New Clause 77 — Documents to be incorporated in or accompany copies of articles issued by company

Orders of the Day – in the House of Commons at 3:45 pm on 19 October 2006.

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'(1) Every copy of a company's articles issued by the company must be accompanied by—

(a) a copy of any resolution or agreement relating to the company to which Chapter 3 applies (resolutions and agreements affecting a company's constitution),

(b) where the company has been required to give notice to the registrar under section 35(2) (notice where company's constitution altered by enactment), a statement that the enactment in question alters the effect of the company's constitution,

(c) where the company's constitution is altered by a special enactment (see section 35(4)), a copy of the enactment, and

(d) a copy of any order required to be sent to the registrar under section 36(2)(a) (order of court or other authority altering company's constitution).

(2) This does not require the articles to be accompanied by a copy of a document or by a statement if—

(a) the effect of the resolution, agreement, enactment or order (as the case may be) on the company's constitution has been incorporated into the articles by amendment, or

(b) the resolution, agreement, enactment or order (as the case may be) is not for the time being in force.

(3) If the company fails to comply with this section, an offence is committed by every officer of the company who is in default.

(4) A person guilty of an offence under this section is liable on summary conviction to a fine not exceeding level 3 on the standard scale for each occasion on which copies are issued, or, as the case may be, requested.

(5) For the purposes of this section, a liquidator of the company is treated as an officer of it.'.— [Margaret Hodge.]

Brought up, and read the First time.

Photo of Margaret Hodge Margaret Hodge Minister of State (Industry and the Regions)

I beg to move, That the clause be read a Second time.

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

With this it will be convenient to discuss the following:

Government new clause 78— Resolutions to be forwarded to registrar.

Government new clause 79— Obligations of company with respect to articles etc.

Government new clause 80— Supplementary provisions where company's constitution altered.

Government new clause 99— Notice to registrar of existence of restriction on amendment of articles.

Government new clause 100— Statement of compliance where amendment of articles restricted.

New clause 89— Unamendable articles—

'(1) Notwithstanding anything in section 22, a company's articles may provide that specified provisions of the articles may not be amended or repealed—

(a) except with the unanimous consent of the members, or

(b) in any circumstances.

(2) Provision for unamendable articles under this section may only be made in the company's articles on formation.

(3) Provision for unamendable articles shall count for the purposes of this Chapter as provision for entrenchment.'.

Government amendments Nos. 688 and 206.

Amendment No. 790, in page 9, line 13, leave out Clause 22.

Government amendments Nos. 837 to 841 and 791.

Amendment No. 378, in page 9, line 31, Clause 23, leave out subsection (2).

Government amendment No. 792.

Amendment No. 379, in page 10, line 7, Clause 24, at end insert 'by unanimous consent less one vote.'.

Amendment No. 380, in page 10, line 7, at end insert

'by a resolution of at least 90 per cent.'.

Amendment No. 381, in page 10, line 7, at end insert

'by a scheme of arrangement approved by the court.'.

Government amendments Nos. 689 to 697.

Amendment No. 4, in page 15, line 23 , Clause 36, at end insert

'or such longer time as the court allows'.

Amendment No. 3, in page 15, leave out lines 26 to 30 and insert—

'(b) if the order—

(i) amends the company's articles, or

(ii) amends a resolution or agreement to which Chapter 3 applies (resolutions and agreements affecting the company's constitution), or

(iii) gives leave for the company to make any, or any specified, alteration in its articles,'.

Government amendments Nos. 698 to 702.

Amendment No. 93, in page 461, line 21, Clause 963, at end insert—

'(f) make provision for entrenchment as referred to under section 22.

(3) The court's order must be embodied in or annexed to every copy of the company's articles issued by the company.'.

Government amendments Nos. 703 and 704.

Photo of Margaret Hodge Margaret Hodge Minister of State (Industry and the Regions)

This series of clauses and amendments relates to a company's constitution. Government new clauses 77 to 80 and amendments Nos. 206, 688 to 695 and 699 to 705 are drafting or minor technical amendments. They also make amendment No. 67, which is grouped with other amendments to part 19, unnecessary. Many of the changes made by these amendments have been prompted by Law Society comments or by amendments tabled by Opposition Members. They tidy up the drafting of various clauses that refer to documents of constitutional significance for companies, and we hope that some potential overlaps or ambiguities have been removed. Some cross-references have been added and some points of procedure clarified. We hope that the overall result is more internally consistent and user-friendly.

Amendment No. 696 has a long history, but its purpose is simply to tidy up the drafting of clause 34, following its amending in Committee, so that it states explicitly that the provisions of a company's constitution take effect as if it was a contract between the company and its members. We are not changing the law—we are simply making it clearer that it means what it has been recognised to mean for many years, and we have removed an outdated reference to signing and sealing. We are all grateful to Lord Wedderburn for raising this issue in another place, and to Mr. Djanogly for proposing in Committee the amendments that, as evidenced today, prompted us to think again about the clause.

Photo of James Brokenshire James Brokenshire Conservative, Hornchurch

I will largely confine my comments to amendment No. 790 and clause 22. This must be one of the most bizarre concepts in the Bill. Historically, members have been able to change their articles of association or amend their memorandums if they get 75 per cent. of the votes in a general meeting. The Government seem fixated with the concept of shareholders being able to entrench their rights, so that future members are unable to change the company's constitution. The foremost question is why the Government want that to happen. We have seen no representations asking for the provision, but plenty of criticism. My hon. Friend Mr. Djanogly put that point in Committee, and the Minister replied:

"Why have a concept of entrenchment? Why go beyond a special resolution?...We have to look at the Companies (Audit, Investigations and Community Enterprises) 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."—[ Official Report, Standing Committee D, 20 June 2006; c. 61.]

It seems strange that the Government should base the entrenchment provisions on the requirements of the roughly 300 community interest companies in existence. There is neither interest in nor demand for entrenchment from large companies, small family companies, venture capital companies, or from any of the tens of thousands of other companies that exist.

