Clause 162

Company Law Reform Bill [Lords] – in a Public Bill Committee at 6:15 pm on 11th July 2006.

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Duty not to accept benefits from third parties

Photo of John Bercow John Bercow Conservative, Buckingham

With this it will be convenient to discuss amendment

No. 154, in clause 162, page 71, line 44, at end add—

‘(6) This duty is not infringed if the acceptance of the benefit is approved by the board of the company.’.

Photo of Jonathan Djanogly Jonathan Djanogly Shadow Minister (Business, Innovation and Skills), Shadow Solicitor General, Shadow Minister (Justice), Shadow Solicitor General

The clause introduces a duty on directors not to exploit their position for personal benefit. They will be liable only if accepting the benefit would give rise to a conflict of interest, in which case they will be caught under that duty and that in clause 159. By virtue of clause 156(2)(a), the duty is extended to former directors in relation to

“things done or omitted by him before he ceased to be a director.”

Although that duty is clearly based on the common law duty to account for any secret profit, there is no exact corresponding duty to the duty in this clause.

Lord Freeman moved a probing amendment toleave out this clause. It aimed to obtain a definition of benefit and to find out whether an indemnity to a director from a third party relating to the performance of his duty or non-financial benefits would be caught by the clause. Lord Goldsmith responded that benefit under the clause covers all forms of benefit given to a director as a result of him being a director. We do not think that the Lords amendment needs to be raised again, but we have concerns and have therefore tabled other amendments.

The Law Society’s parliamentary brief raised the point that a director should be able to obtain approval of a proposed benefit from the board or shareholders. Furthermore, where a joint venture company has been established, benefits provided by one of the parties, who may not be an associate for the purposes of subsection (2), to a director may be caught under the prohibition. Norton Rose’s briefing note states that the prohibition in clause 162 will give rise to debate and some uncertainty over what benefits may be regarded as likely to give rise to a conflict. Directors will therefore need advice as to what benefits may be accepted. I should be grateful if the Solicitor-General told us whether he has given any thought to that matter.

The CBI fears that the clause may make directors reluctant to delegate authority to committees. Amendment No. 154 would therefore insert an approval mechanism. Finally, we wonder whether the clause should apply to de minimis amounts. MPs have limits beneath which they do not need to declare sums. Why should not directors have that? We suggest excluding small amounts and £1,000 is proposed purely on a probing basis.

Photo of Mike O'Brien Mike O'Brien Solicitor General, Law Officers' Department 6:30 pm, 11th July 2006

Our approach to theconflict of interest duties reflects the approach by the company law review. In the words of the review, it strikes the right balance between encouraging efficient business operations and the take-up of business opportunities on the one hand and providing effective protection against abuse on the other. The reviewwas rightly concerned that a strict no-conflict rulemight fetter entrepreneurial and business start-up activity by existing company directors. It is therefore recommended that, in relation to the personal  exploitation of corporate opportunities, it should be possible for the company’s rights to be waived by the board acting independently of any conflicted director. That approach was followed by clause 161, which introduces the new statutory mechanism for the authorisation of conflicts of interest by those directors without an interest in the conflict.

The same arguments do not apply in respect of the acceptance of benefits from third parties in the clause. That is why the review rightly did not recommend that independent directors should be able to authorise acceptance of benefits from third parties. The issue is not the relative seriousness of the abuse, although the acceptance of a bribe by a director can certainly be a serious abuse. Rather, it is about whether other considerations, particularly those relating to the need to encourage entrepreneurial activity and business success, counterbalance the need to provide effective protection for companies against the risks of conflicts of interests by their directors. Those other considerations do not arise to the same degree when it comes to the acceptance of benefits from third parties which should go to the company. Therefore, the acceptance of such benefits should not be left to the self-regulation of the directors themselves.

The hon. Member for Huntingdon asked about benefits. To some extent, his question was dealt with by the Attorney-General in another place. A benefit for the purposes of this duty includes benefits of any description, including non-financial benefits. In using the word “benefit”, we intend the ordinary dictionary meaning of the word. The “Oxford English Dictionary” defines it as a favourable or helpful factor, circumstance, advantage or profit.

In Cronin v. Grierson, the courts had to consider the meaning of the word “benefit” as used in section 2(3) of the Betting, Gaming and Lotteries Act 1963, which states:

“A player’s success at the game shall not entitle any person to, or to exchange any prize or token for, any benefit other than those provided for by subsection (2) of this section.”

In that case Lord Morris said that a successful player who won the jackpot was given preferred terms for further playing and as a result was most likely or almost certain to have further gain. He added that that was a benefit. Lord Upjohn said that benefit is a word of wide import and that in this context it means no more than advantage. He said that he could not construe it as being limited to a tangible, corporeal advantage in the sense of a prize token or article. Therefore, while the meaning of the term will ultimately be a matter of statutory interpretation for the courts, it is intended to include, and we consider that it does, non-financial benefits.

As far as the de minimis rule is concerned, we do not agree that it is necessary. Financial thresholds are by their nature arbitrary and sit uneasily with the function of the general duties, which are set out as general principles governing the obligations of directors. There is a general duty owed by the director to a company and as such it is concerned with the underlying harm that will be done to the interests of the company or the risk of such harm occurring.

