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(b) where the company has been required to give notice to the registrar under section 35(2) (notice where companys constitution altered by enactment), a statement that the enactment in question alters the effect of the companys constitution,
(4) A person guilty of an offence under this section is liable on summary conviction to a fine not exceeding level 3 on the standard scale for each occasion on which copies are issued, or, as the case may be, requested.
by a resolution of at least 90 per cent..
by a scheme of arrangement approved by the court..
Margaret Hodge: This series of clauses and amendments relates to a companys constitution. Government new clauses 77 to 80 and amendments Nos. 206, 688 to 695 and 699 to 705 are drafting or minor technical amendments. They also make amendment No. 67, which is grouped with other amendments to part 19, unnecessary. Many of the changes made by these amendments have been prompted by Law Society comments or by amendments tabled by Opposition Members. They tidy up the drafting of various clauses that refer to documents of constitutional significance for companies, and we hope that some potential overlaps or ambiguities have been removed. Some cross-references have been added and some points of procedure clarified. We hope that the overall result is more internally consistent and user-friendly.
Amendment No. 696 has a long history, but its purpose is simply to tidy up the drafting of clause 34, following its amending in Committee, so that it states explicitly that the provisions of a companys constitution take effect as if it was a contract between the company and its members. We are not changing the lawwe are simply making it clearer that it means what it has been recognised to mean for many years, and we have removed an outdated reference to signing and sealing. We are all grateful to Lord Wedderburn for raising this issue in another place, and to the hon. Member for Huntingdon (Mr. Djanogly) for proposing in Committee the amendments that, as evidenced today, prompted us to think again about the clause.
James Brokenshire: I will largely confine my comments to amendment No. 790 and clause 22. This must be one of the most bizarre concepts in the Bill. Historically, members have been able to change their articles of association or amend their memorandums if they get 75 per cent. of the votes in a general meeting. The Government seem fixated with the concept of shareholders being able to entrench their rights, so that future members are unable to change the companys constitution. The foremost question is why the Government want that to happen. We have seen no representations asking for the provision, but plenty of criticism. My hon. Friend the Member for Huntingdon (Mr. Djanogly) put that point in Committee, and the Minister replied:
Why have a concept of entrenchment? Why go beyond a special resolution?...We have to look at the Companies (Audit, Investigations and Community Enterprises) Act 2004, which introduced new provisions that make it difficult to entrench provisions in articles. There was a demand for us to do so, particularly from social enterprise and community interest companies.[ Official Report, Standing Committee D, 20 June 2006; c. 61.]
It seems strange that the Government should base the entrenchment provisions on the requirements of the roughly 300 community interest companies in existence. There is neither interest in nor demand for entrenchment from large companies, small family companies, venture capital companies, or from any of the tens of thousands of other companies that exist.
In Committee, the Minister agreed that CICs would have separate legislation and would not be consolidated. However, if she wants to present arguments for entrenchment in relation to CICs, surely separate legislation is the best place to do that?
Amendments Nos. 790, 791 and 792 together would provide for those provisions to be deleted from the Bill. If I am given leave to do so, I should like to press amendment No. 790 to a Division, in order to test the Houses opinion on the matter.
I turn now to amendments Nos. 379 and 380. If the entrenchment clauses have to remain in the Bill, better provision should be made for removing them. I recognise that the Government have gone some way to accepting that through their introduction at an earlier stage of an amendment allowing entrenchment to be reversed by a unanimous vote. That was a step in the right direction. Furthermore, they propose to extend the provision to court orders that counter the entrenchment, and that is another welcome improvement. However, the Opposition believe that there is a need to go further, so amendment No. 379 allows for the fact that public companies always have more than one shareholder and that private companies, before 1989, had to have at least two. Many private companies still do have at least two shareholders, as they never got rid of the spare shareholder after 1989.
Public holding companies got around the provision by finding an individualnormally one of the directorswho would hold the second share, subject to a declaration of trust. That declaration meant that the director promised to act in accordance with the holding companys wishes. In practice, those declarations were not always made, depending on the efficiency of the company secretary. Sometimes they get lost in the mists of time, and sometimes old forms get thrown away when a director leaves a company. As a result, getting unanimity can often be tough, and that is why we suggest that articles should be removed by unanimous resolution, less one vote.
Additionally, amendment No. 380 brings back into play a proposal originally put forward by Lord Hodgson. It would reduce to 90 per cent. the level of agreement required for the removal of entrenched articles. That 90 per cent. level would tie in with the amount required to buy out minorities in a takeover, and I also point out that 10 per cent. is the level needed to call a general meeting.
