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I welcome the Bill and the opportunity for us to overhaul, take stock of and examine current company law and the way it can be improved. There has been a lot of change since 1985 in how businesses conduct themselves, and how regulation and technology has moved on. It is therefore right for us to look at the
operation of current practice and the manner in which businesses are conducting themselves, as well as how we can try to regulate them and make life easier in some respects, while using the opportunity to review the parts of the legislative framework that require it.
We have heard about the Bill’s long gestation period. It is astonishing that all this kicked off eight years ago. I welcome the opportunity to have a full consultation period so that stakeholders can express their views on how company law should be updated and revised. However, it is remarkable that we should be discussing at this late stage, when the Bill has already passed through another place, the introduction of several hundred new clauses, albeit by way of restatement of the Companies Act 1985—although we will need to look at the detail to see whether there are any further modifications.
It is surprising that the concept of codification did not arise at a much earlier stage. As a practitioner, I could have told the Minister that it is important to try to keep the law in one place—for the ease not only of practitioners but, most importantly, of companies. Directors and officers should be able to point to one particular Act and know with a degree of assurance that most companies legislation will be in that place. I welcome the news that there will be greater codification so that the parts of the 1985 Act that were not in the Bill will be pushed across into the new legislation. I hope that we will have a full and proper opportunity to review the impact of those changes and to ensure that there are no fundamental implications in making such a substantial change to the Bill at this late stage.
It has been difficult to keep track of the Bill’s progress through the other place, where it has changed dramatically and radically. I would like to put on record my tribute to their lordships for the work that they have done to improve it through their 1,600 amendments tabled in Committee and on Report. It is recognised that a fair amount of work remains to be done. That is no criticism of their lordships, who have done a tremendous job in trying to knock the Bill into shape. However, as this lively debate has shown, various issues require greater scrutiny and amendment to ensure that we end up with a Bill that, in the words of the Secretary of State, is clear and understandable and has no great scope for litigation. I could not agree more, but we are not quite there yet. There will be detailed scrutiny in Committee, and rightly so.
However, the Bill has many positive aspects. I will not mourn the loss of companies having an authorised share capital. We can happily consign to legal history the arcane debate about how much of a company’s authorised share capital should exceed its issued share capital and what its various authorities for allotment should be. There is a new mechanism in place that will be fit for purpose. Similarly, scrapping specific rules such as the financial assistance regime for private companies, which was increasingly questioned, and the convoluted whitewash approval process that sat alongside it, will be no loss to the statute book.
Various other provisions, such as online filing, companies’ ability to provide information electronically through websites and streamlining private company administration, are welcome. Most companies are small, so it is crucial that the burdens of bureaucracy
be light but effective when necessary. The Bill takes important steps towards achieving that result through, for example, providing that annual general meetings may no longer be required, and provisions on written resolutions and the execution of documents.
However, my hon. Friend the Member for Eddisbury (Mr. O'Brien) made a valid point about company secretaries. A company secretary is an effective corporate governance tool in ensuring that a company fulfils its responsibilities to its employees, creditors and shareholders in private companies that are not subject to the overarching wider scrutiny to which a public company is subject, especially when it is listed on a regulated market. I hope that we will have the opportunity in Committee to re-examine the role of and need for company secretaries in a private company environment, and to reflect on my hon. Friend’s comments.
Other issues deserve further scrutiny, including the new provisions to counter corporate terrorism. I welcome the amendments that were made in another place to tackle serious attacks on companies that operate in a legitimate and legal framework so that their operations are not undermined and their shareholders and staff are not intimidated and threatened. The issue needs further consideration to ascertain whether the provisions require strengthening and developing to ensure that they provide the proper protection that hon. Members of all parties rightly acknowledge is necessary so that companies can conduct their affairs properly and are not held to ransom by small groups of individuals intent on acting aggressively and sometimes violently.
We should note that several provisions have been consigned to the draftsmen’s scrap heap, notably chapter 31. I am pleased that that has been removed, because it was a fundamental constitutional change that had no place in the Bill.
One improvement is giving those who hold shares through a nominee the ability to have specific rights, such as voting rights and the right to receive information. It is interesting that the Secretary of State acknowledged that that was a “valid and understandable concern” for shareholders or quasi-shareholders who hold their interest through personal equity plans, individual savings accounts and the nominee approach. Although some stakeholders and interest groups have expressed concern about the implications of that, I would be disappointed if the Government responded simply by restating the previous position. I hope that we have the opportunity in Committee to examine the matter further.
It is valid to acknowledge a position whereby people are essentially prima facie and de facto shareholders. There are some parallels with the uncertificated securities regulations. Increasing numbers of shareholders hold their shares in uncertificated form, which means surrendering a certificate and creating an interest in shares, although it is not termed in that way. Shareholders in those circumstances gain the same right as registered shareholders, who clutch share certificates in their hands. It is therefore right to empower and enfranchise individuals who hold their shares through PEPs, ISAs and other nominee holdings. I hope that we will have the opportunity to review that matter in detail, and to ensure that that basic right is entrenched.