In Committee, the Minister agreed that CICs would have separate legislation and would not be consolidated. However, if she wants to present arguments for entrenchment in relation to CICs, surely separate legislation is the best place to do that? Amendments Nos. 790, 791 and 792 together would provide for those provisions to be deleted from the Bill. If I am given leave to do so, I should like to press amendment No. 790 to a Division, in order to test the House's opinion on the matter.

I turn now to amendments Nos. 379 and 380. If the entrenchment clauses have to remain in the Bill, better provision should be made for removing them. I recognise that the Government have gone some way to accepting that through their introduction at an earlier stage of an amendment allowing entrenchment to be reversed by a unanimous vote. That was a step in the right direction. Furthermore, they propose to extend the provision to court orders that counter the entrenchment, and that is another welcome improvement. However, the Opposition believe that there is a need to go further, so amendment No. 379 allows for the fact that public companies always have more than one shareholder and that private companies, before 1989, had to have at least two. Many private companies still do have at least two shareholders, as they never got rid of the spare shareholder after 1989.

Public holding companies got around the provision by finding an individual—normally one of the directors—who would hold the second share, subject to a declaration of trust. That declaration meant that the director promised to act in accordance with the holding company's wishes. In practice, those declarations were not always made, depending on the efficiency of the company secretary. Sometimes they get lost in the mists of time, and sometimes old forms get thrown away when a director leaves a company. As a result, getting unanimity can often be tough, and that is why we suggest that articles should be removed by unanimous resolution, less one vote.

Additionally, amendment No. 380 brings back into play a proposal originally put forward by Lord Hodgson. It would reduce to 90 per cent. the level of agreement required for the removal of entrenched articles. That 90 per cent. level would tie in with the amount required to buy out minorities in a takeover, and I also point out that 10 per cent. is the level needed to call a general meeting.

My main concern about the Government's position in Committee was that if two individuals owned 100 per cent. of a company that they set up, they could at the outset put in place whatever provisions they wanted. The Minister came up with a compromise, saying that 100 per cent. of shareholders can end the entrenchment. That is an improvement, but we maintain that it is hardly most people's idea of shareholder democracy. The Government need to make clear the concept behind their approach, as they have not yet done so.

We have tabled amendment No. 381 in accordance with the brief from the Institute of Directors in respect of the modernisation of company law. It states:

"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 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 would 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 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)."

That is another option that the Government could use to replace their restrictive provisions to reflect the wishes of many small and large companies.

Turning to amendment No. 378, clause 23 provides for a notice of entrenchment to be filed, but if an entrenchment resolution is passed, surely the resolution filed at Companies House, together with the revised version of the articles filed, should be adequate. I cannot think of any other compliance provisions, so I question the purpose of the extra piece of paper, particularly given our desire to be deregulatory. Furthermore, the measures will increase regulation. The director must ask a lawyer to confirm that the new notice is compliant. Even if it is blatantly the case that it is compliant, doing so is a belt-and-braces safeguard. The Government measure is unnecessary and will lead to trouble, so I urge the Minister to drop it. We should consider how we can improve shareholder democracy, not restrict it with entrenched provisions.

I note the Minister's comments on the contractual arrangement between companies and their members. I certainly welcome that clarification of the law, given the history of such measures. Unfortunately, time does not allow me to discuss the matter in greater detail, or to talk about Lord Wedderburn and various other learned, legal minds, but we certainly welcome that aspect of the Minister's proposals.

Photo of David Howarth David Howarth Shadow Minister (Energy), Trade & Industry

I shall be brief, and shall refer only to amendment No. 790, which James Brokenshire mentioned, and new clause 89, which I tabled with my hon. Friends and which takes exactly the opposite direction from his amendment. Our view, at least on formation, is that companies should be allowed to entrench provisions. We would allow them to set up an organisation in which people had certain rights that only the court could take away, and which could not be removed even by agreement of all the members.

There is no ideological difference between the hon. Gentleman and me. We simply have a different perspective on what the law is for. Some lawyers think that their job is to create new organisations and institutions for people, and to do so in the way that their client wants. That is largely my view—the law should allow such institutions to be created according to the wishes of the people setting them up. The hon. Gentleman and Mr. Djanogly view the law from the opposite perspective, and are concerned with legal professionals who think that it is their job to sort out problems that have been set up by lawyers for other people. There is conflict in the law between those who create and those who dismantle, and I am in favour of the creation lobby, not the dismantling lobby. I urge the Government to choose our way forward rather than theirs, although I suspect that they may stick with their middle way.

Photo of John Gummer John Gummer Conservative, Suffolk Coastal

I would like to speak at length on this group of amendments, as some important issues are involved. However, I cannot do so because we have only two minutes before the guillotine falls, resulting in our failure to discuss the rest of the Bill. I shall just make the major point that the Government have failed, throughout proceedings on the Bill—I have looked at the record—to find anybody of any standing whatever who wants to include such a measure. I am always suspicious of Governments who want to regulate when no one wants them to do so. I am not suspicious of this Minister in particular, but I am suspicious of all Ministers. I am more suspicious of Labour Ministers, but I am suspicious of Ministers from all parties. I believe that Ministers have been led by the nose by civil servants in this case.

Someone, somewhere has decided that the provision is a good idea, and no one has discovered any reason why we should include it. We should not regulate if we do not need to do so. The Better Regulation Commission should look at the Bill, because we do not need this piece of regulation. No one has asked for it, and the House has not had a chance to debate it properly. It is another regulation that will pass into law without having been properly debated. The Minister will not even have time to answer me properly.

Photo of Margaret Hodge Margaret Hodge Minister of State (Industry and the Regions)

I do not have time to answer the right hon. Gentleman properly, but the issue has been discussed many times—probably about five times. I simply draw his attention to the fact that the proposition before us was not invented by civil servants, but emerged from the company law review. It has been debated and discussed with all stakeholders over a very long period, and on that basis has some credibility. We debated it in Committee. We have one view from the Liberal Democrats and a completely opposite view from the Conservatives, while Labour Members stand where they always do—representing the vast majority of people in this country—

It being Four o'clock, Madam Deputy Speaker put forthwith the Questions necessary for the disposal of business to be concluded at that hour, pursuant to Order [17 October].

