Company Law Reform Bill [HL]

– in the House of Lords at 2:59 pm on 9th May 2006.

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Votes in this debate

Report received.

Clause 1 [Companies]:

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

My Lords, in moving Amendment No. 1, I shall speak also to Amendments Nos. 2 and 9, which concern Clauses 1, 9 and 16. I am sure that all of us who have been involved with this Bill from the beginning share my great pleasure that we have reached Report stage. After 13 Grand Committee sittings, which the Minister told us lasted more than 50 hours, and during which we discussed 1,140 amendments, it is with even greater pleasure, and with some relief, that I see, looking through the Marshalled List of amendments before us, that although there are 513 of them, on 86 pages, the Government have taken on board a good many of our arguments and sought to meet the points that we made. I am extremely grateful to the Government for that.

Before we get carried away on a tide of thanks and self-congratulation, there are still areas of concern in the Bill that we need to reconsider. When he introduced the Bill at Second Reading on 11 January, the noble Lord, Lord Sainsbury, said that the strategic objectives of the Bill were,

"enhancing shareholder engagement and a long-term investment culture; ensuring better regulation and a 'think small first' approach; making it easier to set up and run a company; and providing flexibility for the future".—[Hansard, 11/01/06; col. 182.]

As part of those he stated that the,

"underlying approach in this Bill has been to simplify. Sometimes this has been a question of making substantive changes of policy, and sometimes it has been more an issue of simplifying the drafting of the law to make the language more accessible".—[Hansard, 11/01/06; col. 243.]

So comprehensibility and accessibility are clearly the key objectives. Our first amendment seeks to achieve that. This would make references in Clause 1 more comprehensive in defining which provisions apply to which companies. Surely, in doing that, we further both aims of the Government. Disappointingly, the Government appear to think not.

Another key objective was to create a uniform UK platform for company law. We have no problem with that. Amendments Nos. 2 and 9 address this issue directly. The Bill now provides that company law will be provided for throughout the United Kingdom in one statute: a considerable achievement and one that will doubtless promote businesses within the UK and UK business overseas. However, we remain saddled, in various parts of the Bill, with the archaic requirement that companies tie themselves to one region within the United Kingdom. If we are to have one UK law, why should companies have to state whether they are registered in Scotland, Northern Ireland, England and Wales, or just in Wales? Surely, it is sufficient to provide an address in the registration documents and state on the certificate of incorporation that the company is UK registered? Again, I fear that the Government do not agree.

There is no doubt that this Bill will be of considerable benefit to UK business, but there are still improvements to be made. I hope that during the remainder of this Bill's passage through this House we can make the final improvements to this Bill for the sake of UK plc, in the success of which we all have a very direct interest. I beg to move.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, in responding to the noble Lord, Lord Hodgson, perhaps I may say that this is an area of great complexity. We have never claimed to get everything right the first time. It is essential for us to listen carefully to any amendments coming from any part of this House and to ensure that we have clear and effective answers. If we do not, we will then certainly make amendments. This legislation, which will determine how the, literally, hundreds of thousands of transactions that take place every week are carried out, is of critical importance.

It is worth mentioning at the start that Clause 1 relates to the scope of the Companies Acts, and Clause 2 makes clear that by "Companies Acts" we mean, among other things, the company law provisions of this Bill. Not every provision of the Bill falls into this category. The part that deals with business names—to which this amendment refers—is an example of requirements applying far more widely than to companies alone. They are therefore not a matter of company law in the strictest sense.

Another example would be the rules relating to audit in what is now Part 32. The question is how far we should go to indicate what regulatory requirements will apply to overseas companies. Our approach in this clause, which is essentially about the scope of company law, properly so called, is to indicate the core company law requirements that apply to overseas companies; in other words, those appearing in, or applied to by, Part 25 of this Bill. This is what subsection (3) does: it does not attempt to provide an exhaustive list of, or a pointer to, all the regulatory requirements, whether company law or not, which may apply to overseas companies. There could be any number of such requirements, relating to tax, employment, consumer matters, and so on. The rules relating to business names are of this sort, and the clause as currently drafted therefore does not refer to them.

I am confident that this is the right approach. First, I do not believe it would be possible to provide an exhaustive list of non-company law regulatory requirements. To include some but not others, as the amendment proposes, might be misleading and unhelpful to users. Secondly, I am concerned that if we were to indicate expressly that the provisions on business names applied to overseas companies, we might be taken as implying that they were not relevant to other companies, including unregistered companies, mentioned in subsection (2) of this clause. This risks giving a false impression.

I should also mention that the noble Lord's amendment should probably refer to Part 31, rather than Part 32. As the noble Lord will remember, what was Part 31 of the Bill in Committee has now been removed and the numbering of the Bill has therefore been changed. The noble Lord should be forgiven for failing to reflect this change, as he is not alone in so doing. I confess that a change of this sort will be needed to Clause 2 when the Bill is next printed. I hope the noble Lord will understand that, whatever the correct reference in the amendment should be, we do not think it would be sensible to accept it as a matter of principle, for the reasons I have outlined. I hope the noble Lord will agree to withdraw it.

In turning to Amendment No. 2, I should like to address separately the two aspects of this amendment: the deletion of the existing text and the insertion of the alternative text. The proposed insertion, while making clear that the registered office must be in the UK, would duplicate the requirement in subsection (5) of Clause 9 for the address of the registered office. The proposed deletion would remove the requirement for the company to specify within which UK jurisdiction its registered office is situated. Perhaps I should emphasise that the registration requirements will continue to be the same throughout the United Kingdom. Nevertheless, as I hope I can show, it is important to know where it is registered. We covered much of this territory in our debates in Grand Committee.

We continue to consider that it is important to know within which UK jurisdiction a company's registered office is situated, and then to restrict where that office may actually be situated to that jurisdiction. There may come a time when such restrictions can be removed, but this will require making satisfactory provision where this matters. It is true that the location of a registered office within the UK has little or no effect on the application of most company law. However, it impacts on important matters relating to companies. For example, under the current legislative scheme, whether the registered office is in Scotland, Northern Ireland, or England and Wales determines which rules apply for the registration of charges granted by the company. Furthermore, the jurisdiction of registration matters in the event of a company's insolvency. I can assure noble Lords that the registration requirements will continue to be the same throughout the United Kingdom. Amendment No. 9 is wholly consequential to Amendment No. 2. In view of this explanation, I hope noble Lords will not press these amendments.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

My Lords, I am grateful to the Minister for going over the ground once more. I congratulate him on a very sharp catch in the slips on Part 31. I am adjudicated "out" by that. In those circumstances, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 9 [Registration documents]:

[Amendment No. 2 not moved.]

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendment No. 3:

Page 4, line 25, leave out sub-paragraphs (i) and (ii) and insert "a statement of capital and initial shareholdings (see section (Statement of capital and initial shareholdings))"

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, the amendments in this group are designed to address concerns raised by noble Lords in Grand Committee regarding the requirement for separate statements of initial shareholdings and capital and the requirement that subscriber addresses be provided in the statement of initial shareholdings. I will deal with the first of these concerns. Amendment No. 3 removes the requirement for separate statements of initial shareholdings and share capital, replacing this with a requirement for a combined statement of capital and initial shareholdings. This is intended to simplify the formation requirements by combining the two statements. I hope noble Lords will agree that this improves the formation process. The contents of the combined statement are set out in the new clause, which will replace Clause 11 and is introduced by Amendment No. 5. With the exception of what I am about to say about the requirement to provide names and addresses of subscribers, the information to be provided in the new statement remains as before, except for a minor amendment in Clause 11(4)(b), which specifies, in the interests of clarity, that the nominal value to be provided in respect of the subscriber shares is the nominal value of each share.

I turn now to the requirement that subscribers' names and addresses be provided. Subscribers are required to provide this information when they subscribe to the memorandum by virtue of the form of memorandum prescribed in regulations made under Section 3 of the 1985 Act: the Companies (Tables A to F) Regulations, 1985. This is carried forward in the current drafting of Clause 10. The new statement of capital and initial shareholdings envisaged by Amendment No. 5 no longer requires that subscribers' names and addresses be provided. Instead, there is a power contained in subsection (3) of new Clause 11 to enable the Secretary of State to prescribe in regulations what information about identity should be provided for the purpose of identifying subscribers. I should add that we envisage that this power will initially be used to continue to require that the names and addresses of subscribers are provided. However, as now, the address need not be a residential address; a contact address is sufficient. Both the Serious Fraud Office and the Companies Investigation Branch have confirmed that this information is useful in combating fraud. We see no reason not to retain this requirement for the time being.

The power will, however, provide additional flexibility for the future and should it be concluded that, for example, the requirement for subscriber addresses is no longer necessary, the power could be used to remove this requirement, or provide for alternative, or better information pertaining to the subscribers' identity. I hope that that goes a long way to addressing noble Lords' concerns. I beg to move.

Lord Hodgson of Astley Abbotts: My Lords, we are grateful for the Minister's comments and for his response to our request to simplify as far as possible the procedure for forming a company. I am slightly disappointed about his response on the need to continue to give details of the subscriber because all too often the initial capital is committed by a company agent. Therefore, I am not quite sure what the measure achieves. Companies are rarely formed by the people who will operate them. Therefore, the people who the Minister is concerned may be acting fraudulently will not be on the register when the company is started. A company is usually started with a couple of people such as a solicitor or a company agent. I accept that the Government want some time to experiment, but I doubt whether the measure will achieve very much by providing the relevant names given the nature of the people who provide the initial capital. Overall, this is certainly a step in the right direction.

On Question, amendment agreed to.

Clause 10 [Statement of initial shareholdings]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendment No. 4:

Leave out Clause 10.

On Question, amendment agreed to.

Clause 11 [Statement of share capital]:

Lord Sainsbury of Turville moved Amendment No. 5:

Leave out Clause 11 and insert the following new Clause—

"STATEMENT OF CAPITAL AND INITIAL SHAREHOLDINGS

(1) The statement of capital and initial shareholdings required to be delivered in the case of a company that is to have a share capital must comply with this section.

(2) It must state—

(a) the total number of shares of the company to be taken on formation by the subscribers to the memorandum of association,

(b) the aggregate nominal value of those shares,

(c) for each class of shares—

(i) prescribed particulars of the rights attached to the shares,

(ii) the total number of shares of that class, and

(iii) the aggregate nominal value of shares of that class, and

(d) the amount to be paid up and the amount (if any) to be unpaid on each share (whether on account of the nominal value of the share or by way of premium).

(3) It must contain such information as may be prescribed for the purpose of identifying the subscribers to the memorandum of association.

(4) It must state, with respect to each subscriber to the memorandum—

(a) the number, nominal value (of each share) and class of shares to be taken by him on formation, and

(b) the amount to be paid up and the amount (if any) to be unpaid on each share (whether on account of the nominal value of the share or by way of premium).

(5) Where a subscriber to the memorandum is to take shares of more than one class, the information required under subsection (4)(a) is required for each class."

On Question, amendment agreed to.

Clause 13 [Statement of proposed officers]:

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

My Lords, in moving Amendment No. 6, I wish to speak also to a long list of consequential amendments—Amendments Nos. 7, 11, 12, 28, 30 and 148 to 156 inclusive. These amendments concern a range of clauses beginning with Clause 13 and ending with Clause 259.

We return to an issue that we discussed in Grand Committee. I am afraid that I did not find the Minister's response persuasive and I want to have another crack at the matter this afternoon. As your Lordships will be aware, the Bill makes a big change to the current law concerning company secretaries. The current law is that all companies must have a secretary. The Bill, if passed as currently drafted, would change that and require only public companies to have a secretary, leaving private companies to decide for themselves if they wish to have a secretary.

These amendments do not concern the issue of where the line should be drawn between those companies required to have a secretary and those not so required. That is a matter which we shall debate when we reach Part 12. Instead these amendments deal with the situation under the Bill of those companies that are not required to have a secretary but which choose to have one anyway.

The Bill quite properly re-enacts many of the powers and responsibilities that exist at present for secretaries where they are to be required by law; but, as currently drafted, the Bill does not make adequate provision for the empowerment of secretaries where they are not required by law. Our position on this is simple—where a company chooses to have a secretary, that secretary should be fully empowered to exercise all the functions and bear all the responsibilities of a legally required secretary.

The amendments proposed in this grouping are designed to achieve that aim. To pinpoint a specific example where this is necessary we should look at Amendments Nos. 28 and 30 to Clause 44, which is headed, Execution of documents. These amendments would allow a company with a secretary, even if that is not required by law, to continue to be able to execute documents under the signature of the secretary and a director. This issue has attracted the interest of wider groups than those one might expect to be interested, such as the Institute of Chartered Secretaries and Administrators, and other groups, such as the Law Society, have raised concerns that the Bill as drafted is not satisfactory.

When this issue was raised in Grand Committee, the noble Lord, Lord McKenzie, dismissed it as unnecessary, stating that the clause,

"introduces more flexibility for all companies, not less. It in no way hinders the execution of a document by a private company that chooses to continue to have a secretary".—[Official Report, 30/1/06; col. GC41.]

However, I argue that that is not the case. Although a private company will continue to be able to authorise its company secretary to attest the affixing of its common seal, it will not retain the existing facility for a document to be executed under hand by a director and the secretary. It is true that a private company will be able under Clause 44(3) to execute a document by having it executed by a director whose signature is witnessed by another person who could be the secretary. However, we do not consider that that provides an acceptable alternative for the following reasons.

First, under the current law, the director and the secretary can execute a document at different times, but that will not be possible for a private company under the new formulation. Secondly, we think it highly likely that private companies will continue to execute documents as they have been permitted to do since 31 July 1990, pursuant to Section 36A(4) of the Companies Act 1985, because they will be unaware of the change implicit in Clause 44. All the precedent books will be rendered out of date if the Bill proceeds in an unamended form. There would need to be wide publicity to bring this change to the attention of all companies affected by it. The change is likely to give rise to considerable confusion. In this respect we feel that Clause 44 is anything but deregulatory as it removes a facility for companies which exists under current law.

The Bill as currently drafted retains the facility for public companies—that is, companies required to have a secretary—to execute documents under the signature of a director and the secretary of the company, or by two directors of the company. We see no reason why private companies—that is, companies not required to have a secretary—who choose to have a secretary should not be afforded the same facility. Indeed, not to allow this is likely to result in considerable confusion before this change to the law becomes known.

In so far as the provisions of the first company law directive—which require the public register to contain particulars of the persons who are authorised to represent the company in dealings with third parties—would require the particulars of a company secretary to be included in the register of companies if he continues to have signatory powers in relation to deeds and other documents executed by the company, we propose that the Bill is amended to provide that where a company that is not required to have a secretary chooses to have one the particulars of that person should continue to be registrable. That is the rationale behind our Amendments Nos. 11 and 12.

The other amendments seek to ensure that the correct frameworks are put in place for secretaries who have been appointed despite there being no obligation to do so.

Amendments Nos. 6 and 7 would amend Clause 13, headed "Statement of proposed officers", to require any company that has a secretary to include that proposed secretary in the statement of proposed officers.

Amendments Nos. 148 and 149 concern Clause 252, headed "Qualifications of secretaries of public companies". These amendments would make it clear that any company with a secretary must ensure that the secretary has the requisite knowledge and experience, but that only public companies would require secretaries to hold one or more of the qualifications stated in subsection (2) of that clause.

Amendments Nos. 150 to 156 inclusive seek to amend Clauses 253 to 259 inclusive and would simply change the Bill to provide the appropriate powers for companies that have a secretary, despite not being required to do so. I beg to move.

Photo of Lord Razzall Lord Razzall Spokesperson in the Lords, Trade & Industry

My Lords, as noble Lords will realise, I do not normally take form points over substance. However, I had intended to support the noble Lord, Lord Hodgson, only to discover that for some reason the Conservatives have degrouped Amendment No. 29, and that it now stands alone. However, I believe that Amendment No. 29 ought to be discussed at this juncture. I was especially surprised to hear the noble Lord, Lord Hodgson, make all the remarks that I would have made on Amendment No. 29.

The point is simple. Surely the companies legislation should provide for a company secretary—where there is one—to be able to sign and execute documents in the way that company secretaries do at the moment. That is all the amendment seeks. When we reach Amendment No. 29, I shall move it formally. Having said that, I agree with everything said by the noble Lord, Lord Hodgson, in relation to the role of the company secretary.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, in Grand Committee we considered at length the implications of the proposed abolition of the requirement for private companies to have a secretary. No one suggested that the requirement should be retained. However, many noble Lords made clear their concerns about certain implications of the proposal, in particular that there would be no statutory recognition of a private company secretary and that third parties would not be able to discover whether a private company had a secretary and, if so, who that secretary was.

At present the identity of the company secretary of a private company—as, indeed, that of a public company—is a matter of public record, starting with the statement of proposed officers on a company's formation. Thus, third parties can discover who is the secretary of any company. This is of particular importance whenever the signature of the secretary, as secretary, has legal effect. Under the Bill, private companies will still be able to have a company secretary, but whether they so choose will not be material to third parties. That is why the Bill does not provide for them to have statutory recognition nor for their identity to be on the public record, either on formation of the company or thereafter.

However, in Grand Committee, several noble Lords were concerned about the consequent loss of flexibility for private companies when executing documents. At present, the alternative to affixing the company's seal is signature by either two directors or a director and a secretary. Under the Bill, both these possibilities are retained for public companies only. It also provides that for any company, if witnessed, the signature of a single director is sufficient. A crucial difference between the world under the Bill and the present for a private company is that the company secretary and the director must be together if their combined signatures are to be used to execute the document while at present they can sign separately. Of course, as now, a company will be able to appoint an attorney whose sole signature is sufficient for the execution of a document on the company's behalf.

We have given further consideration to this problem and have had useful discussions with the Law Society. The essential requirement for third parties is that the identity of those able to sign for the company be on the public record. We see considerable advantage to all companies, not just private companies, if they were able to give individuals authority for that purpose, whether or not the individual concerned is the company's secretary. It would be essential that any such person's identity be on the public record, which is why I brought up this possibility during our discussions of these amendments.

The Government would like to consider these amendments further and therefore hope that noble Lords will not press for a vote upon them today.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry 3:30 pm, 9th May 2006

My Lords, I am grateful to the Minister, and I agree with what he said. If there is to be a company secretary or an officer who is authorised, his or her name should be on the public record. We have no problem with that; indeed, our Amendments Nos. 11 and 12, which form part of this group, are designed to achieve that. The Minister's response was positive and we look forward to seeing the results of his further deliberations at the next stage of the Bill. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 7 not moved.]

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendment No. 8:

Page 6, line 5, leave out "(see sections 147 to 149) or" and insert "and register of directors' residential addresses (see sections 146 to 149) or, as the case may be, its"

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, I am most grateful to those, including the Association of the British Pharmaceutical Industry, who have made alternative suggestions about how the Bill might provide protection for directors' home addresses. We will consider later the government amendments that will provide a scheme whereby every director's residential address is protected. The amendments in this group are consequential to those introducing the new scheme. They provide for every company to keep a register of directors' residential addresses to which access will be restricted. That will be in addition to the register of directors, to which there is a public right of access; that register will have each director's service address. To minimise the regulatory burden, it will be possible for the entry for the residential address to be that the service address is the usual residential address and that statement will be on the protected register of directors' residential addresses. I beg to move.

