Clause 138

Company Law Reform Bill [Lords] – in a Public Bill Committee at 1:00 pm on 20th July 2006.

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Enjoyment or exercise of members’ rights

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

I beg to move amendment No. 71, in clause138,page61,line31,leave out from beginning to ‘deemed’ and insert

‘Where a company is entitled by virtue of paragraph 7(2) of Schedule 7 to use electronic communications, the company is then’.

Photo of John Bercow John Bercow Conservative, Buckingham

With this it will be convenient to discuss the following: amendment No. 74, in clause138,page61,line31,leave out subsections (1) to (3) and insert—

‘(1) The Secretary of State shall by regulations, make provision to ensure that a nominated person, where he—

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

(b) retains the right to transfer or otherwise dispose of the whole or part of that person’s beneficial interest in the company;

(c) has elected to—

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

(ii) enjoy or exercise all or any specified rights of the member in relation to the company if he so wishes; and

(d) is entitled to—

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

(ii) enjoy or exercise all other rights of the member in relation to the company.

(2) Those regulations shall apply, in particular, to the rights conferred by—

(a) in the case of subsection (1)(a)—

(i) sections 268 and 270 (right to be sent proposed written resolution);

(ii) section 286 (right to notice of general meetings);

(iii) section 399 (right to be sent a copy of annual accounts and reports); and

(b) in the case of subsection (1)(b)—

(i) section 269 (right to require circulation of written resolution);

(ii) section 279 (right to require directors to call general meeting);

(iii) section 290 (right to require circulation of a statement);

(iv) section 299 (right to appoint proxy to act at meeting);

(v) section 313 (right to require circulation of resolution for AGM of public company); and

(vi) all such other rights (not within subsection (1)(a)) as a member would otherwise enjoy (in accordance with any provision of the Companies Acts).

(3) The regulations referred to in subsection (1)—

(a) shall be made by statutory instrument before 1st May 2008, and

(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.’.

Amendment No. 68, in clause138,page61,line31,after ‘companies’, insert ‘whose shares are’.

Amendment No. 251, in clause138,page61,line31,after ‘companies’, insert ‘whose ordinary shares are’.

Amendment No. 69, in clause138,page61,line34,leave out paragraphs (a) and (b) and insert—

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

(b) enjoy or exercise all other rights of the member in relation to the company’.

Amendment No. 70, in clause138,page62,line3,leave out subsection (3) and insert—

‘(3) This applies, in particular, to the rights conferred by—

(a) in the case of subsection 1(a)—

(i) sections 268 and 270 (right to be sent proposed written resolution);

(ii) section 286 (right to notice of general meetings);

(iii) section 399 (right to be sent a copy of annual accounts and reports);

(b) in the case of subsection 1(b);

(i) section 269 (right to require circulation of written resolution);

(ii) section 279 (right to require directors to call general meeting);

(iii) section 290 (right to require circulation of a statement);

(iv) section 299 (right to appoint proxy to act at meeting);

(v) section 313 (right to require circulation of resolution of AGM of public company); and

(vi) all such other rights (not within subsection 1(a)) as a member would otherwise enjoy (in accordance with any provision of the Companies Acts).’.

Amendment No. 250, in clause138,page62,line3,after ‘rights’, insert

‘to attend a general meeting and to vote at it, and’.

Amendment No. 72, in clause138,page62,line19,at end add—

‘(5) For the purposes of section 138 of this Act, the nominated person shall include only those individuals, or their representatives, where:

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

(b) the nominated person retains the right to transfer or otherwise dispose of the whole or part of that person’s beneficial interest in the company; and

(c) the nominated person has elected to

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

(ii) be able to enjoy or exercise all or any specified rights of the member in relation to the company if he so wishes.’.

Amendment No. 73, in clause138,page62,line19,at end insert—

‘(6) A member may only nominate a person whom the member knows or has reasonable cause to believe to be interested in the shares in relation to which the nomination will operate, or a person specified by that person.’.

Clause stand part.

Government new clauses 36 to 44.

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

We move on to part 9, “Exercise of members’ rights”. The list of amendments gives some indication of the interest that all parties take in the provisions. They have proved to be some of the most controversial and widely reported provisions in the Bill. The exercise of members’ rights is an important issue, and the Conservative party feels strongly about it.

The position has moved on significantly since we tabled the amendments. I shall address the issues in the context of the Government’s new clauses, which we welcome and which form the substantive position for debate today. In our view, there should be a link between a person who has chosen to invest in a company’s shares and that company. Once a person invests his money in a company, a line of trust is created; it is a thread that runs directly between the company and the person who has chosen to risk his money by investing in it. The law should acknowledge and respect that.

