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Company Law Reform Bill [HL]
3.53 pm
The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Sainsbury of Turville): My Lords, I beg to move that this Bill be now read a second time.
One hundred and fifty years ago, my predecessor Robert Lowe, later First Viscount Sherbrooke, brought forward the Bill that created the joint stock limited liability company. It was the first nationwide codification of company law in the world, and he has recently been described as "the father of modern company law". Our company law continues to have an excellent record. Since 1997 new incorporations have risen by over 60 per cent and the number of foreign firms incorporating in the UK has more than quadrupled. No doubt this is because, according to the World Bank's assessment, it is quicker and cheaper for companies to set up in the UK than in any other EU member state.
We think that improvements can still be made. Companies operate internationally and recent legal judgments make cross-border incorporations easier. Overseas owners hold around a third of the stock in listed UK companies—more than twice the level in 1993. If we want these owners to continue to invest in UK companies, we need them to retain their confidence in our system of corporate governance.
Over the past half century, a number of significant Companies Acts have been introduced by governments from all parts of the political spectrum, often following on from the deliberations of an expert committee. The first post-war legislation—the Companies Act 1947—implemented the Cohen report of 1945 and, among other things, proposed the requirement that a company's accounts represent a "true and fair view" of the state of affairs of the company.
The Companies Act 1967 introduced, among other things, the requirement for all companies to file accounts with Companies House. Shorter Acts followed: in 1976, dealing with accounts and audit; in 1980, implementing the distinction between public and private companies; and, in 1981, making detailed provisions on the form and content of company accounts and implementing a European directive in this area.
The 750 sections of the consolidating 1985 Act remain of course the centrepiece of our current law. This was followed in 1986 by the Financial Services Act, marking the beginning of a separate branch of legislation for securities, and by the Companies Act 1989, which implemented the EC's Eighth Company
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Law Directive on group accounts and the EC's Eighth Company Law Directive on the qualifications of auditors.
I hope that that short and partial review of the past makes clear the need constantly to update our company law in response to changes in the way that companies do business and how that is often best done, as in this Bill, based on a previous review by independent experts and taken forward largely on a cross-party basis. I hope that we can, as far as possible, continue that tradition. That said, I do not think that the Bill is merely "business as usual". In its clear focus on simplification, on the needs of small businesses, which are so important to our economy, and on deregulation, I believe it represents a break with the past.
The Bill has been drawn up in a unique partnership with business. In 1998, we commissioned the Company Law Review—an independent group of experts, practitioners and business people—to take a fundamental look at our system of company law. The review conducted a thorough and authoritative assessment of the changes that need to be made and is the essential blueprint for the reforms we now propose.
The review was followed by two White Papers, in 2002 and 2005, and by further consultation on specific proposals. The Bill includes significant deregulatory change and, based on the information we have had from stakeholders, we estimate that it will produce savings for business of around £250 million a year, of which £100 million a year will benefit small business. That includes: significant savings relating to moves away from paper communications towards electronic communications, which could be close to £50 million per year for FTSE-listed companies alone; benefits for many companies, particularly smaller private ones, of simplifications to the way they take their decisions, including, for example, removing the requirement for them to hold annual general meetings and a move towards greater use of written resolutions with savings perhaps in the range of £25 million to £100 million a year; greater clarification provided by the Bill on directors' duties; and the general savings to companies, their advisers and all users of the law from redrafting it and providing a clearer structure and language.
It is also important to emphasise the less easily quantifiable, but no less real, economic benefits which we believe could arise for all companies and for the economy as a whole from the enhancements to corporate governance, shareholder engagement and the modernisation of decision-making processes that the Bill introduces.
The Bill repeals about two-thirds of the Companies Acts 1985 and 1989, including all the provisions most frequently used by small companies. The legislation has been reordered and redrafted in clearer language to make it much easier for companies of whatever size to understand the requirements on them. I hope that noble Lords will be able to join me in complimenting
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parliamentary counsel on the clarity of the drafting, which has been favourably commented on by a number of those whom we have consulted.
Noble Lords may ask why the Bill is not a complete consolidation of existing company law. That is largely a case of reflecting the views of those whom we consulted. They told us that they wanted to see restatement of the areas which were of day-to-day relevance but not to see provisions reworked for the sake of it.
On capital maintenance, for example, which is a large chunk of what remains in the 1985 Act, we are pressing for fundamental reform in the EU. To restate in advance of that would not be helpful for users, although the Bill does make some useful specific changes. In practice, we are told that, when referring to company law, users use publications such as Butterworths, which shows the Acts as amended and includes relevant statutory instruments and, indeed, financial services legislation.