Photo of Baroness Whitaker Baroness Whitaker Labour

My Lords, I wonder if I could ask my noble friend a question in relation to four amendments in this group: Amendments Nos. 66 to 69. I apologise for not raising the concern in Committee. Amendments were moved then that touched on the problem but not quite so precisely as my question. They relate to Clause 149, which provides that the Secretary of State can make regulations amending the particulars of directors to be registered. My question is: would such regulations cover a requirement for UK-registered companies to declare beneficial ownership and end the practice of directors of registered companies being themselves companies unless beneficial ownership can be shown? The advantages of such a requirement are that the secret use of shell companies to shield money laundering and corrupt dealings can be prevented, as the report from the All-Party Group on Africa—the other side of the coin—recommended.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, I am afraid that there are no powers to require the disclosure of beneficial ownership. It is almost impossible to define and extremely easy to evade. Clause 139 requires at least one director to be a natural person. We do not think it right to prohibit corporate directors entirely because the facility is useful for some organisations, particularly trade associations. Indeed, it is a requirement for open-ended investment companies. We cannot use this part of the Bill to help.

On Question, amendment agreed to.

Clause 16 [Issue of certificate of incorporation]:

[Amendment No. 9 not moved.]

Clause 17 [Effect of registration]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendment No. 10:

Page 7, line 10, at end insert—

"( ) In the case of a company having a share capital, the subscribers to the memorandum become holders of the shares specified in the statement of capital and initial shareholdings."

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, in Grand Committee, the noble Lord, Lord Hodgson, raised the question of the status of the shares that the subscribers to a company's memorandum take when it is formed and registered. The noble Lord pointed out that there is at present some confusion as to whether such shares should be considered as being allotted to the subscribers and, if so, whether it is necessary for the company to make a return of allotments to the registrar in respect of them.

We are extremely grateful to the noble Lord for raising this issue with us, and the amendments to Clause 17, Clause 538, the new clause after Clause 552 and the new clause before Clause 553 are the result of our deliberations on this point. Taken together, these amendments make it clear that the subscribers become the holders of the shares that are taken by them on formation and that the Bill's provisions on share allotments subsequent to registration, including the requirement for a return of allotments, and the Bill's provisions on pre-emption rights do not apply to the shares taken by the subscribers.

The remaining amendments in this group are largely consequential. We have also taken the opportunity to clarify when references to shares in the context of Part 15 are references to allotted shares. I beg to move.

On Question, amendment agreed to.

[Amendments Nos. 11 and 12 not moved.]

Clause 19 [Articles of association]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendment No. 13:

Page 7, line 34, leave out subsection (3) and insert—

"( ) A company's articles of association must—

(a) be contained in a single document, and

(b) be divided into paragraphs numbered consecutively."

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, model articles of association have been prescribed for companies limited by shares since 1856. The current form of model articles contained in Table A are prescribed under the Companies Act 1985. By long-established tradition, the model articles that apply to a company are those prescribed at the time that company was first formed by registration. For example, if a company was formed and registered as a private company limited by shares under the Companies Act 1929, it remains subject to the 1929 Table A, unless or until its articles exclude or modify the provision of that Table A or it consciously adopts a later Table A. Clause 20 allows the Secretary of State to prescribe different model articles for different types of company and that has prompted us to think about which model articles should apply when a company changes its status, particularly when it moves from being a private company limited by shares to a public company or vice versa. We think that consistency with the approach adopted in previous companies Acts requires that the model articles that applied when the company was first registered should continue to apply following the change of status. That means, for example, that if a company to which model articles apply starts life as a public company, it will remain subject to the model articles prescribed for public companies when the company was originally formed and registered, even if it subsequently re-registers as a private company. We have consulted practitioners and they agree that this is the right approach.

The amendments simply make it clear what the position is since we felt that Clause 21 could have been misinterpreted as suggesting that a different set of model articles applies on re-registration. I beg to move.

Photo of Lord Razzall Lord Razzall Spokesperson in the Lords, Trade & Industry

My Lords, I do not wish to correct the noble Lord, Lord Sainsbury, who has been extremely helpful in our deliberations on the Bill, but I draw to his attention the fact that I suspect that he read the wrong briefing note on the amendment that he has just moved. He was moving Amendment No. 13, and I think that he read the note for Amendment No. 14. His officials are grinning; I will look away to avoid embarrassing him further. I hope that when we get to Amendment No. 14, the Minister does not feel the necessity to read it again, because we all have busy lives. The amendment that he was moving indicated that we deleted,

"A company's articles of association are part of its constitution", and substituted the words in the amendment. Is the Minister saying—this is a provocative question—that a company's articles of association are no longer part of its constitution?

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, I had better set the record right rather quickly on this and speak to Amendment No. 13 rather than moving on. I was so carried away by the speed at which we were going through the amendments that I skipped this one.

Amendment No. 13 does two things. It removes some duplication in Clause 19 and reinstates an important requirement of the 1985 Act about the format of companies' articles. Clause 19(3) states that a company's articles are part of its constitution. That is of course true, but only a few lines earlier Clause 18(a) says that unless the context requires otherwise, references in the Companies Act to a company's constitution include its articles. On reflection, we propose to remove the current Clause 19(3) as unnecessary duplication. Section 7(3)(b) of the 1985 Act requires that a company's articles are to be divided into paragraphs numbered consecutively. This is a sensible and long-standing requirement of UK company law, which is helpful to companies and persons searching the public register alike, and we wish to preserve it.

On Question, amendment agreed to.

Clause 21 [Default application of model articles]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendments Nos. 14 and 15:

Page 8, line 12, leave out "In the case" and insert "On the formation"

Page 8, line 21, leave out "first"

On Question, amendments agreed to.

Clause 23 [Entrenched provisions of the articles]:

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

My Lords, in moving Amendment No. 16, I shall speak also to Amendments Nos. 17 and 18, which are concerned with the entrenched provisions of the articles and notice to the registrar in case of entrenched provisions.

The entrenchment of articles is a new provision that has been created with this Bill. We can see and appreciate how these may be of benefit to companies, but there are still problems with the mechanism as it stands. What concerns us is the lack of provision for amending entrenched articles. What happens where an entrenched article becomes unworkable because of changes in the company's position over time or, more importantly, becomes suddenly inappropriate for any reason, for example after the takeover of a company? Will the company with entrenched articles have to be wound up to make that change? Surely that is not a satisfactory approach. The amendments together create a default provision, which would permit the alteration or repeal of an entrenched article, provided that there was unanimous approval of shareholders.

Another concern with the current mechanism, which has been raised with us, is that a company could alter a provision for entrenchment under Clause 23(1)(b), say, with a resolution of 76 per cent of its members agreeing, and in doing so make such substantial changes that it effectively creates a new entrenchment provision. Has the company "made" a provision for entrenchment under Clause 23(2)? If so, would it be valid given that it is neither "made" on formation nor by a unanimous resolution? There are gaps to be addressed here. I beg to move.

Photo of Viscount Bledisloe Viscount Bledisloe Crossbench 3:45 pm, 9th May 2006

My Lords, may I take this opportunity to raise a rather more general point? The Minister has already said to the noble Lord, Lord Hodgson, "I hope you will withdraw that amendment so that we can come back to it at the next stage". The next stage will be Third Reading, and according to the Companion there are restrictions on the amendments that can be moved at Third Reading. The Companion provides:

"The principal purposes of amendments on third reading are . . . to clarify any remaining uncertainties . . . to improve the drafting; and . . . to enable the government to fulfil undertakings".

If the results of the Minister's deliberations are that the Government are going to give way to the proposal in substance made by the noble Lord, Lord Hodgson, and they bring forward an amendment, they will be fulfilling an undertaking. If, unfortunately, an impasse remains, and the noble Lord, Lord Hodgson, wants to bring it back, technically he would be somewhat outside that paragraph of the Companion.

Many people have made the point that those rules in the Companion are very difficult to apply to a Bill that has been in Grand Committee, and particularly to a Bill as complicated as this one that has been in Grand Committee. Are all on the Front Benches tacitly agreeing that no one will invoke that provision of the Companion to defeat very sensible attempts by the Minister to resolve things by agreement, and that the noble Lord, Lord Hodgson, will not find that if he accepts the Minister's overtures he is then stymied on a subsequent occasion?

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, in a Bill of this complexity where we are trying to find a way through some very complicated issues, that would be the way that we would approach it—we would not invoke anything that would stop further amendments at that stage. Obviously, when we agree to consider something, we think that it is necessary to do something to find a way through an issue. I hope that we will be able to provide something that is satisfactory to the noble Lord, Lord Hodgson, but should he not be satisfied we would not invoke something that said that he could not table an amendment.

Photo of Lord Razzall Lord Razzall Spokesperson in the Lords, Trade & Industry

My Lords, we ought to bear in mind that this Bill started in the House of Lords, and has not yet gone to the other place. As we know, the other place is renowned for its expertise and scrutiny on technical Bills.

Noble Lords:

Oh!

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, we are extremely grateful to the noble Lord, Lord Hodgson, for proposing Amendments Nos. 16 and 17. It does seem that, as drafted, Clause 23 could be read as giving companies a general power to provide that they could never amend or repeal specified provisions of their articles, even with the unanimous consent of all their members. Our intention in this clause is to implement a recommendation of the Company Law Review that companies should be able to entrench elements of their constitution, that is, provide that the amendment or repeal of some provisions of the articles requires a bigger majority than is required to pass a special resolution, or the satisfaction of some other special condition. On reflection, the clause as it stands does not have the desired effect.

We do not wish to give companies generally a power to set particular provisions in stone for ever. That would run against the grain of our company law and could lead to unfortunate results in particular cases. We are not sure that the amendments are the best way to achieve the desired results, but we will give careful thought to what amendments should be brought forward at a later stage to make the position clearer.

On Amendment No. 18, which is also concerned with the articles of association, where a company's articles contain provision for entrenchment, that is a provision which can only be altered if certain conditions are met. Any change that the company makes to its articles must be accompanied by a statement of compliance. The registrar is entitled to rely on that statement as sufficient evidence that all of the procedural requirements as regards the alteration to the company's articles have been met. In addition to making a statement of compliance, the company must also give separate notice to the registrar, under Clause 24(1), where it has inserted a provision for entrenchment in its articles. The purpose of this notice is to ensure that when the registrar receives the document making or evidencing a change, the registrar and persons searching the public register are on notice that special conditions apply.

On the other hand, when a company that has made provisions for entrenchment in its articles changes its articles so they no longer contain any such provision, any flagging of the articles on the public register to the effect that they contain provision for entrenchment needs to be removed, so that the registrar's systems will not be expecting any future changes to its articles to be accompanied by a statement of compliance under Clause 24(2) and persons searching the public register will not be misled. Hence the requirement to give a notice under Clause 25(1) which will trigger the removal of a flag put on following notice under Clause 24(1).

Amendment No. 18 would introduce a further requirement to file a notice when an existing provision for entrenchment is altered. This is unnecessary. Once a notice under Clause 24(1) has triggered the flagging of a company's articles as containing provision for entrenchment, not much is added by requiring a further notice to be given on the amendment of that provision, since any changes made by the company will need to be accompanied by a statement of compliance under Clause 24(2) until notice is given under Clause 25(1). This is another bit of regulatory overkill. In the circumstances, I hope that the noble Lord will agree to withdraw this amendment.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

My Lords, I am grateful to the Minister. He has said that he will look at this matter and, with the noble Viscount, Lord Bledisloe, flying air cover, I am able to withdraw Amendments Nos. 16 and 17.

In his comments on Amendment No. 18 there was a lot of this clause fitting in with that clause. I would like to read what he has to say and make sure the point that we were driving at is met by the safeguards that he believes exist. We have no wish to add regulatory barnacles—we have spent most of the past two months trying to get rid of them. However, we would like to have the chance to read what he said in a long speaking note covering a complex area. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 17 not moved.]

Clause 24 [Notice to registrar in case of entrenched provisions]:

[Amendment No. 18 not moved.]

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendment No. 19:

Page 9, line 11, leave out subsection (2) and insert—

"( ) Where a company whose articles contain provision for entrenchment amends its articles and is required to send to the registrar any document making or evidencing the amendment, it must deliver with that document a statement of compliance."

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, the Bill as it stands provides mechanisms for registering alterations to a company's constitution which are made by the company itself or by legislation. However, courts and other authorities have powers, for example, to alter companies' articles in certain circumstances.

At present, the Bill does not provide for the registration of such changes. The new clause after Clause 36 obliges companies to notify changes ordered by courts or other authorities to the registrar.

Clause 18 provides that a company's constitution includes not only its articles, but the various types of resolution and agreement listed in Clause 30(1). As it stands, Clause 36 requires a company whose constitution is altered by an enactment to refile a copy of its constitution as altered with the registrar. This means that where, for example, a company's articles are altered by an enactment, the company is required not only to file an updated copy of its articles reflecting that alteration but to resubmit a copy of its entire constitution. For the purposes of Part 3 of the Bill, a company's constitution is defined in Clause 30 and this means that, as currently drafted, Clause 36 would require the company to also refile any Clause 30(1) resolutions or agreements which it has already registered in addition to a copy of the articles as amended. Clearly this would serve no useful purpose and the amendment to Clause 36 avoids this by requiring registration of an updated version only of the part of a company's constitution which the enactment has altered.

The other amendments in this group are consequential on the introduction of the new clause that will come after Clause 36. The amendments to Clause 24 remove the need for a statement of compliance where provision for entrenchment is introduced by an enactment or the order of a court or other authority. There is no need for a statement of compliance in these circumstances because the authority for making any such changes is that of the court or other authority making the order and does not come from the articles themselves. The amendment to Clause 27 removes potential duplication of filing requirements between that clause and the new clause that will come after Clause 36, while also ensuring that there is no duplication between Clauses 27 and 36. I beg to move.

On Question, amendment agreed to.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendment No. 20:

Page 9, line 16, leave out "alteration" and insert "amendment"

On Question, amendment agreed to.

Clause 27 [Registrar to be sent copies of amended articles]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendment No. 21:

Page 9, line 38, leave out subsection (1) and insert—

"( ) Where a company amends its articles it must send to the registrar a copy of the articles as amended not later than 15 days after the amendment takes effect."

On Question, amendment agreed to.

Clause 29 [Existing companies: provisions of memorandum treated as provisions of articles]:

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

moved Amendment No. 22:

Page 10, line 42 at end insert—

"( ) If there is a conflict between a provision, which immediately before the commencement of this Part was contained in the company's memorandum of association, and a provision contained in a company's articles of association, the former shall prevail."

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

My Lords, the issue of the legislative gap as to the resolution of conflicts between the memorandum and the articles when the transfer of provisions is to take place from the memorandum to the articles under the provisions of the Bill was raised by us in Committee and it continues to give concern amongst practitioners.

In Committee the noble Lord, Lord McKenzie, said that this would be dealt with,

"in the context of transitional arrangements under Clause 882".—[Official Report, 30/1/06; cols. GC 24–5.]

From our discussions with the Bill team—who have been very helpful on this matter—we understand that this may take a number of guises: amendment to the Bill at a later stage of its passage; free-standing transitional provision in subordinate legislation; using subordinate legislation to amend the Bill after Royal Assent; or a mixture of any or all of the above.

There has been concern amongst practitioners in the world outside as to how that will be proceeded with. Can the Minister outline the ways in which the Government plan to deal with this fundamental issue? I beg to move.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, we agreed in Grand Committee that it is extremely important to give companies certainty about the status of provisions which were originally contained in their memoranda but which will, by virtue of Clause 29(1), be deemed to form part of their articles after this part of the Bill comes into force. We also want to avoid, as far as possible, a situation in which the Bill forces existing companies to change their constitutional arrangements just to preserve the status quo.

Since the current law is that provisions in the memorandum prevail over conflicting provisions in the articles, a provision along the lines of this amendment may well be part of the solution. But, as we said in Grand Committee, the Bill is not necessarily the most appropriate place to make such a provision. For a variety of reasons, it may be better to deal with this in a transitional order under Clause 881. Although Clause 29 makes specific provision on the application of the new law to old companies, our approach more generally has been to leave such matters to be dealt with at a later stage under transitional arrangements.

We are currently looking at a range of issues where we need to consider how the new law should apply to existing companies. Some of these issues are interrelated and consequently I do not wish to pre-empt the results of that exercise by agreeing to consider an amendment to Clause 29 at this stage. That could undermine the best outcome as regards implementation of other parts of the Bill. What I can promise is that the issues raised by this amendment will be dealt with by clear legislative provisions in good time for existing companies to deal with them.

I can also assure noble Lords that the Bill will not be imposed on existing companies at short notice or without warning: there will be full consultation with interested parties on all significant transitional measures. We will be consulting carefully over the coming months on the wider issue of applying the new law to existing companies and we think that this is the best way forward.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

My Lords, I am grateful to the Minister for that reassurance. In particular I noted that he promised full consultation. External parties wanted to know that they will have a chance to influence the way in which the transition is made. In the light of that assurance, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 31 [Copies of resolutions or agreements to be forwarded to and recorded by registrar]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation) 4:00 pm, 9th May 2006

moved Amendment No. 23:

Page 11, line 41, leave out from "applies" to "must" in line 42 and insert "or (in the case of a resolution or agreement that is not in writing) a written memorandum setting out its terms,"

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, as currently drafted, Clause 31 requires that a copy of every resolution or agreement to which Chapter 3 of Part 3 of the Bill applies,

"printed or in some other form approved by the registrar", must be forwarded to the registrar within 15 days and recorded by her. In Grand Committee, the noble Lord, Lord Hodgson, asked whether "approved" meant the same as "prescribed", a term used elsewhere in the Bill, and we agreed to look at that requirement again.

The resolutions and agreements to which Chapter 3 of Part 3 applies are listed in Clause 30. These are resolutions and agreements which affect a company's constitution. As such, they are a matter of public record, so a difficulty arises in capturing them if they are not in written form. This is what the reference to "approved" in Clause 31 was primarily intended to capture, but on reflection we agree that this clause could have been clearer.

The proposed amendment makes it clear that where an agreement or resolution which affects a company's constitution is not in writing, a written memorandum is required to be forwarded to the registrar setting out the terms of the resolution or agreement in question. Requirements as to the form and manner of delivery of these memoranda, as they are for resolutions or agreements that are in writing, remain for the registrar to impose under Clause 689, which deals with the registrar's requirements as regards documents delivered to her.

I am grateful to the noble Lord for prompting us to look again at the clause and I hope that noble Lords will agree to this amendment. I beg to move.

On Question, amendment agreed to.

Clause 34 [Constitutional documents to be provided to members]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendment No. 24:

Page 13, line 26, leave out sub-paragraphs (i) and (ii) and insert ", a current statement of capital;"

On Question, amendment agreed to.

Clause 36 [Notice to registrar where company's constitution altered by enactment]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendment No. 25:

Page 14, line 16, leave out subsection (3) and insert—

"( ) If the enactment amends—

(a) the company's articles, or

(b) a resolution or agreement to which Chapter 3 applies (resolutions and agreements affecting a company's constitution), the notice must be accompanied by a copy of the company's articles, or the resolution or agreement in question, as amended."

On Question, amendment agreed to.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendment No. 26:

After Clause 36, insert the following new clause—

"NOTICE TO REGISTRAR WHERE COMPANY'S CONSTITUTION ALTERED BY ORDER

(1) Where a company's constitution is altered by an order of a court or other authority, the company must give notice to the registrar of the alteration not later than 15 days after the alteration takes effect.

(2) The notice must be accompanied by—

(a) a copy of the order, and

(b) if the order amends—

(i) the company's articles, or

(ii) a resolution or agreement to which Chapter 3 applies (resolutions and agreements affecting the company's constitution), a copy of the company's articles, or the resolution or agreement in question, as amended.

(3) If a company fails to comply with this section an offence is committed by—

(a) the company, and

(b) 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 and, for continued contravention, a daily default fine not exceeding one-tenth of level 3 on the standard scale."