There are myriad ways of investing one’s money in a company. While it is still possible to buy shares in one’s  own name, it is increasingly common, especially among small investors, to arrange instead for the shares to be held in the name of a nominee. However, where group arrangements are used, it is often the case that a nominee account holder is put down as the legal owner of the shares, whereas the beneficial or actual owner of the shares is somebody quite different—the person who has paid money to invest in the company rather than that nominee or broker.

Let me give an idea of the extent of the practice by mentioning some statistics. We are told that nearly 50 per cent. of all private shareholdings are now administered by nominees. Whereas there are 26 million certified shareholdings, there are now 24 nominee-based shareholdings. It is estimated, therefore, that £100 billion-worth of share capital is held in that way. The owners of those 24 million shareholdings held in nominee accounts should benefit from shareholder democracy. At present, they have no rights in the companies in which they have chosen to invest money. They cannot vote on matters that are normally voted upon by shareholders, nor do they have a right to receive any of the information that is normally received by shareholders.

The Government have now gone some way towards heeding our calls, but it is only fair to set out the views to those who have campaigned hard on both sides. Over the past 20 years, while shareholder groups such as The Share Centre, the United Kingdom Shareholders Association and the Association of Private Client Investment Managers and Stockbrokers have lobbied for such enfranchisement, registrars and various corporate groups have lobbied against it. Although many of the briefings that I have received relate to the old drafting of the clause, the groups’ points are still pertinent. We have received a great deal of information from a wide range of companies and groups that feel strongly. The CBI and some of its members have expressed concerns about the clause in relation to indirect investors and have mentioned the costs and burdens that they feel could be imposed on listed companies should it come into effect.

We have listened carefully. Mechanisms are already in place for beneficial shareholders to choose to vote in some circumstances, and more and more publicly listed companies place their annual reports and other information on their websites. Many of the companies to which we have spoken have indicated that they would be happy to provide information to any beneficial shareholder who might contact them. However, although systems are in place, we need to do more to encourage active shareholder participation. A representative of one major public limited company told us that the clause was not necessary because few of the private investors in his company vote. We would support an update in the law because the corporate environment is not healthy; private investors do not engage enough in the running of what are, essentially, their companies. In some limited companies, only 7 per cent. of private investors vote. That should be just as unacceptable as falling national and local electoral votes.

Photo of James Brokenshire James Brokenshire Conservative, Hornchurch

My hon. Friend makes a powerful point about the need for greater shareholder democracy. Does he share my dismay that, at plc  AGMs, the advisers often significantly outnumber the shareholders? That starts to bring the process into disrepute, so there is a need to encourage greater participation, engagement and involvement of shareholders in their companies.

Photo of Jonathan Djanogly Jonathan Djanogly Shadow Minister (Business, Innovation and Skills), Shadow Solicitor General, Shadow Minister (Justice) 1:15 pm, 20th July 2006

My hon. Friend makes a good point. We have all been there, and that is often the norm for small and medium-sized listed companies. However, while that situation is typical, we should not accept it; we want to move away from it. The Conservative party stands for increased shareholder democracy. In an ideal world, all private shareholders would use the avenues there are to obtain the information available, but in practical terms, unless they are given the choice to opt in, few will. In an ideal world, all issuers would take a positive interest in the beneficial owners of their shares and give them the option to receive information. Unfortunately, that does not occur. A voluntary system is in place and it does not work very well. Electronic communication and CREST are delivering significant cost-savings to companies, but the success of technology should not mean that members’ rights are destroyed. The system needs to be adapted to cater for technology.

Many of the anxieties that businesses have expressed about the clause concern the cost to the issuer. We believe that it will not be as great as many fear. Thevast majority of communications, for voting or information, will be electronic, which is quick, easy and far cheaper than conventional postage delivery systems. As issuers already send electronic communications to those with a full shareholding who want them, it would not be a significant cost burden to increase the volume of those communications to take into account those with a beneficial interest.

