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I should offer my thanks to their lordships for their admirable work on the Bill. They took a long time, quite rightly, to consider it. I particularly thank Lord Hodgson of Astley Abbotts, Lady Noakes and Lord Freeman, who on behalf of the Opposition put in an enormous amount of work to improve the Bill. More than 1,600 amendments were considered in the
other place. We are pleased that, on some issues, the Government took our suggestions on board. For example, the removal of what was part 31 was a sensible victory for the principle that the law should be clear to those who must abide by it. The idea that the fundamentals of company law should be changed by a Government without the full scrutiny of Parliament was deeply disturbing to people who know how difficult this area of law is. We are pleased, too, that the Government have agreed that the Bill should fully replace the Companies Act 1985. It was absurd to expect to be able to repeal of three quarters of that Act, leaving behind a stubby remnant and making cross-referencing impossible and company law even more complex.
We welcome the extension of shareholders rights to ensure that someone who invests in a company has the same rights regardless of whether they invest in their own name or do so through an individual savings account, personal equity plan or nominee account. I heard what the Secretary of State said a moment ago, but we must debate the issue in Committee. I hope that between us we can find a workable solution that will extend shareholder democracy without placing an unwarranted burden on company administration. The wording of the relevant provision requires significant work, and during the passage of the Bill we will go to great lengths to consult interested parties to achieve the workable solution that we all want.
Other significant improvements have been made to the Bill, and I hope to come on to them shortly. Elsewhere, however, serious problems arise from provisions that add new burdens and from clauses that confuse existing practice. In the other place, a number of controversial issues became clear. One that attracted significant public notice was the codification in statute of directors duties. We support the principle underpinning the relevant provision. Good directors take account of a range of long-term factors when acting in the best interests of their business. Good business involves making assessments of short and long-term risks, and using them to achieve success for the company. Furthermore, we entirely agree that a successful director pays close attention to the factors listed in clause 158, as well as many others. Fulfilled employees and satisfied customers are good for business, and a concern for the environmental impact of ones activities may attract consumers and investors who are increasingly conscious of corporate social responsibility. Our anxiety is not that part 10 fails to fit with an ideological position, but that it is inflexible and will lead to confusion. In flagging up the issues associated with part 10, the Opposition were initially on their own, but now, largely as a result of the work done by my noble Friends and my hon. Friend the Member for Huntingdon (Mr. Djanogly), we have received the support of the Financial Times, The Economist, the Law Society and the CBI.
The existing common law position holds that directors duties are more complex than simply maximising profit from a given transaction. The provision appears likely to reduce the courts ability to develop the law to suit changes in business practice, so we must look at what the codification adds.
I am surprised by the position that the hon. Gentlemans noble Friends took in the other place. Is he not aware, for example, that in section 309 of the
Companies Act 1985, a Conservative Government legislated to ensure that employees interests had to be taken into account by directors when pursuing the company interest? The position that he has outlined marks a return to the position that applied many years ago, when corporate practice was not as good as it is today.
Mr. Duncan: That is a red herringthe Government removed that provision, and we will probably take steps to restore it. The codification provides a list of just six factors, so it is a little like a written constitutionif we try to codify something in simple terms in clause 159 there is a danger that we may lose the wealth of experience and practice that has built up over time. Some people believe that the list is designed entirely to replace the greater number of fiduciary duties in common law. That would be a simplificationbut, in our view, a bad one. The courts would be unlikely to consider themselves bound by this simple list, and in any case it is clear from Government guidance attached to the Bill that that is not what they intend.
Mr. Darling: Clause 158 states that directors must have regard to the matters set out there, but it adds amongst other matters. I cannot see how on earth passing the Bill will curtail the courts consideration of these issues. Furthermore, if the hon. Gentleman speaks about green issues, he might think about how such aims are to be achieved.
Mr. Duncan: The problem is that there are about 650 other matters which have built up over time as considerations that guide the behaviour of directors. By picking out a mere six, the simplicity of the codification may make matters worse. It seems clear that directors will have to look, as the Secretary of State said, at both statute and case law to find out what their legal duties are, and perhaps at guidance as well.