On Question, amendment agreed to.

Clause 42 [Constitutional limitations: companies that are charities]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, in speaking to the amendment, I shall speak also to Amendments Nos. 458 and 491. They make minor technical amendments to change the references to the "Charity Commissioners" into references to the "Charity Commission", in line with the Charities Bill currently before Parliament, which is dear to the heart of the noble Lord, Lord Hodgson. I beg to move.

On Question, amendment agreed to.

Clause 44 [Execution of documents]:

[Amendment Nos. 28 to 30 not moved.]

Clause 45 [Common seal]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendment No. 31:

Page 18, line 29, at end insert—

"(2) A company which has a common seal shall have its name engraved in legible characters on the seal.

(3) If a company fails to comply with subsection (2) an offence is committed by—

(a) the company, and

(b) every officer of the company who is in default.

(4) An officer of a company, or a person acting on behalf of a company, commits an offence if he uses, or authorises the use of, a seal purporting to be a seal of the company on which its name is not engraved as required by subsection (2).

(5) 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."

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, in speaking to the amendment, I shall speak also to Amendment No. 32. Amendment No. 31 brings into the Bill the existing requirement in Section 350 of the 1985 Act for a common seal used by a company to include its name. It also brings in the offences associated with failure to do this. It thus consolidates the provisions relating to seals. As noble Lords have noted, this makes it easier for those concerned to discover the current position.

Amendment No. 32 follows on from our consideration of this clause in Grand Committee. The noble Lords, Lord Hodgson and Lord Razzall, pressed for an amendment to spell out on the face of the Bill that a company has power to appoint an attorney to execute deeds and documents on its behalf within the UK. The 1985 Act, like the Bill as drafted, makes an express provision for this only in relation to execution of deeds and documents outside the UK. We agreed to reconsider this clause.

Although there is already nothing in the law that prevents companies from appointing attorneys to execute deeds and documents within the UK, we have carefully considered whether it would be helpful to include a provision that spelled this out, alongside the provision which applies to execution abroad. Having sought the views of the Law Society, the Law Society of Scotland, the Incorporated Law Society of Northern Ireland and the British Bankers' Association as to the best way forward, we now propose this amendment. It is of course essential to avoid the risk that a change would cast doubt on previous acts by companies or to risk limiting what they might otherwise do. It was that concern that led to the Law Commission recommending against change in its report, The Execution of Deeds and Documents by or on behalf of Bodies Corporate.

We believe that, by being part of a comprehensive reform of company law, this amendment avoids that risk. It should be seen, among other reforms, in the light of our proposals for new model articles which do not include a provision akin to Regulation 71 of Table A, which permits the directors, by power of attorney or otherwise, to appoint any person to be the agent of the company. The amendment is not intended in any way to limit the purposes for which attorneys may be appointed by companies. It is merely to state in the Bill that which is considered to be the present position, which is that the power under the law of England and Wales and of Northern Ireland—namely, the legislation to appoint attorneys for this purpose for deeds and documents executed abroad—does not prevent attorneys from being so appointed in respect of deeds and documents to be executed. I therefore hope that noble Lords will agree to the amendments. I beg to move.

Photo of Lord Razzall Lord Razzall Spokesperson in the Lords, Trade & Industry

My Lords, in view of the Minister's remarks in accepting the points that the noble Lord, Lord Hodgson, and I made in Grand Committee, it is appropriate for me to thank him and to say that I agree with every word that he has just said.

On Question, amendment agreed to.

Clause 47 [Execution of deeds abroad]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendment No. 32:

Leave out Clause 47 and insert the following new Clause—

"EXECUTION OF DEEDS OR OTHER DOCUMENTS BY ATTORNEY

(1) Under the law of England and Wales or Northern Ireland a company may, by writing under its common seal, empower a person, either generally or in respect of specified matters, as its attorney to execute deeds or other documents on its behalf.

(2) A deed or other document so executed, whether in the United Kingdom or elsewhere, has effect as if executed by the company."

On Question, amendment agreed to.

Clause 57 [Duty to seek comments of government department or other specified body]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 33:

Page 21, line 40, leave out from "Where" to second "the" and insert "a request under this section is made in connection with an application for the registration of a company under this Act,"

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, in moving the amendment, I shall speak also to Amendment No. 34. Both amendments are technical. The first is to make an improvement suggested by the noble Lords, Lord Hodgson, Lord de Mauley, Lord Sharman and Lord Razzall, based on the fact that a company cannot apply for its own registration. The other amendment is to ensure that the drafting of Clause 57(4) is consistent with the new drafting in Clause 57(3) and dovetails better with the new, more flexible procedure for changing company names. I beg to move.

On Question, amendment agreed to.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 34:

Page 22, line 4, leave out from "Where" to "sent" in line 5 and insert "a request under this section is made in connection with a change in a company's name, the notice of the change"

On Question, amendment agreed to.

Clause 74 [Appeal from adjudicator's decision]:

[Amendment No. 35 not moved.]

Clause 92 [Requirements as to net assets]:

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

My Lords, our amendment seeks to remove a piece of legislation that has become superfluous and unnecessary—the requirement that a company wishing to re-register as a public company must have a written statement from its auditor that the balance sheet amount at that date is not less than the aggregate of its called-up share capital and undistributable reserves. In the past, this has been intended to act as a bar to many companies re-registering, but we are told that in practice it is routinely circumvented by other methods which involve extra time and expense for the same result. There seems to be little point in clinging on to this requirement, which is lifted directly from the Companies Act 1985, if it performs no useful regulatory purpose.

The Minister may say that it is desirable for companies to be prevented from re-registering if they cannot fulfil this requirement—as the noble Lord, Lord McKenzie, stated in Grand Committee—but that misses our point. If the Government are keen on keeping this requirement, they should look to ways of bolstering this provision to make it truly effective. The current position, which is restated in the Bill, does not have the desired effect; it is without impact and, therefore, in a deregulatory spirit, should be removed. I beg to move.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, Clause 92(1)(c) carries forward the current requirement contained in Section 43(3)(b) of 1985 Act for a written statement made by the company's auditors confirming that the company's net assets are not less than the aggregate of its called-up share capital and undistributable reserves. This provision applies where the company is proposing to re-register from private to public and is essentially protective: it provides a valuable check as regards the company's share capital and net assets at the point of application for re-registration and is designed to ensure that when a private company applies to re-register as public, its allotted share capital is backed by assets.

In Grand Committee, the noble Lord, Lord Hodgson, tabled an amendment that would have produced the same effect as the amendment that we are debating this afternoon—the removal of the requirement for a written statement. I offered to write to the noble Lord on this point at that time, but I am afraid that the noble Lord was slightly quicker off the mark on this occasion than we were, and my letter did not go out until after he had tabled his amendment. A copy of my letter is in the Library. I hoped that he would have been content to withdraw his amendment. If he has not had a chance to absorb the letter, or still wishes to press the amendment, perhaps I can explain again our thinking on the matter.

Noble Lords will be aware that the second EC company law directive imposes minimum requirements as to share capital for public companies. Clause 92(1)(c) implements Article 13 of that directive, which calls for safeguards where an existing company is proposing to re-register as a public company—those are equivalent to the safeguards laid down for public companies that are formed as such. The safeguards that apply on application for re-registration as a public company are expressed in a somewhat different form from the provisions as they apply to public companies formed as such. It would be impractical to require a company that is re-registering as public to jump through the same hoops as a public company that is formed as such.

For example, under Section 103 of the 1985 Act, where a public company allots shares other than for cash, the consideration for the allotment must be independently valued under Section 108 of that Act. It would not make sense to require retrospective reports from independent experts on the value of any non-cash consideration for shares that were issued by the company prior to its re-registration as public, particularly as the application for re-registration may be made several years after the shares were issued.

Clause 92(1)(c), like Section 43(3)(b) of the 1985 Act, therefore takes a more broad-based and practical approach to satisfying our obligations under EU law: it provides that the company's net assets at the point of re-registration as a public company should be at least equal to the called-up share capital and the company's undistributable reserves.

We accept that this is a different test from the one that is applied when a public company is formed as such. It does not guarantee that in every case where shares were issued for a non-cash consideration that consideration was worth at least as much as the nominal value and any premium on the shares, but it nevertheless provides an equivalent safeguard, as any shortfall on a particular share issue has to be made good from other surpluses. I hope that that further explanation will enable the noble Lord to withdraw the amendment. The provision is a requirement under the directive, which is why it is in the Bill.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

My Lords, I am grateful to the Minister for that further explanation. Our concern was not that there should not be safeguards but that this was a safeguard that had no value at all because it could be so routinely evaded—indeed, is routinely evaded—by other devices. However, I think that we have got all the juice out of this particular orange and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 97 [Re-registration of public company as private limited company]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip 4:15 pm, 9th May 2006

moved Amendment No. 37:

Page 42, line 30, leave out paragraph (a) and insert—

"( ) where no application under section 98 for cancellation of the resolution has been made—

(i) having regard to the number of members who consented to or voted in favour of the resolution, no such application may be made, or

(ii) the period within which such an application could be made has expired, or"

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, in Grand Committee, the noble Lord, Lord Hodgson, eloquently argued—that is what it says in my speaking note—that it should be unnecessary for the registrar to wait for the expiry of the 28-day period, during which dissenting shareholders can apply to the court to cancel a resolution for the re-registration of a public company as private limited, where it was clear that there were insufficient dissenting shareholders to make such an application to the court—for example, because more than 90 per cent of the shareholders voted in favour of the resolution. Amendment No. 37 is designed to address that point. It will permit what we understand to be the registrar's present practice of processing an application for re-registration from public to private limited within the 28-day statutory period where it is clear that an application to cancel the resolution is incapable of being made.

The second amendment in this group—Amendment No. 38—is designed to address a further point that was made by the noble Lord in Grand Committee. The concern is that, where there are sufficient dissenting shareholders to object to the re-registration, the registrar has developed a practice of delaying the re-registration process beyond the 28-day statutory period during which shareholders can object. This practice has developed because the registrar may only hear about such an application to cancel the resolution for re-registration from public to private limited when she receives notice—currently under Section 54 of the 1985 Act—from the company, and the company itself may not find out that such an application to court has been made until after the expiration of the 28-day period. To ensure that the registrar can know about last-minute applications to the court, she delays registrations for a further period, to allow time for such notifications to be made.

Amendment No. 38 addresses those practical difficulties. It requires the dissenting shareholders, on making an application to the court to cancel the resolution for re-registration from public to private, to give notice direct to the registrar. The aim here is that the registrar should then be able to re-register the company without undue delay, provided that there has been no notification about an application to the court by the applicants or the company.

I trust that these amendments address the noble Lord's concerns. I am grateful to him for raising these matters in Grand Committee. I beg to move.

On Question, amendment agreed to.

Clause 99 [Notice to registrar of court application or order]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendments Nos. 38 and 39:

Page 43, line 34, leave out from beginning to first "the" in line 35 and insert—

"(1) On making an application under section 98 (application to court to cancel resolution) the applicants, or the person making the application on their behalf, must immediately give notice to the registrar.

This is without prejudice to any provision of rules of court as to service of notice of the application.

(1A) On being served with notice of any such application,"

Page 43, line 39, leave out "(1)" and insert "(1A)"

On Question, amendments agreed to.

Clause 102 [Re-registration of private limited company as unlimited]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 40:

Page 45, line 1, leave out from "limited" to end of line 2.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, in Grand Committee, the noble Lord, Lord Hodgson, asked why Clause 102(2) was necessary. Noble Lords will be pleased to hear that I do not propose to revisit the detail of the arguments that were put forward in Committee again, save to say that we laid a marker at that time that we might revisit the drafting of this clause.

This issue is whether the condition in subsection (2)(b) of Clause 102—which prevents a limited company from re-registering as unlimited in circumstances where it was previously limited, but had re-registered as unlimited, then re-registered again as limited—is strictly necessary, given that Clause 105(2) prevents a limited company which has re-registered as unlimited from reverting back to limited status. We have concluded that the condition is not necessary, because the situation cannot arise. The amendment removes the superfluous drafting in Clause 102. I am grateful to the noble Lord for prompting us to look at this clause again and hope that he will agree to the amendment. I beg to move.

On Question, amendment agreed to.

Clause 103 [Application and accompanying documents]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 41:

Page 45, line 26, leave out "subscribed" and insert "authenticated"

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, in moving Amendment No. 41, I shall also speak to Amendments Nos. 42 to 47 and Amendments Nos. 50 to 54. In Grand Committee, the noble Lord, Lord Hodgson, queried why Clause 109(6) contained the following qualification:

"References in this section to subscription include, in relation to a document in electronic form, authentication in such manner as the registrar may require".

His point was that other clauses do not specifically say that authentication is a matter for the registrar. The same qualification is found in Clause 103(6). I am grateful to the noble Lord for pointing out this inconsistency in the drafting, and trust that Amendments Nos. 47 and 54 in this group address his point.

It became clear to us, when we were looking at the clauses again, that there were further inconsistencies between the drafting approach adopted in Clauses 103 and 109 and other clauses. For example, Clause 8, which deals with the contents of the memorandum of association, refers not to subscription to the memorandum of association but to the memorandum being "authenticated by each subscriber". We think that the same approach is needed in respect of the form of assent that is given by the members where a company, whether public or private, re-registers as an unlimited company under the Bill. The remaining amendments in this group therefore substitute "authenticated" for "subscribed" in various places in Clauses 103 and 109. These are minor drafting amendments, which improve the Bill, and I trust that noble Lords will have no objections to them. I beg to move.

On Question, amendment agreed to.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendments Nos. 42 to 47:

Page 45, line 28, leave out paragraph (b).

Page 45, leave out line 32.

Page 45, line 38, leave out "subscribed" and insert "authenticated"

Page 45, line 39, leave out "subscribed" and insert "authenticated"

Page 45, line 41, leave out "subscribed" and insert "authenticated"

Page 46, line 1, leave out subsection (6).

On Question, amendments agreed to.

Clause 106 [Application and accompanying documents]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 48:

Page 47, line 4, leave out paragraph (b).

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, in moving Amendment No. 48, I shall also speak to Amendments Nos. 49 and 55. In considering whether it was necessary to have separate statements of initial shareholdings and share capital on formation, we looked again at the requirement, presently in Clause 106 of the Bill, for these statements to be provided to the registrar where an unlimited company that has not previously had a share capital applies to reregister as a company that is to be limited by shares. We have concluded that the requirement for these statements in Clause 106 is superfluous as subsequent to its reregistration as limited, the company is required, under Clause 544, to make a return of allotments when it allots shares to its shareholders and this return must be accompanied by a statement of capital.

In short, there appears to be a duplication of the requirement to file a statement of capital in Clause 106 and the amendments in this group remove that duplication. I should add that the Government are considering whether there are any circumstances where an unlimited company should provide a statement of capital on reregistration. We may need to return to this at Third Reading.

On Question, amendment agreed to.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 49:

Page 47, leave out lines 10 and 11 and insert—

"( ) The statement of guarantee required to be delivered in the case of a company that is to be limited by guarantee must state that each member undertakes that, if the company is wound up while he is a member, or within one year after he ceases to be a member, he will contribute to the assets of the company such amount as may be required for—

(a) payment of the debts and liabilities of the company contracted before he ceases to be a member,

(b) payment of the costs, charges and expenses of winding up, and

(c) adjustment of the rights of the contributories among themselves, not exceeding a specified amount."

On Question, amendment agreed to.

Clause 109 [Application and accompanying documents]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendments Nos. 50 to 54:

Page 48, line 27, leave out "subscribed" and insert "authenticated"

Page 48, line 35, leave out "subscribed" and insert "authenticated"

Page 48, line 36, leave out "subscribed" and insert "authenticated"

Page 48, line 38, leave out "subscribed" and insert "authenticated"

Page 48, line 43, leave out subsection (6).

On Question, amendments agreed to.

Clause 111 [Form of statements required]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 55:

Leave out Clause 111.

On Question, amendment agreed to.

Clause 116 [Rights to inspect and request copies]:

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

My Lords, we have had a comfortable run in through the first clauses of the Bill, but this group of amendments takes us to rather more controversial matters. In moving Amendment No. 56, I shall speak also to Amendments Nos. 57 and 58 to Clause 116 of the Bill which concerns the rights to inspect a shareholders' register and request copies of it.

The noble Baroness, Lady Murphy, spoke about this issue in Grand Committee. We were pleased to support her then and I am grateful for her continuing interest and support today. There has been much public interest in this area. We note the letter in the Financial Times on 4 May which explains graphically the use to which share registers are being put under the current law—in this case, a vulnerability to "boiler rooms". The letter, which is from Mr Christopher Pearson, company secretary at Balfour Beatty, states:

"A number of our shareholders . . . have been telephoned over the past few months by the organisation in question, claiming to be connected with us, and offered some dubious 'opportunities' to buy shares . . . As a result, we have been forced to circulate all our shareholders with an appropriate warning".

The letter continues:

"I know that we are not the only company that has been put in this position", a fact that is borne out by a subsequent article in the Financial Times on 6 May which lists Diageo, Close Brothers, GlaxoSmithKline, MFI and Majestic as some of those other companies. Indeed, today's Financial Times leads on the whole story with GSK saying that investors are being targeted by extremists.

By introducing the provisions to allow companies to refuse access to the register, the Bill goes some way towards tackling the problem. However, there remain concerns over the exact formulation of these provisions and their effectiveness at preventing this mischief in a broader context. The thrust of our amendment is to give some guidance as to when companies can legitimately refuse to give access to the register of members. As I have said, these are new powers and, as such, there is no precedent on which companies, the public or the courts can rely. This is not eased by the current drafting of the Bill, which states that the court must be satisfied that the register is,

"not sought for a proper purpose".

A number of questions clearly arise out of this—the biggest of which is what is "a proper purpose"?

Without clearer guidance on this matter in primary legislation, we may well be left with a situation where, on the one hand, unscrupulous companies could limit or delay access to the register by repeatedly appealing to the court to seek approval not to disclose the information. On the other hand, we could see companies not wishing to risk the expense of the court process to protect a few names on the register when they are uncertain that they will get the approval that they seek. As a result, they expose their members unnecessarily to precisely the danger that this provision is intended to prevent.

Our amendment would redefine this power to refuse access to the register, focusing on the words "improper purpose". As a further guidance to the courts, we have also stated a purpose that will be regarded as improper—one that,

"is likely to lead to harassment or intimidation of members".

That is not an exclusive list and it leaves it open to the courts to rule on other purposes as being either proper or improper, but it goes further than the current drafting, which offers no guidance at all.

The Minister will notice that the shape of our amendment has changed since Grand Committee when he had difficulty accepting the second part, which included in the definition of "improper",

"the promotion of goods or services not related directly to the business of the company".

As he said in Grand Committee on 1 February,

"but the second does not, I consider, achieve her purpose. The promotion of widgets is not, I believe, a proper purpose for permitting access to the register of members of a company manufacturing widgets, and yet, under the noble Baroness's amendment"— the amendment of the noble Baroness, Lady Murphy—

"the court would have no discretion to relieve the company from its obligation to permit access to an applicant wishing to use the register as a mailing list to promote such widgets".—[Official Report, 1/2/06; col. GC 150.]

This appeared to be a major obstacle to the meeting of minds that day, so we have taken the amendment away and reconsidered it. On reflection, we see the force of the Minister's arguments and have removed that part of our amendment. We introduce this amendment in the hope that the Government will now find that they agree sufficiently to be able to accept it.