My main concern about the Governments position in Committee was that if two individuals owned 100 per cent. of a company that they set up, they could at the outset put in place whatever provisions they wanted. The Minister came up with a compromise, saying that 100 per cent. of shareholders can end the entrenchment. That is an improvement, but we maintain that it is hardly most peoples idea of shareholder democracy. The Government need to make clear the concept behind their approach, as they have not yet done so.
Entrenching provisions need to be approached with care. In commercial companies they could be dangerous, as a company could be held to ransom by a single shareholder holding one share (if he has a genuine grievance, his remedy will normally be to apply to the courts). We think it is essential to make it explicit in the legislation that any entrenching provision (and any entrenched provision) may be a scheme of arrangement approved by the court regardless of absence of unanimity (or other level of approval stipulated in the constitution). We consider that this would reduce the impact of companies happily introducing a
requirement for unanimity then living to regret it when the business cannot move on. We also think there should be no encouragement for commercial companies to adopt entrenching provisions. For instance, any model form of constitution for such a company should not include wording for entrenching provisions (even as an optional extra).
Turning to amendment No. 378, clause 23 provides for a notice of entrenchment to be filed, but if an entrenchment resolution is passed, surely the resolution filed at Companies House, together with the revised version of the articles filed, should be adequate. I cannot think of any other compliance provisions, so I question the purpose of the extra piece of paper, particularly given our desire to be deregulatory. Furthermore, the measures will increase regulation. The director must ask a lawyer to confirm that the new notice is compliant. Even if it is blatantly the case that it is compliant, doing so is a belt-and-braces safeguard. The Government measure is unnecessary and will lead to trouble, so I urge the Minister to drop it. We should consider how we can improve shareholder democracy, not restrict it with entrenched provisions.
I note the Ministers comments on the contractual arrangement between companies and their members. I certainly welcome that clarification of the law, given the history of such measures. Unfortunately, time does not allow me to discuss the matter in greater detail, or to talk about Lord Wedderburn and various other learned, legal minds, but we certainly welcome that aspect of the Ministers proposals.
David Howarth: I shall be brief, and shall refer only to amendment No. 790, which the hon. Member for Hornchurch (James Brokenshire) mentioned, and new clause 89, which I tabled with my hon. Friends and which takes exactly the opposite direction from his amendment. Our view, at least on formation, is that companies should be allowed to entrench provisions. We would allow them to set up an organisation in which people had certain rights that only the court could take away, and which could not be removed even by agreement of all the members.
There is no ideological difference between the hon. Gentleman and me. We simply have a different perspective on what the law is for. Some lawyers think that their job is to create new organisations and institutions for people, and to do so in the way that their client wants. That is largely my viewthe law should allow such institutions to be created according to the wishes of the people setting them up. The hon. Gentleman and the hon. Member for Huntingdon (Mr. Djanogly) view the law from the opposite perspective, and are concerned with legal professionals who think that it is their job to sort out problems that have been set up by lawyers for other people. There is conflict in the law between those who create and those who dismantle, and I am in favour of the creation lobby, not the dismantling lobby. I urge the Government to choose our way forward rather than theirs, although I suspect that they may stick with their middle way.
Mr. Gummer: I would like to speak at length on this group of amendments, as some important issues are involved. However, I cannot do so because we have only two minutes before the guillotine falls, resulting in our failure to discuss the rest of the Bill. I shall just make the major point that the Government have failed, throughout proceedings on the BillI have looked at the recordto find anybody of any standing whatever who wants to include such a measure. I am always suspicious of Governments who want to regulate when no one wants them to do so. I am not suspicious of this Minister in particular, but I am suspicious of all Ministers. I am more suspicious of Labour Ministers, but I am suspicious of Ministers from all parties. I believe that Ministers have been led by the nose by civil servants in this case.
Someone, somewhere has decided that the provision is a good idea, and no one has discovered any reason why we should include it. We should not regulate if we do not need to do so. The Better Regulation Commission should look at the Bill, because we do not need this piece of regulation. No one has asked for it, and the House has not had a chance to debate it properly. It is another regulation that will pass into law without having been properly debated. The Minister will not even have time to answer me properly.
Margaret Hodge: I do not have time to answer the right hon. Gentleman properly, but the issue has been discussed many timesprobably about five times. I simply draw his attention to the fact that the proposition before us was not invented by civil servants, but emerged from the company law review. It has been debated and discussed with all stakeholders over a very long period, and on that basis has some credibility. We debated it in Committee. We have one view from the Liberal Democrats and a completely opposite view from the Conservatives, while Labour Members stand where they always dorepresenting the vast majority of people in this country
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