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Lord Sharman: I support the amendment. The noble Lord, Lord Freeman, is absolutely right to point out that current practice has moved on. It is fair to say that certainly as regards public companies, anything longer than a year for a contract is now unacceptable. In my view, five years would be out of the question.
Lord Hodgson of Astley Abbotts: I rise briefly to support my noble friend. Out there in UK plc or among the general public, if they were to see us
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considering long-term contracts of five years, they would consider it an amazing length of time. It would be laughable against the background of modern corporate governance and practice. Given that, the Bill needs to be brought into line with up-to-date thinking. I hope that the Government will respond positively to my noble friend's amendment.
The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Sainsbury of Turville): I am grateful to the noble Lord for raising this issue, which has been the subject of much consideration over the past few years. We are very sympathetic to the thrust of this amendment. As the noble Lord, Lord Freeman, said, best practice has moved on, and we need to take account of that.
Section 319 of the 1985 Act, which applies to all companies, requires specific shareholder approval for directors' service contracts of more than five years. A shareholder resolution must approve the specific term of agreement setting the period. The maximum permitted duration of directors' contracts of employment is of importance in setting the maximum compensation for loss of employment. The combined code also has provisions on this. Listed companies have, as a condition of listing, to "comply or explain" to the provisions. These say:
"Notice or contract periods should be set at one year or less. If it is necessary to offer longer notice or contract periods to new directors recruited from outside, such periods should reduce to one year or less after the initial period".
In 1999, the Law Commissions recommended a reduction in the period in Section 319 from five years to three years, although it suggested that further consideration should be given to the position of small companies. The Company Law Review consulted on whether the limit should be reduced to one year, with flexibility to contract for three years on first employment, both limits to be subject to extension by members' resolution. The great majority of responses supported a reduction of the five-year maximum to three, but there was quite strong opposition to the reduction to one year, except as a matter of "comply or explain" as a listing rules requirement for listed companies. Concerns included the possible competitive disadvantage for British companies in the market for management skills internationally, and whether this would lead to excessive remuneration on the shorter contracts. It was also argued that this might be appropriate for public companies, but not for closely held private ones. The Company Law Review concluded that the normal maximum should be one year—or three on first appointment—but that this should be able to be overridden by shareholders if they wished.
The Directors' Remuneration Report Regulations 2002 introduced both more comprehensive reporting by quoted companies on directors' remuneration—including information about service contracts—and a compulsory shareholder vote in quoted companies on the directors' remuneration report. Research by Deloittes demonstrated that these regulations have led to substantial and direct improvements in the
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transparency of executive remuneration. The regulations thus acted as a catalyst for increasing company accountability and effective shareholder engagement.
In principle, we are sympathetic to the intention behind this amendment. Five years is, in our view, too long and we agree that the period could sensibly be shortened. We would not want to introduce different provisions for public and private companies—especially as the combined code already provides stricter provision for quoted companies on a "comply or explain" basis—but we would want to check whether a reduced period would cause real difficulty, in particular for smaller companies. We would therefore like to consider this amendment, do some more consultation and come back on the issue. As the noble Lord has said, best practice has moved on, and we should reflect it.
Lord Freeman: I find myself in agreement with the noble Lord, Lord Sainsbury. From our side, we think that a signal should be sent both to public and private companies. After all, it is only a contract and contracts can be, once the appropriate process is gone through, renewed. It is the signal that should be sent throughout our economy: there are no jobs for life—to use a phrase that some have adopted regarding this clause. I think that it would send the right signal if we reduced it to two. I look forward to the results of the consultation and perhaps, in consultation with the Minister, find common ground: something that is not too overbearing but which sets a signal for the next two decades—if it is going to be that long, some of us may not be here—before we return to another company law reform Bill. In the mean time, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 188 not moved.]
Clause 173 [Substantial property transactions: requirement of members' approval]:
3.45 pm
Lord Freeman moved Amendment No. 189:
The noble Lord said: We feel that the current drafting of subsection (2) is confused, and the amendment would help to clarify it. It is a probing amendment that seeks to improve the wording of the Bill. I beg to move.
Lord Sainsbury of Turville: We think this makes the clause clearer, and therefore we will accept it.
Lord Freeman: Peace is breaking out. Whether it is the advance of the clock I do not know. I was confidently expecting Amendment No. 214 to be our only victory this afternoon, but I am glad to add this amendment. I am grateful.
On Question, amendment agreed to.
Clause 173, as amended, agreed to.
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Clause 175 [Exception for transactions with members or other group companies]:
On Question, Whether Clause 175 shall stand part of the Bill?
Lord Freeman: I wish to speak to question of whether Clause 175 should stand part. We think it would be helpful if the Minister could provide us with guidance as to the circumstances in which a person should be treated as acting,
of the company for the purposes of Clause 175(a). There is some uncertainty about this and any clarification offered either today or subsequently would be much appreciated.
Lord Sainsbury of Turville: Paragraph (a) restates Section 321(3) of the Companies Act 1985. The only substantive change is to expand the exception to include the acquisition of assets from the member. Paragraph (b) reinstates Section 321(2)(a) of that Act. The wording in paragraph (a), creating an exception from the requirement for approval for substantial property transactions between a company and person in his character as a member, is taken directly from the 1985 Act. It is intended to cover transactions such as the payment of the dividend in specie as well as the distribution of assets to a member of a company during the winding-up of the company and in satisfaction of his rights qua member in the liquidation. Likewise a duly sanctioned return of capital in the form of non-cash assets would fall within this exception. It is also intended to put beyond doubt that the issue of shares or other rights to a member does not require approval under the rules for substantial property transactions.
Paragraph (b) creates an exemption for transactions between wholly owned subsidiaries of the same holding company. This is not a strong reason to require member approval in the case of a wholly owned subsidiary, as the holding company should be able to exercise all the control it wishes through its 100 per cent shareholding. I hope that makes clear what we mean by a person,
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