We have spent some time on part 10, which deals with directors’ fiduciary duties and with codification. The problem is that this part of the Bill is neither fish nor
fowl. It is right and proper, and entirely understandable, that Members have expressed concern about the need to strengthen corporate social responsibility. The present drafting, however, is intended only to codify existing directors’ duties, although I would argue that the Bill does not even do that. It is a mish-mash of a number of different provisions. It neither codifies nor seeks to extend the provisions to address issues of corporate social responsibility.
The Bill also fails officially to list certain other groups of people. For example, creditors of companies are noticeable by their absence from clause 158. There is also the question of the relationship between these provisions and other statute law. This will result in uncertainty, from which disputes could arise. I note that the Law Society maintains its view—notwithstanding the amendments that have been made in another place—that the clause will make a material change to the existing law. It states:
“In our view, the introduction of a list of factors which the directors are obliged to consider makes it significantly more likely that the courts will intervene in matters previously left to the directors’ judgement. We believe that this is likely to lead to wasted management time, and unnecessary expense, on the company’s part.”
That gives the lie to the Government’s apparent contention that this measure involves only codification.
We have heard reference today to section 309 of the Companies Act 1985, and to a director’s duty to have regard to the interests of employees. It is interesting that clause 158 of the Bill states that the primary responsibility of a director is to
“promote the success of the company for the benefit of its members as a whole, and in doing so have regard”
to the various factors listed. Section 309 of the 1985 Act states:
“The matters to which the directors of a company are to have regard in the performance of their functions include the interests of the company’s employees in general, as well as the interests of its members.”
The new provision therefore seems to water down the rights of employees, which were on an almost equal footing in the existing legislation, in so far as they have now been downgraded to a position behind the interests of the members. I am sure that we will have an interesting debate in Committee on the effectiveness of clause 158, and on its implications for directors and the costs that it is likely to expose. It certainly does not achieve its overarching aim of promoting greater corporate social responsibility. There are other ways of doing that, as has been said today.
Other provisions in the Bill also require further scrutiny. A valid concern has been expressed about companies seeking to protect their business name, and a new procedure has been proposed whereby if someone had misappropriated a name to which good will has been attached, a mechanism would exist to challenge that, rather than the injured party having to rely on intellectual property rights relief. That is a laudable aim, but the provisions in the Bill will not achieve the right result. They will not work speedily enough, and they could even have the opposite effect of allowing bigger companies to bully smaller companies in relation to the use of names. That is a real risk, and
we need to reconsider the mechanism by which company names adjudication will work.
There is also the issue of approvals for political donations. That aspect has been strengthened, but we need to examine the issue of piercing the corporate veil and reflect on the fact that if a director is a director of a holding company, which passes a resolution effectively sanctioning its subsidiary’s approval of political donations, the director is deemed to have knowledge of all the actions of that subsidiary. That may be appropriate, as we have already heard this afternoon, where there are common directorships, but that is not often the case, particularly in large groups. We should reflect carefully on the impact of such provisions.
In conclusion, I welcome the opportunity that the Bill provides to update, modernise and streamline company law in this country for the best interests of the corporate sector, to promote good corporate governance and to promote this country as a place where companies can conduct business in an effective regulatory environment. We should continue to receive significant investment, jobs and opportunities as a key international financial centre. It is just a pity that it has taken us so long to get here, and that there is still such an awful lot of work to be done. I hope that we will be given the time and opportunity to carry out that work, so we should reflect on the programme motion and the time available for us to do properly the job that business, shareholders and employees rightly require to ensure that we have a companies Act that ultimately stands the test of time, and implements the aims that the whole House rightly wants achieved.
8.51 pm
Mr. David Jones (Clwyd, West) (Con): I am grateful for the opportunity to participate in the debate on such an important measure. The Bill is a huge piece of legislation, amounting to a wholesale reform of company law. Indeed, such is the extent of the reform that it is surprising, as my hon. Friend the Member for Hornchurch (James Brokenshire) pointed out, that it was not originally framed as a consolidating measure. It is good to see that it now is.
I shall confine my remarks to part 10, which deals with the duties of company directors, and particularly to the provisions in clause 158, which was described by the CBI as perhaps the most important clause in the whole Bill. The duties of directors are currently defined by common law and equity through developed case law precedent. Part 10’s aim is to introduce a new statutory codification of the general duties owed by directors to their companies and shareholders.
It would appear from the explanatory notes and from the remarks of the Attorney-General in the other place that the aim of the codification is to make the law clearer and more accessible for the lay user, but it remains to be seen whether that aim will be realised. It is the job of the courts, of course, to carry out the function of interpreting the code set out in part 10 and no doubt they will do so. Over time, as interpretation succeeds interpretation, the code will become less clear to the lay reader, who will then need a lawyer to interpret it.