Yet more confusing is the lack of clarity about how the list of factors provided in clause 158 should be approached. Are they listed in order of precedence? If not, what happens when there is a conflict between them? Ministers have given assurances that decisions taken in good faith will not be subject to review by the courts. The Secretary of State stated that yesterday in the Financial Times. However, the Law Society and many leading lawyers think otherwise. If it is not the Governments intention that decisions taken by directors in good faith should be hauled through the courts, we urge them to work with us to tackle a provision that we think will lead to confusion. After all, it is what is in the Bill that matters, not what Ministers say they meant by the Bill.
The Government has to make sure that the proposed legislation does not fundamentally change the current law. There is a danger that some of the drafting of the Bill could well have this effect, leaving confusion and uncertainty until the provisions are interpreted by the courts.
I am following my hon. Friends argument with great care. Mr. Templeman does not want the present law to be changed because he does not want to take seriously issues of the environment and
social concerns. That is a different position from the one that my hon. Friend is advancing. I hope that he will not quote the IOD on the matter, as it wants to restrict the responsibilities of directors, whereas he wants to clarify those responsibilities. That is a different issue. If he is doing the one, I support him. If he is doing the other, there is a real difference.
Mr. Duncan: I imagine that if Miles Templeman were standing in my little shoes at this moment, he would robustly say that as a responsible businessman he would, in everything he does, wish to take seriously issues of the environment. If I may leap vicariously to his defence, I am pretty sure that that is what he would say in riposte.
We are perfectly willing to work with the Government to improve the clause and will table amendments in Committee. Our preference is for the Government to issue a single document of non-statutory guidance, which they have indicated they are willing to do. That would give directors a greater measure of certainty and clarity than does the current drafting. If, instead, the Government insist on the new statutory statement of duties, it must be drafted so as to make it clear that, as the Secretary of State wrote yesterday,
directors are not required to keep additional records as a result of the statutory duties; and directors who act in good faith will not be held liable.
Mr. Redwood: Is my hon. Friend suggesting that, in the case that I put to the Secretary of State, if a business successfully applied for planning permission for, say, an opencast coalmine and met all the regulatory and other legal requirements, the local community could take an action against the directors under clause 158 if it did not approve?
Mr. Duncan: No. To be fair, the Secretary of State answered that and, however reluctant I might be to do so, I largely go along with his attitude. In Committee we will have to consider the detailed working of all the clauses. This is a crucial Bill that the House must scrutinise word by word to make sure that every potential unintended and intended consequence is foreseen and properly understood, so that as a result of this mammoth piece of legislation we do not end up with a legislative corporate nightmare.
Those concerns about part 10 relate closely to concerns about part 11, which sets out a new procedure for individual shareholders to bring claims against directors. We are pleased that that procedure requires that the shareholder obtain the permission of the court to continue a claim, but we wait to see how high the bar is set when allowing such cases. This is, to some extent, an answer to my right hon. Friend the Member for Wokingham (Mr. Redwood). We believe in the principle that shareholders who suffer from the negligent actions of directors should have the right to bring an action, but because there is confusion arising from the statement of directors duties set out in the Bill, this part is problematic.
Under the new procedure, a pressure group could purchase a relatively small number of shares in a business and attempt to sue a director for a decision that he took with which the pressure group disagreed. If that decision had some environmental consequence,
for example, the pressure group could reasonably argue that insufficient regard was given to that. Even if the case failed at the first hurdle, the damage done to the company could be significant, but if the court did allow the action to proceed, the company could find itself paying the legal costs of both sides, leaving the pressure group with no financial risk. The same procedure would be open to employees and ex-employees who owned shares, whereby decisions taken by directors that affected their jobs would be open to challenge in the courts. It seems likely that this part of the Bill will increase the likelihood of litigation without sufficient safeguards. It is possibly a recipe for disaster.
Mr. Davey: I am surprised by the hon. Gentlemans remarks, because I thought that his colleagues in the other place had been fairly pleased with the Governments approach. The standard by which the courts will have to form a judgment is whether there is prima facie evidence that a tort has occurred. That is quite a high standard. The hon. Gentleman is in danger of scaremongering on this issue when there has been a degree of compromise and consensus in the other place.
Mr. Duncan: We will see. No doubt it will be discussed in Committee. Nevertheless, the provision opens the door for generously funded single issue pressure groups to try to use corporate law to undermine companies rather than to do what a companys shareholders should, which is to try to make it a success.
