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Question, That new schedules 1 to 3 be brought up, read the First and Second time, and added to the Bill, put and agreed to.
Remaining Government amendments agreed to.
Order for Third Reading read.—[Queen’s Consent, on behalf of the Crown, and Prince of Wales’s consent, on behalf of the Duchy of Cornwall, signified.]
Motion made, and Question proposed, That the Bill be now read the Third time.— [Mr. Michael Foster.]
4.19 pm
Margaret Hodge: This has been a very good learning process. I am delighted that we have now reached the Third Reading of the Bill.
I am proud to have been part of what has been the biggest reform ever, I think, of company law. The Government’s goal has been to increase competitiveness. We are committed to ensuring that the legal and regulatory framework within which business operates promotes enterprise, growth and the right conditions for investment and employment. We all recognise that we operate in an increasingly global marketplace. Our company law framework must enable business to flourish in the 21st century, where business and investment decisions are determined more and more by our global environment, and cross-border activity is commonplace.
Since this Government have been in office, we have been extremely successful in securing growth in British enterprise and growth in British jobs. New incorporations have risen by over 60 per cent. since 1997. Companies House adds 120 companies to its register every working hour. Indeed, the customer record for the fastest incorporation at Companies House is less than five minutes. The number of EU firms incorporating in the UK has more than quadrupled since 1997, and Britain is increasingly seen as the location of choice for international companies for manufacturing, research and development, marketing and European headquarters.
The Bill will make the UK an even more attractive place in which to invest and do business. It is a real step forward in the reform and modernisation of company law, so that the UK remains a leader in the world of business and finance. As I have learned, much of our company law dated back to Victorian times. Over the past 50 years, the law has undergone reform, but in a piecemeal fashion, leading to a body of law that is increasingly complex and inaccessible, especially for smaller businesses. The framework established by that law needed to be updated. It needed in-depth and considered reform. That is what we have delivered.
This Bill will bring many and important benefits to British business. Company law is a crucial part of the legal framework that promotes enterprise and growth. The Bill ensures that we can continue to grow our economy, providing the right conditions for investment, employment and modernisation. Our aim has been to maintain the UK’s position as a prime place to incorporate a business. I am confident that we have succeeded.
The Bill has also rightly attracted the attention of a much wider constituency. The Bill is significant for the culture it seeks to promote on corporate accountability.
Our company law needed to reflect the new climate of corporate social responsibility. The importance of the issue to companies and citizens was reflected in the thousands of representations to MPs, and in the time that we spent on Report and before that debating the relevant clauses. In my view, we have taken some historic steps forward, which will help us to achieve long-term sustainability for businesses and for the communities and societies within which they operate.
Let me reiterate the Bill’s key themes. The first is to enhance shareholder engagement and create a long-term investment culture. The second is to ensure better regulation and a “Think small first” approach. The third is to make it easier to set up and run a company. The fourth is to provide flexibility for the future.
The Bill updates and simplifies the regulatory framework to reduce cost and increase flexibility for companies. The “Think small first” approach to regulation is at its heart, which makes it easier to set up and to run a company. It makes life easier for companies and their advisers by bringing company law together in one place, and by restating the law in clear, modern language. It is now a complete code of company legislation. It incorporates all the provisions in existing companies legislation except those on investigations, which go wider than companies, and the self-contained provisions on community enterprise companies.
I should make it clear that in introducing the restated clauses, we have not made changes to the law except to the extent necessary to ensure consistency with other parts of the Bill, and in some cases to ensure that the provisions comply with our European obligations. A complete code is what users want, and I am pleased that we have been able to deliver it.
At the heart of the Bill are the provisions on directors and shareholders. We have provided a statutory statement of directors’ general duties, which will make what is expected of directors much clearer. It recognises that to achieve sustainable success for the benefit of shareholders, directors should have regard to wider factors than short-term profit. Many businesses have long seen the link between long-term success and responsible behaviour, but we want all directors and all companies to behave in that way. Prosperity and responsibility go hand in hand.
We have carried forward the long-established principle of enabling shareholders rather than the state to be the primary regulators of corporate behaviour. Provisions to strengthen the involvement of shareholders and thus to promote a long-term investment culture are key parts of the Bill. There will be fuller reporting, and quoted companies will need to cover future challenges and opportunities as well as past performance. Investors holding shares indirectly will now be able to play a full part.
This is undeniably a long Bill, but it is also comprehensive. Now is not the time for me to go through all the ways in which it modernises and simplifies the law. Many of the changes are small, taken individually, but taken together they add up to a thorough-going reform that will help UK business to succeed in the future.
On Report, the hon. Member for Huntingdon (Mr. Djanogly) asked me for an indication of when the Bill’s provisions would commence. Because of time
pressures, I did not respond then. I can say now that some of the provisions, such as those on takeovers and the transparency directive, need to be in place very soon because of our European obligations. As for the rest, there are strong interconnections. We have already received detailed views from interested parties on the factors that we should take into account in deciding on the timetable. I want to ensure that we implement the Bill in the way that will be best for business. We will announce our timetable for implementation before it completes its passage.