There is a wider issue here that is not directly addressed by the amendment and to which I alluded in Grand Committee. How can members prevent access to their details, by the menaces that this provision seeks to prevent, and ensure that their information cannot be found via other avenues—at Companies House, for example? If that is not addressed in some way by the Government, we may find ourselves plugging a hole here in the Company Law Reform Bill only to find the water rising over the top of the dam in another place. I hope that the Government will consider this wider issue as well as the amendment. Not only did the Financial Times lead today on it, but the Times itself wrote a further article about planned law against extremists being useless. This is an important issue which is a matter of great public concern. I beg to move.

Photo of Lord Razzall Lord Razzall Spokesperson in the Lords, Trade & Industry

My Lords, I have every sympathy with the points made by the noble Lord, Lord Hodgson. What concerns me, and the events of the past few days rather demonstrate this, is that the amendment does not go far enough in relation to the problem that we appear to be faced with. When we were in the Moses Room, nobody would have dreamt that an issue would come forward under which animal rights activists appear to want to get hold of the shareholder register of GSK to use it to frighten people into selling their shares because of the use by GSK of the services of Huntingdon Life Sciences. Indeed, one cannot even contemplate what will happen when the publicity about this leads to farmers getting hold of the shareholder list for Sainsbury's and demonstrating to persuade everyone to sell their Sainsbury's shares because Sainsbury's is not dealing properly with the interests of farmers. My concern about the amendment is that history has moved on.

Between now and Third Reading, or between Third Reading and the Bill going to another place, the Government really must think about what they will do about this because, as I started by saying, no one thought that animal rights activists would start to attack shareholders in these sorts of companies. The Government need to take a policy decision. One of the problems of discussing this on Report shortly before Third Reading is that the issue needs to be thought through. It did not arise in Committee, and I hope that the Minister will take that on board and say that he will return with proposals either here or in another place to deal with what is clearly a very serious issue.

Photo of Lord Jenkin of Roding Lord Jenkin of Roding Conservative 4:30 pm, 9th May 2006

My Lords, I have hitherto taken no part in debates on the provisions of the Bill, and I have been full of admiration for my noble friends on the Front Bench who have been dealing with this almighty Bill. In the past few days, however, I have been in contact with the Association of the British Pharmaceutical Industry and the BioIndustry Association, who have expressed their grave concern that the animal rights terrorists—I am afraid I call them terrorists because of their tactics—seem always to be outflanking the legislation passed by Parliament and the measures taken by the authorities to curb their activities.

This is not the time to get involved in what I might call Home Office matters, but it has always seemed to me quite astonishing that we have had laws on the statute book, certainly for more than a century—originally in the context of trade union legislation—that preclude watching, besetting, intimidation and harassment, but that none of this, it seems, can be used against animal rights terrorists. However, that matter is not before the House this afternoon. I, too, was struck by the articles in the Times this morning in the wake of the campaign by, I believe, a so-far anonymous group to intimidate the shareholders of GlaxoSmithKline, our leading pharmaceutical company, which has a long and distinguished record of new drugs and treatments to fight diseases. GSK has put out a press release. I will not read it all, but will make just one point. It says:

"The letter campaign, which is designed to target GSK's continued use of Huntingdon Life Sciences . . . is a typical tactic used by extremist groups and is intended to cause fear and intimidation".

I find it appalling that, in the 21st century, major industries of enormous importance to this country and our economy have to put out such releases to try to defend their shareholders from the attentions of these terrorists. Indeed, it is extraordinary that the authorities have begun to wake up to the nature of the campaign only in the past year or two. It is also astonishing that, to the public, robbing a grave appeared to be much the most serious action that these people have taken. That action occasioned considerable police activity to find the remains of the lady whose grave was robbed.

I had thought that my noble friend's amendments answered the question asked in the Times this morning as to what is meant by "proper use", but the debate and the noble Lord, Lord Razzall, echoed an exchange of e-mails that I have been having with the ABPI only this afternoon; namely, that this needs to be thought through further to ensure that there is an adequate defence against the improper publication and improper use of shareholders' registers. Companies must know where they stand when they receive requests for these details and where they suspect that the person making the request may be contemplating improper use.

Further sanctions are needed; they are not yet in the Bill. I hope that, between now and Third Reading, or perhaps even when the Bill reaches another place, the Government may be able to produce legislation that effectively addresses the problem. At the moment, the Bill clearly does not do so. Indeed, it leaves it undefined. As the spokesman quoted by the Times this morning makes clear, what is meant by proper use? My noble friend's amendment tries to deal with that question and refers specifically to harassment and so on. But there could well be other improper uses. I used those words when I talked to the ABPI this morning. This needs to be carefully thought through. This must not be legislation on the hoof.

This is a desperately serious matter for the industries concerned. I know that the Minister now accepts that and has been at the forefront of efforts to try to curb it. Nevertheless, as we have seen in the past day or two, it still continues and is a source of considerable anxiety. I leave the House with only one more thought: if businesses are driven abroad, and if research of the kind carried out by GlaxoSmithKline eventually has to be done in other countries, what is absolutely certain is that the care of any animals that may be used in the research or in testing will be grossly inferior to anything that is enforced by our Government here in Britain. We have the tightest regulation. I ask terrorists whether that is what they want, or have they now become so imbued by the viciousness of their campaign that that does not worry them at all?

I find this a very disturbing feature of our society at present. My noble friend has tabled an amendment that goes at least part of the way to dealing with this problem, and I have tabled a few amendments on the disclosure of directors' private addresses, which clearly must be addressed. The Government have gone a long way to meeting the industry's case on that, but the shareholder issue is equally important. The shareholders of the company that built the laboratory in Oxford were targeted, which knocked the company's share prices for a burton because so many of the shareholders felt they had to sell. This is economic damage of enormous importance which, as I said, achieves nothing for the purposes of the people who are concerned about the welfare of animals. I hope that the Government will now treat this with extreme seriousness and will perhaps move at Third Reading to tighten up the legislation.

Photo of Baroness Murphy Baroness Murphy Crossbench

My Lords, I shall be brief. I support the amendment in the names of the noble Lords, Lord Hodgson of Astley Abbotts and Lord De Mauley. I think this is an admirable compromise and, although I recognise the force of what has been said about the problem of the term "improper uses", I come at it from the point of view of organisations that support small shareholders and who do not want to be denied access for the proper purpose of bringing matters to the attention of their members. That might well be jeopardised by the rather complex rules introduced in the Bill to refuse access to information. I very strongly support the admirable compromise proposed in the amendments.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

My Lords, like my noble friend, I am relieved that I have not been involved in these proceedings. I picked up the Bill thinking it was quite big, only to find to my astonishment that it was Volume I.

I will pick up one important point. Companies, particularly those like Glaxo, are now highly mobile. The decision whether to locate their headquarters here in Britain or elsewhere is a finely balanced one. There are already tax and other pressures encouraging them to go elsewhere. If we land boards of directors with onerous provisions, that will be yet another incentive to go elsewhere.

I support my noble friend's amendment because it goes some way to improving the Bill, but, like my noble friend Lord Jenkin, I am not sure that it entirely meets the problem because it rests on the foundation of the Bill, with the difficulty of defining an "improper purpose". I ask the Minister, who clearly wants to address this problem, whether that is not the wrong way round. Should not the legislation start from the assumption that there ought to be a proper purpose before the names are revealed? I sometimes think that we have gone so far down the disclosure road in this country that we not only invade people's privacy but are now damaging their security.

Shareholder information need not necessarily be disclosed directly. For example, the noble Baroness, Lady Murphy, mentioned the legitimate rights of small shareholders to circulate information. That could be done by the company without disclosing information about shareholders. It is difficult to know how any shareholder or other person might have a proper purpose: they might apply with a legitimate purpose, but the information is then made available to other parties. As we have seen, some of these terrorist groups, particularly in animal welfare, are completely without scruple.

Photo of Lord Borrie Lord Borrie Labour

My Lords, the last speaker raises a number of sympathetic thoughts in my mind. He made some useful points, but also indicated matters that lead me to question the achievements that this amendment could have if it were passed. I sympathise, as almost all your Lordships will, with pretty well everything that the noble Lord, Lord Jenkin of Roding, said. He referred to animal rights terrorists who have no scruple, to use the words of the noble Lord, Lord Forsyth, and will stop at nothing. That immediately raises the question of the practical value of this amendment. I am sorry to say that, because one would like to achieve something to damage the effectiveness of these people. I cannot imagine how people without scruple who have shown enormous ingenuity in their activity would not be able through nominee inquiries to find out what they could not get directly if this amendment were passed.

My other question often crops up in legislation. We have here a major piece of legislation dealing with the reform of company law. There is a provision which one could latch on to for this particular purpose, the objectives of which I am all in favour of. Is it right, however, in dealing with the question of people's rights generally to get hold of the names of shareholders for proper purposes, to try to deal with improper purposes? Is it right to try to alter this basically because we naturally strongly disapprove of the activities of certain types of animal rights people who want to get hold of these lists? I very much doubt whether passing an amendment to this Bill, which deals generally with company law, to deal with the particular problem is the right way to go about it.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, I will make a few general remarks because, from people's comments, it might be thought that I was in some way resisting something put forward by Members of this House to deal with this problem, as though it were not a major problem as far as I was concerned. Because I look after the biosciences and the pharmaceutical industries in the DTI, I have been dealing with this issue for five years now. For noble Lords to come to this House and say that we have a problem here, simply on the basis of what has happened this morning with GlaxoSmithKline, shows that they have not been following this issue for the past five years. It has been a major issue. As a Government, we have introduced the substantial legislation required to deal with the economic damage situation. This is not a question of sharing the views of noble Lords on our objectives, but of saying that I probably feel more strongly about it than other Members of this House.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative 4:45 pm, 9th May 2006

My Lords, I am grateful to the Minister for giving way. There are many issues which the Government have been addressing for a number of years which have got worse. The fact that the Government are addressing them does not mean that there is not a problem. To suggest that noble Lords have not been following this issue, that we are somehow unaware of what the Government have done, is a little unfair because we are aware of the concerns about this problem. The problem is that the problem remains.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, of course that is correct. However, I want to make it clear that it is not because the Government have not cared about this issue or sought to do something about it. We have brought in an extraordinarily long record of legislation because we realise exactly the seriousness of the situation. In approaching this amendment, therefore, we do not start from a position of resisting it because it is not a good piece of legislation. What we have done was not, in fact, because of the robbing of a grave. We have a record of taking action going back far longer than that, starting with the situation at the Cambridge laboratory, going on to the animal house in Oxford and so on. We have been trying to deal with the situation for many years. We have introduced laws and put huge resources behind the police to deal with it. I approach this matter not merely sharing noble Lords' feeling but feeling as strongly as they do or possibly more strongly that this issue must be dealt with.

The issue is how we deal with a situation where unscrupulous people take copies of a company's register of members. We can all agree—this is not in dispute—that using this right to harass or intimidate a company's members is an abuse. The Bill potentially gives more protection to members than these amendments. There is a difference between saying that the court must be satisfied that information is not being requested for a proper purpose, and saying that the court must be satisfied that it has been requested for an improper purpose. As I understood the noble Lord, Lord Forsyth, he said that it is better to start with what a "proper purpose" is. That is exactly what this clause says, whereas the amendment says that it should be about an "improper purpose".

We think that the clause as drafted is broader and that it therefore potentially gives more protection to members, because the scope of what is "not proper" may sometimes be broader than the scope of what is "improper", just as a thing which is not good is not necessarily bad. Both the amendments and the clause as drafted will mean that a company can be relieved from the obligation to provide the register of members when it is wanted for improper purposes. To the extent that the current draft potentially excludes a wider range of unmeritorious applications, it is to be preferred. In other words, we cannot see whether noble Lords who put their names to the amendment want, in fact, to reduce protection for members.

As for the third of these amendments, regardless of whether the test refers to "proper" or "improper", it does not help to provide any kind of illustrative definition of proper or improper purposes. I cannot imagine that a court would ever consider it proper to seek a copy of the register for the purposes of intimidating or harassing a company's members any more than I can imagine that a court would ever not consider it proper for a shareholder who had genuine concerns about a company's management to share them with other shareholders, using a copy of the register of members to do so.

However, there is a risk that, by mentioning these things in the Bill—even by way of illustration for a definition of proper or improper purposes—we would narrow the perception of what would be thought of as proper or improper, and so diminish the protection which the clause affords to members.

Photo of Lord Jenkin of Roding Lord Jenkin of Roding Conservative

My Lords, I was basing my remarks in support of the amendment moved by my noble friend on the statement reported in the Times today by Mr John Roundhill, chairman of Britain's main registrars' association, which said that the proposed reforms—that would be as they are in the Bill, not in the amendment—due to be debated in the House today would prove ineffective. Mr Roundhill went on to say that there is no way in which one can define a "fit and proper" purpose.

From what the noble Lord has said from the Dispatch Box, I understand that he wants a return to what is in the Bill. That does not meet Mr Roundhill's complaint at all. This is what my noble friend has been trying to do and it is why we need to think this through in order to get something really effective.

Photo of Lord Razzall Lord Razzall Spokesperson in the Lords, Trade & Industry

My Lords, on this side of the House we understand that the noble Lord, as the Minister for Science, has been at the forefront of these important issues in trying to deal with the activities of animal rights activists and others who wish to disrupt the normal, proper and well-regulated conduct of scientific activity. So far, however, I am not sure that he has taken the point that is being made by the noble Lords, Lord Jenkin and Lord Forsyth.

In all the Minister's five years in dealing with this issue, I defy him to suggest he has come across a situation that arose in the past week whereby activists wish to threaten people because they are shareholders in one of our major British companies. This is a completely new point. The Minister may have had experience of it but, if he did, he never disclosed it to the House—to use a Charles Clarke analogy. If he had experience of it he did not tell us. As far as we on this side of the House and those on the Tory side are concerned, this is a new point. Bearing that in mind, I cannot immediately think how to deal with the issue of what happens when a perfectly respectable firm of solicitors asks GSK for its shareholder list, which it then turns over to an animal rights activist group which is its client. I do not know how that issue can be dealt with. This is a new problem that has come up in the past week. I should have thought that the Government should take the time between now and Third Reading—or, if necessary, when the Bill goes to another place—to consider how they will deal with it. I do not think that the amendment tabled by the noble Lord, Lord Hodgson, deals with the issue, which is why I did not put my name to it.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, there are just two simple issues here. One is the question of whether one talks about "proper" or "improper". I agree with other noble Lords that the issue is whether, in talking about "not improper use" or "proper use", one will restrict or widen the definition. The clear advice I have is that if one talks about "not for a proper use", one is actually providing a wider definition. We are all agreed that we want a wider definition. I cannot see the logic of restricting the use that can be made of this clause.

Photo of Lord Clinton-Davis Lord Clinton-Davis Labour

My Lords, is there not a case for taking this away and trying to reach a common approach? That is vital and is not a matter of party politics at all. Would it not be advisable to take this away and for Ministers to have a meeting with the leaders of the Liberal Democrat and Conservative Benches and anybody else who wants to attend?

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, perhaps I may finish saying why I do not think these amendments will work and then we can go on from there. I do not think they will work for two reasons, as I have said. The first is that they would narrow the definition, and we do not want to do that. Secondly, all the advice I have is that it is not sensible to put in a particular illustration of this for something which is going to be in company law and, therefore, should be as wide as possible to take account of the very points that the noble Lord, Lord Hodgson, has made. This is not only about animal rights extremism; it is also about other improper uses of the register of shareholders. We do not think that these amendments help. I cannot say that I will go away and consider them because I do not think they are going in the right direction. But if these amendments are not pressed, I will certainly have a meeting with noble Lords and others in this field to see whether there are other ways in which we can make this provision stronger and more appropriate. If so, we will bring back amendments to deal with that. I do not wish to say that I will consider these amendments because I do not think they actually help this case. I will certainly have a meeting, however, and consider whether there is any other way that we can take this matter forward. As I said, I see this as a very serious issue.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

My Lords, that is a gracious offer, but we on this side of the House are the Opposition and the Minister represents the Government. There is a serious problem and there should be a remedy to it. It is not often that one gets a legislative opportunity. Surely it would be a dereliction of duty for the Government not to address the problem by coming forward with their own amendments.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, the point I was trying to make was that if we can find a way of strengthening this clause, which is clearly what the whole House wants, then we as the Government would seek to bring forward amendments to deal with the situation, either at Third Reading here or in the House of Commons. The seriousness of the situation is not in dispute. The question is whether there are things that could be done to this clause which would make it more effective in dealing with this matter. I am very open to having a meeting, and if people can come forward with suggestions on how to do that then we will listen to them and bring forward appropriate amendments.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

My Lords, I am grateful to all those who have spoken in this important debate. Our view on these Benches is that we have a company law Bill every 15 or 20 years and, therefore, we would be failing to carry out our proper role of scrutinising the Bill if we were just to wave it away in its present form. I never thought that these amendments would provide a deus ex machina to solve this problem. It was a step in the right direction because the advice we have had is that, far from what the Minister is saying, the drafting of the clause is far too wide and allows people to move round the edges in a way that our formulation would not.

The noble Lord, Lord Razzall, might feel that it does not go far enough but what we were trying to achieve here was half a loaf. In that sense it was a step in the right direction and we should not allow this to go unconsidered.

The Minister, however, has made a fair offer—to have a further look at this before Third Reading. We will want to consider what he said, including the legal points he has made, to see whether they have validity in the eyes of people we can talk to outside the House. If, in parallel with that, we can have some serious discussions about how we could make this effective—for all the reasons my noble friends, including the noble Baroness, Lady Murphy, have said—and pursue it as a twin-track approach, then I would be happy to withdraw these amendments.

Amendment, by leave, withdrawn.

[Amendments Nos. 57 and 58 not moved.]

Clause 136 [Enjoyment or exercise of members' rights]:

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry 5:00 pm, 9th May 2006

moved Amendment No. 59:

Page 60, line 31, leave out subsection (1) and insert—

"( ) All companies admitted to trading on a regulated market are deemed within the company's articles to have a provision to enable members to nominate another person or persons as entitled to—

(a) receive documents and information that the member is entitled to receive from the company; and

(b) enjoy or exercise all or any specified rights of the member in relation to the company."

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

My Lords, I shall speak also to Amendments Nos. 60 and 61. This is another significant group of amendments. The exercise of members' rights is an important issue, which we discussed at some length in Grand Committee and about which we feel strongly. We are extremely grateful to the noble Lords, Lord Razzall and Lord Sharman, for their support from the Liberal Democrat Benches and for adding their names to the amendments, and to the noble Baroness, Lady Murphy, on the Cross Benches, who, I know, shares our view.

In summary, once a person invests their money in the shares of a company, a golden thread of trust and responsibility runs from that company to the investor. It does not matter whether the investment is held directly—that is to say, in the person's own name—or through an ISA, PEP or other group arrangement whereby the shares are held by a nominee account holder. For that reason we have retabled these amendments, which we moved first in Grand Committee.

I do not wish to trouble your Lordships' House by repeating at length the background to the arguments we put forward in Grand Committee. Suffice it to say that the amendments would require all companies that trade on a regulated market to give members whose shares are held in nominee accounts the right to receive information—that is to say, annual and interim accounts, and notice of meetings—and the ability to exercise their right to vote on the shares they own.

The Government did not feel they could accept this proposal when we discussed it in Grand Committee on 1 February. They put forward three reasons for not doing so. First, the Government said they would work with the industry to promote an environment in which it becomes the standard practice without the creation of a bureaucracy of enforcement. That is a commendable objective. However, we fear that if the extension of shareholders' rights is voluntary for companies, the situation may remain as it is. Very few companies extend rights to nominee shareholders. There have been calls for nominee shareholder enfranchisement for nearly 20 years, and no appreciable improvement has occurred. If individual companies can refuse enfranchisement, nominee shareholders' rights may not exist across a whole share portfolio. The grant of opt-in rights to investors on a company-by-company basis will lead to a very unsatisfactory situation and to considerable frustration for individual shareholders.

