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“It is not designed to help individuals decide on investment decisions, nor is it targeted at the wider public in the sense that they should feel entitled to rely on it.”—[ Official Report, House of Lords, 10 May 2006; Vol. 681, c. 920.]
Does not that exactly contradict what the right hon. Gentleman just said? Does it not define the problem involved in shifting from an operating and financial review to a business review?
Mr. Darling: I do not think that it does. As I said at the outset, a director’s duty is to the company and therefore to its members—its shareholders. A company’s annual report or business review is primarily for its members, but it is also something that would-be investors or outside groups can read, and so form judgments about what the company is doing. The hon. Lady illustrates why we must make sure that the Bill makes it clear to whom a director is responsible. If we do not have that clarity, all sorts of difficulties will arise, both in getting directors to make sensible decisions and in achieving our objective. Clause 399 will provide much more openness and transparency than is available at present, and will also meet requirements other than those specified under clause 158. I believe that we have struck the right balance. It is inconceivable that what large public companies publish in their business reviews will not be very widely studied.
Jo Swinson:
The Secretary of State seems to accept that many people increasingly take social and
environmental factors into account in their purchasing and investment decisions—I am sure that that is backed up by the contents of our postbags—so it is vital that people have clear information. However, does he not also accept that the Government have missed a huge opportunity in abandoning OFRs in favour of the business review? The business review is much narrower, applies to far fewer companies and will not be subject to the clear mandatory standards that would allow consumers to compare like with like.
Mr. Darling: I do not accept that. I agree that many members of the public want to make informed decisions as to where they buy their goods and services. The Bill will help, as will other measures. The reason why the Government decided not to proceed with the OFR was that we were anxious to minimise the regulatory burden on companies in general. I forget whether the Liberal Democrats have a policy on that— I suppose it depends who they are talking to at the time. I do not accept the point that the hon. Lady makes about the business review. It will allow ample scope for all the things that need to be reported on to be set out as fully as possible.
In Committee there will obviously be a great deal of scrutiny of the two clauses relating to the business review, as of others. The Government have sought to put on the statute book a major step forward. I accept that it is controversial, but it provides clarity, and something that will actually work and, in the years to come, will influence companies’ behaviour. Let us be in no doubt: the duty is certainly intended to affect a company’s behaviour so that it behaves ethically and has proper regard for all the matters set out in the Bill. I also want to make sure that the business review is properly understood. I believe that it will encourage directors to provide information that will enable people to make decisions.
I shall now say a word about a small part of the Bill that was controversial in another place. It relates to derivative actions. We recognise that occasionally directors of a company may put their own interests ahead of those of the company. We have sought to introduce a new procedure that means that claims lacking merit will be thrown out at an early stage.
We have provided a two-stage process. First, any applicant has to make a prima facie case. At the second stage, still before the substantive action begins, the court has to consider whether the decision of the directors was one that the company could reasonably and independently have taken. I believe that what the Government have done here will ensure that the process is not open to misuse, but will avoid the situation that we have seen in the past whereby a small section of the shareholders have felt that the directors have done something to the company’s detriment. Until now the remedy in such a situation was not clear. It is time that the remedy was put on the statute book.
A lot of the Bill is designed to regulate companies better. It is essentially a deregulatory measure. Much of our companies legislation was put in place with large companies with numerous public investors in mind. It is worth bearing in mind the fact that more than 90 per cent. of companies have five shareholders or fewer, and
that many shares are not publicly traded. The Bill will help smaller companies. It will make it more straightforward to set up a company. It will remove the prohibition on private companies providing financial assistance to purchase their own shares. It will simplify the way in which they take decisions, they will no longer have to have annual general meetings, and it will allow greater use of written resolutions.
The Bill will also help bigger companies. It produces significant savings by removing obstacles in the way of electronic communications. We believe that the saving could amount to about £50 million a year for FTSE-listed companies alone.
Mr. Weir: The Secretary of State talks about private companies. Concerns have been raised with me about the provisions that allow a private company to do away with the post of company secretary. While I understand that in a small private company, such as a husband-and-wife operation, that is sensible, there are some very large private companies. Has the Secretary of State given any consideration to whether the provision should relate to the size of the company rather than whether it is private or public?
Mr. Darling: We did consider that, and came to the view that the right distinction was between private and public. Of course, not having a company secretary does not mean that someone does not have to be authorised to take decisions. But just as there does not have to be a company chairman—although there usually is a chairman, for private companies as well as for public companies—we thought it best to remove that requirement. As the hon. Gentleman says, for a very small company that is properly run, some requirements are excessive. A husband and wife may have to hold an AGM in their front room once a year.
The hon. Gentleman makes a fair point, in that some private companies are quite big, but for that reason, and because of the amount of money that they handle, they probably would take up the option of having a company secretary. It is not mandatory not to have one, but we are giving them that option. If he is lucky enough to be on the Committee that will scrutinise the Bill, he may want to press that point further.