The Law Society, of which I am a member, takes the view that creating greater clarity for the lay reader would be better achieved by the publication of a non-statutory guide to directors’ duties. I understand that the Government have already made it clear that they intend to publish non-statutory guidance on the statutory statement of directors’ duties. That rather questions the value of statutory codification, if it is incapable of standing alone without such guidance.
The Law Society has also pointed out, quite properly, that the new code contained in part 10 will have an uncertain relationship with the existing common law in that it is unclear how far concepts that have been developed under the common law will continue to be relevant under a statutory regime that uses different terminology and introduces wholly new concepts. Common lawyers well understand what is meant by the expression “acting in the interests of the company”. It is uncertain how acting to promote the success of the company for the benefit of its members as a whole will differ from acting in the interests of the company.
The explanatory notes to the Bill make it clear that the Government are seeking to promote the principle of enlightened shareholder value, or corporate social responsibility—an aim that is, no doubt, shared by hon. Members on both sides of the House. However, given that clause 158 sets out what is effectively a checklist—albeit non-exhaustive—of matters that are to be taken into account in establishing whether that principle has been achieved, one can only sympathise with the comments of the Association of British Insurers that codification is more likely to lead to a compliance-based approach to the exercise of directors’ duties, rather than one based on the making of good faith judgments, which is more likely truly to promote the principle of enlightened shareholder value.
The ABI further points out that directors could feel obliged to take expensive and time-consuming legal advice, which may impair efficient decision making and add an extra layer of bureaucracy to the practice of company boards. The codification of directors’ duties, therefore, may not achieve the Government’s goal of greater transparency and accountability, but instead create new uncertainties, greater administrative burdens and a tick-box approach to the discharge of directors’ duties.
The Attorney-General reiterated in the debate in Grand Committee in another place that the Government’s aim is to make the general duties of directors clearer and to make the law more accessible. He commented that the traditional formulation of directors’ duties as being the obligation to act in the interests of the company did not achieve that aim, but it is hard to understand how greater clarity will be introduced by the Bill’s formulation.
A major concern must be that part 10 will apply, of course, not only to the directors of large multinational companies but to small family undertakings. The duties set out in clause 158 are in no sense reduced in the case of a corner-shop company. It might be said that that is as it should be, but in truth, smaller companies simply cannot afford the compliance-based approach that appears to be envisaged in clause 158.
Clause 158 will require a company director to act subjectively in good faith, but whether he has done so
will be judged objectively against the test set out in clause 158(1). The additional pressures that that will place on directors, particularly those of small companies, is predictable. There will be longer board meetings and audit trails of compliance. The CBI points out:
“The list of stakeholder interests to have regard to in Clause 158 is much more diverse than the current requirement to have regard to the interests of employees. And, being more diverse, it is more difficult to demonstrate compliance, even though the interests of shareholders remain paramount. We therefore argue it should be more clearly stated on the face of the Bill that it is for the directors and the board to determine the manner and extent they have regard to stakeholder interests, according to their good faith business judgement.”
I agree with the CBI’s criticism of clause 158.
In conclusion, I have no doubt that the Government mean well, but if it is not amended, clause 158 may turn out to be a fertile source of future litigation. It will certainly impose greater pressure on often already hard-pressed directors, particularly those of smaller companies, without leading to the promotion of the principle of enlightened shareholder value. I believe that clause 158 is in dire need of amendment, and I look forward to its discussion in Committee.
8.59 pm
Justine Greening (Putney) (Con): I want to concentrate on parts 15 and 16.
Clause 399 deals with the business review. I think that the Government should be careful with subsection (2), which concerns the purpose of the review. We should bear in mind earlier attempts to legislate on directors’ activities. In the Corporate Manslaughter Bill, for instance, directors’ duties were very much part of the Government’s original proposals, but that measure was ultimately not as successful as the Government, or indeed the House, would have wished. Revision of the Bill focused on corporate duties and corporate management. I suggest that at some point the Government should think carefully about the risk posed by clause 399(2); a similar situation could arise.
Anyone who has worked in business for any length of time will confirm that there is a distinction between directors’ actions and the success of a business. There may be an indirect link. In the other place the link was described as fundamental, and of course that is true, but there is a temporal issue relating to when directors make decisions and when those decisions affect the success or otherwise of the company. I fear that some of the wording of clause 399 is so vague that directors will not be clear about how much detail they should give in the review, or about the time scale within which they should be prepared to give that detail.
I hope that the Minister will clarify another aspect of the review. Perhaps we shall be able to return to it in Committee. The performance of directors must be assessed very clearly. It could be said that a director had performed badly because he or she had not made decisions quickly enough to take advantage of certain business opportunities. That might not be flagged up in a business review, but it could arguably represent a bad case of poor director performance. We should consider whether the business review will focus on optimising directors’ behaviour in terms of optimising the success of companies, or whether it will focus merely on whether the directors have performed adequately.
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