There have been various criticisms from the Institute of Chartered Secretaries and Administrators, the Royal Institution of Chartered Surveyors, the Law Society and the Institute of Directors. The ICSA expressed reservations, including concerns about the practical implementation of the new system and the lack of obligations imposed upon the member, but its primary concern is about cost. The Law Society expressed anxiety about the legal workings of clause 138. It is important to hear from the larger brokers themselves, and I mention one in particular. We received an e-mail from the Halifax, on behalf of Halifax Share Dealing Ltd which states:

“We are delighted with the new clause 138. It has proposed a Government amendment to the Company Law Reform Bill... covering shareholders’ right. HSDL is one of the UK’s largest execution-only stockholders with regulatory responsibility for a number of nominee companies in which we hold shareholdings on behalf of 2.3 million retail investors. Whenever and where possible we try to obtain for our customers the same rights as they would have if they were registered in their own right. However, to do so we have to depend on the whim of registrars and regrettably all too frequently they are not willing to help us provide these rights which we strongly believe that our customers, who are investors in these companies, are entitled to. We have campaigned long for these rights and as you are aware we are part of the Shareholders’ Rights Alliance.”

The e-mail ends by saying:

“On behalf of our customers and those of other nominee operators it is our fervent hope that the amendment will remain  in place and that the moral right of investors will prevail over the profit motives of a small number of interested parties.”

The depth of feeling on the issue runs deep; only a couple of weeks ago my hon. Friends on the Committee, the shadow Secretary of State and I joined a rally just outside Parliament supporting the people campaigning for these rights. We are glad, and many shareholders are relieved, that the Government have seen the right way forward on the issue and tabled a new set of amendments to the Bill. Having said that, they were tabled very late in the day, which allowed little time for a contribution on the clauses.

I shall explain briefly why we do not support the voluntary extension of shareholders’ rights. Our view is that when possible the industry should lead without the need for the Government to legislate. However, in this case, if the extension of shareholders’ rights was allowed to be voluntary for companies, the status quo would simply remain. The shareholder groups we have spoken to have been lobbying for nominee shareholder enfranchisement for nearly 20 years. In that time, relatively few companies have chosen to extend normal shareholder rights to nominee shareholders. If little has changed in the last 20 years there seems little reason to believe that it will change much in the next 20 years before this House considers company reform again.

We are glad that the Government are coming round to our point of view, but I want to note some of the problems that have arisen as a result of the measure, because ultimately it has become reactive law, made somewhat on the hoof. Although we support and welcome the reversal, it should have come sooner so that all interested parties could have been given a proper amount of time to consider this important issue.

We were provided with draft clauses on 11 July and the Minister set out the significant consultation that there has been on the proposals. Although it is probably going too far to say that every party has everything it wanted, we are much closer to consensus than we might otherwise have been. We recognise the Minister’s efforts in that regard.

The Minister will recognise that we will need to hear what interested parties have to say. Although we reserve our right to return to this matter on Report, the measure is only possible in relation to detail, rather than form, which is broadly acceptable. However, I should like to mention some specific points.

Yesterday afternoon, we received comments from the Law Society, which moved very fast, dealing with various issues that the Government will need to consider over the summer. Perhaps the Minister has not received those comments yet; although I am sure that she will, I shall mention some of them so she can hear what the Law Society is saying. I have not had time to consider those comments in detail myself, so that is another thing to do in the summer.

The Law Society, in respect of clause 2(3), says:

“The definition of ‘information rights’ refers to a right to receive ‘a copy of all communications that the company sends to its members generally’. It is not linked to the information rights that the shareholder, as a matter of fact, possesses. For example, articles may include a provision stating that overseas shareholders are not entitled to notices of meetings unless they provide an address for communications in the UK.”

In respect of clause 2(5), it says:

“In Clause 2(5)(a), replace ‘(2)(a)’ with ‘(3)(a)’. In Clause 2(5)(b), replace ‘(2)(b)’ with ‘(3)(b)’.”

I do not expect the Minister to respond immediately to these technical points; I am putting them on the record.

The Law Society says that clause 3

“should provide that a nomination ceases to have effect if the nominated person ceases to own the shares beneficially. Equally, it seems that the member or nominated person should be required to notify the company of this situation.”

On clause 3(2) it says:

“It is not clear whether in the case of shares held by more than one member, all those members need to request the nomination to be terminated. Clause 3(2) should provide that the member or nominated person must notify the company of the termination of a nomination.”

The Law Society says that the provisions in clause 4

“do not encompass the concepts in the articles of association for how notices are served and communications made to shareholders which would also need to apply to the information rights of nominated persons.”

It wants to

“Delete the last reference to ‘appointed’.” in clause 5(2)(a).

On clause 6, the Law Society states:

“The rights introduced by this clause are highly likely to give rise to unforeseen practical difficulties and issues in relation to corporate actions. Clause 6 is also unclear. Does a member to whom the section applies ‘exercise his rights’ within the meaning of the section...only when he exercises all the rights directly himself...only in respect of those of the rights which he elects to exercise directly himself; or...also in respect of rights which are exercised directly by persons whom he has nominated?