This is not red tape; it is about shareholder democracy. We are told that nearly 50 per cent of all private shareholdings are now administered by nominees. There are now 24 million nominee-based shareholdings against 26 million certificated shareholdings. It is estimated that £100 billion worth of share capital is therefore held in a form that is accorded no corporate governance rights. That means that a significant section of UK shareholders have no ability to influence the direction of the company in which they have chosen to invest. That is why this is not red tape; it is an injustice to shareholding democracy. It is worth noting that steps are being taken to address this injustice at European level. We would surely not wish to be seen as laggards in shareholder democracy.

Secondly, the Government have said that investors can and do choose to hold shares through many types of investment and increasingly complex investment chains. That means, according to the Government, that there cannot be a "one size fits all" legislative solution to enfranchising indirect investors without imposing disproportionate costs on industry and uncertainty whether the intended outcome will be achieved. In fact, the vast majority of individual shareholders hold their shares through nominee operators, whose name is listed as the "member" on the register. Individual shareholders who choose their own investments do not, for the most part, use complex investment chains; it is they who want shareholders' rights the most. If complex chains are really the Government's concern, the clause could be tightened still further—we have not tabled an amendment at the moment—to meet that objection by inserting the following additional definition:

"For the purposes of Section 136 the nominated person shall include only those individuals, where:

(a) the nominated person is the beneficial owner of the interest in the company; and

(b) the nominated person retains the right to transfer or dispose of the shares".

The Government's claim that there would be a disproportionate cost burden is simply not true. It has been calculated that a company would need 10 times the number of nominee shareholdings to "name on register" shareholdings to cancel out the saving that can accrue from the ability to provide communications in electronic form, as provided for in Part 3 of Schedule 7. Meanwhile, the mechanism proposed for delivering nominee shareholders' rights will allow companies to obtain an early indication—say, for printing purposes—of aggregate reports required for opted-in nominee shareholders. The overall saving to UK companies if electronic communication is adopted is estimated at over £100 million per annum. The overall cost of nominee shareholder enfranchisement is estimated at around £6 million per annum. In any event, sufficient time could be allowed in the implementation of provisions enforcing enfranchisement to permit further consultation on how those relatively minor costs should be borne.

Thirdly, the Government have said that the Secretary of State's power under Clause 137 is intended as an additional tool for encouraging and achieving greater enfranchisement. Unfortunately, there is no guarantee that that power will be exercised. The numerous groups that have made representations to us on the matter have little confidence that it will be used in practice. Furthermore, the power is limited to the provision of documents and information; that is not satisfactory. Clause 137(1) states:

"The Secretary of State may by regulations require companies to enable members to nominate another person or persons as entitled to receive documents and information that the member is entitled to receive from the company".

What about the ability to exercise their right to vote? That critical issue is not covered in the Bill. Over the past 20 years or so, registrars and their corporate clients have lobbied hard and successfully to resist the enfranchisement of nominee shareholders. The Bill should, therefore, make mandatory the enfranchisement of nominee shareholders in companies whose shares are traded on a regulated market. I beg to move.

Photo of Lord Razzall Lord Razzall Spokesperson in the Lords, Trade & Industry

My Lords, I support the amendment, to which my noble friend Lord Sharman and I have added our names. The noble Lord, Lord Hodgson, has made the point very articulately. It is very simple: roughly half the shareholders in UK listed companies now hold their shares through nominee companies. This is an opportunity to ensure that the beneficial owners of those shares can exercise their rights as shareholders, which are very often denied them by the nominee companies. When the annual report arrives, very few nominee companies contact the beneficial owners and ask, "How do you want us to vote in relation to the shares we hold in your name?" In fact, very few nominee companies involve the beneficial owners in any decisions regarding the companies in which they hold shares.

We will probably not have more companies legislation for another 10 or 20 years, when the noble Lord, Lord Sainsbury, will undoubtedly be in office but the rest of us will have retired. This is an opportunity to enable shareholders who wish to opt in to a system to exercise their democratic rights, notwithstanding the fact that their shares are held by nominees.

Photo of Baroness Murphy Baroness Murphy Crossbench

My Lords, I, too, support the amendment. I spoke at length about this in Committee. Ten million people now hold shares of this kind. Usually they do not have any other shares, therefore most have no opportunity to participate in the shareholding democracy. This is their one chance. It is an enormous chance to educate people about investing in companies and about taking an interest in their personal savings and investments.

It is quite clear from subsequent clauses that the Government are enormously sympathetic to this and would like to see it on a voluntary basis. Sadly, I do not think that we have got any evidence that companies are willing to do it on a voluntary basis. The costs are very small. This is an important opportunity. I hope that we will be able to get nominee shareholder rights recognised in the Bill.

Photo of Viscount Bledisloe Viscount Bledisloe Crossbench

My Lords, I fully understand the problem put forward by the noble Lord, Lord Hodgson. Undoubtedly, it would be better if more people whose shares are held in nominee names had a right to participate. But, as the noble Lord, Lord Razzall, hinted, why is that a matter between them and the company, rather than between them and the nominee whom they have selected to hold their shares? If I choose to put my shares in the name of a nominee, why is it not for me to say to that nominee, "I will put it forward only"—

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

My Lords, I am very grateful to the noble Viscount for giving way. The fact is that for a lot of shares you have no option. If you hold your share through an ISA or a PEP, you have to hold it through a nominee. You cannot own the share directly. That is not permitted under the regulations. It has to go through a nominee, so you have no option.

Photo of Viscount Bledisloe Viscount Bledisloe Crossbench

My Lords, I accept that. But I have the choice of who I have my ISA with. Why can I not then deal with a nominee who will do what I want; namely, send me company information if I want it and, if I ask him, give me a proxy to vote my number of shares in any way that I want? Of course, there would have to be co-operation from the company so that the nominee could say to the company, "Look, I need 100 copies of the annual report to distribute to those who have asked for them". Some ISA operators could provide that service and some might not. Then I would choose to have my ISA with one of those operators.

Where I voluntarily put my ISA into a nominee name, surely I should do the deal with the nominee. I could have it in my own name. For some reason—such as the stockbroker says that he will do it cheaper if it is in his name or he can do the shares deals quicker—I choose to put it in a nominee name. Why can I not say to that nominee, "But I want you to send me the annual reports and I want a proxy that enables me to vote"? Perhaps we would have to put in the Bill a power for the nominee to get reports. I do not see why this burden has to be put on the company rather than being dealt with between the nominator and the nominee.

Photo of Lord Razzall Lord Razzall Spokesperson in the Lords, Trade & Industry

My Lords, before the noble Viscount sits down, he has touched on one of the points that would apply with certain relationships between beneficial owners and the companies providing nominee shareholdings for those beneficial owners. But he does not deal with the thousands, if not millions, of small shareholders who purchase particularly ISAs through institutions. If you buy an ISA through Barclays bank, you do not have the luxury of saying, "I tell you what: I want to have nominee company X who will provide me with the annual report". Those small shareholders are locked into the nominee company that the provider of the ISA is leading them to. They have no option. When you decide whether you will put your £6,000 into an ISA on 5 April, you do not think to yourself, "Lord Bledisloe made the point. I have got to make sure that that company will provide me with the annual report and give me my voting rights". Of course not. So those myriad small shareholders are locked into the structure that the financial institutions have given them.

Of course, the point is right that if you have 2 million shares in GlaxoSmithKline, you can probably persuade your stockbroker's nominee company to give you the annual report. But we are talking about the hundreds of thousands, if not millions, of small shareholders who are into small shareholding deals, usually through ISAs, which require them to accept the nominee company and the rules that that institution gives them.

Photo of Viscount Bledisloe Viscount Bledisloe Crossbench 5:15 pm, 9th May 2006

My Lords, the noble Lord suggested that I had not yet sat down, so that presumably gives me the right to continue my speech to deal with his point. Of course, that may be a problem for those who already have ISAs, but why should not the Bill compel their nominated persons to do those things? I suggest that in future, working on my basis, certain ISA sellers can say, "We will provide this service" and certain ISA sellers can say, "We don't provide this service", and you can decide which ISA to buy.

Photo of The Bishop of Chester The Bishop of Chester Bishop

My Lords, perhaps I may offer support to the amendment. In a Bill which produced more than 1,000 amendments at Committee stage and, extraordinarily, more than 500 on Report, there are just two or three on which I have been lobbied—this is one of them—from people who feel simply disenfranchised, for the reasons that have been given. The Bill and its explanatory documents speak of shareholder rights. I want to recast the argument of shareholder responsibilities. As we move into a more complex world, the importance in our democracy of emphasising the stakeholding character of democracy will become ever more important. The drift is certainly towards more shareholdings being held in nominee accounts for the reasons that have been given, which is likely to continue. It seems to be unhealthy in a shareholding, stakeholding democracy to have ever increasing numbers of shareholders effectively disenfranchised from the decision-making processes. It seems to be just a healthy statement of shareholder responsibility, along with shareholder rights, that this amendment should be supported.

Photo of Lord Sanderson of Bowden Lord Sanderson of Bowden Conservative

My Lords, I was not going to speak on this matter, but I notice that share certificates are about 50 per cent of those held and the others are held by nominees. I am willing to bet that over the next few years, nominee shareholdings will go up and up because of the way in which the market works. I feel very strongly that shareholder rights come into this. Something has to be done in legislation to make sure that those who operate the system have to obey the rules.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, let me reiterate that the Government are committed to promoting a long-term investment culture through the wide participation of shareholders and the responsible exercise of share ownership rights. To that end, the Bill implements a comprehensive package of provisions to ensure that voting processes are more transparent and to help enfranchise those, such as ISA or PEP investors, investing through nominee accounts.

The provisions in Part 9, as the first element of this package, are intended to ensure that companies can, through their articles, enable indirect investors to exercise and enjoy varying levels of shareholder rights as suits their needs. In addition, the Bill enables brokers to confer voting and other governance rights on indirect investors. Brokers will be able to use the enhanced proxy rights introduced by Clause 303 in Part 13 to give indirect investors rights to attend, speak and vote at general meetings. That will give investors the option to choose brokers who pass on all such participation rights. I very much agree with the noble Viscount, Lord Bledisloe. There is an issue of choice here. When we are talking about shareholder democracy, it seems strange to say that shareholders should not be in a position to exercise that choice. When shares are held in nominee accounts, we believe that it is for individual investors to ensure that the terms and conditions under which their accounts operate suit their particular needs.

One of the keys to enhancing the position of indirect investors is to ensure that they have access to the information that they need. The Bill therefore includes further measures which will improve the position of investors. First, all quoted companies will be required to publish on a website their annual report and accounts, thus enabling indirect investors to have the same access to annual company information as registered members. Secondly, while e-communications are legally available now, the Bill will permit companies subject to shareholder approval to default to sending shareholder communications electronically. That should encourage greater use of e-communications, making it easier and cheaper for nominee operators and brokers to forward information to their account holders.

We understand that the UK Shareholders Association, the Share Centre and some other brokers and intermediaries are pressing for the enforcement of legal rights for indirect investors. They argue that it is a matter of principle about shareholder democracy. We could not agree more with their aim. As I said, it is the Government's aim to enhance shareholder engagement and to encourage the responsible exercise of governance rights. However, amendments that impose a compulsory provision on companies are not the way to achieve greater enfranchisement of indirect investors. Business groups, including the CBI, the Institute of Chartered Secretaries and Administrators and the Association of Investment Trust Companies have consistently opposed a compulsory approach to enfranchising indirect investors. They point to the high administrative burden that such an approach would impose on companies and raise some key concerns.

First, on practicality, the systems required to allow the nomination by members of parties to exercise shareholder rights are expected to be complex and costly. The Registrar of Companies would have to maintain details of any third parties via a sub-register for each member who has nominated them. Both the main register and these sub-registers would have to be updated on an ongoing basis. A company would have to invest in putting such systems in place, even though the number of indirect investors wishing to exercise full shareholder rights may be very small. Estimates for likely take-up of governance rights vary from just 0.3 per cent to 5 per cent of investors.

Secondly, on the principle of compulsion, should it not be the shareholders as a whole who decide whether the company should bear the administrative burden of setting up and maintaining systems to enfranchise indirect investors, when the vast majority of them may never exercise their new rights or take note of information they receive? Noble Lords may argue that under a voluntary approach to enfranchisement, companies will still need to implement appropriate changes to their administrative systems. The point is that companies will be able to develop the most efficient, cost-effective systems to suit their needs, rather than incurring the costs of complying with a "one size fits all" legislative approach.

The Government believe that the better way to achieve greater enfranchisement of indirect investors is to work with the industry—the companies, brokers and investor groups—to promote an environment in which it becomes standard practice without creating an inflexible bureaucracy of enforcement. We have reached that view after considering carefully the arguments and interests of the many different business and investor groups and other interested parties on this issue.

As the noble Lord, Lord Hodgson, noted in Grand Committee, good practice in this area is beginning to emerge in the UK. We are encouraged by some excellent examples of the market developing solutions to enfranchise those investing in ISA schemes, and other indirect investors. Several brokers are already taking voting instructions from underlying investors, while many London Stock Exchange listed companies are making additional copies of their corporate information available to third parties on request.

We do not agree that little has been happening; it is wrong to think that there is little appetite among the industry to enfranchise indirect investors. A number of PLCs have been actively engaged in the debate on shareholders' rights through the industry-wide shareholder rights working group. That group, comprising members of the CBI and the United Kingdom Shareholders' Association as well as intermediaries and brokers, has been considering solutions that work in line with the proposals in the Bill. So, we are seeing the market working here, with people making choices of the kind that the noble Viscount, Lord Bledisloe, mentioned and shareholders choosing which way they want to go on this issue. A voluntary, market-based approach seems the best approach to be taken in this situation.

As I explained at Second Reading and in Grand Committee, the Bill's reserve power under Clause 137—for the Secretary of State to compel companies to provide information to indirect investors—is intended as an additional tool towards encouraging and achieving greater enfranchisement. Better informed investors will be better equipped to demand voting and other governance rights from nominees and the companies in which their investments are made. The scope of the power was strengthened following consultation through the Company Law White Paper of March 2005, to ensure that indirect investors could be given parity of treatment in information rights with those holding shares indirectly. We would prefer market solutions to develop, but if they do not the power will be available—and, in that context, we do not have to wait for another Company Law Reform Bill. My own view is that one of those is enough in one's lifetime. The powers will be there so that, if we find things are not moving, we can take things forward.

By deeming certain provisions to be within a company's articles without necessarily being written in, the noble Lord's amendments would simply create more confusion for companies, shareholders and indirect investors. In short, I fear that, as before when we debated the clauses in Grand Committee, these amendments would impose disproportionate cost burdens on industry compared with the benefits to be gained for the relatively small number of indirect investors who want to but find that they cannot exercise full governance rights. On the basis of a market-based, voluntary approach being better than heavy-handed regulation, I urge the noble Lord to withdraw the amendment.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

My Lords, I am grateful to all who have participated in this debate. The noble Viscount, Lord Bledisloe, was kind enough to fly air cover for me earlier this afternoon. However, on this matter his analysis of the relationships is incorrect.

First, the shareholding and the relationship you have is with the company—the vehicle to which you are entrusting your investment. Secondly, on shopping around, there is the issue of equality of arms that the noble Lord, Lord Razzall, spoke about. When you have your ISA, it is suggested that you will be able to shop around to find somebody who will do that for you, but they are not available. As an ISA and PEP holder, I have never had an offer of information about any company that I invest in at all. I am grateful to the right reverend Prelate the Bishop of Chester for reminding us about responsibilities as well as rights. He is absolutely right on that. I am also grateful to my noble friend Lord Sanderson for his support.

The Minister has been persuasive on many occasions, stretching back to January, but this afternoon, as he skates across this particular pond, the ice is cracking beneath his feet. He says that it will be very expensive, yet the Bill—as he rightly points out—allows for electronic communication if companies choose to use it. The savings if the companies choose to go electronic will wildly outweigh any costs that they have in enfranchising their nominees. To say that the provisions of Clause 303 will provide the choice to which small shareholders can adjust does not focus on the reality of events in the marketplace.

As we have said at Second Reading and indeed throughout, we need an opt-in system. Not everyone has to have it; many shareholders may choose not to have it. However, the company should say to them once a year, "Do you wish to receive this information?" At that point, they can decide and if they do not want to have large amounts of paperwork delivered to them, then that is fine—but the option should be there. That golden thread is important to our shareholding democracy. I am astonished that the Minister, who is normally so open-minded and commercial on these matters, really cannot see that that thread exists.

His final attempt was to fall back on the voluntary system, which has not worked well enough. If we were all getting offered information about our ISAs and PEPs then maybe we would be inclined to think again. However, we have to strike a blow here for the small shareholder, the private shareholder and the shareholding democracy. I wish to test the opinion of the House.

On Question, Whether the said amendment (No. 59) shall be agreed to?

Their Lordships divided: Contents, 153; Not-Contents, 146.

Division number 1 Private Parking: Ports and Trading Estates — Company Law Reform Bill [HL]

Aye: 151 Members of the House of Lords

No: 144 Members of the House of Lords

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Resolved in the affirmative, and amendment agreed to accordingly.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry 5:41 pm, 9th May 2006

moved Amendment No. 60:

Page 61, line 8, at end insert "; and

( ) all such other rights as a member would otherwise enjoy (in accordance with any provision of the Companies Acts)"

On Question, amendment agreed to.

Clause 137 [Power to require provision to be made in company's articles]:

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

moved Amendment No. 61:

Leave out Clause 137.

On Question, amendment agreed to.

Clause 146 [Register of directors]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendment No. 62:

Page 65, leave out line 15.

On Question, amendment agreed to.

Clause 147 [Particulars of directors to be registered: individuals]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendments Nos. 63 and 64:

Page 65, line 26, leave out paragraph (b) and insert—

"( ) a service address;

( ) the country or state (or part of the United Kingdom) in which he is usually resident;"

Page 66, line 8, leave out subsection (5) and insert—

"( ) A person's service address may be stated to be "The company's registered office"."

On Question, amendments agreed to.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendment No. 65:

After Clause 148, insert the following new clause—

"REGISTER OF DIRECTORS' RESIDENTIAL ADDRESSES

(1) Every company must keep a register of directors' residential addresses.

(2) The register must state the usual residential address of each of the company's directors.

(3) If a director's service address (as stated in the company's register of directors) is his usual residential address, the register of directors' residential addresses need only contain an entry to that effect.

(4) If default is made in complying with this section, an offence is committed by—

(a) the company, and

(b) every officer of the company who is in default.

(5) A person guilty of an offence under this section is liable on summary conviction to a fine not exceeding level 5 on the standard scale and, for continued contravention, a daily default fine not exceeding one-tenth of level 5 on the standard scale.

(6) This section applies only to directors who are individuals, not where the director is a body corporate or a firm that is a legal person under the law by which it is governed."

On Question, amendment agreed to.

Clause 149 [Particulars of directors to be registered: power to make regulations]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendments Nos. 66 to 69:

Page 66, line 31, leave out "or"

Page 66, line 33, at end insert "or section (Register of directors' residential addresses) (register of directors' residential addresses),"

Page 66, line 35, at end insert "or register of directors' residential addresses"

Page 66, line 36, leave out subsection (2).

On Question, amendments agreed to.