Question put and agreed to.

Clause read a Second time, and added to the Bill.

Question, That new clauses 78 to 80, 84, 85, 87, 88A, 92 to 96 and 98 to 100 be brought up, read the First and Second time and added to the Bill, put and agreed to.

Question, That amendments Nos. 470, 471, 823, 472, 764, 718, 765, 719, 720, 473, 721, 766, 722, 688 and 206 be made, put and agreed to.

Amendment proposed: No. 790, in page 9, line 13, leave out clause 22.— [James Brokenshire.]

Question put, That the amendment be made:—

The House divided: Ayes 116, Noes 304.

Division number 318 Orders of the Day — New Clause 77 — Documents to be incorporated in or accompany copies of articles issued by company

Aye: 116 MPs

No: 304 MPs

Aye: A-Z by last name


No: A-Z by last name


Question accordingly negatived.

Question, That new schedules 1 to 3 be brought up, read the First and Second time, and added to the Bill, put and agreed to.

Remaining Government amendments agreed to.

Order for Third Reading read.—[Queen's Consent, on behalf of the Crown, and Prince of Wales's consent, on behalf of the Duchy of Cornwall, signified.]

Motion made, and Question proposed, That the Bill be now read the Third time.— [Mr. Michael Foster.]

Photo of Margaret Hodge Margaret Hodge Minister of State (Industry and the Regions) 4:19, 19 October 2006

This has been a very good learning process. I am delighted that we have now reached the Third Reading of the Bill.

I am proud to have been part of what has been the biggest reform ever, I think, of company law. The Government's goal has been to increase competitiveness. We are committed to ensuring that the legal and regulatory framework within which business operates promotes enterprise, growth and the right conditions for investment and employment. We all recognise that we operate in an increasingly global marketplace. Our company law framework must enable business to flourish in the 21st century, where business and investment decisions are determined more and more by our global environment, and cross-border activity is commonplace.

Since this Government have been in office, we have been extremely successful in securing growth in British enterprise and growth in British jobs. New incorporations have risen by over 60 per cent. since 1997. Companies House adds 120 companies to its register every working hour. Indeed, the customer record for the fastest incorporation at Companies House is less than five minutes. The number of EU firms incorporating in the UK has more than quadrupled since 1997, and Britain is increasingly seen as the location of choice for international companies for manufacturing, research and development, marketing and European headquarters.

The Bill will make the UK an even more attractive place in which to invest and do business. It is a real step forward in the reform and modernisation of company law, so that the UK remains a leader in the world of business and finance. As I have learned, much of our company law dated back to Victorian times. Over the past 50 years, the law has undergone reform, but in a piecemeal fashion, leading to a body of law that is increasingly complex and inaccessible, especially for smaller businesses. The framework established by that law needed to be updated. It needed in-depth and considered reform. That is what we have delivered.

This Bill will bring many and important benefits to British business. Company law is a crucial part of the legal framework that promotes enterprise and growth. The Bill ensures that we can continue to grow our economy, providing the right conditions for investment, employment and modernisation. Our aim has been to maintain the UK's position as a prime place to incorporate a business. I am confident that we have succeeded.

The Bill has also rightly attracted the attention of a much wider constituency. The Bill is significant for the culture it seeks to promote on corporate accountability. Our company law needed to reflect the new climate of corporate social responsibility. The importance of the issue to companies and citizens was reflected in the thousands of representations to MPs, and in the time that we spent on Report and before that debating the relevant clauses. In my view, we have taken some historic steps forward, which will help us to achieve long-term sustainability for businesses and for the communities and societies within which they operate.

Let me reiterate the Bill's key themes. The first is to enhance shareholder engagement and create a long-term investment culture. The second is to ensure better regulation and a "Think small first" approach. The third is to make it easier to set up and run a company. The fourth is to provide flexibility for the future.

The Bill updates and simplifies the regulatory framework to reduce cost and increase flexibility for companies. The "Think small first" approach to regulation is at its heart, which makes it easier to set up and to run a company. It makes life easier for companies and their advisers by bringing company law together in one place, and by restating the law in clear, modern language. It is now a complete code of company legislation. It incorporates all the provisions in existing companies legislation except those on investigations, which go wider than companies, and the self-contained provisions on community enterprise companies.

I should make it clear that in introducing the restated clauses, we have not made changes to the law except to the extent necessary to ensure consistency with other parts of the Bill, and in some cases to ensure that the provisions comply with our European obligations. A complete code is what users want, and I am pleased that we have been able to deliver it.

At the heart of the Bill are the provisions on directors and shareholders. We have provided a statutory statement of directors' general duties, which will make what is expected of directors much clearer. It recognises that to achieve sustainable success for the benefit of shareholders, directors should have regard to wider factors than short-term profit. Many businesses have long seen the link between long-term success and responsible behaviour, but we want all directors and all companies to behave in that way. Prosperity and responsibility go hand in hand.

We have carried forward the long-established principle of enabling shareholders rather than the state to be the primary regulators of corporate behaviour. Provisions to strengthen the involvement of shareholders and thus to promote a long-term investment culture are key parts of the Bill. There will be fuller reporting, and quoted companies will need to cover future challenges and opportunities as well as past performance. Investors holding shares indirectly will now be able to play a full part.

This is undeniably a long Bill, but it is also comprehensive. Now is not the time for me to go through all the ways in which it modernises and simplifies the law. Many of the changes are small, taken individually, but taken together they add up to a thorough-going reform that will help UK business to succeed in the future.

On Report, Mr. Djanogly asked me for an indication of when the Bill's provisions would commence. Because of time pressures, I did not respond then. I can say now that some of the provisions, such as those on takeovers and the transparency directive, need to be in place very soon because of our European obligations. As for the rest, there are strong interconnections. We have already received detailed views from interested parties on the factors that we should take into account in deciding on the timetable. I want to ensure that we implement the Bill in the way that will be best for business. We will announce our timetable for implementation before it completes its passage.