Let me say something about the way in which the Bill has been developed. I take particular pride in the inclusive and collaborative approach that we have adopted, and in the consistent and informed engagement of so many outside parties. I pay tribute to those who undertook the company law review, which was the inspiration for the reform process. The review brought together leading experts in the field, and many interested parties became involved in the deliberations both during the review and subsequently. I thank the many businesses and other organisations—including professional associations, trade unions and special interest groups—who worked with us so constructively in developing the legislation over time. I particularly thank the company law committee of the Law Society, which worked painstakingly to scrutinise the proposals at every stage. That includes the re-statement clauses added during the Commons passage. I believe that it is in large part thanks to that collaborative approach that the resulting legislation has generally been warmly welcomed.
I should also like to pay tribute to the parliamentary draftsman and his team. The clarity and simplicity of his drafting style has been much commented on and will, I know, be appreciated by generations to come who have to use our company law. I thank colleagues from all parties for their contributions to our interesting and constructive debates. I particularly want to thank those hon. Members who served so expertly on Standing Committee D and the Chairmen of that Committee for the thorough and detailed scrutiny of the Bill which took place there. My particular thanks go to my hon. Friends on the Labour Back Benches, who had to sit patiently through many hours and many sittings of Committee proceedings. They are not here today, but I will mention their names.
I thank my hon. Friend the Member for Newcastle upon Tyne, Central (Jim Cousins), who was a member of the Committee until he was taken ill, but who has helped considerably on Report. He was replaced by my hon. Friend the Member for Broxtowe (Dr. Palmer). I also thank my hon. Friends the Members for Liverpool, Riverside (Mrs. Ellman), for Barnsley, East and Mexborough (Jeff Ennis) and for Newcastle-under-Lyme (Paul Farrelly). My hon. Friend the Member for Bedford (Patrick Hall) has played a constructive and active role, and I thank my hon. Friends the Members for Falkirk (Mr. Joyce) and for Bradford, West (Mr. Singh). My hon. Friend the Member for Burnley (Kitty Ussher) has been extremely helpful to me, and I also thank my right hon. Friend the Member for Leicester, East (Keith Vaz).
I thank Opposition Members who sat through the proceedings on the Bill. I hope that they accept that we listened constructively to the propositions that they
made. I always tried where I could to incorporate them in the legislation. I pay particular thanks to my ministerial colleagues—the Solicitor-General and the Under-Secretary of State for Constitutional Affairs, my hon. and learned Friend the Member for Redcar (Vera Baird)—for their help and expertise in taking the Bill through and keeping me sane by supporting me in what was a massive task.
I pay tribute to our Whip, my hon. Friend the Member for Birmingham, Hall Green (Steve McCabe), who also had challenges facing him during the proceedings on the Bill and who worked extremely hard to ensure its proper passage. Finally, I thank the officials and reporters of the House, who have earned particular gratitude for coping with the challenges of dealing with legislation of this size and complexity and the many officials in my Department and across Government, especially Philip Bovey and Anne Willcocks, for the contribution that they have made in ensuring that we got this historic legislation this far.
This is a crucial Bill for UK competitiveness. Our company law has served us well in the past. With this Bill, we modernise and strengthen it and ensure that we create a firm platform for national business success. I commend the Bill to the House.
4.33 pm
Alan Duncan (Rutland and Melton) (Con): Reaching the Third Reading of this Bill has taken a long, long time. Right back in March 1998, the Government launched the company law review, as the Minister has said. There was then a good case for updating company law in this country. It is a case that has grown in the intervening years. Since then, we have had eight years to discuss the issues and two White Papers along the way.
In another place Lord Hodgson opened the debate in Grand Committee by saying:
“A journey of a thousand miles begins with a single amendment.”—[ Official Report, House of Lords, 30 January 2006; Vol. 678, GC1.]
It is a view with which I wholeheartedly agree. I should like to return to the issue of the passage of the Bill shortly, but first I thank my colleagues in this House and another place who have worked extremely hard in the past year to improve the Bill. In another place, Lord Hodgson, Baroness Noakes and Lord Freeman made substantial improvements to it. In this House, my hon. Friend the Member for Huntingdon (Mr. Djanogly), who apologises that he has not been able to stay for this Third Reading debate, has done a marvellous job in keeping on top of the Bill’s more than 1,200 clauses and an even greater number of amendments.
I should also like to thank our DTI Whip, my hon. Friend the Member for Reigate (Mr. Blunt), who has been utterly determined and masterly throughout this long process. We have also had the welcome assistance on the Front Bench of my hon. Friends the Members for Hornchurch (James Brokenshire) and for Putney (Justine Greening), who have both worked so hard in Committee and on the Floor of the House. They have proved themselves to be professional and effective Members of Parliament.
Conservative Members support most of the Bill and the loudest dissent, it has to be said, has come from Labour Back Benchers. There remain only a small number of issues on which we disagree with the Government. That is due in good part to the Government having conceded our point on a raft of concerns—a point to which I shall return later in acknowledgement of what the Minister said a few moments ago. In wrapping up this long process, I should like to spend a little time dealing with some of the most important issues.