Clause 150 [Duty to notify registrar of changes]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendments Nos. 70 and 71:

Page 66, line 42, at end insert "or its register of directors' residential addresses"

Page 67, line 3, after "directors" insert "and its register of directors' residential addresses"

On Question, amendments agreed to.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, earlier concerns were raised about the duty placed on directors to avoid conflicts of interest. In fact, the Bill relaxes the strict duty in some significant ways. Authorisation is no longer needed for conflicts of interest arising in relation to transactions or arrangements with the company. In moving Amendment No. 72, I shall speak also to Amendment No. 76. Clause 150 imposes a duty to notify the registrar of the appointment of a director. That notification must include the director's consent to act in that capacity. Amendment No. 72 removes the express reference to that consent being authenticated by the director concerned because the authentication of the document sent to the registrar is, under the Bill, to be a matter for the registrar to specify under Clause 689 which permits the registrar to require documents sent to her to be authenticated by particular persons and to specify the means of that authentication.

The amendment brings the clause into line with the approach found in Clauses 13(3) and 255(2) of the Bill. For those reasons, the requirement for authentication in this clause is otiose. Therefore, Amendment No. 72 removes it.

The purpose of Amendment No. 74 is also to achieve a consistent approach throughout the Bill. Elsewhere in the Bill, the view has been taken that it is not necessary to state expressly that the provisions of the Bill have effect, notwithstanding anything in the company's articles. It is considered unnecessary to say that in terms, as the articles may not override the requirements set out in the Bill. Therefore, Amendment No. 76 removes those words from Clause 152. I hope noble Lords agree that these two amendments improve the drafting of the Bill. I beg to move.

On Question, amendment agreed to.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendments Nos. 73 and 74:

Page 67, line 5, at end insert—

"( ) Notice of a change of a director's service address must be accompanied by confirmation of the director's usual residential address or, as the case may be, that the service address is his usual residential address."

Page 67, line 6 at end insert "—

(a) the company, and

(b) "

On Question, amendments agreed to.

Clause 151 [Application of provisions to shadow directors]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendment No. 75:

Leave out Clause 151 and insert the following new Clause—

"APPLICATION OF PROVISIONS TO SHADOW DIRECTORS

A shadow director is treated as a director for the purposes of— sections 146 to 148 (register of directors), and section (Register of directors's residential addresses) (register of directors' residential addresses),. but not for the purposes of section 150 (duty to notify registrar)."

On Question, amendment agreed to.

Clause 152 [Resolution to remove director]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendment No. 76:

Page 67, line 19, leave out "in its articles or"

On Question, amendment agreed to.

Clause 154 [Scope and nature of general duties]:

Photo of Lord Freeman Lord Freeman Conservative 5:45 pm, 9th May 2006

moved Amendment No. 77:

Page 69, line 1, leave out from "duties" to end of line 2 and insert "do not apply to shadow directors save as otherwise provided for in the Companies Acts"

Photo of Lord Freeman Lord Freeman Conservative

My Lords, the clauses that we shall be debating next raise important points of principle. However, Amendment No. 77 is a probing amendment which follows on from Grand Committee stage. It deals with the responsibilities and duties of shadow directors. It is an opportunity for the Attorney-General to clarify the position of shadow directors.

On shadow directors, the Bill allows the common law to develop in relation to duties. At present, the application of current common law rules and equitable principles is an area of uncertainty. For ordinary directors, the duties are codified in the Bill in the statutory code. Surely that is confusing and unfair. The duties of shadow directors should be codified and not left in doubt. To be frank, I suspect that the Government have just said that it is too difficult to achieve that. The process is unsatisfactory. The courts decide which common law rules and equitable principles should apply to shadow directors and, of course, they no longer apply to ordinary directors, as their duties are codified in statute. Then the courts have to decide which general statutory duties are applicable that correspond with the common law rules and equitable principles. The Law Society is concerned about this issue and I, like other noble Lords, will appreciate hearing the Attorney-General's comments. I beg to move.

Photo of Lord Goldsmith Lord Goldsmith Attorney General, Law Officers' Department, Attorney General (Law Officers)

My Lords, the effect of the amendment—I understand that the noble Lord has identified it as a probing amendment—would be that none of the general duties would apply to shadow directors. The amendment says that the duties do not apply to shadow directors and then says,

"save as otherwise provided for in the Companies Acts".

But the Companies Acts do not provide for any general duties of this sort to be applied to shadow directors, so in that sense, they are meaningless.

The noble Lord has indicated that the common law is uncertain—we talked about that in Grand Committee—and it would be better if the general duties to apply to shadow directors were spelt out, but of course his amendment does not do that. His amendment does not attempt to identify what general duties should apply to shadow directors. It has the effect of saying that none of them should. That is not a position with which the Government could agree.

Perhaps I can set out the context. The concept of shadow directorship is to catch individuals who are effectively acting as directors via the agency of the real directors who deal with third parties and enter into contracts on behalf of the company according to the instructions of the shadow director. If the shadow director had himself done those things in relation to the company that they are directing, that person would almost certainly be, at least for those purposes, sufficiently involved to be a de facto director. Therefore, we think that although the concept of shadow director is a creation of statute, it would be wrong for a shadow director to be able to escape all of the general duties, merely because of a quirk in the way that the person is acting.

The law commissions were alive to that danger. They stated that the better view was that shadow directors were to be regarded as akin to de facto directors and that they could incur the liability of a properly appointed director under the general law, where they effectively act as a director through the people whom they influence. That is why the Company Law Review made a clear recommendation that the general duties should apply to shadow directors. It is a concept designed to prevent those who really exercise control sheltering behind a puppet board.

The law is still developing. It would not be right for the general duties not to apply at all to a shadow director, but the law may develop in such a way that some do and some do not. It is right to leave that area, as now, to the courts, as I indicated when we spoke about this in Grand Committee. There was a view in jurisprudence that these general duties should apply to shadow directors, but then an impressive, well reasoned further judgment took a different view. Certainly, I cannot accept the noble Lord's amendment. He has not put forward any alternative proposal, other than that the duties should not apply at all to shadow directors, which is not one we can agree with. It leaves the area as one for the courts to develop; that is true of other aspects of this Bill. Those on the noble Lord's Side of the House have not disagreed with this in other areas, precisely because it leaves the law where it is, rather than changing it. The noble Lord has probed and I have sought to answer; I hope he will withdraw the amendment.

Photo of Lord Freeman Lord Freeman Conservative

My Lords, I am grateful to the Attorney-General. He certainly set out the position very clearly. It still does not deal with the key issue, which is that there is a distinction between how we deal with shadow directors and ordinary directors. Nevertheless, the noble and learned Lord's comments have been helpful. They will be studied and we will have to return to this at a later stage if necessary. In the mean time, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 156 [Duty to promote the success of the company]:

Photo of Lord Freeman Lord Freeman Conservative

moved Amendment No. 78:

Page 69, line 9, leave out from "act" to end of line 28 and insert ", in good faith, in what he considers to be in the interests of the company"

Photo of Lord Freeman Lord Freeman Conservative

My Lords, this is a key amendment. It would leave Clause 156 indicating only that a company director must act in good faith in what he considers to be the interests of the company. That is the present position in law. It is well established and well understood. My amendment would remove the list of other duties that the Bill seeks to codify. We will have an opportunity, following this amendment, to consider the explanation for the fresh draft produced by the Government in Amendment No. 79. We believe that Amendment No. 79 is unacceptable and that we should pursue the status quo. We should give guidance on other issues—which will continue to develop in coming years—of which directors should take account.

We on this side of the House support the principle of "enlightened shareholder value" in the management of businesses. That is not at issue. The Company Law Review was right to introduce the concept and to talk about the issues that any sensible board of directors should consider in the discharge of their responsibilities. We believe in the pursuit of good corporate governance. Indeed, many of my noble friends on this side of the House and many noble Lords from the Liberal Democrat Benches—to say nothing of those on the Government Benches—belong, as I do, to the All-Party Parliamentary Corporate Governance Group and support its work. We also believe that directors should discharge high standards of corporate social responsibility. That, too, is common sense. Any good company and any sensible board—whether of a large or small company—will adopt and implement the principles enshrined in the Company Law Review and, indeed, in the Government's amendment. However, the argument is not about whether these principles are correct; it is about whether they should be codified in law, which implies rigidity, potential liability and extra cost.

The Government's approach in Clause 156, as proposed to be amended by Amendment No. 79, is to pursue dialogue with the various lobby groups and interest groups, including noble Lords on this side of the House, and seek a compromise. I have paid tribute to the noble and learned Lord the Attorney-General and to the noble Lord, Lord Sainsbury. However, I am sorry to say that the compromise is a muddle. It is wrong in principle and it should be rejected. It is a compromise between, on the one hand, those who favour retaining the status quo on the face of the Bill—with guidance being given to boards of directors—and, on the other, the lobby groups and those who misguidedly say that you should put into statute a whole list of other duties. This would be counterproductive. I have repeated the basic principle that directors should act in good faith in the interests of the company, meaning the interests of the shareholders.

It is significant that a number of directors, company secretaries, lawyers and other advisers have made—and continue to make—representations to us on this side of the House about the muddled Amendment No. 79. Their argument—and ours—is that statute should give a clear and simple definition of "duty", understood by all. That should certainly be placed in statute, as in common law. However, for a broader modern understanding of that basic duty, on a non-statutory basis, the Secretary of State should have power to issue guidance on some of the other issues that boards should take into account. These will grow and change in number over the years. That is perfectly correct.

Let me deal very briefly, so that the Attorney-General and others have plenty of time to contribute to this important debate, with four reasons why the Government's proposal is flawed and our approach is correct. First, it is surely key to maintain the principle that directors must use their own judgment in discharging their duties. They must use subjective criteria and not follow rigid, prescriptive objectives contained in externally mandated rules. The Bill is clear, in Clause 157, that directors should use "independent judgment" in discharging their basic duty to shareholders, and, in Clause 158, that they must exercise—and here we agree—"care, skill and diligence". The fundamental principle that each individual director must use his own subjective judgment as to what is in the interests of shareholders should not be shaken or clouded.

Secondly, the Government acknowledge that the other duties in Clause 156 are not exclusive. I think that the Attorney-General has already indicated that they are not by the way in which the Government have sought to amend the clause. The duties outlined are indicative of a much longer list that could arise over time. It is far better, in this imprecise field, to use the more flexible and amendable mechanism of guidance notes.

Thirdly, the proposed extended definition of duties would apply to all directors: from BP plc at one end, right down to the small company managing flats in a residential block at the other. That, surely, must be wrong. One size does not fit all.

Finally, there is the argument repeated in today's newspapers. I very much agree with it. The statutory route would significantly hamper the running of businesses, adversely affecting the wealth-creating sector of our economy. Boards would spend valuable time and costs seeking advice on whether they were following the strict letter of the law. Some existing directors would fear litigation from pressure groups. Some newly created companies might seek registration outside the United Kingdom—my noble friend Lord Forsyth drew attention to this risk earlier in today's proceedings—and potential directors might be dissuaded from joining boards.

I believe that the common sense way forward is to stick to the simple accepted definition of the duty of directors. They should have regard to the needs and interests of their employees, their customers, the environment in which they operate and the long-term sustainable future growth of their businesses, but guidance, not regulation, is the better way forward. I commend my amendment to the House. I beg to move.

Photo of Lord Tordoff Lord Tordoff Liberal Democrat 6:00 pm, 9th May 2006

My Lords, it may assist the House if I point out that, if Amendment No. 78 were agreed to, it would pre-empt Amendments Nos. 79 to 86, which I would therefore not be able to call.

Photo of Lord Razzall Lord Razzall Spokesperson in the Lords, Trade & Industry

My Lords, as the Minister will appreciate, and as noble Lords will realise, during our deliberations in the Moses Room the Liberal Democrat Opposition joined the Conservative Opposition, and sometimes they joined us, on a number of technical amendments to the Bill. Certainly, the Government's response today indicates that many of the points that we made have been taken on board and amendments have subsequently been proposed.

However, on the amendment that we are discussing, we find ourselves oceans apart from the noble Lords, Lord Freeman and Lord Hodgson. The noble Lord, Lord Freeman, said that the Conservatives do not disagree with the concept of enlightened shareholder value but then made a speech which demonstrated that he regards enlightened shareholder value as an issue for probably the year 3000 rather than 2006. His amendment would take company law back to what it probably was in 1862 or 1948. However, my noble friend Lord Sharman does not even think that the amendment and the analysis of the noble Lord, Lord Freeman, reflect what modern company law is. He thinks that a lot of the issues that are reflected in the Government's proposals already exist in common law in relation to directors' duties and that the world has moved on significantly.

There is an issue here. In a way, I am very grateful to the noble Lord, Lord Freeman, for moving the amendment, because it enables us to delineate clearly where some of us stand on this issue. We have had some extremely helpful proposals from various NGOs on how the law should be amended to take on board environmental issues in relation to directors' duties. I am very grateful for the work that those NGOs have done.

The Government are trying to steer a path between Scylla and Charybdis. On the one hand, they do not want to cause damage in relation to directors' responsibilities and restrict the number of people who are prepared to take on the director role. They do not want to happen in this country what happened in America following the Sarbanes-Oxley legislation, which led to people not wanting to become directors of American companies. On the other hand, the Government are trying to meet the concerns of the NGOs. I refer to Amendment No. 79 in that regard.

I suspect that the Government are getting close to a satisfactory resolution of the issue. They are meeting a lot of the points that the NGOs are making. Whether they are quite there yet remains to be seen. Of course, there is always the opportunity for Members of another place to discuss the matter. As I have said, Members of another place are renowned for their expertise and erudition on these technical Bills.

The real point here is that we cannot go back to the law as it used to be. We do not often make political points in this House, but if the Tories really—

Noble Lords:

Oh!

Photo of Lord Razzall Lord Razzall Spokesperson in the Lords, Trade & Industry

It is rather like saying, "With respect", when you do not mean that. I shall go on to make the political point. If the Leader of the Conservative Party wants to go on a sledge to Norway to demonstrate his green credentials, he cannot have Members of his party in the House of Lords tabling amendments to delete environmental concerns from a Bill in which we have an opportunity at last to get those codified in company law.

Photo of Lord Lea of Crondall Lord Lea of Crondall Labour

My Lords, I wish to add a couple of points to the contribution of the noble Lord, Lord Razzall, because I begin from a not totally dissimilar position.

I remind the House that the noble and learned Lord the Attorney-General made a very important point in the Moses Room when he said that,

"the main purpose in codifying the general duties of directors is to make what is expected of directors clearer and to make the law more accessible to them and to others. The problem is that the traditional formulation of that duty does not achieve that".—[Official Report, 6/2/06; col. GC254.]

I have not heard the noble Lords, Lord Freeman and Lord Hodgson, and other noble Lords on the Conservative Benches address that point.

There is another point made by elision, which ought to be brought out into the open—I think that it has been touched on by the noble Lord, Lord Razzall—which is that somehow we are interfering here with the common law, which has been with us since the 12th or 13th century or whenever. But surely company law has had a major part to play in what the modern capitalist system is constrained by. Limited liability is a tremendous protection for the system. It is not a case of the common law being involved here; what is involved here is an intervention by Parliament in 1862, as the noble Lord, Lord Razzall, said. That is the second reason why it is the property of Parliament to present a framework for companies. Again, I do not think that that point has been addressed by the Conservative Benches.

It may well be true that some people in the great world out there do not understand the subtlety of the distinction between the interests of the company and the interests of the shareholders. But there must be many millions of people out there who would query the formulation that the noble Lord, Lord Freeman, has used. He did so in good faith; he believes very passionately that it is the only way in which the system can work. The noble Lord says that the interests of the company equate with the interests of the shareholders. He then says that he is not against matters concerning long-termism, the interests of employees and so on and so forth being in codes of practice. So we are back to the angels on the head of a pin regarding whether Clause 156 changes anything substantive at all. As my noble friend Lord Sainsbury has said on so many occasions—we are all repeating ourselves—the fact is that the clause does change something. The "something" which it changes is that directors should have explicit regard to the points that are set out and that those points do not comprise just a box-ticking exercise. I believe that that is a reasonably accurate summation of what has been said during the past couple of months.

Ministers have leant over backwards to make many concessions. I give the example of safe harbours. Many important points made by Members on the Conservative Benches in Grand Committee in the Moses Room have been listened to and acted on—a few more have been acted on than suggestions made by noble Lords on this side of the House. However, I do not complain about that today; I shall complain about it tomorrow.

Photo of Lord Patten Lord Patten Conservative

My Lords, in this debate on the amendment we are looking at the very pith, the kernel or the epicentre of directors' duties. My noble friend Lord Freeman has put his finger right there. I support his suggestion that we admit this list of duties.

I have tried to imagine what would happen if they were to be retained. I have tried to imagine myself in a boardroom—where sometimes I sit—trying to help to take those difficult decisions where there is a high profile merger, a hostile approach of a contentious kind or a proposal afoot within the boardroom—perhaps under the eagle eye of experienced company chairmen such as my noble friends Lord Kalms or Lord Kirkham—to take a lower cash bid than the high profile cash bid because I decide that in my judgment it is in the shareholders' interest as that bid is more likely to be delivered and more likely to be sustainable, or whatever.

These are the issues that directors up and down the land—men and women—face day in, day out. If the Government's provisions remain in the Bill, I would be concerned if during those discussions I had not taken the trouble to keep a proper trail of contemporaneous notes to justify that I had directed myself properly in coming to decisions and that I had emptied my mind of every consideration that should not be in it when taking those decisions and so on and so forth. "So on" includes taking account of the sometimes conflicting claims of the six groups of stakeholders that are referred to in the Bill.

In effect, this clause introduces unforeseen circumstances—a new regulatory burden—to the boardroom. This Government do that from time to time. We can see the difficulties that they have got into recently in the alterations made by the Treasury to the tax treatment of trusts, which is allegedly going to affect exactly 23,000 trusts, although practitioners say that it will affect a million or more and the excellent Law Society says more. The Government have not thought through what will happen as a result of wrapping directors in red tape by this legislation. Directors will potentially be at risk not just from activist shareholders, but also from activist judges. Your Lordships will know from experience in this place that there are one or two activist judges around. I see a very small smile crossing the face of the noble and learned Lord the Attorney-General—but it has quickly gone away. There are one or two activist judges who would be eager to exercise the new powers given to them, and who would be aided and abetted by human rights lawyers who would suddenly see moral imperatives to involve themselves in the human rights of shareholders. They would have a field day. This clause—let alone the next amendment that we are going to address—is trying to legislate not for reasonable, good-faith behaviour by company directors but for perfect behaviour followed by equally perfect evidential paper trails for the courts that may be waiting. These perceptions among those who are directors or who may be tempted to become directors should not just be brushed away as being highly unlikely in the real world.

The Government are still in a mess in this area. If they want to save face, they could, doubtless, cook up some non-statutory code with explain-or-comply opportunities written in it, but, in corporate life, we do not need another box-ticking boardroom industry, particularly since the Government have failed to demonstrate a nuisance that needs correction. This is a point that was made time and again at Second Reading. It might be of interest for the noble and learned Lord the Attorney-General to give us an example of the nuisances that need correction because there is no point in having law unless it is dealing with such nuisances. The Government should also reflect on the law—with a small "l", not a capital "L"—of unintended consequences. My noble friend Lord Freeman has already referred to the unfortunate—from America's point of view—aftermath of the passage into law of Sarbanes-Oxley legislation in that jurisdiction, leading to a flood of potential initial public offerings moving away from exchanges such as NASDAQ to exchanges over here such as AIM. That is very good, and it has helped to strengthen the grip of the London markets on global capital markets, but if this Bill becomes law, then the perception of the risk to directors—not only of the greater regulatory burden, but of the greater risks in law—could be equally significant in driving companies seeking to list in the United Kingdom to look elsewhere, as my noble friend Lord Forsyth said in an intervention in a debate on an earlier amendment.