Let me say something about the way in which the Bill has been developed. I take particular pride in the inclusive and collaborative approach that we have adopted, and in the consistent and informed engagement of so many outside parties. I pay tribute to those who undertook the company law review, which was the inspiration for the reform process. The review brought together leading experts in the field, and many interested parties became involved in the deliberations both during the review and subsequently. I thank the many businesses and other organisations—including professional associations, trade unions and special interest groups—who worked with us so constructively in developing the legislation over time. I particularly thank the company law committee of the Law Society, which worked painstakingly to scrutinise the proposals at every stage. That includes the re-statement clauses added during the Commons passage. I believe that it is in large part thanks to that collaborative approach that the resulting legislation has generally been warmly welcomed.

I should also like to pay tribute to the parliamentary draftsman and his team. The clarity and simplicity of his drafting style has been much commented on and will, I know, be appreciated by generations to come who have to use our company law. I thank colleagues from all parties for their contributions to our interesting and constructive debates. I particularly want to thank those hon. Members who served so expertly on Standing Committee D and the Chairmen of that Committee for the thorough and detailed scrutiny of the Bill which took place there. My particular thanks go to my hon. Friends on the Labour Back Benches, who had to sit patiently through many hours and many sittings of Committee proceedings. They are not here today, but I will mention their names.

I thank my hon. Friend Jim Cousins, who was a member of the Committee until he was taken ill, but who has helped considerably on Report. He was replaced by my hon. Friend Dr. Palmer. I also thank my hon. Friends the Members for Liverpool, Riverside (Mrs. Ellman), for Barnsley, East and Mexborough (Jeff Ennis) and for Newcastle-under-Lyme (Paul Farrelly). My hon. Friend Patrick Hall has played a constructive and active role, and I thank my hon. Friends the Members for Falkirk (Mr. Joyce) and for Bradford, West (Mr. Singh). My hon. Friend Kitty Ussher has been extremely helpful to me, and I also thank my right hon. Friend Keith Vaz.

I thank Opposition Members who sat through the proceedings on the Bill. I hope that they accept that we listened constructively to the propositions that they made. I always tried where I could to incorporate them in the legislation. I pay particular thanks to my ministerial colleagues—the Solicitor-General and the Under-Secretary of State for Constitutional Affairs, my hon. and learned Friend Vera Baird—for their help and expertise in taking the Bill through and keeping me sane by supporting me in what was a massive task.

I pay tribute to our Whip, my hon. Friend Steve McCabe, who also had challenges facing him during the proceedings on the Bill and who worked extremely hard to ensure its proper passage. Finally, I thank the officials and reporters of the House, who have earned particular gratitude for coping with the challenges of dealing with legislation of this size and complexity and the many officials in my Department and across Government, especially Philip Bovey and Anne Willcocks, for the contribution that they have made in ensuring that we got this historic legislation this far.

This is a crucial Bill for UK competitiveness. Our company law has served us well in the past. With this Bill, we modernise and strengthen it and ensure that we create a firm platform for national business success. I commend the Bill to the House.

Photo of Alan Duncan Alan Duncan Shadow Secretary of State (Trade and Industry) 4:33, 19 October 2006

Reaching the Third Reading of this Bill has taken a long, long time. Right back in March 1998, the Government launched the company law review, as the Minister has said. There was then a good case for updating company law in this country. It is a case that has grown in the intervening years. Since then, we have had eight years to discuss the issues and two White Papers along the way.

In another place Lord Hodgson opened the debate in Grand Committee by saying:

"A journey of a thousand miles begins with a single amendment."—[ Official Report, House of Lords, 30 January 2006; Vol. 678, GC1.]

It is a view with which I wholeheartedly agree. I should like to return to the issue of the passage of the Bill shortly, but first I thank my colleagues in this House and another place who have worked extremely hard in the past year to improve the Bill. In another place, Lord Hodgson, Baroness Noakes and Lord Freeman made substantial improvements to it. In this House, my hon. Friend Mr. Djanogly, who apologises that he has not been able to stay for this Third Reading debate, has done a marvellous job in keeping on top of the Bill's more than 1,200 clauses and an even greater number of amendments.

I should also like to thank our DTI Whip, my hon. Friend Mr. Blunt, who has been utterly determined and masterly throughout this long process. We have also had the welcome assistance on the Front Bench of my hon. Friends the Members for Hornchurch (James Brokenshire) and for Putney (Justine Greening), who have both worked so hard in Committee and on the Floor of the House. They have proved themselves to be professional and effective Members of Parliament.

Conservative Members support most of the Bill and the loudest dissent, it has to be said, has come from Labour Back Benchers. There remain only a small number of issues on which we disagree with the Government. That is due in good part to the Government having conceded our point on a raft of concerns—a point to which I shall return later in acknowledgement of what the Minister said a few moments ago. In wrapping up this long process, I should like to spend a little time dealing with some of the most important issues.

The question of directors' duties has proved one of the most contentious as the Bill has proceeded and I would like to make our position clear and put a few points on the record. First, Conservatives agree with the ethos behind enlightened shareholder value, even though the Government have been unable—or perhaps unwilling—to provide a simple interpretation of what it actually means. We tabled a number of amendments to what will become section 173 because we did not believe that the clause as drafted represented the best statement of the enlightened shareholder value principle.

Although the wording has, to be fair, improved, the central problem with the clause remains. It is broad, vague and unclear and is capable of being interpreted in many different ways. That may be something that Ministers have used to their advantage during the Bill's passage. When addressing business audiences, Ministers have claimed that the clause is merely a restatement of the status quo, but when talking to campaign groups such as the Corporate Responsibility Coalition, they have emphasised how much the new approach will change things. The lack of certainty goes to the heart of the issue, as the House should aim to pass laws that are clear about what it is they are meant to do. We should reject laws that are worded in such a way as to make recourse to interpretation by the courts inevitable.