If a member, without having made any nomination, exercises his rights in two different ways, does he automatically fall within this clause? If so, this should be made clear.

If the clause also applies to a member (A) who has nominated another person (B) in respect of certain of his shares, (a) does the member only ‘exercise his rights’ if he exercises them in respect of the remainder of his shares, or (b) does the member also ‘exercise his rights’ in respect of rights exercised by B?”

In clause 6(1), it would like to

“Replace ‘person’ with ‘member’.”

On clause 7, the Law Society states:

“At clause 7(2)(e) we question whether the computation of the total amount of the sums paid up will be mathematically correct. The members’ request must already have the support of ‘100 persons’...It is hard to understand, therefore, why the calculation requires the division of the relevant aggregate nominal value by the number of persons named in the request which will in any event ‘name’ the registered holder.

We also envisage uncertainties arising under Clause 7(2)(c)(ii) as to when the nominee holds shares “in the course of a business’”.

I have put those points on the record. We are where we are in terms of timing, but the Minister will have my party’s full co-operation in making clause 138 work, if the changes that are required arise.

Under the new clauses as they are currently drafted, there will be no compulsion on a broker to provide the relevant services. The relationship between the broker and the company, rather than the company and the customer, which is envisaged in the clauses, means that there is no compulsion on the broker to provide the  services to shareholders. In reality, however, we appreciate that it will be for the shareholder to choose a broker who supplies such services. That needs to be put on the record.

It is also worth noting that the default position for the delivery of information under the new clauses is electronic delivery. From the cost perspective, that is the right approach, but we must consider the remaining issue of the cost to the company if a beneficial shareholder chooses to opt in for hard copies of information, rather than electronic copies. I would appreciate it if the Minister confirmed that her Department will keep that aspect under review.

The Government originally used the issue of cost against the approach that they are now taking; the implementation of the system may well involve increased costs to companies, especially if many shareholders choose to opt for hard copies of the information. However, I put it on record that we believe that those marginally increased costs will be greatly outweighed by the savings that companies have borne from the use of nominee shareholders and the CREST share trading system. Again, we agree that the issue should be reviewed in due course.

The electronic CREST system is used in the vast majority of those share owning situations, whether the shares are bought by means of an individual savings account, personal equity plan or other similar arrangement. That saves a lot of time and money, as all the information is held electronically. The enfranchisement of beneficial shareholders is a natural progression in the modernisation of our company law. Nominee accounts have brought a great deal of efficiency to the UK stock market and enabled more electronic trading and settlement.

If we put the estimated £6 million per annum that this new system will cost all UK companies against the savings brought about by CREST, it seems clear that we are evolving the UK shareholding system for very little real cost. That is an essential development if we are to have a participative public financial market.

The Government have not introduced any criminal sanctions into this part of the Bill. We accept that that is right in the circumstances; indeed, it is a pity that the Government have not taken that less heavy-handed approach to other parts of the Bill. We also recognise the fact that stockbrokers have the right and ability to split votes of shares that they hold as a block. That is the right approach. Previously, the Government had argued that the increasingly complex investment claims in place precluded a one-size-fits-all approach to the enfranchisement of indirect shareholders. At thetime, they missed the point that the vast majority of individual shareholders who are currently disfranchised hold their shares through nominee operators. The names of those operators appear on the register of members; it is not a complex investment chain.

I should also point out that under the Bill the company will need a list of people who require information. We should like to receive confirmation from the Minister that the law provides for that list to be kept confidential and that the list will not be used by the company for other or inappropriate reasons. The company will send out a letter explaining that people’s rights will need to be actioned through their nominees.  Will that letter be in the standard Financial Services Authority format? Has the Minister devised the law in conjunction with the FSA? If she has not, will she confirm whether that will be done?

We also note that the provisions apply only to companies operating in regulated markets. They will not apply to unregulated markets such as the alternative investment market or the off-exchange market. Will the Minister justify why she took that decision? Will the Government inform us about when they intend to review the position in due course?

Overall, I should like to commend the Government for finally seeing sense on the issue and coming round to our point of view. I also recognise the swift work that the Minister and her officials, having made the decision to change the Government’s approach, did to produce the clause and consult relatively widely on it in the short time available.

The rights of shareholders are important, and not just within the narrow definition of allowing them to receive information and votes. Shareholder rights and responsible shareholder activism are the central drivers of increasing corporate social responsibility and ethical behaviour. An important step in furthering those goals has been taken today. There is still work to be done to fine-tune the clauses. As I said, I shall be happy to discuss that with the Minister over the summer. For now, I shall recommend that my hon. Friends support the Government’s amendments.