The Government are in a two-way squeeze here because there are those of us who wish to liberalise what they are trying to enforce in the over-regulatory framework contained in these provisions, while—

Photo of Lord Lea of Crondall Lord Lea of Crondall Labour 6:15 pm, 9th May 2006

My Lords, the noble Lord has spent a few minutes making an argument that adds up to saying that there is a perception in the City—for want of a better expression—that certain things could happen. There have been many occasions that I remember vividly where there has been a trades union Bill and there has been a perception in the trades union movement that this, that or the other would be the consequence of a Bill and Ministers, the CBI and others represented mainly on the other side of the House have said that if it is a question of perception, then it should be corrected by educating people that the perception is wrong. If the noble Lord is saying that it is not a question of perception, that is different, but if he is saying that it is a question of perception, surely the question becomes: what about changing the perception? Is that not the responsibility of people in Parliament?

Photo of Lord Patten Lord Patten Conservative

My Lords, if tomorrow the noble Lord has the time, let alone the inclination, to read what I said, I referred to both the reality and the perception of this legislation. I shall conclude my remarks on this point: I suspect that we will now face ping-pong between this House and the other place, which has not yet got its teeth into the Bill. In that House, there are legions of old Labour—now much more buoyant than they once were—waiting to receive the Bill and put far more onerous burdens on directors than anything put forward by the Minister. There are already Early-Day Motions.

Photo of Viscount Bledisloe Viscount Bledisloe Crossbench

My Lords, at the moment, I am tempted to support this amendment because I find the provisions difficult to understand, whether as in the Bill or as in the amendment. I do not say this because the Bill uses modern words, for example,

"would be most likely to promote the success of the company for the benefit of its members as a whole", whereas the amendment uses,

"in what he considers to be in the interests of the company", which is the time-honoured phrase, because I do not believe that there is a great deal of difference between the two and I do not know why we have to be trendy and change it. However, I do not think that that is the important point.

What I find confusing, and I think most directors will find it even more confusing, is the effect of the various things to which the director is to have regard. Let us consider, at random, the fact that he is to have regard to the impact of the company's operations on the community and the environment. Obviously, any director will have to ask what the impact of a decision on the community and the environment will be and, if it will be adverse, whether that will damage the company's reputation, its business, its custom or so on. But the Bill is equally open to the interpretation that what he has to do is to ask himself whether something will have an adverse impact on the community or the environment, although it is of benefit to the company and the damage to the company by any adverse impact will be slight. Has he got to balance what is in the interests of the company with what is in the interests of the community and the environment? Is he to say that although the company will do well out of something and the damage to its reputation will be very slight, it will not be very nice for the community and therefore the company must not do it? I do not think that is what is intended, but the Bill is very open to being interpreted as saying that. If that is what is intended, how on earth is a director to decide how to balance the interests or success of the company—which are what he thought he was there to protect—against outside consequences that are to be dealt with by planners, environmental authorities or so on? If he is meant to be a general policeman of the public good, against the interests of the company, then his job becomes impossible and he is open to complaints from everyone. If it is made plain that all he has to do is what he is doing at the moment, that is, ask, "Will this damage our relations with our employees and therefore bring business to a halt? Will it mean they work less well? Will it mean that we are very unpopular in the community and therefore no one buys our products?", that is alright, because that is what he does at the moment. But if he is to be expected to balance those considerations as an absolute or a relative other factor, his life is made impossible.

The Bill is wholly unclear on that, and it will certainly give rise to an enormous number of directors saying, "I do not know what I am meant to be doing. I can quite clearly see what is best for the company, but what about the fact that some of the community will not want our new factory?". It seems to me that this is creating enormous uncertainty and runs the risk of being thought to widen the director's responsibilities enormously.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

My Lords, I very much agree with the noble Viscount, Lord Bledisloe, but I want to say a few words in support of my noble friend Lord Freeman. He is more moderate than I. Looking at the six duties on directors, none of them seems to me to be in any way in conflict with the overall duty to look after the interests of the shareholder and to promote value. Listening to the debate and particularly the comments by the noble Lord, Lord Razzall, and his quite unfair attack on the Leader of the Opposition—he is normally quite sensible—it seems to me to suggest that if one is pursuing the interests of shareholders, that somehow is in conflict with taking decisions with a view to the long term, or taking decisions with a view to the interests of the employees. Surely we want boards of directors in our country who get out there and win business and create wealth and prosperity. That is what their duty is.

If the noble Lord, Lord Razzall, is worried about the environment, there are enough regulations on the environment to sink a ship, to which businesses must operate under the rule of law. The last thing that you want to have in the boardroom is uncertainty, a lack of clarity and a professional class of directors who are constantly looking over their shoulders, assisted by expensive lawyers who distract them from the business of wealth creation. We have had 2,000 jobs lost by NTL and 2,000 jobs lost by Peugeot, and we are beginning to see on the news the job losses clicking up.

We have the Government's Better Regulation Task Force saying that regulation now costs 11 per cent of GDP, which is more than the entire revenue from income tax, and here we are trying to bring into the boardroom more burdens and more responsibilities that have nothing whatever to do with what boards of directors are about. Boards of directors are not politicians, they are not local authorities and they are not social workers. They are there to advance the interests of a company to create wealth; and that is in the interest of communities and employees. My noble friend is absolutely right to scratch this from the Bill. It is part of the creeping political correctness that we see going into industry, and part of a Government who seem to want to achieve nationalisation again by regulation and by the back door.

Photo of Lord MacGregor of Pulham Market Lord MacGregor of Pulham Market Conservative

My Lords, I will be as brief as I can be. I only want to make one point. Like other non-executive directors—and I declare an interest—I not infrequently attend seminars, training sessions and so on that are laid on by firms of accountants and lawyers, and in all the discussions that I have had during the last few weeks in those sessions and elsewhere, Clause 156 is the part of the Bill that most exercises most directors. I readily recognise that the Government have listened to the debates in Grand Committee, and I very much welcome and thank them for the amendments that they have tabled, both to this clause and also to the clauses on derivative claims, which I will come on to in a moment; but I still think that the concern remains.

I was at a lunch at one of those training sessions today, where a number of non-executive directors expressed to me their remaining concern about the Bill, even with amendments put in. Noble Lords will have noticed the letter in the Financial Times today from the chairman of the company law committee of the City of London Law Society, explaining exactly what reservations it still had. It was summed up in a way by the front page of the Financial Times, which reads:

"Under the proposals, lawyers say directors could be left in breach of their duties if they cannot demonstrate that they have considered every interest group".

That is the point that I want to ask the Attorney-General about, because it has certainly been widely aired outside this place. The noble Lord, Lord Lea, said that the Bill was not changing the law. It is; that is the point. If you combine the listing in statutory form of the duties mentioned in Clause 156 with Part 11—Clauses 239 to 243—on derivative claims, it changes the law.

Photo of Lord Lea of Crondall Lord Lea of Crondall Labour

My Lords, I am grateful to the noble Lord for giving way. If he reads Hansard tomorrow, I think he will find that I did not say that. I said that there had been a debate about whether this made any change. I said, and I cited the noble Lord, Lord Sainsbury, that yes, it does make a change; it is not just a box-ticking exercise.

Photo of Lord MacGregor of Pulham Market Lord MacGregor of Pulham Market Conservative

My Lords, I am grateful for that, and I am sorry if I misheard the noble Lord. But really that enables me to take my argument further that it is actually changing the law. Of course directors pay attention to all the six issues that are mentioned, but the point is that by having them expressed in statute it opens up huge possibilities for new legal action and opportunistic legal challenges.

I have two examples. Individual shareholders or groups, perhaps acting on behalf of another company, could use the new possibilities opened up here in a way that is not possible now to challenge directors' decisions or to raise any issues incurring substantial costs and management distractions against the interests of the shareholders generally. They have to go through one or two processes on the derivative claims, but nevertheless there is a fear that in some cases they will get through those and the problems will arise.

More particularly, I am concerned about the possibilities that the provision extends to hedge funds, particularly aggressive American ones. Companies that have been subject to American pressures before this, even under existing legislation—and I have been given a clear illustration of one such company—know how American practitioners could exploit this legislation if it goes through as proposed by the amendment. The directors of that company believe that they would have been in a difficult situation if this legislation had been in place and they were trying to do a major restructuring both in the interests of the company and the economy generally. Indeed, they argued that some of the directors may have been deterred from serving on that board if the Bill was in place when they were carrying that through.

We live in an age of globalised markets. In many of the big corporate restructurings, hedge funds would have greater opportunities to apply pressure for their own ends. Many are American, they have deep pockets, and they are used to American litigation practices. I indicated in Committee that I had been told that a number of American law firms were looking to come here to exploit these opportunities. It may be that some, indeed many, will be deterred by the new amendments on derivative claims; I readily acknowledge that. But the fear is that others will not be deterred, and even the new approach will still give a shareholder new ways to bring claims to include substantial costs for the company and to be a great diversion for senior management at times when it may be least in the company's interests.

I hope that I am wrong; but the people who have been expressing these fears to me are more experienced and qualified than I am, and they feel that the concerns are still there. If they are right, considerable damage could be done, and it will certainly not be easy to amend this legislation, because we have already heard from the noble Lord, Lord Sainsbury, and others that he hopes—and I expect that this will be right—that we will not have another company law Bill for a number of years, and this would be a comparatively minor point. It will not be easy. I have these fears, which are widely shared outside, and that is why I believe it is right to support my noble friend's amendment.

(3)

Photo of Lord Goldsmith Lord Goldsmith Attorney General, Law Officers' Department, Attorney General (Law Officers) 6:30 pm, 9th May 2006

My Lords, I am disappointed and surprised at the way that the noble Lord, Lord Freeman, put his amendment. The concept of enlightened shareholder value was recommended by the Company Law Review and has been the subject of consultation and comment for a long time in many processes.

A number of noble Lords, such as the noble Lords, Lord MacGregor and Lord Razzall, have been good enough to note that the Government, in particular the noble Lord, Lord Sainsbury, and myself, have spent a lot of time since Grand Committee talking to different groups, particularly business groups of different sizes and other interested parties and nobody—nobody—has challenged the idea that we need to include the concept of enlightened shareholder value within the Bill.

As the noble Lord, Lord Razzall, reminded us, the noble Lord, Lord Freeman, started by saying that he supported enlightened shareholder value. If he supports it, why does he put forward an amendment that takes us not forward but backwards? I will explain why it takes us backwards.

First, let us get rid of one or two misconceptions. In putting forward his support for the amendment, the noble Lord, Lord Patten, painted the picture of him sitting in a boardroom deciding that it would be in the better interests of the company and its shareholders to accept a bid which was lower because it was more likely to be a credible one that would stick. What are the Government doing in the Bill that would make that decision any different? The noble Lord, Lord MacGregor, said—as business leader after business leader has said to me—that we already take all of these factors into account. There is nothing new in this. The noble Viscount, Lord Bledisloe, said exactly the same. What is the problem? There are not six duties, as the noble Lord, Lord Forsyth, said: there is one duty. That is what our amendment in the next group makes clear. There is one duty which includes having regard to factors to which companies already give regard. I give way to the noble Lord, Lord Patten.

Photo of Lord Patten Lord Patten Conservative

My Lords, I am glad that the noble and learned Lord has given me the opportunity to respond to his direct request to me to give an example of what is new in a director having to face the job of deciding whether to recommend a bid with a lower cash value. Paragraph (f) concerns,

"the need to act fairly as between members of the company".

Some members of the company might accept that my judgment was right if the board listened to the arguments and decided to go that way. Other members, such as the hedge funds represented through prime brokerages to which my noble friend Lord MacGregor referred, might say that I had not acted fairly in relation to their interests in regard to company X, because they wanted the short-term profits from the bigger cash bid. And hey-ho, off we go to the courts, aided by activist lawyers and prompted doubtless to decisions by activist judges.

Photo of Lord Goldsmith Lord Goldsmith Attorney General, Law Officers' Department, Attorney General (Law Officers)

My Lords, I am sorry if that is the best the noble Lord can do. It simply will not do. Paragraph (f) is concerned with,

"the need to act fairly as between members of the company".

The one common ground that we all agreed was that ultimately the decision of what is in the best interests and to the benefit of the members as a whole is for the directors to take. There will be differing views. There may be differing views between the directors. There will be differing views between different members of the company and different shareholders. But that is not acting "fairly" between them. Acting fairly would be, for example, a situation where one class or group of shareholders was offered more for its shares than another group. It is important to consider carefully just what the duty means and what having regard to these factors implies.

For example, having regard to,

"the likely consequences of any decision in the long term".

Surely directors do that now. Having regard to,

"the interests of the company's employees".

That is a matter of statute at the moment under Section 309 of the Companies Act 1985. Having regard to,

"the need to foster the company's business relationships with suppliers, customers and others".

Surely all good directors do this when making decisions. Having regard to,

"the impact of the company's operations on the community and the environment".

Again, for the reasons given by the noble Viscount, Lord Bledisloe, a company will consider whether a decision will create such damage to its reputation that it is not in the best interests of its members to do so.

It does not mean that any one of those factors is determinative. Ultimately, it is for the directors to decide. Having regard to those factors is what a director,

"considers, in good faith, would be most likely to promote the success of the company for the benefits of its members as a whole".

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

My Lords, if the noble and learned Lord is arguing that this is done and provided by statute already, why is it necessary to have it at all if it is not adding something, as critics of the Bill suggest?

Photo of Lord Goldsmith Lord Goldsmith Attorney General, Law Officers' Department, Attorney General (Law Officers)

My Lords, the noble Lord, Lord Lea, gave that answer as indeed we have given it before—and which I may respectfully suggest some of the comments in the House suggest may be necessary—so that there is clarity on what the responsibilities of directors are. That is why their duties are to be put in statute. That is what the Company Law Review said and what we have said. If there are people at the moment who do not have regard to these factors then—on the basis of the best business practices that we have had explained to us by some of the best business leaders in this country—they should.

The next surprising part of the amendment tabled by the noble Lord, Lord Freeman, was the suggestion that these matters should instead be laid down in guidance from the Secretary of State. I almost felt like going to my colleagues and saying, "Yippee, they have now decided that we can do all this by ministerial fiat". On some other amendments we were taking the opposite line and being severely criticised for not putting all things to the decision of Parliament. I do not know where that matter in the noble Lord's amendment comes from, unless from a belated intention to support Amendment No. 87 tabled by my noble friends for guidance to be put forward. It is simply not workable. It can only be envisaged that one day the Secretary of State will say that all company directors ought to have regard to the interests of the company's fat cats for the next month or so: let us give them guidance to that effect. Surely that is not the way we expect this matter to be dealt with. Surely it is right to identify these factors in the way that has been done—through tremendous consultation—and put them into statute. None of the factors has been disputed. When we come to our amendment I will explain why.

The next point that has been put forward is the one that has been consistent in the discussions that we have had with different groups. The noble Lord, Lord MacGregor, raised the point that it would be expensive and that there is a need for a proper audit trail, a paper trail. I have consistently said that I do not accept that. When we come to the derivative claims provisions, it will be seen that what is necessary for an individual shareholder to get a claim off the ground will be to persuade a judge that the shareholder has a prima facie case that he should be able to bring that claim. He will have to show that the directors are prima facie in breach of duty. I have never understood the proposition that it is necessary to have some particular form of paper trail. There is nothing in the Bill that says there is a need for a paper trail. Somebody says that a director did not have regard to the long-term interests of the company and the director responds, "Don't be stupid, of course I did". But where is that written down? The director says, "I don't need to write down something like that, because that is the fact; that is the truth". If you want to write it down that is fine as well. But I do not accept this proposition.

Reference has been made to particular views that have been expressed in newspapers today. We have considered very carefully the arguments that have been put forward by certain lawyers from different places but I do not find their case persuasive. That is not because I want to see companies subjected to unnecessary bureaucracy. I do not believe that this clause will do that. I confess from my professional experience that legal advice can sometimes be very cautious, sometimes excessively so; but that is the point that has been put forward today in the newspapers—it is excessively cautious. But, answering directly the point put by the noble Lord, Lord MacGregor, I do not agree that the effect of passing this Bill will be that directors will be subject to a breach if they cannot demonstrate that they have considered every element. It will be for the person who is asserting breach of duty to make that case good. They will have to do so at their own expense if they bring a derivative claim and they will have to recognise that they cannot claim damages for themselves, as is the case in some other jurisdictions, but only for the company. The only effect of a derivative action by the shareholder, if it were successful, would be to obtain damages for the company. It is true that the shareholder might benefit from that—but he might not; he cannot obtain damages for himself. Due to our present court system in which, generally, the loser pays costs, it would not be a cost-free exercise in any event if someone brought such a claim.

So we have listened very carefully to those concerns. We have sought to meet many of them in two ways. First, it will be made clear when I explain the government amendment that the factors presently in subsection (3) will be incorporated into subsection (1) so that they can be seen as part of a single duty. We never intended them to be separate duties. Secondly, we are strengthening the procedure for derivative claims so that there cannot be frivolous actions. They will be struck out if there is no decent basis for them.

I started by saying that this amendment is going backwards—it is. A clear example of that, which I put respectfully to the noble Lord, Lord Freeman, is that it amounts to repealing something that has been in our law for more than 20 years. It has been a statutory requirement under Section 309 of the Companies Act 1985 that:

"The matters to which the directors of a company are to have regard in the performance of their functions shall include the interests of the company's employees in general, as well as the interests of its members".

No one has said to us that that statutory provision that has been in place for 21 years is proving unworkable. No one has said to us that, as a result of that, "we have unnecessary expensive paper trails". No one has said "we cannot make decisions in the best interests of the company". No one has said to us, "because of that duty, people are declining to do business in this country". I say, respectfully, to the noble Lord, Lord Freeman—I shall not quite descend into the political arena—that if the Conservative Party stands on the proposition that it now wants to remove the duty of company directors to have regard to the interests of employees, that will be noted.

My final point picks up on the comments of the noble Lord, Lord Razzall. We have tried hard to steer a constructive course between those who would want much more onerous duties to be placed on directors and those who would wish there to be no duties at all. I know that that is perhaps an exaggeration, but noble Lords will understand my point. We have tried to strike that middle ground. As the noble Lord, Lord MacGregor, rightly said, you have to look at derivative claim rights as well as the statement of duties. I genuinely believe that we have met that balance. I commend our substantial government amendments, which we will consider in due course and for which my noble friend Lord Lea has given notice he will exact some anger tomorrow, if not today. I respectfully invite the noble Lord, Lord Freeman, to recognise that enlightened shareholder value, which he says he supports, is what the Government are seeking to do. I ask him to withdraw his amendment.

Photo of Lord Freeman Lord Freeman Conservative

My Lords, we have had a frank debate. There is no meeting of minds. The Attorney-General has not addressed the key criterion on which we should judge both our amendment and the government amendment. Which amendment will hinder or help economic growth and the creation of jobs? The answer is clear: the preservation of the status quo. There is no intention to resile in terms of protection of employees—that was a total misrepresentation. We should now test the mood of the House.

On Question, Whether the said amendment (No. 78) shall be agreed to?

Their Lordships divided: Contents, 104; Not-Contents, 156.

Division number 2 Private Parking: Ports and Trading Estates — Company Law Reform Bill [HL]

Aye: 102 Members of the House of Lords

No: 154 Members of the House of Lords

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Resolved in the negative, and amendment disagreed to accordingly.

