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The Attorney-General (Lord Goldsmith): As my noble friend has rightly identified, and as I said when the Committee last met, this clause changes the position from the pre-existing law. My noble friend has indicated, at least to some extent, the history that gets us to this point. It is right that the new approach would be to say that the duty to avoid conflicts of interest would not be infringed if the matter has been authorised by the directors in accordance with the constitution.
Subsection (5) sets out how the matter is to be proposed and authorised by the directors. Plainly, the intention is that the directors should therefore be entitled to give consent to their fellow director—provided that the constitution so provides, in the case of a public company—in a situation in which a conflict of interest could arise. I agree with my noble friend that their consent needs to be informed consent. One would hope, in the case of directors of a public company, that they would require that the consent be informed in any event, and that they would want to know enough in order to make their decision.
The clause is not prescriptive about the degree of specificity with which information should be provided. The situation—or the "matter", which, as my noble friend says, is the word used in the clause—needs to be disclosed or else the directors could not authorise the matter. The Government prefer to leave it to the general law to identify the degree of specificity with which they do that, rather than by adding any particular epithet in the Bill at this stage.
We can see circumstances in which, if an epithet were put in, it may give rise to difficulties. An example that we have debated in Committee was where a director might wish to become a non-executive director of another company. He may rightly be concerned that this might in the future put him in a position where he may have conflicting interests or duties, and so needed to ask for the authorisation of his fellow directors to take up that post. It would be open to them at that stage to say, "Yes, but", or to limit the authorisation in some way. If they did not, it may well be that, properly understood, the authorisation should then be capable of covering any conflicting interest or duty that subsequently arose as a result of that non-executive directorship. That would be what the directors would intend by consenting to his taking up that post.
The amendment proposed by my noble friend might cause difficulties with that by raising doubts subsequently about whether, by not having identified
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things in advance that might arise, the director has put himself in breach of his duty. The Government think it is not really possible to prescribe the level of information to be given, which will depend on the circumstances of each case. The key point is that there will need to be an effective authorisation and that the extent of that authorisation will be for the general law to determine in the light of the authorisation that is given. My noble friend ended his helpful speech in moving this amendment by saying that he wanted to understand the Government's position, which is what I have sought to set out.
Lord Wedderburn of Charlton: I am grateful for my noble and learned friend's reply, but a little disappointed that he did not show great alacrity in wishing to change anything in this clause. Perhaps I could add in response to his reply that on many occasions in its reports—that is, the final report and the reports called Developing the Structure and The Strategic Structure—the CLR steering group repeated the need for safeguards in this new change in the law of what is a fundamental principle with regard to fiduciary duty.
My amendment would only begin the process of providing for safeguards, but the fact that the consent must be informed consent—on which I entirely agree with my noble and learned friend—should be reflected in the Bill, which instead uses the words "the matter" in what must be two rather different meanings in the same line.
After the final report, Professor Davies, who edited the book to which I referred earlier and was a member of the Company Law Review steering group, wrote that,
"the impact of the law will depend heavily on the integrity of the decision-making of the non-involved members of the board and upon their ability to avoid self-interested decisions and pressure from those seeking approval".
I interpret that remark to mean that we are not given very much guidance in the clause on how we will recognise those directors who are not interested in the matter. Given that,
guidance should be given about safeguards on the matter. I hope that my noble and learned friend will look at this again. But, at this stage, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
2.15 pm
Lord Freeman moved Amendment No. 174:
Page 70, line 21, at end insert "provided that the occurrence of such an authorisation shall be reported in the next annual report of the company"
The noble Lord said: I sense that there is agreement on both sides of the Committee that, using reasonable care, skill and diligence we might conclude Part 10 today. We will certainly do our best to ensure that we can leave the important but quite separate debate on derivative action to another day. Most of the amendments to which I will speak today are
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probing in nature. They have been raised by a number of organisations, including the CBI, the Law Society, the UK share association, a number of leading firms of city solicitors, investment management associations and many other professional bodies. There are probably at least two key issues on which we may get satisfaction today, but on which we may have to return later—that is, addresses of directors and future conflicts that it may not be possible to foresee.