Mr. Darling: There are two points here. First, it is already possible to bring such an action; the difference is that we are putting on to the statute book the rules that will govern it. Secondly, there are two stages: first, as the hon. Member for Kingston and Surbiton (Mr. Davey) said, there would have to be a prima facie case; and, secondly, the court would have to consider whether the decision was one that the directors could reasonably and independently have taken. That is a very high standard. People may not like the decision, and may come to the view that they would have taken a different one, but if it was found that the company could reasonably have taken it, an action of this sort would fail.
Mr. Duncan: The other danger, though, is that the winners from the new procedure might well end up being not shareholders but insurers who offer to indemnify directors against such claims. Premiums are already shooting up. There is a risk, too, that the losers are likely to be British companies. As the provisions add to the liability of directors and the likelihood of litigation against them, it will become increasingly difficult to attract high-calibre candidates to be directors of UK companies. In extremis, it would make certain companies incorporate in another jurisdiction.
I should like to turn my attention to the growing concern regarding the uses to which registers of shareholders are being put. The issue hit the headlines most recently with shareholders of GlaxoSmithKline being targeted by animal rights extremists. In typical fashion, that led the Government to ensure that they were seen to be doing something; to be fair, I think that in the end they did. It is essential that the Bill contains the necessary protections on members register. We have called for
that repeatedly, and as the Bill progresses we will be looking to see whether the Governments specific proposals are the right ones. The UK Shareholders Association certainly thinks that so far the changes have not been thought through. We want to make absolutely sure that those who face potential intimidation from animal rights extremists are thoroughly and comprehensively protected.
This morning, we learned from the Financial Times that the Government are planning to reintroduce provisions in the Bill to compel institutional investors to disclose how they voted. The Committee will have to examine that in detail to ascertain exactly how it will be achieved and what it will achieve. We shall consider the Governments proposals in detail to ensure that they are proportionate and avoid unnecessary burdens.
Clearly, the Bill deserves proper scrutiny. We are concerned that the Government still intend to move a programme motion for such a large measure about which there is so much agreement. We appreciate that the Secretary of State does not want it to spill over into the next Session and we understand that that is the bookend for the debates. However, in another place, three days were allowed for Report and one for Third Readinga total of four days. It would therefore be unfortunate and dismaying to allow only one day for the House to consider the Committees work on Report. We understand that the Committee will have to debate more than 1,000 amendments. Given that we will work hard until we rise for the summer and then have the summer to examine everything that has happened, I hope that the Secretary of State will consider a proper extended period for Report and Third Reading, probably when we come back in October.
There is much to commend in the Governments aims for the Bill. The consultations and reviews that preceded it have been long and detailed. We want company law to be brought up to date and we want to give firms in Britain a legal framework that promotes their success. In recent times, some British businesses have struggled under an ever greater burden of regulation and red tape. On productivity, the rate of growth has slowed since the Government took office. In competitiveness, Britain has dropped from fourth to 13th in the World Economic Forums league table. Our trade deficit is at a record high and our deficit with China jumped by 20 per cent. last year alone. Britains tax burden is rising to all-time record levels while many other countries are lowering theirs.
That is why we believe that the Bill is important and repeat our offer to work with the Government to improve it, and why my hon. Friends will table amendments in Committee to give British business the best chance of succeeding by giving it the best legal framework in which to operate.
Alun Michael (Cardiff, South and Penarth) (Lab/Co-op): I am pleased to be able to use the freedom of the Back Benches to commend the Bill to the House and to congratulate my right hon. Friend the Secretary of State for the manner in which he introduced it.
The Bill focuses on modernisation and simplification. As I have said on several occasions, it is long because it is simpler. When I became involved with it in May 2005,
it became clear that the timesome seven years or moresince the days of the company law reform group and the time invested by Ministers and interested parties from every sector of business and the third sector had been well spent. That dialogue continued over the past year as clauses were published. I commend the approach as an example of especially good practice, open debate and confidence on the part of Government in discussing the way forward on an important measure.