Photo of Lord Goldsmith Lord Goldsmith Attorney General, Law Officers' Department, Attorney General (Law Officers) 6:57 pm, 9th May 2006

moved Amendment No. 79:

Page 69, leave out lines 12 to 25 and insert ", and in doing so have regard (amongst other matters) to—

(a) the likely consequences of any decision in the long term,

(b) the interests of the company's employees,

(c) the need to foster the company's business relationships with suppliers, customers and others,

(d) the impact of the company's operations on the community and the environment,

(e) the desirability of the company maintaining a reputation for high standards of business conduct, and

(f) the need to act fairly as between members of the company.

(2) Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes."

Photo of Lord Goldsmith Lord Goldsmith Attorney General, Law Officers' Department, Attorney General (Law Officers)

My Lords, I hope that the House will agree that, given the substantial and, as the noble Lord, Lord Freeman, said, frank but full debate we have just had on shareholder value, it may be sufficient if I simply explain the purposes behind the amendment, while being ready to answer any questions, of course.

We believe that enlightened shareholder value is the right approach, but we have listened carefully to the concerns expressed. Some were misunderstandings, but some had to be dealt with by amendment, which is why we have tabled these amendments. We would make three changes. First, we propose to bring together subsections (1) and (3) of Clause 156 in the hope of addressing misunderstandings that have arisen from their separation. We did not intend them to be two distinct duties, so by bringing them together, we hope that our intention will be made clearer in that, while a director must have regard to the various factors, that is subordinate to the overriding duty to act in the way the director,

"considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole".

In the light of further discussions with business and other stakeholders, we retabled the original amendment to delete the second "must" in the amended Clause 156(1), as it was suggested that using "must" twice might imply a separate duty. We do not think that the deletion of that word affects the obligation to have regard to the factors, but it makes it clearer that Clause 156(1) is a single proposition, so we are content to make the change.

Secondly, we believe that it is better to delete the phrase,

"so far as reasonably practicable", which gave rise to uncertainty from almost all sides. The words were intended to operate as a limit on what was required of directors, but also to indicate that directors were required to do more than pay lip-service to the factors. On reflection, we think that the degree of uncertainty to which the words give rise is unhelpful. We want the director to give such consideration to the factors identified as is necessary for the decision that he has to take, and no more than that. We do not intend a director to be required to do more than good faith and the duty of skill and care would require, nor do we want it to be possible for a director acting in good faith to be held liable for a process failure where it could not have affected the outcome. In the light of concerns about the effect of the words,

"so far as reasonably practicable", we thought it best to delete them.

The third point is that we have included the words "amongst other matters". We want it to be clear that the list of factors is not exhaustive. I suggested in Grand Committee that it could not possibly be exhaustive. I said, for example, that there was no specific reference to the duty to have regard to the profitability that the transaction would bring, but we believe that that is implicit. Nor does the list as it stands include the short-term implications, but it is better to make what is implicit explicit by inserting the words "amongst other matters" to make that clear. We do not think that that detracts from the obligation to have regard to those other factors.

We have genuinely striven to meet concerns. The other concerns, as I have already indicated, and as the noble Lord, Lord MacGregor, noted, relate to the concept of derivative actions, but we will come on to that later. I beg to move.

Photo of Lord Lea of Crondall Lord Lea of Crondall Labour 7:00 pm, 9th May 2006

moved, as an amendment to Amendment No. 79, Amendment No. 79A:

Line 1, leave out "have regard (amongst other matters) to" and insert "take account of"

Photo of Lord Lea of Crondall Lord Lea of Crondall Labour

My Lords, I will briefly explain what might otherwise look a little strange. The wording of Amendments Nos. 79A to 79F is nearly but not totally identical to that of Amendments Nos. 80 to 86. That is because of the potential problem of pre-emption whereby if Amendment No. 79 were agreed to—as it is likely to be—Amendments Nos. 80 to 86 could not be voted on in their present form. Therefore, the provisions in those amendments should be made in amendments to Amendment No. 79. That is the origin of Amendment No. 79A. My noble friend Lady Thornton will explain the substance of the later amendments. I beg to move.

Photo of Baroness Thornton Baroness Thornton Labour

My Lords, I rise to speak to Amendments Nos. 80 to 87—Amendment No. 87 should probably have been taken separately, but I was trying to help the business in the House when I discussed it with the Clerk. I very much welcome Amendment No. 79 proposed by my noble friend the Minister and compliment my noble friend Lord Lea on his imaginative way of dealing with this matter, because I had not thought to amend the Government's amendment. However, my amendments address the same issues.

My understanding is that if Amendment No. 79 is agreed to, my amendments will fall, but I feel that it is important to have the opportunity to discuss them at this stage. The Government have made significant progress, for which I compliment them, towards addressing the issues that were raised during the discussions about directors' duties in Grand Committee and at Second Reading. Indeed, the discussion will continue to take place in further stages of the Bill and in another place.

In the government amendment, I particularly welcome the removal of the words,

"so far as reasonably practicable".

I also welcome the addition of the new subsection (2), which is a logical and useful prompt regarding companies that are run for the benefit of those other than members—social enterprises, for example.

However, the government amendment should have gone further. I fear that it does not quite deliver on the principal issue of directors' duties, which would involve the inclusion of a positive duty for company directors to take reasonable steps to minimise significant potential negative impacts of their company's operations on communities and the environment around the world. That is the nub of the new wording to subsection (3) proposed in Amendment No. 81.

I would also like to take this opportunity to remind noble Lords about the Trade Justice Movement and the CORE coalition, which are concerned with corporate social responsibility. These coalitions represent more than 100 organisations with 9 million individual members. They are calling for amendments to the Company Law Reform Bill to ensure that UK companies are more accountable for the impact of their activities on employees, communities and the environment. Having listened to the debate that took place earlier this afternoon, I believe that they are quite right in those concerns, which is why I have chosen to support them.

The discussions that we have had so far have been about the nature of directors' duties. The Government have been considering two contrasting approaches—enlightened shareholder value and pluralism. The approach finally adopted was enlightened shareholder value, so ably explained by my noble friend the Minister earlier. Those of us who wish to address these issues face the problem that the key assumption underlying enlightened shareholder value is that business prosperity and responsible business behaviour are two sides of the same coin. However, the CORE coalition, the Trade Justice Movement and many of us believe that this assumption places too much emphasis on the voluntary approach to corporate social responsibility. Indeed, Action Aid, Friends of the Earth, Christian Aid, Amnesty International and other such organisations have numerous case studies that demonstrate that the voluntary approach to CSR cannot be relied on to prevent corporate abuse and to ensure that companies minimise their negative impacts on communities and the environment.

I waited in vain for the noble Lord, Lord Freeman, to address issues to do with, for example, the violated rights of women fruit pickers in South Africa and the many well recorded examples of British companies that, while on the face of it have strong corporate responsibility policies, pursue practices in other parts of the world, such as Africa and Asia, that are to the detriment of local communities and the environment.

The Trade Justice Movement and CORE support a pluralist approach. Ever practical, however, we realise that that is the least likely option to be pursued under these circumstances. It is recognised that the enlightened shareholder value approach explained by my noble friend is the route down which we will go. Therefore, we argue that that needs to be strengthened as far as possible.

Specifically, Amendment No. 80 repeats the use of the phrase "in good faith" used in subsections (1) and (2) and is intended to reinforce the message that the duty to take account of environmental and community issues is a serious obligation. That is a positive clarification of that duty. Amendment No. 81 deals with the issue that has already being referred to—the environment and social impacts. Amendments Nos. 82 and 86 relate to the wholesale approach of UK corporate performance in dealing with its impacts, as I have already mentioned, on the environment and local communities. Amendment No. 84 addresses the issue of the high standards of business conduct and would ensure that they included ethical standards. That should be explicitly addressed to strengthen and clarify that duty. Amendment No. 85 would make it clear that the minimisation of adverse impact is desirable, and that responsible behaviour, including taking account of the interests of a company's full range of stakeholders, can be economically beneficial.

As I said, Amendment No. 87 should probably have been taken separately, because it concerns the recognition that company directors will need detailed guidance about what, in practical terms, the enhanced duties will mean for them and how the duty to minimise adverse impacts relates to other duties in Clause 156. Such guidance will need to be regularly updated, because the way in which directors' duties should be translated into practice is likely to change through the passage of time. Clause 156 requires the Secretary of State for Trade and Industry to publish guidance on how directors should interpret the duties in the clause, and how they can reconcile or integrate the different considerations that the clause requires them to take into account. The guidance can be updated more frequently and easily than the Company Law Reform Bill can be once it has become law.

Photo of Baroness Northover Baroness Northover Spokesperson in the Lords, International Development, Liberal Democrat Lords Spokesperson (International Development)

My Lords, I support the amendments on directors' duties. I very much welcome the Government's Amendment No. 79, but I hope that they will look hard at the other amendments in the group. I join the noble Baroness, Lady Thornton, in commending CORE and the Trade Justice Movement for all their efforts in this regard.

I understand the theory that the best interests of companies should embrace the protection of the environment—it would surely be short-sighted to degrade that—and of the communities in which the companies are working. However, we all know that this is not necessarily the case. As Liberal Democrat spokesperson on international development, I see cases both of enlightened action and of unenlightened action by companies. Let us take as an example the British companies identified by the United Nations expert panel as being involved in malpractice in the Democratic Republic of Congo. Their actions certainly do not promote the interests of the community; in fact, they foster conflict. And they certainly do not promote the interests of the environment; in fact, they are tearing it apart for its mineral wealth. To judge by the previous debate, the Tories seem to be closing their eyes to this, whatever they may say in other debates.

We all know about the actions of companies in the Amazon forest and elsewhere. That is why I wonder whether the Government's amendment, welcome though it is, still allows too much room for such companies to get off the hook, and why I am glad that additional amendments have been tabled to strengthen this clause. The amendments would, for example, minimise the effect on the environment and not simply have regard to it, and would promote sustainable development.

I also welcome Amendment No. 87, which would require the Government to publish guidance on the duties of company directors. I hope that that would help those directors to clarify their responsibilities. Perhaps such guidance would reassure some of the noble Lords who spoke in the previous debate and make things clearer for them. I therefore look forward to hearing the Minister's response to the debate.

Photo of Lord Freeman Lord Freeman Conservative

My Lords, now that the House has taken a vote on Amendment No. 78, we believe that Amendment No. 79 is the right way forward. Doubtless there is a certain wry humour in the fact that the Attorney-General has heard one side of the argument for Amendment No. 78 and has now heard the other side of the compromise in the debate on Amendments Nos. 79A to 86. But we believe that the Government's amendment is the right way forward. The Attorney-General has explained the improvements, which we accept have been made. We will all reflect further on what has been said in this brief debate, and the Attorney-General will not be surprised to learn that I am very much in favour of Amendment No. 87.

Photo of The Earl of Sandwich The Earl of Sandwich Crossbench

My Lords, I support the noble Baroness's amendments because I am impressed by the technical arguments of the NGOs, with which I have worked for many years. We should be aware that there is a very strong lobby—I think that the noble Lord, Lord Judd, will agree—of environmental and development agencies acting together in favour of greater corporate responsibility. They greatly deplore the loss of the Operating and Financial Review, which was proposed by the Chancellor of the Exchequer and then removed. As a former board member of Christian Aid, which is part of the Trade Justice Movement, I recognise the importance of a coalition which combines these two wings—the greens and the aid lobby. This is a very rare combination in public life.

I know that Ministers are falling over backwards to get the wording right, but I feel that the government amendment is so weak as to be almost unnecessary, as the noble Lord, Lord Forsyth, said, and as many Conservatives agree. The Government would be making a mistake if they did not give a little more ground to the lobby in the interests of developing countries and those who seek to support them. Companies should at the very least be required to promote sustainable development, to report on the social and environmental impact of their work, to minimise any damage to local communities and to compensate those affected.

Further, companies should if necessary enable the victims to have access to justice in the UK if they cannot get redress in their own countries. Such a minimal degree of corporate responsibility will also, in my view, enhance the value and the reputation of the company—an argument on which I think the Conservatives would do well to reflect.

Photo of Lord Razzall Lord Razzall Spokesperson in the Lords, Trade & Industry 7:15 pm, 9th May 2006

My Lords, before the Minister responds, I join my noble friend Lady Northover in saying how much I welcome the amendments in the names of the noble Baroness, Lady Thornton, and the noble Lord, Lord Whitty. In a sense, it is a shame that we did not have a longer debate on these issues in Grand Committee. We spent 37 days—no, 13—in the Moses Room, and had the opportunity to have an extensive debate on this, but I well understand why some of these amendments have been tabled rather late. They do, I think, get the balance right between Amendment No. 79, which we broadly support, as the Minister knows, and some of the views expressed by the noble Baroness, who represents the interests of a large number of the NGOs, as she rightly said. I do hope that the Government will see to what extent they can take on board the points that she has made before the Bill finally passes to another place.

It will not surprise noble Lords that I end by being political. I say to the Tory Opposition—although I recognise that the noble Lord, Lord Freeman, is not speaking here for the leader of the Conservative Party—that being environmental or in favour of sustainable development is not simply about going to Norway with skis on or putting Zac Goldsmith or Bob Geldof on a commission. I will see how the Conservative Party votes on these issues in another place before I decide whether they are prepared to make hard choices.

Photo of Lord Goldsmith Lord Goldsmith Attorney General, Law Officers' Department, Attorney General (Law Officers)

My Lords, I thank all who have taken part in this short debate. I am particularly grateful for the welcome given to Amendment No. 79, and particularly to the noble Lord, Lord Freeman, who dealt with it very graciously in the light of the decision on the previous amendment. Everything that my noble friends, the noble Earl, Lord Sandwich, and the noble Baroness, Lady Northover, have said is powerful stuff; of that, there is no doubt. It demonstrates the balance that the Government have been trying to achieve between the powerful points they make and the other concerns we discussed in the previous debate. I shall deal with the amendments in turn, and shall explain the Government's attitude to them. There are a number of them, although, as the noble Lord, Lord Lea, said, that is to some extent the result of ingenuity and the attempt to avoid pre-emption, for which I congratulate him.

Amendment No. 79A would require the directors to take account of the factors listed, rather than to have regard to them. The intention may have been to impose a more onerous requirement. The clause creates a requirement to "have regard to", rather than to have some other consideration of the matters listed in subsection (3), so as not to diminish the overriding nature of the duty in subsection (1), which we intend to conflate with subsection (3). The words "have regard to" also reflect the wording used in Section 309 of the Companies Act 1985, to which I drew attention in the previous debate, requiring directors to have regard to the interests of the employees.

The amendment would also delete the words "amongst other matters". As I said in moving this amendment, those words are helpful, indicating that the list is not exhaustive. I would not want to see them go.

Amendments Nos. 79B, 79C and 79D would amend the list of factors by painting them in, if I can put it this way, more pluralist colours. There are three reasons why that would be wrong. First, the list of factors is based on those recommended by the Company Law Review and, as such, has benefited from lengthy consultation. Secondly, these words do not need to be added to make the point that both the company and, more widely, society will benefit from an enlightened approach. That is implicit in the clause. Thirdly, we are concerned that, in so far as the words would have an effect, they might confuse directors about what they should be seeking to achieve. The overarching objective of directors should be the success of the company, for the benefits of its members as a whole; that is a key part of the enlightened shareholder value concept. We do not want wording which leads to confusion on that point.

Amendment No. 79E is effectively a description of the case for enlightened shareholder value. That is unnecessary because, by having regard to the factors, directors will achieve long-term sustainable business success for the company. That is implicit in the clause. Amendment No. 79F is also unnecessary and likely to lead to confusion. This is perhaps the most substantial amendment, because it shifts the objective of the clause. It is important to recognise—we have said this before, and I am happy to repeat it—that having regard to something does not mean that a box-ticking approach is acceptable. It is meant to be more than mere window dressing. It is therefore right that weight is given to the individual factors. The problem with the amendment is that it would point the directors in two different directions. Its introductory words:

"In fulfilling the duty imposed by this section", point the directors towards the duty in subsection (1), of deciding what will promote the success of the company. However, the amendment would also require them, so far as was reasonably practicable, to promote the interests of the company's employees or minimise any adverse impact of the company's operations on the community and environment. That is just the situation which could lead directors into the difficulty of not being able to determine which of those objectives should have priority. The concept of enlightened shareholder value means that they need to properly have regard to those factors as I have indicated, but then to reach a judgment as identified by subsection (1).

Photo of Lord Clinton-Davis Lord Clinton-Davis Labour

My Lords, before the Minister goes on, is there some way in which the company could report on these matters without imposing a legal duty? Does the Minister agree that a report could envisage all these things?

Photo of Lord Goldsmith Lord Goldsmith Attorney General, Law Officers' Department, Attorney General (Law Officers)

My Lords, that is exactly what I was going to say; it is funny that the noble Lord should say that. This concerns the concept of OFR, which has been raised. I think that my noble friend Lord Sainsbury will be dealing with that at a later stage. I therefore pass the baton deftly to him. If the noble Lord, Lord Clinton-Davis, will remain patient, he will hear the answer.

I think I dealt last with Amendment No. 79F. I am sorry, it takes a few moments, but I should give a proper response to all the amendments, because powerful and important points have been made by my noble friends Lady Thornton and Lord Lea.

Much that I said on the non-pre-empting amendments applies to Amendments Nos. 80 to 85 to the same effect. Amendment No. 87 is the last one to which I must particularly refer to, although if my noble friends think that I have not dealt properly with any of the other amendments, we will do so. Amendment No. 87 is distinct. I was not surprised that the noble Lord, Lord Freeman, supports it, given what had happened before. I am happy to recommit the Government to the publication of non-statutory guidance on the statutory statement of director's general duties. I said that in Grand Committee, and am happy to repeat it here. We want to improve accessibility in this important area of financial activity, and I share the view of others that it would therefore be helpful to have guidance, playing a role in achieving that aim. I am also happy to give a commitment that the Government will consult on that guidance.

I am therefore content to accept the substance of the amendment. I take issue with my noble friend simply on whether it is necessary to put it in statutory form. Having raised the point, and had those assurances from the Dispatch Box, I hope my noble friends will not think it necessary to press for an express statutory reference but, rather, to accept the promises that I have made on the Government's behalf. I hope that covers the amendments that have been spoken to, and repeat my thanks for the important points made by others who contributed to the debate. I commend Amendment No. 79 to the House.

Photo of Lord Lea of Crondall Lord Lea of Crondall Labour

My Lords, I think you have to move your amendment first.

Photo of Baroness Pitkeathley Baroness Pitkeathley Labour

My Lords, Amendment No. 79 has been moved, and the noble Lord's amendments have been spoken to.

Photo of Lord Lea of Crondall Lord Lea of Crondall Labour

My Lords, I am grateful to the noble Baroness, Lady Northover, and the noble Lord, Lord Razzall, for their support. I agree that when the Bill goes back to the other place, it will be interesting to see the degree of enthusiasm that David Cameron shows towards the principles of these amendments.

Photo of Lord Lea of Crondall Lord Lea of Crondall Labour

That is absolutely right, my Lords. At the moment, however, it falls to me to thank my noble and learned friend the Attorney-General for his explanation. We will give this further thought. I beg leave to withdraw the amendment.

Amendment No. 79A, as an amendment to Amendment No. 79, by leave, withdrawn.

[Amendments Nos. 79B to 79F, as amendments to Amendment No. 79, not moved.]

On Question, Amendment No. 79 agreed to.

[Amendments Nos. 80 to 87 not moved.]

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, I beg to move that consideration on Report be now adjourned. In moving this Motion, I suggest that Report stage begin again not before 8.30 pm.

Moved accordingly, and, on Question, Motion agreed to.