Mr. Stephen O'Brien: For the purposes of dealing with company secretaries, I declare my registered interests. The answer that the Secretary of State has just given betrays one of the fundamental misunderstandings about the proposal for getting rid of the requirement for a company secretary in a private company: a company secretary, as opposed to the chairman of a board, is an office holder—otherwise we would not even have the term “directors’ and officers’ liability insurance”. An office holder is a completely different species from the chairman of a board, who is another co-director, chosen by the board to chair that board, and who has the accountabilities that go with that. I hope that I will be able to develop some of those points if I get the chance to catch your eye, Mr. Speaker. As we develop the debate on the requirement for a secretary, it is important to recognise that the secretary is, uniquely, an office holder. That was not part of the Secretary of State’s answer.
Mr. Darling: I think that I acknowledged the fact that the secretary of a company performs an extremely useful function in many companies. The point of the legislation is to remove the requirement for private companies to have a secretary—although they may still choose to have one. Certainly they will probably want to designate somebody to authorise signatories. If the hon. Gentleman or I were dealing with a company, we would want to be sure that whoever was entering into an agreement with us had that company’s authority to do so. Those safeguards exist in the Bill—but I am sure that he will return to the matter if he catches your eye, Mr. Speaker, and that he will return to it in Committee if he catches his Whip’s eye. We look forward to hearing what he has to say.
Lorely Burt (Solihull) (LD): Will the Secretary of State explain why the Government are trying to improve their own cash flow at the expense of private companies by reducing the accounting period from 10 months from the end of the financial period to only seven months from the end of the financial year?
Mr. Darling: Again, we thought that that was the right thing to do. Perhaps I will come back to the hon. Lady if she wants that to be explained further. What the appropriate accounting period should be is always a matter of judgment, but I will happily come back to her on that matter.
We think that the Bill will save businesses about £250 million a year, of which £100 million will benefit small businesses—so the deregulatory measures are important. In relation to the engagement of shareholders and encouraging long-term thinking, the Bill also carries forward the long-established principle of enabling shareholders to be the primary regulators of corporate behaviour. It is designed to encourage and enable companies to create internal structures and controls that will promote trust and transparency and lead to better performance.
The Bill also contains a number of other provisions, to which I want briefly to turn. The first seven parts relate to the fundamentals of a company and how it can be formed. Later in the Bill, there are clauses that remove any obstacles to electronic incorporation. There are a number of measures on shareholders and management generally. Part 8 provides a balance between, on the one hand, the public right to know who a company’s members are and how to contact them, and, on the other, protecting members from attempts to defraud or harass them.
There is one important measure that I hope will be supported on both sides of the House—the part of the Bill that is designed to protect directors and shareholders in companies that have been targeted by a tiny minority of people who threaten or intimidate them simply because they do not agree with them. The measure will allow directors’ names to be withheld and will also mean that if a company suspects that someone is trying to get hold of its register of shareholders for an improper purpose, it can get the protection of the court. The measure has been widely welcomed by the industry, and I hope that it will be welcomed by everybody in the House, because it is important that we show our unconditional support for people who are exposed to that totally unjustified behaviour.
Mr. Davey: We totally support those moves, although we will suggest in Committee that the Government need to go further to protect individual shareholders. In the other place, the Government appeared to create the offence of using the register for improper purposes. However, surely the Secretary of State will admit that people who wish to access the register for bad purposes are not worried about another criminal offence, given that they are accessing the shareholder register to commit a crime. The protection that he is giving shareholders appears to be weak, so will he be prepared to be open-minded and examine the matter again?
Mr. Darling: If there is a feeling that we need to do more to help companies in such circumstances we will, of course, do so. However, we will want to ensure that any proposal is workable, strikes the right balance and is not open to abuse, because there has been worry about that. If the hon. Gentleman can make proposals that would help people who would otherwise be subject to such harassment, the Government will consider them. He might be interested to know that we had quite extensive discussions with several pharmaceutical companies about the matter, and as I understand it, they are happy with our approach.
Part 9 of the Bill deals with the ability of indirect investors to exercise governance rights. It might be helpful if I tell the House—especially the official Opposition—that the Government intend to reverse an amendment that was successfully made in the other place, which on the face of it extends the exercising of members’ rights for shareholders who hold shares through nominees. I understand perfectly well what the official Opposition were trying to do, and I am not against extending the democratic process in such a way, but subsequent to the passing of the amendment, many representations have been made suggesting that the measure now in the Bill would be pretty unworkable and expensive. We thus propose to table a further amendment, and my right hon. Friend the Minister for Industry and the Regions will hold discussions with the spokesmen for other parties in the House with a view to trying to get a measure that is actually workable.
Mr. Jonathan Djanogly (Huntingdon) (Con): Will the Secretary of State please clarify what he is proposing? Is he proposing to amend or scrap the concept that beneficial shareholders should have access to documents and votes?
