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The funding of political parties is important and rightly concerns noble Lords on both sides of the House. The company law interest in this area arises from the possibility that a director might put his personal interests or those of a political organisation ahead of the interests of the company. In other words, a director might have a conflict of interest when making a political donation or incurring political expenditure. These provisions, therefore, have an important but limited purpose. Company law would of course not be an appropriate vehicle for delivering wider policy objectives in relation to political funding.
Clause 353 provides that a trade union is not a political organisation for the purposes of Part 14. This means that funding from a company for a trade union, such as the provision of a meeting room or use of a company car, cannot be considered as a political donation requiring the authorisation of the company's shareholders.
However, concern was expressed in another place that this provision might allow companies to circumvent the Bill’s requirements for authorisation by making donations to the political fund of a trade union in the expectation that the trade union would make a donation to a political party. In response to those concerns we propose to replace Clause 353 with a new clause that would require shareholder authorisation of donations made to the political fund of a trade union, but not of other donations made to the union. This will prevent companies circumventing the controls of the Bill.
There is no danger of donations other than to a political fund being redirected to political parties, because the Trade Union and Labour Relations (Consolidation) Act 1992 prevents trade unions making payments to political parties, except through their political fund. That Act also prohibits trade unions from redirecting money received from third parties into the political fund unless the money is given as a contribution to the political fund. I should make clear that we are not aware of any companies making donations to trade unions as a means of circumventing requirements applicable to political donations in that way. This amendment will ensure that it is not even a possibility in the future.
Amendments Nos. 219 to 223 address an issue that was raised in another place. Under Clause 353, the directors of both a subsidiary company and its “relevant holding company” may be liable if an unauthorised donation is made by a subsidiary. Clause 354 recognises the possibility that neither the holding company nor the subsidiary itself may bring an action against the directors who are liable in respect of the unauthorised donation. It therefore allows shareholders to bring legal proceedings to enforce that liability. In such cases, we agree that both shareholders of the subsidiary and shareholders of the holding company should be able to bring proceedings. This is particularly important if the directors of the holding company are effectively the shareholders of the subsidiary; for example, if it is a wholly owned subsidiary.
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The clause as currently drafted would allow only shareholders of the subsidiary to bring proceedings, even against directors of the holding company. As I explained, we do not think that this will work in practice. These amendments address the problem and give the right to bring these proceedings to shareholders both of the subsidiary and of the holding company. This will ensure that directors of holding companies can be held to account by their shareholders if they use subsidiaries that they control to make unauthorised donations.
Amendments Nos. 212 and 217 make minor drafting amendments to Clauses 348 and 352. These amendments are consequential on Amendment No. 918, which inserts a new clause providing definitions of “subsidiary” and “holding company”.
Amendments Nos. 226 and 227 provide greater clarity, and we are grateful to the Opposition for suggesting those changes.
Moved, That the House do agree with the Commons in their Amendment No. 212.—(Lord McKenzie of Luton.)
On Question, Motion agreed to.
Lord McKenzie of Luton: My Lords, I beg to move that the House do agree with the Commons in their Amendments Nos. 213 to 227.
Moved accordingly, and, on Question, Motion agreed to.
Lord McKenzie of Luton: My Lords, I beg to move that the House do agree with the Commons in their Amendments Nos. 228 to 244. I shall speak also to Amendments Nos. 247, 251 to 254, 258, 259, 261, 264, 266 to 272, 274 to 282, 285, 289 to 291, 293 to 295, 302 to 308, and 310 to 314. The 61 amendments in this group are mainly minor and technical improvements to the accounts and audit provisions of the Bill. I shall mention two of the more substantive changes that they make. If any noble Lord would like an explanation of the other amendments, I shall happily do my best to provide it.
The most substantive change made by this group is to the accounts and audit requirements for certain small financial service companies. Twenty-three of these amendments achieve this change: the two key ones are Amendment No. 231, which amends Clause 366, and Amendment No. 289, which amends Clause 462. These amendments are deregulatory in that they will allow more small financial companies not to have their accounts audited, and to take advantage of less onerous accounting and reporting requirements.
The noble Baroness, Lady Noakes, proposed an amendment in this area when we debated the Bill in Grand Committee. The Financial Services Authority has carried out a consultation and found strong support for deregulation. The Government are pleased to be making these amendments to reduce the reporting burden on small companies. Some 4,690 small companies—all those where the requirement to have an audit is not based on a European Union requirement—will be able to benefit, saving them
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I want to focus particularly on preliminary statements. Five of these amendments—Amendments Nos. 251 to 254 and 277—remove what would have been a new requirement for quoted companies to disclose on a website the preliminary statements that they are required to produce. Those amendments were prompted by a recent consultation by the Financial Services Authority on whether to change the regime for preliminary statements of annual results from a mandatory to a permissive one. We have concluded that the requirements on publication of preliminary statements are more properly a matter for securities law—just as what those statements must contain is—and those requirements should not be unnecessarily duplicated in company law.