Photo of Quentin Davies Quentin Davies Conservative, Grantham and Stamford

May I take up my hon. Friend straight away on his point about the lack of criminal sanctions in the clause? I read the clause to mean that articles of association are deemed to have those provisions, whether they are there or not, and that the redress for nominee or beneficial shareholders—

Margaret Hodgeindicated dissent.

Photo of Quentin Davies Quentin Davies Conservative, Grantham and Stamford

But the clause states:

“All companies admitted to trading on a regulated market are deemed within the company’s articles to have a provision” and so on. As I understand it, the clause deems that certain provisions exist in a company’s articles of association; they are there for the purposes of the law, whether the company bothers to put them in or not. The redress to nominee shareholders, beneficial shareholders or anybody else against the provisions not being observed is simply the sanctions against directors who act in breach of the articles of association already dealt with in an earlier part of the Bill. The Minister shook her head, so if my understanding is wrong, I hope that she will intervene on me or explain the position to the Committee. We should not go any further without understanding what the Bill purports to say.

Photo of Margaret Hodge Margaret Hodge Minister of State (Industry and the Regions) 1:30 pm, 20th July 2006

I shook my head because from our discussions with stakeholders, it was clear that we would not make the provision a criminal sanction. I am trying to find the provision—I think that the hon.  Gentleman might be referring to the Opposition clause that was inserted in the Bill in the Lords, rather than our new clause.

Photo of Quentin Davies Quentin Davies Conservative, Grantham and Stamford

On the contrary, I am reading from the text. We all have the same text, volume I of the Company Law Reform Bill, and I shall repeat the details. Clause 138 states:

“Enjoyment or exercise of members’ rights

(1) 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”,

and so on.

Photo of John Bercow John Bercow Conservative, Buckingham

Order. To whom does the hon. Gentleman want to give way?

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

Clause 138 was the result of a successful Opposition motion in the House of Lords. It is, I suppose, the Opposition’s text. The Government will presumably propose that it does not stand part of the Bill and that it is replaced by their new clause.

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

I suggest that the hon. Member for Grantham and Stamford looks at new clauses 38 and 39, which is where we want to end up.

Photo of Quentin Davies Quentin Davies Conservative, Grantham and Stamford

I admit that this was a perverse thing to do in Committee, but I was addressing the text before us. Perhaps I shall return to the subject if I find a similar anomaly in the new clause.

The issue is important, because, as my hon. Friend the Member for Huntingdon (Mr. Djanogly) has said, an increasing number of people—beneficial shareholders and investors—choose to hold their shares via nominee accounts. In the overwhelming majority of cases, their reasons are entirely respectable—there are often economic reasons, to which my hon. Friend has referred, because modern technology often makes it the administratively cheapest way of holding shares.

We should note that in this country the Government have forced certain classes of investor to hold their shares through nominees. This Government have used Taxes Acts to compel people who want to obtain basic tax benefits to hold their shares in that way. Self-invested pension funds and ISAs are good examples—in both cases, if one puts one’s name on the shareholder register, one does not get the tax break. The Government have pushed investors in that  direction, and it has been a mistake, because the shareholders, investors and savers have had to give away at least part, and sometimes a substantial part, of the tax benefit to the company running the vehicle—a toll to their scheme’s gatekeeper. A large proportion of the funds generated by those tax provisions have flowed not from the generality of taxpayers to those taxpayers who save, which was the purported intention, so as to increase the inducement to save, but away from the generality of taxpayers to a number of firms and institutions. Many of those firms and institutions are in the square mile, and they have done well out of selling those products.

I agree with the Government that there was a conflict between economic rationality and HM Revenue and Customs caution, which was arguably excessive, about the danger of tax avoidance. In that particular conflict, the Revenue won, and whatever the reason for that may have been, we have compelled certain classes of investor to invest through nominees, and it is therefore our obligation to ensure that they do not lose their shareholder rights as a result. It seems to me to be quite wrong economically, for shareholder democracy and in terms of equity for that to happen. The purpose of the clause—I can debate only the clause before us—is to redress that anomaly.

Two of the amendments to clause 138 are in my name. Someone is bound to tell me that they amend a text that will be voted against—in a few moments, the text will cease to exist—but I cannot anticipate the Committee’s decision and must debate the text before us. I shall endeavour to change the text, because I think that it can be improved.