The question of directors’ duties has proved one of the most contentious as the Bill has proceeded and I would like to make our position clear and put a few points on the record. First, Conservatives agree with the ethos behind enlightened shareholder value, even though the Government have been unable—or perhaps unwilling—to provide a simple interpretation of what it actually means. We tabled a number of amendments to what will become section 173 because we did not believe that the clause as drafted represented the best statement of the enlightened shareholder value principle.
Although the wording has, to be fair, improved, the central problem with the clause remains. It is broad, vague and unclear and is capable of being interpreted in many different ways. That may be something that Ministers have used to their advantage during the Bill’s passage. When addressing business audiences, Ministers have claimed that the clause is merely a restatement of the status quo, but when talking to campaign groups such as the Corporate Responsibility Coalition, they have emphasised how much the new approach will change things. The lack of certainty goes to the heart of the issue, as the House should aim to pass laws that are clear about what it is they are meant to do. We should reject laws that are worded in such a way as to make recourse to interpretation by the courts inevitable.
Let me make another point clear. Our amendments have not been designed to make it easier for directors to ignore concerns about employee issues, social issues or the environment. My hon. Friends will know that we are calling on the Government to introduce a climate change Bill in the next Session. Such a Bill would contain concrete provisions on companies and their environmental impact. That is the sort of regulation that we Conservatives believe would work effectively. By contrast, the Government perhaps want to fob us off with the vague provisions of clause 173.
It was Lord Eldon, then Lord Chancellor, who set down in 1817 one of the fundamental tenets of company law—that the courts should not
“be required on each Occasion to take the Management of every Playhouse and Brewhouse in the Kingdom.”
Since that time, the judiciary has been rightly reluctant to interfere with the internal management of companies. Lying behind Lord Eldon’s phrase is the principle that, so long as the directors of a company act in good faith, decisions will not be revisited by courts with the benefit of hindsight. I am afraid that the Government’s phrasing may well end up undermining that commendable principle.
The second contentious issue relates to clause 22, which deals with entrenched provisions in a company’s
articles. There are potentially two logically consistent positions that one can hold on this matter. The first was put forward by the hon. Member for Cambridge (David Howarth), who said that full and irreversible entrenchment was desirable and that companies should have the right to create articles that can then never be changed. I disagree with the hon. Gentleman for reasons that I shall come on to in a few moments, but it is a logically consistent position to hold. The second possible approach is one of flexibility, reflecting the fact that businesses need to be able to respond to a changing marketplace or to changing purposes as a company’s scope and activities change.
The changed circumstances that we will see in the future will mean that companies will have to change, but the people entrenching provisions in today’s companies are not able to foresee the changes that lie ahead. We should not allow the present shareholders to impose absolutely on future shareholders. Such fossilisation may entrench principles that are inferior and unsuitable for future circumstances. That is our position and it, too, is logically consistent.
The Government’s position, on the other hand, is not logically consistent. They have argued, and continue to argue, that there may be value in allowing companies to entrench articles, but now they say that it should not be irreversible. In Committee, the Minister said that they do not want companies’ constitutions set in stone, but they have allowed the unreasonable requirement of unanimity to change provisions. What is really unacceptable is that the Government’s programming did not even give time for that issue to be debated at all on Report.
Thirdly, we are concerned about directors’ conflicts of interest and that the tightening of what constitutes a conflict and, more important, how it is dealt with by a board will lead to experienced directors being unwilling to share their experience on other boards. Our fourth area of concern relates to the new derivative claims regime, which by broadening the scope for shareholder-inspired actions against directors could lead us to the US have-a-go litigation culture, with the associated risks of higher directors and officers insurance premiums and fewer people wishing to serve as a director. We must look at the implications of Sarbanes-Oxley, which are stifling small and medium-sized listed companies in the United States, and be sure not to repeat the same mistakes in the UK.
Our fifth concern is the requirement to disclose institutional voting. That provision is one of a large number of clauses introduced by the Government at the end of Committee. No time was given to debate it in Committee, or to give it proper scrutiny. We support institutional investors voluntarily declaring how they voted with the shares they own. However, we feel that making it compulsory could be counter-productive. If such declarations mean extra costs, extra paperwork and intimidation from campaign groups, institutional shareholders are more likely not to bother voting at all with the shares they hold, which would not be good news for shareholder democracy.
Our sixth area of contention—and Members will be relieved to hear, the last—concerns the business review. Here, too, the Government and others have misrepresented our position. We believe in and support
the business review, and for the avoidance of doubt I shall explain why. Clause 423 refers to businesses reporting annually on
“trends and factors likely to affect the future development, performance and position of the company’s business”.
That is eminently sensible. Investors will be pleased to see the provision enacted and will be able to make better investment decisions as a result of the extra information made available to them. The next paragraph in the clause requires reporting on environmental and social matters, along with issues relating to the company’s employees, and is also covered by the phrase:
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