There is no financial threshold in the current law. The current law does not seem to need one and neither the Law Commission nor the company law review  recommended that there should be one. The current law operates a much more sophisticated test based on the risk of a conflict of interest. That is how subsection (4) operates. A director may accept a benefit if it cannot reasonably be regarded as being likely togive rise to a conflict of interest in the specific circumstances of the individual case. This is not simply a matter of the financial value.

I happen to have had a dinner with the hon. Member for Grantham and Stamford some years ago. He will recall the incident because it featured in the newspapers. At one point I remember he bought a very expensive bottle of wine. Some people might regard that as an inducement. However, most people would regard the purchase of a mere meal as not being an inducement or bribe of any sort. But wines varyin price. They can be worth many hundreds andindeed thousands of pounds. What is a benefit? The circumstances must dictate that.

Mr. Djanoglyrose—

Photo of Mike O'Brien Mike O'Brien Solicitor General, Law Officers' Department

I give way if the hon. Gentleman is really interested in this wine question.

Photo of Jonathan Djanogly Jonathan Djanogly Shadow Minister (Business, Innovation and Skills), Shadow Solicitor General, Shadow Minister (Justice), Shadow Solicitor General

I am. The reason why is because it is rather proving my point. Why have all the complication of deciding whether a wine is an expensive bottle of wine and whether it will influence people or not? Why not just have a de minimis level under which it is considered unnecessary to go into what the Solicitor-General called the sophisticated argument?

Photo of Mike O'Brien Mike O'Brien Solicitor General, Law Officers' Department

The hon. Gentleman is clearly a discerner of fine wines on the basis that he can afford them. A small company might well find that £1,000 was quite a substantial inducement to a member of a company or a director of a company. Companies vary in size. One thousand pounds may be a mere de minimis amount to him. It may be simply the price of a bottle of wine to him but it will not be for most people. For many people, particularly in a small company, £1,000 is not minimal, but significant. Therefore, it should be for the company to determine in the particular circumstances it faces whether a benefit was one that should concern it.

A director may benefit if it cannot reasonably be regarded as giving rise to a conflict of interest in the specific circumstances of the individual case. Such benefits with a small monetary value may be effective bribes because they take account of the director’s particular interests or passions. For example, the hon. Member for Huntingdon likes wine. I know that the hon. Member for Grantham and Stamford does. A ticket for a one-off performance or a carefully chosen gift for an avid collector of wine may be quite an inducement. I therefore think that we should not have the de minimis clause; we should leave it to the company to consider its own circumstances.

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

Does not the Solicitor-General consider that there might be some merit in a combination of the two proposals? For very  small amounts, the directors might well be in a good position to give authorisation. Under the ratification provisions of clause 222, the shareholders are required to give authorisation. That seems to be a rather cumbersome procedure for the authorisation of asmall deal.

Photo of Mike O'Brien Mike O'Brien Solicitor General, Law Officers' Department

If the company wants to set that out in its constitution or to change things, it is able to take the steps necessary to authorise a particular approach by directors.

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

That raises a general issue about the degree to which the rules in the Bill are mandatory. Clause 154, which we did not discuss, is understood to be mandatory because all the clauses in the Bill are considered mandatory unless otherwise stated. The Solicitor-General’s comments seemed to go against that.

Photo of Mike O'Brien Mike O'Brien Solicitor General, Law Officers' Department

A company will need to be able to determine whether a director’s benefits present a problem; it might be concerned only about some benefits. Providing that is all done openly, there will not be a problem that we need worry about. But the company must have the right to intervene if it is concerned about the benefits that a director has obtained.

The de minimis provision presents a technical issue. What is a benefit of £1,000? What does that mean? Many benefits might not be in cash or have a clear monetary value. Who would be responsible for assessing the value of such benefits? The third party might choose also to pay the benefit in instalments. What is the position if a director accepts a payment from a third party of £950 one week, and another of equal value the next week? It is not entirely clear. There are definitional issues here.

The proposal by the hon. Member for Huntingdon would produce all sorts of threshold issues and create fresh opportunities for those who wish to evade their directors’ duties. It would be possible to respond by introducing detailed anti-evasion provisions, but that would further complicate an area of law that we are trying to codify. We do not want to complicate that further, so let us leave out the de minimis provision and ensure that companies can determine the best approach for dealing with conflicts of interest. The duty not to accept benefits from third parties should remain on directors.

Photo of Jonathan Djanogly Jonathan Djanogly Shadow Minister (Business, Innovation and Skills), Shadow Solicitor General, Shadow Minister (Justice), Shadow Solicitor General

I am not entirely sure what the Solicitor-General was going on about when referring to fine wines—I think I got lost on about the third bottle.

From the contributions that I have heard, I am not sure that we have reached the right approach. As the hon. Member for Cambridge pointed out, the clause could probably be improved by being more flexible. The Solicitor-General was not necessarily without reason in querying whether the drafting of my amendments was as fine tuned as it could have been. However, I have made my point. We will think further about the matter over the summer. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 162 ordered to stand part of the Bill.