I tabled amendment No. 251 at the suggestion and behest of the CBI, which lobbied me—I hope the CBI will not mind my passing on that conversation—to vote against the clause. I am not going to do so, as I very much support the idea of protecting shareholder rights, even if people decide or are forced to invest via nominees. However, having heard a litany of complaints from various companies about the cost of the imposition, I agreed to consider whether there might be merit in restricting the beneficiaries of the new rights to holders of ordinary shares. I am not sure whether that would greatly reduce the aggregate financial cost to companies, because the vast majority of shareholders hold ordinary shares. I think that a good case can be made for giving other forms of shareholder—preference shareholders and so forth—the same democratic rights in their companies. I do not wish to pursue that amendment any further.

Amendment No. 250 arises from an anomaly that struck me when I first read the Bill. The clause purports to preserve certain essential rights for those who invest via nominees. Subsection (1)(b) states that we are trying to provide for such shareholders to

“enjoy or exercise all or any specified rights”.

However, subsection (3) states that “This applies in particular” to a set of designated rights. The most curious thing—I still cannot understand how the omission could have occurred—is that the clause does not mention the most important right, which is the right to attend meetings, whether exceptional or not, and the right to vote at such meetings.

For the avoidance of all possible doubt, we should proclaim loud and clear to the public and to all investors that it is Parliament’s intention to provide in the clause for that right to be continued to be exercisable, even if people have invested via an intermediary or a nominee. That is the purpose of amendment No. 250. I may be told that I have missed the relevant provision and that that right is preserved elsewhere, but it is curious, when a large number of rights are spelled out in subsection (3), that arguably the most important right should be omitted.

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

As I said in an intervention on the hon. Gentleman, the existing text is the result of an amendment passed with Opposition votes in the other place, and I record my gratitude to Lord Razzall and Lord Sharman for their part in that.

The purpose of the clause is to further the enfranchisement of indirect investors, which it does for two important reasons. The first reason concerns the accountability of companies to society, not just to fund managers—with all respect to fund managers, they are less representative of society than the great mass of shareholders. The second reason is to encourage participation in the corporate side of the economy, which involves information being spread among the general public about how companies work so that they have an understanding of the problems that companies face.

The Government raised a number of practical objections to the clause, as passed by the other place, especially on cost and flexibility. For example, at the heart of the proposal about voting rights is the question of the cost and the difficulty of organising annual meetings and votes, especially of large companies, and at the heart of the proposal about information was the expense of preparing hard copy documents for large numbers of people. We said on Second Reading that we were fully prepared to think about those objections, and after consulting widely, the Minister has come back with these proposals as a replacement for clause 138.

We are content to go forward on the basis of the compromise that the Minister has brokered, although the information side of the compromise is clearer than the voting side. The proposal is now that the default option will be electronic communication and that that there will be an option to opt in for hard copy, although in normal circumstances information will be transferred electronically, which meets the cost objection. On voting rights, the Government have not accepted our view, but they at least accept that they have a role in helping to create a market.

As the hon. Member for Huntingdon has mentioned, the Government’s proposal effectively provides information for indirect investors about whether the nominee that they have chosen allows them to act as proxies in the company’s governance structure. That would allow individual indirect investors to choose a nominee or an institutional investor who offers that service, which helps to create a market for that service itself. It will then be for individuals to decide whether that is a service that they value. If they value it, they will be able to choose the nominee who offers that aspect of investment.

It remains to be seen whether that pure market approach will deliver the social benefits that I have mentioned. It is possible that it might do so, although it is also possible that it might not be enough. The benefits that interest us in clause 138 are essentially social benefits rather than benefits accruing to the companies or the investors themselves. It might be that a pure market approach does not deliver those social benefits.

Photo of Quentin Davies Quentin Davies Conservative, Grantham and Stamford

Does the hon. Gentleman agree that investors choose fund managers on the basis of two criteria—first, the perceived quality of the fund management and, secondly, the cost? In the case of passively invested rather than actively invested funds, their choice will be based entirely on cost, and they will not take into account the offer to allow them to act as proxies at AGMs. If he wishes to give investors that right, he should vote for my amendment rather than for this new clause.

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

I accept what the hon. Gentleman has said to the extent that those two factors are the most important that investors will take into account. It is up to them what they take into account, and we will see the extent to which this right is exercised through the market. As I have said, if enfranchisement does not deliver the social benefits that we envisage, it might be necessary to propose a further move forward, perhaps to a default option, where voting rights are transferred but investors can opt out and give those rights back to the nominee. Nevertheless, I am perfectly willing to accept the Government’s present position as a starting point from which to move forward.