Under Clause 159, the directors can still authorise a conflict of interest situation, if the constitution allows, without telling the shareholders. We think that any such occurrence should be reported in the next annual report. The Explanatory Notes are extremely helpful and I congratulate those who put them together. They state that, as the CLR was concerned that this strict requirement might stifle entrepreneurial activity, it recommended that, in the case of a private company, it should be possible for conflicts to be authorised by independent directors unless the company's constitution prevents that. However, there is no explanation of why the Government have deliberately gone further than the CLR in extending this exemption to public companies. Accordingly, we have tabled this probing amendment. I beg to move.
Lord Sharman: I support this amendment. The point made by the noble Lord, Lord Freeman, with regard to public companies is particularly relevant. It is common practice for directors' interests to be disclosed on an after-the-fact basis. Anything that moves back from that would be a retrograde step.
Lord Goldsmith: The specific amendment moved by the noble Lord, Lord Freeman, relates to the disclosure in the next annual report of the company that authorisations of conflicts of interest have been made. Clause 389(4) makes provision in general terms for what information might be included in the directors' report. All companies have to prepare directors' reports, although those in the small companies regime do not need to file them. There is a regulation-making power that I acknowledge could be used to include something along these lines if that were thought to be desirable. However, as things are at the moment, the Government have considered that the regime that is in place includes adequate safeguards. I want to come on to the second part of what the noble Lord, Lord Freeman, said in a moment. One has to recognise that each time one imposes an obligation, one is imposing a burden, and one has to be satisfied that it is an appropriate burden to impose.
What safeguards are included? That will go some way to answering the question that the noble Lord, Lord Freeman, raised about why apply the measure to public companies. First, so far as private companies are concerned, the company's constitution can remove that power. So the default position for a private company will be that authorisation by the directors is acceptable, but the constitution can take it away. One sees that from Clause 159(5)(a). The noble Lord, Lord MacGregor, made the point on the last occasion that for a public company there is a different provision, and it is necessary that the company's
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constitution permits this to take place. There needs to be a conscious decision to include that in the constitution—either originally or by amendment in accordance with those provisions allowing for amendment—at some future date. The constitution has to permit it—in the case of a public company, advisedly, expressly and deliberately permit it. It may be that there are public companies whose members do not want such a provision to exist and will therefore not allow such a change to take place.
Secondly, the authorisation has to be given without relying on the votes of the directors seeking the authorisation or any other director with an interest in it. Unlike my noble friend Lord Wedderburn in the last amendment, I anticipate that it would not be difficult to know which directors had an interest. Those directors cannot count towards the quorum either.
Thirdly, any requirements under the common law for what is necessary for a valid authorisation remain in force. I draw the Committee's attention to Clause 159(6), which says:
It then sets out certain specific requirements. It deliberately does not say that if those requirements are met the authorisation is effective. There might be other conditions in relation to the authorisation that would be required—for example, the company's constitution may have some specific provision with which it would be necessary to comply. Those formalities and those conditions need to be complied with as well.
Finally, in general terms, the directors who are giving the authorisation will need to comply with the general duties imposed on them. Those will include, specifically, the general duty that we discussed on the last occasion to act in such a way that in good faith they consider that authorisation is the course of action most likely to promote the success of the company. They will have to have regard to the interests of the company. Against that background of safeguards, the Government's view has been that it is not necessary therefore to impose the particular additional requirement that the noble Lord, Lord Freeman, proposed.
I think that I am right in saying that the Company Law Review's conclusion was exactly what the Bill provides for—namely, that approval should be permitted for a public company only if explicitly permitted by its constitution. That is what the clause does. I hope that I have dealt with both parts of what I perceive to be the probe that the noble Lord set in moving the amendment.
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