Let me make another point clear. Our amendments have not been designed to make it easier for directors to ignore concerns about employee issues, social issues or the environment. My hon. Friends will know that we are calling on the Government to introduce a climate change Bill in the next Session. Such a Bill would contain concrete provisions on companies and their environmental impact. That is the sort of regulation that we Conservatives believe would work effectively. By contrast, the Government perhaps want to fob us off with the vague provisions of clause 173.

It was Lord Eldon, then Lord Chancellor, who set down in 1817 one of the fundamental tenets of company law—that the courts should not

"be required on each Occasion to take the Management of every Playhouse and Brewhouse in the Kingdom."

Since that time, the judiciary has been rightly reluctant to interfere with the internal management of companies. Lying behind Lord Eldon's phrase is the principle that, so long as the directors of a company act in good faith, decisions will not be revisited by courts with the benefit of hindsight. I am afraid that the Government's phrasing may well end up undermining that commendable principle.

The second contentious issue relates to clause 22, which deals with entrenched provisions in a company's articles. There are potentially two logically consistent positions that one can hold on this matter. The first was put forward by David Howarth, who said that full and irreversible entrenchment was desirable and that companies should have the right to create articles that can then never be changed. I disagree with the hon. Gentleman for reasons that I shall come on to in a few moments, but it is a logically consistent position to hold. The second possible approach is one of flexibility, reflecting the fact that businesses need to be able to respond to a changing marketplace or to changing purposes as a company's scope and activities change.

The changed circumstances that we will see in the future will mean that companies will have to change, but the people entrenching provisions in today's companies are not able to foresee the changes that lie ahead. We should not allow the present shareholders to impose absolutely on future shareholders. Such fossilisation may entrench principles that are inferior and unsuitable for future circumstances. That is our position and it, too, is logically consistent.

The Government's position, on the other hand, is not logically consistent. They have argued, and continue to argue, that there may be value in allowing companies to entrench articles, but now they say that it should not be irreversible. In Committee, the Minister said that they do not want companies' constitutions set in stone, but they have allowed the unreasonable requirement of unanimity to change provisions. What is really unacceptable is that the Government's programming did not even give time for that issue to be debated at all on Report.

Thirdly, we are concerned about directors' conflicts of interest and that the tightening of what constitutes a conflict and, more important, how it is dealt with by a board will lead to experienced directors being unwilling to share their experience on other boards. Our fourth area of concern relates to the new derivative claims regime, which by broadening the scope for shareholder-inspired actions against directors could lead us to the US have-a-go litigation culture, with the associated risks of higher directors and officers insurance premiums and fewer people wishing to serve as a director. We must look at the implications of Sarbanes-Oxley, which are stifling small and medium-sized listed companies in the United States, and be sure not to repeat the same mistakes in the UK.

Our fifth concern is the requirement to disclose institutional voting. That provision is one of a large number of clauses introduced by the Government at the end of Committee. No time was given to debate it in Committee, or to give it proper scrutiny. We support institutional investors voluntarily declaring how they voted with the shares they own. However, we feel that making it compulsory could be counter-productive. If such declarations mean extra costs, extra paperwork and intimidation from campaign groups, institutional shareholders are more likely not to bother voting at all with the shares they hold, which would not be good news for shareholder democracy.

Our sixth area of contention—and Members will be relieved to hear, the last—concerns the business review. Here, too, the Government and others have misrepresented our position. We believe in and support the business review, and for the avoidance of doubt I shall explain why. Clause 423 refers to businesses reporting annually on

"trends and factors likely to affect the future development, performance and position of the company's business".

That is eminently sensible. Investors will be pleased to see the provision enacted and will be able to make better investment decisions as a result of the extra information made available to them. The next paragraph in the clause requires reporting on environmental and social matters, along with issues relating to the company's employees, and is also covered by the phrase:

"to the extent necessary for an understanding of the development, performance or position of the company's business".

Again, that seems perfectly sensible from the point of view of investors and not over-burdensome from the point of view of quoted companies. Indeed, according to the Association of British Insurers all FTSE 100 companies were reporting at some level on social, ethical and environmental issues as long ago as 2003. British companies are leading the way.

What is happening with voluntary reporting is good news. The business review will improve things by making companies that currently report nothing report something. Even greater levels of corporate disclosure will be commonplace in the next few years, through the voluntary actions of companies that increasingly recognise—as the Minister said earlier—the business benefits of openness and transparency.

Companies I talk to broadly welcome the business review, as it gives them flexibility to refer to their social and environmental actions in their own way and in a way that is relevant to their business. However, there is just one small spanner in the works of the business review: the Government's decision to table last Monday a new amendment on the subject. It is not as though they have not already tinkered enough with corporate reporting provisions. First, they consulted on an operating and financial review and then regulated for it. Then, last November, the Chancellor scrapped it without telling the Department of Trade and Industry. Nine weeks later, he U-turned again and agreed to consult on it again. Finally, in March, the Government formally scrapped it.

Let us be clear: indecision on that issue helps no one and achieves nothing. Many British companies already lead the world in corporate social responsibility. They want to act decently and to be seen to be doing the right thing; yet, without consultation and without so much as a courtesy phone call, the Government slipped in amendment No. 821 at the last possible moment. The effect of the amendment will be significant and wide-ranging. Again, the proposed wording is broad, vague and unclear. Of course, the Government's programme motion for Report ensured that Members did not even get a chance to debate it.

Photo of John Gummer John Gummer Conservative, Suffolk Coastal

I wonder whether my hon. Friend would note that it is not only indecision on the part of the Government that has caused the problem. The Government got almost every major company in Britain all teed up for the OFR. Then, once they had spent the money and got themselves prepared, it was thrown over by the whim of the Chancellor. Now, at the last moment, we have something else. Even those of us who are enthusiastic about greater reporting and transparency and an emphasis on corporate social responsibility have to say that to include a provision such as this, which is quite unknown in its effect, makes the whole thing worse. That is particularly true given that it has been included only to get the Chancellor off a hook—a hook that he put himself on and ought to stay on.