A number of smaller matters are outstanding, such as the list of drafting issues put forward by the Law Society, which the hon. Member for Huntingdon mentioned. I shall not repeat them, but I wish to mention one final small issue, which is of interest to a lot of small shareholders. It is how the arrangements will deal with shareholders’ perks. I remember once having a conversation with someone who is now a prominent economist, who told me that he had just bought shares in the channel tunnel company solely to get the perk of cheap rail travel. He envisaged that, given the size and difficulty of the project, the value of the shares was likely eventually to fall to zero. However, it was worth while buying the shares simply for the perks. Will the Minister address that aspect of shareholding?

As the hon. Member for Huntingdon said, we accept that the Government have moved a long way and accepted that they have a role in creating a market. We thought that they should have such a role in our other area of concern about the business review—the environmental and social practices of companies. That is a legitimate way forward, and we are happy to accept as a compromise the Government’s offer today.

Photo of Margaret Hodge Margaret Hodge Minister of State (Industry and the Regions) 1:45 pm, 20th July 2006

We will end on consensus; I cannot believe it. It is a good way to end our lengthy consideration of the Bill. I shall start by saying that on this issue, on which I came in at a much earlier stage than on others discussed in Committee, I was grateful  to all the stakeholders. They worked incredibly fast and hard to try to reach a compromise and consensus. I attended three meetings, and my officials attended others. There are conflicts in approach, and the issue of cost looms high on the agenda of the companies involved, and the compromise and consensus that we have reached is down to them, facilitated by us. I am grateful to all the stakeholders involved.

I agree that there is consensus on the importance of the matter. Part of the underlying thinking that led us to devise the Bill was the intention to strengthen shareholder rights. We have attempted to do so throughout, and the position that we reached before the House of Lords debate was that the costs involved provided an overwhelming argument to companies. Opposition Members recognised that the clause as it came to us from the Lords would not have been workable and would have imposed unfair burdens on companies. We have now found a good way forward, not going as far as the hon. Member for Cambridge would like, although I am told that Marks and Spencer has included a note with its recent vouchers inviting nominees to let them know details of indirect shareholders. We hope to see such practice spread to other companies.

We may well return to the issue, because there is consensus in the room that there will be growth in direct shareholders, so entrenching their rights will be ever more important.

Photo of Paul Farrelly Paul Farrelly Labour, Newcastle-under-Lyme

I congratulate my right hon. Friend and her fellow Ministers on the Front Bench on the fact that, in the many sittings of the Committee, when serious and credible comments have been made in our scrutiny of the Bill, the Government have sought consensus. That is demonstrated now.

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

I thank my hon. Friend for those remarks. My first duty as a new Member on entering the House after a by-election—this is a slightly old anecdote—was to sit on a Bill Committee, and any amendment tabled by the Opposition, who were us in those days, was simply ignored. I determined then that that would never be the way in which I acted when responsible for Committees. Good ideas, wherever they come from, need to be absorbed. We have done that during our consideration of the Bill. We shall return to the issue, but we have taken important first steps on a consensual basis.

I cannot avoid saying that I am delighted that the Conservative party supports increased shareholder democracy. However, that should stretch right the way through to include shareholders having the right to know about a company’s activities and policies when they impact on the environment, community and other issues discussed earlier in the Bill. I look forward to its wholehearted support for those clauses when we return to them on Report.

I shall respond to the Law Society’s amendments. I have not seen the letter, but my officials have. I think that it was responding to an earlier draft of the clauses—there have been a couple—but nevertheless, if it has pertinent concerns, we will of course come back to them. We will keep the cost of hard copies under  review. I gave that commitment to the companies that negotiated with us and I am happy to put it on the record today. The list that companies will need to keep will ensure that information passed to their indirect shareholders is protected under the Data Protection Act 1998 and that confidentiality is maintained. Clause 42 contains powers to extend those indirect shareholder rights to the AIM list and others, if appropriate.

The hon. Member for Grantham and Stamford (Mr. Davies) asked about the voting rights of indirect investors. Clause 307 deals with that matter, but again we might want to return to it at a later stage. We looked at providing for such voting rights, but it would have required all indirect investors to be identified and reported. That would have been a huge job and would have added to the complications. I was anxious to build a way forward.

In the remaining minutes I shall take Members through what I have in front of me. We think that everyone who invests in shares—directly in a company or through a nominee broker—should be able to enjoy and exercise much the same rights as other shareholders. If indirect investors wish to exercise shareholder governance rights, they should be able to do so. I think that that is the unanimous view in Committee.