FSA disclosure rules require an issuer to keep for one year on its websites all price-sensitive information published through a regulated information provider. In the FSA’s experience, it would be unusual for a company to come to the conclusion that there was no price-sensitive information contained in any future preliminary statements that it produced. Consequently, the FSA expects that companies will put their preliminary statements on their websites anyway.
As I have said, the remaining 33 amendments are more minor and technical, though I shall be happy to seek to explain them if that would be helpful.
Moved, That the House do agree with the Commons in their Amendments Nos. 228 to 244.—(Lord McKenzie of Luton.)
On Question, Motion agreed to.
The Lord Speaker (Baroness Hayman): My Lords, before I call Amendment No. 245, I should indicate that the italic heading over Amendments Nos. 245C and 245D should refer to Amendment No. 245B and not be as printed.
2.15 pm
Lord Sainsbury of Turville moved, That this House do disagree with the Commons in their Amendment No. 245, but do propose Amendments Nos. 245A and 245B in lieu—
subject to subsection (11), information about persons with whom the company has contractual or other arrangements which are essential to the business of the company.”
Nothing in subsection (5)(c) requires the disclosure of information about a person if the disclosure would, in the opinion of the directors, be seriously prejudicial to that person and contrary to the public interest.”
The noble Lord said: My Lords, we come to Amendment No. 245 and the other amendments in this group—Amendments Nos. 245A, 245B, 245C, 245D and 246—on the business review, on which
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Let me remind noble Lords of our policy and overall aims. The Government are committed to improving both company reporting and transparency. We believe that one of the most important ways in which directors will be accountable is through improved corporate reporting. It is important to stress that we have made great progress to bring together commercial success with sustainability in the Bill. The business review goes hand in hand with directors’ duties and is key to encouraging directors to provide meaningful, forward-looking information for shareholders, without imposing disproportionate burdens on business. On Report in another place, the Government introduced Amendment No. 245A to Clause 399, to require quoted companies to disclose information on contractual and other arrangements essential to the business. The Government now propose to elaborate on the new provision in order to ensure that such information cannot be misused by animal rights extremists. That is the purpose of Amendment No. 245B.
Some may accuse us of watering down the amendment that we originally tabled in another place, which is not the case at all. Clearly, we do not want the new requirement to disclose information on contractual and other arrangements to be exploited by animal rights extremists. But it is also important that narrative reporting from business is meaningful and shows the risks as well as the opportunities facing a company. The revised amendment strengthens the provisions by allowing directors to omit information about a person if, in the directors’ view, it would be,
We believe that that is the right way forward.
Let me explain how we arrived at that point. Throughout the passage of the Bill, Ministers have continued to consult and listen carefully to representations from all parties. We tabled amendments to the Bill in another place to reflect business views on the position of company secretaries, the liability regime, and a raft of technical amendments suggested by business groups. As regards the business review, a number of interests were also lobbying consistently to strengthen the provisions for a higher level of audit requirement and for reporting standards with statutory backing—we will be debating that again when we come to the amendment tabled by the noble Lord, Lord Razzall. They were also lobbying to extend the explicit requirements for quoted companies to all large and medium-sized companies, to remove exemptions for medium-sized companies from reporting non-financial key performance indicators and to disclose information on the supply chain.
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Adding an explicit requirement for quoted companies to report information on contractual and other arrangements essential to the business is one change that we believe will add value to the quality of the reporting without imposing disproportionate or onerous burdens on business. That is entirely in line with the Government's key agenda on better regulation and sustainability.
Let me provide some clarity on what the Government expect to be reported in the business review. This is not a requirement on companies to list their suppliers and customers, or to provide detail about contracts. The provision is about reporting significant relationships, such as with major suppliers or key customers critical to the business, which are likely to influence, directly or indirectly, the performance of the business and its value. It is for the directors to exercise judgment on what is necessary to report. They need only include information to the extent necessary for an understanding of the development, performance or position of the business.
Let me illustrate that with some simple examples. Where a company provides the vast majority of its products or services to one customer, the arrangements might well be essential and therefore disclosable, particularly if the company could not be sure of finding an alternative buyer for its product. Similarly, where a company relies on a single supplier for a key component, so that, if that supplier went bust, that would have a serious impact on the company’s business, then that too would be disclosable. But where a company is buying products or services from a number of suppliers, or could switch suppliers, then it is much less likely that it would be necessary to disclose details of a particular supplier to give an understanding of the development, performance or position of the business. Similarly, if a company has a wide market of customers, then the directors might judge it unnecessary to disclose information about any particular customer.
Some have complained at the disproportionate burdens that this provision imposes on companies. We disagree. The provision is identical to a similar one in the original OFR legislation, which was discussed widely at the time. As I said, this is about reporting key relationships—for example, with customers, suppliers, key employees and regulators for companies in regulated sectors—not exhaustive lists. The cost implications are minimal, based on cost estimates provided by the CBI and others at an earlier stage.