Photo of Alan Duncan Alan Duncan Shadow Secretary of State (Trade and Industry)

My right hon. Friend is absolutely right. The Government's conduct made the grand old Duke of York look like a hero. It is unacceptable for the Government to make such a change at this stage and without consultation. As he suggested, the provision is clearly designed by Ministers to keep a few of their own Back Benchers quiet. That is not the right way to make good law. Ministers should know that without successful and thriving businesses in this country, there would be no jobs, no tax receipts and therefore no money for the critical public services that we all want to see. They should know that creating vague, vexatious and burdensome regulation for political reasons is bad for the country and the reputation of politicians.

I said on Second Reading that we broadly support the Bill and that it is pleasing that we have to disagree with only a handful of its many clauses. Despite the areas that I have just laid out, where I believe that the Government have got things wrong, I still believe what I said earlier. In fact, I think that we now agree on more areas of the Bill, because the Government, to be fair, have listened to the reasoned arguments of Conservative Members on a number of key issues. I welcome the fact—and express appropriate gratitude—that Ministers have recognised that in a Bill this large, it was not possible to get everything right the first time. By the process of listening to suggestions and arguments from both sides of the House, the Bill has been much improved. I am grateful to the Government for accepting some of our arguments and not being obdurate on everything just because we are the Opposition. We are, after all, here to make good law for the one country that we all represent.

I am not claiming that Conservatives have a monopoly on wisdom in the House, but on this matter, just as on synthetic phonics, tax in relation to soldiers in combat, integration in faith schools and many other issues, the Government have come round to our way of thinking. They accepted our arguments on the value of company secretaries. They listened to our calls for consolidation of the Bill with the Companies Act 1985. The Conservatives even changed the name of the Bill. The Solicitor-General was good enough to vote with us on that and I am grateful for that support.

The Government saw the error of their ways on what was the original part 31, which created a monstrous new kind of super statutory instrument. They have come to agree in part with my hon. Friend the Member for Huntingdon on the issue of the home addresses of directors and, in part, with our position on access to the register of members. Following arguments from my colleagues in another place, nominee shareholders will have a greater opportunity to participate actively in the companies that they own. Our arguments to reduce the numbers of forms have been accepted, as well as our arguments on a host of technical issues, for which practitioners have been grateful. Small and charitable companies will benefit from our work on audit rules for such companies.

I express our profound gratitude to Ministers for the positive way in which they have dealt with those improvements to the Bill. I add my special gratitude—echoing the Minister—to Department of Trade and Industry officials, the Clerks of the House and all the Officers of the House for the mammoth undertaking that has probably dominated their lives for the past six months or so. I hope that they have managed to get some sleep in the course of their hard work.

I will conclude with a few remarks about the progress of the Bill. I understand—no one has questioned this—that this is the biggest Bill in parliamentary history. It had more than 1,260 clauses when it left Committee and more clauses have been added since. We have considered many hundreds of amendments. The Government have tabled more than 600 in the past fortnight. Some of them are what the Minister would have described, if she had just found the word, as consequential amendments—amendments that follow naturally, out of logic, from amendments that have been made earlier. Inasmuch as many of the amendments are consequential, we accept that they do not necessarily need debate—if they are genuinely consequential. However, this has not been a satisfactory way for the House to make law. Hundreds of new clauses—ones that do matter and are not merely consequential—have never been debated at all; some because they were uncontentious, many because of the iniquity of the programme motion, and yet more because they were tabled only at the end of the Committee stage and time was not given on Report to correct that misdemeanour.

Yesterday, my hon. Friend the Member for Reigate raised a point of order because for reasons that I have outlined we wished to vote against Government amendment No. 821. Madam Deputy Speaker ruled, quite rightly and understandably, that if we were to vote against those two lines of text, we would be obliged to vote against several pages of perfectly sensible amendments as well. It is a pity that our processes do not allow us to press distinctive amendments to a Division.

We have kept a tally of what has not been debated. In Committee, 419 Government new clauses were not debated. On Report, 33 out of 52 subject areas that were selected by Mr. Speaker were not debated, along with 177 Government amendments, seven Government new clauses and one Government new schedule. I have been given a useful crib sheet saying that I can add to that 123 Government amendments, two new clauses and two new schedules—and, no doubt, a partridge in a pear tree.

I hope that the Government will learn from the experience of this Bill. By bringing forward more clearly directed legislation that is better consulted on in advance, and without tabling surprise amendments at the last possible minute, the Government can help to ensure that the House delivers better legislation, and they will thus trouble our courts less with questions of interpretation.

By and large, the Bill is welcome and good. However, I am certain that we will have to revisit elements of it in the not-too-distant future. Sooner than we would wish, it will be tested in the courts, and subsequent legislation will be required to tidy it up.

Photo of David Howarth David Howarth Shadow Minister (Energy), Trade & Industry 4:52, 19 October 2006

Company law is part of the hidden wiring of the economy. Immense problems are caused if it goes wrong, but no one notices if it goes right. The limited liability company was one of the great inventions of the 19th century. In many ways, it was more important than the technological inventions of that century. However, like all inventions and advances, it brings its own problems. The corporate form helps to channel investment into specific areas, but it also brings its inherent problems, which are classically problems for creditors. The corporate form helps new enterprises to get off the ground by separating an enterprise's assets from the personal assets of the entrepreneur, but it also provides a vehicle for the concentration of economic power and a type of organisation in which responsibility is diffuse. The fundamental principle of company law for the past 150 years—I hope that it is maintained in the Bill—has been that people should be allowed to use the tool of the corporate form as they wish, unless there is a public interest that overrides that power.

We welcome the underlying themes of the Bill, especially the deregulatory and "Think small first" themes. However, we remain convinced of the need for regulation in specific areas not only to restrain harmful behaviour, but—this was the theme of our contribution to the debate on the OFR and the business review—to help the creation of new markets and forms of market. However, we fully accept that the Bill is an attempt to strike the same balance that has faced Parliament for 150 years in new economic and social circumstances.