Mr. Darling: We are already holding discussions with sections of the industry, and there will be discussions in the House with a view to trying to address people’s understandable desire that the franchise should be widened, without imposing an unjustified burden on companies by causing them to go to huge expense for no obvious purpose. In keeping with what I said earlier, it is important that we get a system that is workable.
Part 10 of the Bill will tighten up the law on child directors. Many people will find it strange that in this country a director need not be a person, so long as it is a legal person, and that anyone of any age can sit on a board. It may be novel to stick a toddler on a company’s board of directors, but that can be done at present. We propose to change the law so that a
director must be over 16. There will be regulations to provide for exemptions—for example, a charitable company might want a young person as a director—but I think that the change to the law is welcomed.
We are also simplifying the decision-making process and making changes on accounts and auditing, especially regarding auditors’ liability, which people think are sensible. There will be a new offence for those who knowingly or recklessly cause misleading, false or deceptive material to be included in audit reports.
There are measures in the Bill on the raising of share capital and takeovers. There are also provisions that preserve the independence of the takeover panel, which has worked well in this country. On the regulatory framework, there are provisions to provide for the greater use of electronic communications. Part 36 of the Bill includes changes that will make procedures a bit more transparent.
A measure on institutional shareholders’ voting was discussed in the other place. I think that I am right in saying that both Conservative and Liberal Members of the other place voted to remove a provision that would have allowed the Government to make it compulsory for institutional investors to reveal how they voted. I am not sure why they did that, but the Government believe that transparency is important. I can think of no reason why companies’ institutional investors should withhold such information. The provision would have allowed us to introduce measures to make such transparency mandatory—albeit at some point in the future, because we would like to encourage a voluntary approach. As the Bill stands, institutional investors who do not wish to disclose what they do could remain in such a position for ever, but that would not be in keeping with the modern view that companies should be as open as possible.
Although there is no Member representing a Northern Ireland constituency in the Chamber at present, I should say that the Bill does extend company law to the whole of the United Kingdom, which I think will be welcomed by Northern Ireland businesses. Until now they have always had to wait to get what the rest of the United Kingdom has been getting.
This is an important Bill. It may be lengthy, but if we pass it I believe that it will add to the value that people see in investing in this country. The Bill is deregulatory; it aims to simplify. It also aims, crucially, to give investors a greater say and greater access to what companies are doing. As I have said, the changes that we are making in relation to directors’ duties are, I believe, a major step forward and should be accepted. I hope that we shall be able to continue to discuss the Bill in a largely consensual way. It will make a difference not only to corporate Britain, but to Britain’s well-being overall. I commend it to the House.
4.30 pm
Mr. Alan Duncan (Rutland and Melton) (Con): I welcome the Secretary of State to his first Second Reading debate in his new role. I had the pleasure of being his opposite number in my previous role as shadow Secretary of State for Transport.
The Secretary of State went to great lengths to explain what is in the Bill. Although I do not agree with him on some aspects of it, I am grateful for his explanation. Furthermore, I appreciate the way in which he took many interventions during his speech. I am sure that the Bill will receive detailed scrutiny in Committee, as far as we are able to engage in it.
We broadly support the Bill. As it has nearly 1,000 clauses, it is pleasing that we have to disagree with only a handful of them. We are glad that the Government have moved towards our position on some of the issues that remain before us.
The reports, consultations and reviews on which the Bill is based argued for putting deregulation and a “think small first” approach at the heart of company law. The Bill that has come to us, much amended in another place, is broadly to be supported. In many areas it deregulates and simplifies existing law, for which companies will be grateful.
The Opposition have some concerns about a number of the provisions in the Bill. I hope that the Secretary of State will not sweep aside our concerns on the ground that the overall effect of the Bill is to be deregulatory. We must examine the specifics.
Our shared objective with business is that it should achieve sustainable economic growth. That is why, under the leadership of my right hon. Friend the Member for Witney (Mr. Cameron), Conservatives have put ideas such as corporate social responsibility very much at the heart of the agenda that we wish to champion. Company law forms the framework in which business must operate. Achieving our aim of seeing a growing, competitive and high productivity economy depends on the legal framework being right. It has to be comprehensive and effective yet simple to understand and as unburdensome as possible.
Against those measures, much of the Bill stands up very well. Existing companies legislation certainly needs revision so that it better reflects modern business practice and technological developments such as electronic communications. Businesses have rightly complained that existing law involves unnecessary formalities and creates administrative burdens that no longer have any corresponding benefits. The Bill does good work in tackling some of these issues. We therefore congratulate the Government on realising how important such matters are.
Small business and private companies have in the past suffered from having to comply with requirements that were designed for larger public companies. The Bill goes some way towards rectifying that. We support, for example, the provision that one person alone can set up a company and that he will not have to appoint a company secretary, although they may choose to do so if they so wish. The requirement to hold an annual general meeting was a burdensome formality—it was a nuisance for some small firms. It is the recognition of these issues in the Bill that we thoroughly support.
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