Furthermore, when my right honourable friend the Minister for Industry and the Regions and I met representatives of the CBI and other business organisations on Monday and Tuesday this week, they were reassured that this requirement was not about imposing big reporting burdens on companies. As Miles Templeman, director-general of the Institute of Directors, was quoted in the Financial Times the next day as saying:
“We’ve now had a period of consultation which we weren’t able to have before this clause. We believe that the intent is not to bring out a whole new raft of bureaucratic work and regulatory burden”.
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While business groups were seeking clarity behind the Government’s intent, they were certain that they did not want statutory standards. However, there were concerns about animal rights extremists.
The intention behind the revised government Amendments Nos. 245A and 245B is to deal with legitimate concerns over animal rights terrorism, although the amendments are not confined to that and could deal with other similar cases. The concern was that, if a quoted company engaged in animal testing disclosed, for example, who its key customers or suppliers were, that could seriously prejudice the interests of those customers or suppliers, who could then be targeted by animal rights activists.
That is why the Government’s amendment is framed in the way that it is—to exempt directors from disclosing information about a person if disclosure would, in their opinion, be seriously prejudicial to the interests of that person. Disclosure must also be contrary to the public interest. The intention of the requirement is to ensure that the exclusion is not used to cover up wrongdoing on the part of suppliers. For example, if a supplier supplies dangerous goods and may be negligent in doing so, it is clearly not in the public interest to conceal his identity.
We are not seeking to exempt the directors from reporting information that would be prejudicial merely to the company. Our view is that that would create an unjustifiable let-out and that it is not necessary to do so to ensure that the interests that we are concerned to protect are covered.
We have considered a number of scenarios. If a contract with company B is essential to company A and there is a clear risk that company B will be unable to continue to meet its obligation, we think it right for the shareholders of company A to be made aware of the risk, whether that risk is from animal rights extremism or otherwise. However, in most cases, there will be no reason to explain why the risk arose. It is the effect on the reporting company that is important. If it were necessary to disclose, then it would almost certainly be prejudicial to the supplier.
We are also conscious that it could be damaging to a reporting company if it were known that it was in a relationship with a company engaged in animal testing. In very many cases, that will not need to be disclosed as it will not be essential to the reporting company’s business. But if it were essential, we think that the prejudice would be not only to the reporting company but to the other company, because it would lose the business if the reporting company had to withdraw. Alternatively, the threat might be that the other company would be boycotted if it continued in the relationship. Again, that would prejudice the other company. In effect, it would force the other company to choose between the reporting company and its other customers.
Therefore, after considering the matter carefully, we believe that all the cases that we want to cover are covered by an exclusion for prejudice to persons other than the reporting company. As I said, we believe that an exclusion for prejudice to the reporting company itself would go too far and enable things which should be properly disclosed to be concealed.
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Moved, That the House do disagree with the Commons in their Amendment No. 245, but do propose Amendments Nos. 245A and 245B in lieu.—(Lord Sainsbury of Turville.)
Baroness Noakes moved, as an amendment to Amendment No. 245B in lieu, Amendment No. 245C:
The noble Baroness said: My Lords, we could see no reason for the haste to put this amendment into the Bill in the dying days of its consideration in another place. During the Bill’s passage through your Lordships’ House, we inserted Clause 452, which gives the Government power to amend financial reporting requirements by order—an entirely sensible power that could have been used with a more seemly timetable and could have allowed for proper consultation and focused discussion.
Noble Lords will be aware that many voices in the business community have urged us to delete Amendment No. 245. Instead, we have sought to work constructively with them to achieve an amendment which does least harm to the businesses that it will affect. The Minister explained the nature of reporting only contractual or other arrangements that are essential, and of course a disclosure is required only if it is necessary for an understanding of the business.
The Government’s Back Benches in another place, and indeed the lobby groups, might like to reflect on whether these words will require any disclosure at all by the highly complex and diverse businesses found at the top end of the FTSE. The Minister himself made the case that it is very unlikely that significant, or any, amounts will be disclosed by such businesses in the FTSE—for example, Sainsbury’s, Tesco and HSBC. It is extremely unlikely that essential contracts will be necessary for an understanding of the business. Although it is very unlikely that these large companies will end up reporting nothing, that does not mean that the amendment is benign, because it is very likely to affect the smaller quoted companies, of which there are up to 2,000.
One problem with the amendment that has been pointed out by the Stock Exchange, the Quoted Companies Alliance and the CBI is that every company will have to go through the process of considering what it has to disclose, and for many that will be an onerous task. However, the real burden will be borne not by the companies in the FTSE that have large departments that deal with this sort of thing but by the smaller quoted companies which are less diverse and may well have essential contracts that need to be disclosed for them. The Government have talked a lot about easing the regulatory burdens on business, and they made that one of their themes for the Bill. But with Amendment No. 245, they have in practice loaded the burdens on to the quoted companies least able to bear them.
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