I shall not go through all the areas of the Bill that Alan Duncan mentioned. The Bill is far too long and complex for me even to attempt a summary of pros and cons at this stage, but I shall mention one aspect that he covered: directors' duties. Our view is that the reform contained in clause 173 is a useful development. The Minister called it historic. I am not sure that it is historic, but it is an important advance. It has the effect of protecting directors who wish to follow corporate social and environmental responsibility to a greater degree than fund managers might like. It encourages a responsible attitude towards the environment and social matters, and taking a long-term view.

There are worries that the clause mandates that approach in a way that would be restrictive for directors and difficult for them to deal with. We do not believe that that is the case. We believe that the reform is well balanced, but there are problems with the directors' duties area of the Bill. The hon. Gentleman mentioned that there was insufficient time to debate certain parts of the Bill. I draw the Government's attention to one aspect of the directors' duties, a chapter which I fear may produce difficulties in the future. I hope that they pay some attention to it.

I refer to clause 171, which we were due to debate yesterday, but it was in one of the groups that fell. The problem in the clause is that the Government have not fully made up their mind what the relationship is between the duties as they stand in the Bill and the law as it was before the Bill. It should have been possible to be clearer about which aspects of the Bill are reforms and are new, and therefore take precedence, and which areas are consolidations and codifications of existing law, in which case the previous law is highly relevant.

There might be a political problem for the Government in doing that. The hon. Gentleman mentioned the difficulty of having to say slightly different things to different audiences. The cost of not being entirely clear about what is reform and what is codification will be litigation. I hope that the Government will bear that in mind in future consideration of these issues.

The other matter to which I draw the attention of the House has been mentioned several times—the business review. As Mr. Gummer said, the history of this part of company law is somewhat chequered and includes an extraordinary double reversal in the past couple of years, with the Chancellor of the Exchequer looking for a symbolic gesture to show his commitment to deregulation and big business, then a subtle reversal, with the position in the Bill being halfway back to where we started, but not quite, in our view, far enough.

The problems in the Bill are, first, that the coverage of the review is not broad enough. The question is, not broad enough for what? Our view all along has been that one of the purposes of the review is to help ethical investors and ethical consumers, rather than just to help members of the company—shareholders for the time being—hold directors to account for what the company is doing at present. For us, the fact that only listed companies are covered is a problem. We think that ethical investors, and especially ethical consumers, have an interest in more companies than those that are listed.

Perhaps a bigger problem—it is the biggest problem with the state of the business review as it leaves the House—is to do with auditing. That is, I think, the single issue that motivated the Chancellor to remove the original operating and financial review. Ministers frequently refer to the cost of auditing the business review—previously the OFR—but the auditing requirement is central to the utility of the review, for creating and helping to develop markets for ethical consumption and investment. Only reliable information will help to create those new markets. We accept that that process will bring a cost to business, but we believe that the offsetting benefit of developing ethical investment and consumption far outweighs that cost.

The Bill will leave the House in a somewhat rough state—especially for a Bill that will have gone through its Third Reading in its second Chamber. Consideration has sometimes been very rushed—at times it has been close to shambolic. However, we all must accept responsibility for that, because I fear that the origin of the problems to do with the consideration of the Bill lies in the decision to use it as a consolidation measure, and not just as a reform measure. There is evidence in all parts of the House—there are fingerprints and traces everywhere—of all parties having been involved in that decision.

If it had been recognised all along that the intention was to go for consolidation, we might have started our consideration of the Bill at a different time of year and have thought about having a carry-over provision for it. We did not do that. Consolidation and codification is, indeed, a good thing, as the Minister said: having a Bill that covers as much of company law as possible in one place is a good thing. However, if we had thought about this matter better in advance, we might either have started earlier, or have done the reform first and the consolidation second at greater leisure. Nevertheless, speaking as someone who attended almost every Committee sitting and almost every debate on Report, I certainly do not want to start again at this stage, so I have no intention of opposing the Bill on Third Reading.

I thank all those involved in discussions on the Bill, especially my hon. Friend Lorely Burt, who supported me throughout in Committee and on Report, and my hon. Friend Mark Hunter, who also attended the Committee. I also thank the Liberal Democrat team in the House of Lords, who brought to discussions an extraordinary depth of experience of business. I pay tribute to Mr. Djanogly—unfortunately, he is not present—who displayed an extraordinary degree of persistence and accuracy in his attempt to get to the technical heart of a great number of questions. I also thank the other members of the official Opposition Front-Bench team for their courtesy and good humour throughout the Bill's extraordinary progress.

However, I thank most of all the ministerial team, and especially the Minister for Industry and the Regions, who has had to pick up, and learn to master, an extraordinarily complex and difficult brief in a very short period. Those of us who have dealt for a long time with company law—in my case, a quarter of my life, and I spent 10 years teaching the subject at university—have been very impressed by what a quick and accurate learner of this area of law she has shown herself to be. The rest of the ministerial team are more legally experienced, but they have shown themselves to be able to adapt quickly and well to a new area of law.

I should also like to thank the Bill team and the civil service for the very helpful way in which they dealt with Opposition Members. It is perhaps unusual at a national level—it is rather less unusual in local politics—for there to be a good relationship between the civil service and Opposition politicians. That has been genuinely helpful in our effort to make genuine progress in getting legislation through this House.

At one stage in the past couple of days, the hon. Member for Huntingdon said to me that he wanted to be involved in this Bill because, for a lawyer, it is a once-in-a-generation opportunity. That is true. Company law reform of this sort comes through Parliament very rarely, but I have to say that I expect we now both hope that it is a once-in-a-lifetime experience.

Photo of Jacqui Lait Jacqui Lait Shadow Minister (London), Communities and Local Government 5:05, 19 October 2006

It is with some trepidation that I contribute to the debate, after all the hard work that so many people have clearly done over so many months on such technical legislation. However, there is one issue about which I remain concerned: information about shareholders and directors. I tried to discuss it on Tuesday evening, but—as with many of the amendments that were tabled, and as my hon. Friend Alan Duncan explained—that subject was not reached.

