Company Law Reform Bill [HL]

Part of the debate – in the House of Lords at 5:15 pm on 23 May 2006.

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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) 5:15, 23 May 2006

My Lords, I rise to speak to the two amendments in my name in this group. At Report I told the House that we would bring forward amendments to clarify the position on the liability of directors and issuers, relating to narrative reporting and transparency directive disclosures, as soon as possible. I could not commit firmly to doing so at Third Reading. Much depended on the responses of interested parties to the draft clauses, issued for comment on 3 May, as to what measures the Government might introduce. I am pleased therefore that we have been able to table these new clauses in time to give the House the opportunity for debate before the Bill passes to the other place. In doing so, I would like to record our appreciation for those who commented on the original draft clauses so quickly. This helped us address initial concerns and refine the clauses accordingly into what we have introduced to the House.

I note that the noble Baroness, Lady Noakes, tabled our original draft clause as an amendment, but has now withdrawn it; she will have seen that we have moved forward somewhat since the draft in light of comments received. I am happy that the noble Baroness seems to be in agreement with our approach. Let me now expand on that approach before setting out clause details. These provisions provide directors and companies with a degree of certainty about the extent of their liability, so as not to inhibit transparent and meaningful narrative reporting. The clauses should be read and understood as part of the wider provisions in the Bill, dealing with directors' duties and companies' reporting obligations. They deal only with directors' liability for the content of narrative reporting and with issuers' liability to investors for the content of reports or statements required to be made public under the transparency directive. They do not deal with any liability that may arise in respect of the underlying matters covered by the report. In other words, it is about what is said in the reports, not about liability for the underlying actions of directors. Further, it is addressed to issues of compensation and does not affect regulatory sanctions which may be relevant, such as those of the Financial Reporting Review Panel and the Financial Services Authority.

In developing a civil liability regime, the Government seek to ensure that the scope of liability is reasonable in relation to expectations, the existing law and the law as it will be after the implementation of the transparency directive. The purpose of doing so is to encourage meaningful and open reporting. The Government are also anxious not to extend unnecessarily the scope of any duties which might be owed to investors or wider classes of third party, in order to protect the interests of company members, employees and creditors.

I turn now to the detail of both clauses. The key differences between them concern the kind of reporting that is covered, who should be liable—the directors or the company—and to whom they are liable. Thus the new clause before Clause 444 is concerned with liability for reporting under this Bill. It specifies that the liability provisions only apply to statements made in the directors' report, the directors' remuneration report, or summary financial statements derived from them. The clause limits the directors' liability to the company only. In other words, directors will not be liable to individual investors or third parties. This in effect codifies the Caparo principle. That principle is reinforced by Clause 396(2), which specifies that the purpose of the business review is to inform the members of the company and help them assess how the directors have performed their duty under Clause 155 to promote the success of the company.

The clause also specifies that the directors will only be liable in certain circumstances; that is, for untrue or misleading statements or omissions made in bad faith or recklessly, or where there is deliberate and dishonest concealment. It is the liability for reliance on the report that the clause is concerned with not, for example, liability for defamation. Subsection (4) makes clear that third parties such as auditors will remain liable to the company for negligence in preparing their own report.

I now turn to the second amendment in the group. We propose to insert a series of revised clauses in a new Part 33A, including other provisions which comprehensively implement all transparency obligations. Within those provisions, we propose to insert a new Section 90A into the Financial Services and Markets Act 2000, establishing a regime for civil liability to third parties by companies admitted to trading on a regulated market in respect of disclosures under the transparency directive.

No liability on the part of issuers or their directors has been found to shareholders and other investors in respect of information communicated to them and subsequently made public by the issuer. Substantial changes in recent years to the law relating to the operation of financial markets and the obligations of the issuer to the market, culminating in Articles 4 to 7 of the transparency directive, have cast doubt on that position and lead to a position of uncertainty as to whether there is any liability and, if so, what and to whom any relevant duty is owed.

The transparency directive requires that member states must ensure that their laws, regulations and administrative provisions on liability apply to issuers, or the persons responsible in the issuers, for the information required to be disclosed. Read with the relevant recital, those provisions give considerable flexibility to member states. As the wording of the directive implies a presumption towards liability to a wider class of people than the position in the UK under Caparo, it is desirable that this uncertainty be clarified now in respect of obligations arising from the transparency directive.

The clause makes issuers admitted to trading on a regulated market liable in respect of the periodic information required to be disclosed under Articles 4, 5 and 6 of the directive as given effect by FSA rules. That would include annual and half-yearly financial statements and management reports, the sign-off by directors or other responsible parties, as well as interim management statements. Issuers would be liable where the disclosures contained statements that were misleading, false or deceptive at the time the statements were made, and such statements were made in bad faith or recklessly. Issuers would only be liable to holders of securities in the issuer who had reasonably relied on the statements for investment purposes and suffered loss as a result.

As I said earlier, we are grateful to the people who have commented on the earlier draft of these clauses. They raised a number of concerns, some of which resulted in us making changes to the clauses. Let me address some of the key points raised with us. First, have we set the right bar for liability? The Government's objective is to encourage meaningful, strategic narrative reporting. We need to ensure appropriate standards of care and discipline in drawing up the directors' report. Taken together with the directors' duty to exercise reasonable care, skill and diligence under Clause 157, which applies equally to the way in which directors fulfil their duty in reporting, we believe that we have done so.

Secondly, several commentators have asked about liability for information included in voluntary operating and financial reviews. We see no reason why information that would have been in a voluntary OFR could not be included in the statutory business review, on the basis that it contributes to a balanced and comprehensive analysis of the company's business performance. If companies include voluntary OFR information by clear cross reference, the intention is that this would be covered by the new clauses. As now, directors may put their own disclaimers on any reporting that goes beyond statutory requirements.

Thirdly, business and legal interests have suggested that the scope of the liability regime should be expanded to cover the liability of issuers in respect of non-transparency directive disclosures, such as disclosures under the market abuse regime. As I indicated only moments ago, the purpose of these clauses is to establish the civil liability position of issuers arising from disclosures required by the transparency directive, which is why we have focused only on reports required under the directive. This is not intended to affect the regime for the enforcement of the market abuse directive.

Representations have been made that liability in damages in respect of disclosures required by the market abuse regime, which will be included shortly afterwards in the material protected by the transparency directive regime, needs to be treated in a similar way. At this stage, we are not convinced that that must be addressed, but there is time for further representations to be made.

The fourth concern is the risk of issuers in UK-regulated markets being sued in other EU jurisdictions under the national law implementing the transparency directive. The Government's preference is that issuers should be sued primarily in the jurisdiction for which they have opted as their home member state for the purposes of the prospectus directive and transparency directive. The Government will continue to examine how such an outcome might be achieved, recognising that this matter is governed by EC law.

We have worked hard to produce these clauses in a very short time and we think that they are in reasonably good shape. We appreciate that people have had only a very short time to comment on them and we are grateful for the comments received. We thought it important for this House to have the opportunity to debate the clauses before passing the Bill to the other place. Of course, if anyone has further comments, we will give them very careful consideration as the Bill progresses. I beg to move.