeguards. This is a power that, as the hon. Member for Huntingdon has accepted, by its very existence acts an incentive for such issues to be settled outside a meeting of shareholders. The director has the right to be heard orally or to have his or her representations read out at the meeting, if he or she cannot be there. The clause should stand as it is, although as an aside to the hon. Member for Cambridge, as I hate Americanisms too, I shall look into the matter.

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

The hon. Member for Cambridge makes a fair point about documents arriving too late. If the delay was the fault of the director or if there was evasive action on their part, we would contemplate changing the drafting of the amendment to accommodate that, so that it would not apply in such circumstances.

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

The hon. Gentleman must recognise that once that point is conceded, one ends up with such a complicated procedure that it is a nightmare to administer, with all sorts of people challenging aspects of it in litigation.

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

That is not the case at all. The procedure could be kept pretty straightforward. The Minister does not appreciate the reality of the situation, in that there will normally be a huge disparity of firepower between the director and the institutional investors. The delaying tactics that the director is likely to use are probably less than those that an aggressive shareholder could use. The firepower of the aggressive hedge fund that takes a stake in the company but then wants to sack the whole board and put its own people in place will be a lot greater, in terms of spending power and having PR people on board, than that of the average director. The purpose of the amendment is to address that disparity.

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

I accept the picture that the hon. Gentleman paints of the situation that could arise, but I am not sure that his mechanism would in any way alter it. Nothing that he has suggested would militate against a majority of shareholders passing a resolution to sack a director, which would happen anyway.

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

I am certainly not trying to stop the enshrined right of members to get rid of directors—quite the opposite, as I thoroughly approve of it. At the same time, however, the director who is under attack must have the right to defend him or herself.

James Brokenshire (Hornchurch, Conservative)

Does my hon. Friend agree that the question is one of fairness? In the issue of default, if a company has either deliberately or negligently failed to send out a statement, there should be at least some protection for the director in the circumstances that he has described, given that shareholders might not turn up to a general meeting, because the facts will have been presented to them in a particular way, which could be corrected by a statement. That goes to the fundamental issue of fairness, which he is trying to address.

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

Very much so. By the time the meeting happens, everything is all over anyway, because in practice the majority of the votes will have been cast by proxy. For those reasons, I am minded to press the amendment to a Division.