My principal concern, which stems from my involvement in this area for more than 25 years, is people and companies that undertake scientific research that involves the use of animals. I know that the Government have considered, and will be consulting on, ways of making it more difficult for information on such people and companies to be accessible to those of malign intent. I hope that the consultation will proceed apace and that innocent people whose lives are made a misery, who suffer mental breakdowns, whose marriages break down, whose children are terrorised, whose property is vandalised and whose companies are brought to the brink of bankruptcy through the malign efforts of animal rights terrorists can be afforded some protection from their names and addresses being known.

I have constituents who have been targeted in that way, and many of my friends have been broken by the attentions of animal rights terrorists. I hope that the Government will proceed with great speed and firmness to ensure that while information on a company and its members and shareholders can be made available, it is not available to those who wish to do them harm. As I said, I hope that the consultation will proceed apace and that the Government will quickly come up with serious measures to deal with this issue.

This is a new development, and it is particularly important to me because I understand that the name of the company that is allegedly building the primate laboratory in Oxford is well known to animal rights terrorists. That company—if it is that company—is also likely to be involved in building Olympic provision. If the animal rights terrorists, having obtained such information, behave in the same way toward the Olympics and everybody involved in it—that includes all the athletes, trainers and suppliers worldwide—we can only tremble at the prospect of what could happen to our Olympic games. That is the seriousness of the situation, and it is the reason why I have risen, with trepidation, to intervene at this very late stage to implore Ministers to ensure that there is no way that those people can ever gain access to any of that information.

Photo of Michael Weir Michael Weir Shadow Spokesperson (Work and Pensions), Shadow Spokesperson (Trade and Industry) 5:10, 19 October 2006

I want to make a few brief points at the end of the debate. The length of the Bill has been commented on, and it is the biggest ever to go through the House. When I was a student—more years ago than I care to remember—I used to carry many legal volumes. I think that modern law students and lawyers must be thankful for the invention of the CD-ROM.

We have heard a lot about enlightened shareholder value being the cornerstone of the Government's policy for company law in the 21st century. I believe that our system limits enlightened shareholder value, as the bulk of most large companies' shares are controlled by institutions or other large companies. Alan Duncan dismissed problems to do with disclosure about how institutions vote, but it is a vital matter. Many of us do not hold shares as individuals, but the institutions to which I referred control our pension funds or other investments. If we are serious about ethical investment, we need to know how they deal with those matters on our behalf. One of the most important facets of the Bill is that it will give many small shareholders the information that they need to understand what is happening to their investments.

A couple of days ago, I spoke to clause 173, which was presented as a way of improving directors' responsibilities in respect of the environment and other matters. As I said, the clause is a step forward, although it does not go far enough. We will have to revisit the matter, as the world is changing. I heard this morning that the Conservative party, like the Liberal Democrats, is discussing green taxes. I am sure that other parties will follow suit, which means that all companies will have to change. That will have a knock-on effect on how directors react and companies work.

Another strand to the argument has to do with the proposed climate change Bill. If such a Bill comes before the House, that too will have an impact on companies. It does not contradict what has been achieved with this Bill to say that the climate change legislation must place a responsibility on directors to react to environmental issues.

Finally, it has been noted that many clauses have not been discussed, although the huge number of clauses means that we would still be talking next Christmas if we had debated all of them as much as some would have preferred. However, we did not discuss the important new clause 3, which was due to be debated today. It deals with the liability of UK companies for the actions of their overseas subsidiaries.

I raised the matter on Second Reading, when I said that the legal system in many developing countries is not sufficient to allow people to gain redress for the actions of companies. The Secretary of State said that he would be very reluctant to encourage widespread litigation in UK courts simply because remedies might not be easily available in some countries. However, if we as a developed nation are not prepared to give people the opportunity to take matters to court—and only a small number of UK companies would be involved—we are failing our responsibilities to the developing world.

The Government argue that the Bill is not the place to deal with such matters, but it codifies the law affecting UK companies so, if it is not appropriate for the purpose that I have set out, what would be? We have been told that the Bill sets out company law in the 21st century but it has been noted often enough over the past few days that the world is changing. Companies have to change with it: issues to do with the environment and trade justice are much more to the fore, and companies need to reflect our changing times. This was the time and the place to tackle the issue, and to ensure that UK companies were at the forefront in accepting responsibility for their actions, and those of their subsidiarie overseas. The best of our companies already do that; I stress that we are not talking about the majority of companies, which act responsibly in most areas. One of the problems is that people in many developing countries cannot easily get access to the courts. We have a well developed legal system, and a massive Bill on what our companies can do. We should have taken that extra step and allowed justice to prevail for those affected by the actions of some in the third world, and it is a shame that we did not.

Photo of Mike O'Brien Mike O'Brien Solicitor General, Law Officers' Department 5:15, 19 October 2006

I thank all Members for their contributions, particularly those who were on the Standing Committee. Britain is part of a global economy. Nobody owes us a living in that economy, so we must ensure that we modernise our industry and our tax laws. As David Howarth said, we must modernise the hard-wiring of the economy—the company law—and we must get it right. That is what we have done during our consideration of the Bill.

The Bill had a very long gestation—it was eight years in consideration, and the company law review looked into all aspects of company law. Initially, the legislation was the Company Law Reform Bill, and it then became a consolidation Bill. We have struck the right balance between ensuring that we build on the need for an enterprise economy and introducing the right element of regulation. We thus create fairness for shareholders and allow them better control over the companies in which they invest. Rightly, in addition to considering those issues, we looked into the subjects of animal rights and terrorism, and some of the other problems that Mrs. Lait identified in her contribution.

I thank all those who have contributed, particularly my noble Friend Lord Sainsbury and my right hon. and learned Friend the Attorney-General, who spoke in another place. I thank my right hon. Friend the Minister for Industry and the Regions for the way in which she piloted the Bill through its stages. It is a major reform that modernises Britain's company law, and it will make our economy stronger. In no small part, that is thanks to her dedication and effort in ensuring that the Bill becomes law.

Question put and agreed to.

Bill accordingly read the Third time, and passed, with amendments.