I especially commend the officials whom my right hon. Friend has inherited. A particularly good team has worked on the Bill and that has enabled the discussions in the House of Lords to be well supported. I also commend the people who are described as stakeholders, although I am not sure whether that term does them justice. They come from all sorts of fields, including accountancy, law and investment as well as large and small businesses. In my time at the Department of Trade and Industry, I found the discussions intellectually stimulating and even entertaining.
The hon. Member for Rutland and Melton (Mr. Duncan) praised the Bill graciously, although I believe that I detected gritted teeth in some parts of his contribution. On the timetable, I remind him that there have been seven years of discussion before the Bills introduction. It has not appeared out of the blue and many people, certainly Labour Members, have taken the opportunity of being involved in the discussions that led to the measure.
The hon. Gentleman referred to the dangers of bureaucratic record keeping that could arise from the advice that some lawyers seem impelled to give. That would involve taking an excessively legalistic and bureaucratic approach to the way in which company decisions are taken, and it is somewhat divorced from the real life situations in which decisions are made and business done.
We experienced a similar problem with data protection. I well recall making it clear, when I was at the Home Office, that data could be shared between the police and local authorities for the purposes of crime reduction, and the legal experts advised that that was already what the law said. However, even after we had put a clause to make that abundantly clear in the Bill that was to become the Crime and Disorder Act 1998, some people still said, If in doubt, dont share the information. That was bad advice. It is bad law, it is inappropriate and it is wrong. Data protection seeks to ensure that people share information appropriately and responsibly. Similarly, this Bill is about helping directors to know where they stand, to take good responsible decisions and to understand how they will be held accountable for their actions by their shareholders.
The law will not require the kind of bureaucratic record keeping that the hon. Gentleman suggested is feared by some people. He was also wrong to suggest that there was a danger of increased litigation, although that might have been the case without the amendments that have arisen from the considerable contribution made to the Bill in another place by the Attorney-General. Far from discouraging high-quality people from coming forward to serve as directors, the measures seek to make it clear that only when there is a genuine case to be made and evidence to be considered by the courts can such cases go forward to consideration or even disclosure. It was irresponsible and inaccurate of the hon. Gentleman
to suggest that such dangers existed, or that the Bill might discourage high-quality people from acting as directors. Given the more consensual way in which he concluded his speech, I suggest that it would be in the interests of us all to ensure that the Bill does not threaten responsible directors, and that it encourages good practice by the directors of companies.
The principle of think small first is absolutely right, but I would counsel my right hon. Friend the Secretary of State that there will be pitfalls to be avoided when the Bill becomes an Act. Many of us remember occasions on which the House has got the legislation right, only for the detail of its implementationthrough regulations and so onto move away from what was intended either by the Bills authors or by the House. The Bill must be about enabling and encouraging business and enterprise to flourish.
I was pleased to see todays visit to No. 10 by the corporate leaders group on climate change. The group comprises business leaders who recognise the global challenge to the environmentas well as to tradeas an opportunity and a challenge, rather than as a cause for panic and alarm. They recognise that sustainable development that balances and integrates economic, environmental and social considerations involves a joined-up approach that is good for business as well as for the wider community. That leads to a win-win-win opportunity for us, in regard not only to encouraging business and our competitiveness abroad but to environmental and social issues.
There is a lesson here for the CBI, because there is a temptation to argue that attacks on the Government are good and attractive to its membership. I would contrast that argument with the work that has been done on the Bill by representatives of the CBI, including those on its manufacturing councilwhich makes a massive contribution to the manufacturing forumand on its small business council. I would also draw the Houses attention to its initiative on information technology security. Those are significant contributions, and they are much more important than the public face of criticism of and confrontation with the Government. Such activities might satisfy some of the CBIs members, but they are not in their best interests. The kind of co-operation that we have seen on the Bill certainly is, however, and I commend it as best practice.
Mr. Gummer: Does the right hon. Gentleman agree that it was a pity to hear the CBI on this mornings radio attack the position of the Aldersgate group and not be prepared to go along with a proper estimate of the necessary degree of cut that would be required to reduce emissions by 60 per cent. by 2050?
Alun Michael: Without any gritted teeth whatever, I am happy to agree with the right hon. Gentleman and to say that the development of that sort of consensus and leadership within business would be a welcome development, which we should encourage on both sides of the House.
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