Our key concern, however, has always been that such enfranchisement be achieved in a way that is proportionate, offers flexibility and avoids imposing undue burdens on parties involved, whether issuers, investors or intermediaries. That is why, on Second Reading, we said that we would look at reversing the Opposition’s amendments and why we have tabled the new clauses. Also on Second Reading, we made it clear that we would meet interested parties to discuss other ways in which to strengthen the position of indirect investors. We have done that, which has enabled us to move to the new clauses.

Briefly, I shall outline how the new provisions will operate. The new clauses provide that indirect investors can be nominated to receive company mailings. It is up to the registered member—typically, a broker—to decide whether to nominate. The registered member will be able to appoint indirect investors as proxies under the provisions in part 13 so that they can exercise their voting rights.

Clauses at the end of new part 9 will make it easier for registered members to exercise rights in different ways to reflect underlying holdings and to allow indirect investors to participate in, for example, requests for resolutions at the AGM. We think that that is a balanced package. One of our key concerns in finding a way forward has been proportionality and avoiding unnecessary cost burdens on companies or any other parties. I was keen to explore cost implications in our discussions with interested parties, and I recognise that our proposals still involve extra costs being borne by different participants. There will be some incremental costs for companies in printing additional copies of their annual report and accounts, but we understand that roughly 70 per cent. of London listed companies are already happy to send copies of those to anyone on request.

The other extra cost for companies will be that of maintaining a list of those nominated to receive the company mailings under the new procedure. We have addressed those concerns by requiring a positive opt-in by indirect investors to hard copy information and by ensuring the validity of, for example, company meetings is not affected by failure to send communications to indirect investors.

As for brokers, they will need to bear the costs of marshalling, for example, proxy voting rights and instructing the company accordingly, if they wish to pass on such rights to nominee investors. It will be up to indirect investors, as the hon. Member for Huntingdon said, to choose a broker who offers such rights as part of their service.

In bringing forward the new clauses, I want again to put on record our appreciation of the organisations with which we negotiated: the CBI, the Institute for Chartered Secretaries and Administrators, the Association of Private Client Investment and Management Services and the London stock exchange, as well as a number of individual brokers and issuers. We have already—which is why I was surprised—received helpful input from the Law Society and the TUC. We have involved both those who inspired the Opposition amendment in the first place and those who subsequently objected to it, which was the right way forward. I am glad of the opportunity that we had to share our thinking on that and other developments with both Opposition parties in advance of our Committee debates.

New clauses 36 to 44 are good news for everybody—for both small investors and quoted companies. I therefore commend them to the Committee and oppose clause 138 standing part of the Bill. I hope on that basis that hon. Members will not press their amendments.

Photo of James Brokenshire James Brokenshire Conservative, Hornchurch

I am grateful to the Minister for setting out the debate and how we have moved forward on this significant and important matter. I put on record the Opposition’s thanks for the work of Lord Hodgson in initially highlighting the issue. We have since sought to come up with a mechanism and a workable approach.

I note that there is still further reflection and consideration to be undertaken. I heard the reservations expressed by the hon. Member for Cambridge about whether the new clauses go far enough, but it is fair to say that a consensus has been reached, building on the input of various stakeholders, broadly reflecting the need to ensure that nominee shareholders are given rights and that that is recognised in the Bill.

I note that the Minister commented on cost. Gavin Oldman, chief executive of the Share Centre, a private client stockbroker, said:

“We think only 5 per cent. of shareholders would opt in to receive information from companies. That is 1.2 million nominee shareholders costing say £5 a year, a total of £6 million. That is an insignificant amount compared with the estimated £100 million companies would save from being allowed to disseminate information electronically, which would also be allowed by the Bill.”

I suppose that that shows one view on the cost issue. I recognise that various stakeholders expressed some  concern about the implications of costs, but I hope that by virtue of the debate we have arrived at a broadly acceptable point.

My hon. Friend the Member for Huntingdon pointed out the implications on the AIM market and OFEX. We could give some further consideration to that. It is odd that shares traded on the official market and the nominee shareholders of those companies should be treated differently. We can reflect on that further.

The debate has been productive. I am pleased that we have been able to secure some positive steps forward, to put shareholder democracy and nominee shareholders at the forefront. I hope that, in so doing, we can ensure that more people take a much more active role in shareholder democracy and engage more readily with their companies.

Amendment, by leave, withdrawn.

“It being Two o’clock, THE CHAIRMAN proceeded, pursuant to Standing Order 83D and the Order of the Committee [20 June], (as amended [6July]), to put forthwith the Questions necessary to dispose of the business to be concluded at that time. Amendment negatived”.

Clause 138 disagreed to.