Lord Clinton-Davis: My Lords, as the Minister knows, I am in favour of some degree of consolidation at this stage. However, the logic of what he says is that we will have to wait for a very long time before consolidation can take effect. For that reason, would he reconsider consolidation now? It is always possible to come back later with further measures.
Lord Sainsbury of Turville: My Lords, as I was saying, this is not what we have been asked to, and not what business and lawyers want us to do. In any case, if we were to consolidate all company law, we would shortly be faced with a situation on capital maintenance which would involve another Bill, and it would no longer be consolidated. It is simply not possible to have a consolidated Bill which holds for a lengthy period of time and, as I said, it is neither desirable nor necessary, nor what people want.
The Company Law Reform Bill has four key objectives: enhancing shareholder engagement and a long-term investment culture; ensuring better regulation and a "think small first" approach; making it easier to set up and run a company; and providing flexibility for the future.
Better regulation is at the heart of the Bill. As it stands, our company law was originally designed for large companies with numerous public investors, but over 90 per cent of companies have five shareholders or fewer. We have lifted from private companies the burden of unnecessary provisions, and drafted the provisions they use most often in a more accessible way. We will also ensure that small companies and their advisors have easy access to plain English guidance on what they need to know about the law.
The Bill follows the important principle, established by our predecessors, of enabling shareholders to be the primary regulators of corporate behaviour rather than the state. Companies exist for the benefit for all their members collectively and need the freedom and flexibility to create wealth. Corporate law and governance must be designed to encourage and enable
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companies to create the internal structures and controls that will promote trust and transparency, and lead to better performance.
The Bill is part of a wider programme of government and business-led reform. In 2002, we launched a review by Sir Derek Higgs on non-executive directors, which led to an updating of the Combined Code on Corporate Governance. That year we also introduced regulations to require quoted companies to put the directors' remuneration report to a shareholders' vote. The Companies (Audit, Investigations and Community Enterprise) Act 2004 ensured better oversight and stronger regulation of the accounting and audit profession, strengthened powers to investigate companies and created the framework for community interest companies. We have also raised the audit thresholds, so that some 69,000 companies no longer have to have their accounts professionally audited.
I now come to the Bill itself, which is 885 clauses long, partly because of its simplicity, with shorter, clearer clauses. If the Opposition think that this is not a matter of great interest to small companies and businesses—to have the document in a clear, simple form with short clauses—they do not understand what business is about. I should add, in the light of a claim by Conservatives this morning, that the Bill is not deregulatory. It contains 885 clauses, but repeals only 642 clauses of previous Company Acts. There must be more intelligent ways of measuring the financial impact of a piece of legislation than simply counting the clauses.
As I have shown, the Bill significantly reduces the financial burdens on industry. Also to say in the same press release that a Bill which covers such issues as directors' duties, the limitation of auditors' liabilities, shareholders' rights and the provision of a statutory footing for the Takeover Panel is a mouse of a Bill suggests to me not so much that the Conservative Party is standing up to business as that it is losing touch with it and with reality. These are extremely important issues; they are known to be important issues to business. To describe this as a mouse of a Bill is simply to lose touch with the real world. The Bill is long and I hope that the law will be clearer as a result. I shall summarise some of the key elements.
Parts 1 to 7 of the Bill deal with the fundamentals of what a company is; how it can be formed; and what it can be called. These clauses remove any obstacles to "electronic incorporation". The Bill enables the Secretary of State to set out default model articles for different descriptions of companies. We published draft default articles for private companies in our 2005 White Paper. They are radically simplified to reflect the way in which small companies operate. This approach was developed with the involvement of small companies.
Part 9 will ensure that companies can enable indirect investors to exercise certain governance rights. Investors today increasingly hold their shares in listed companies through intermediaries—for example, through nominee holdings—and thus rely on
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contractual arrangements both to obtain information and to give any instructions about how they wish shares to be voted. These provisions are intended to ensure that companies can extend certain rights of members to investors holding through intermediaries. They also provide a power to make regulations to compel companies to provide information to those nominated by a member, subject to consideration of possible costs and benefits.
Part 10 introduces a statutory statement of directors' general duties. The statutory statement reflects the recommendations of the Law Commission, the Scottish Law Commission and the Company Law Review, and it will provide much greater clarity on what is expected of directors. I shall highlight two points. The statutory statement is, for the most part, a codification of the current law and preserves the existing civil consequences of breach of the duties. The duties are owed to the company rather than to shareholders individually or to other stakeholders.
The duty to promote the success of the company answers one of the fundamental questions in company law: "in whose interests should companies be run?". In line with the recommendation of the Company Law Review, the Bill's answer is that directors should run the company for the benefit of its members collectively. However, directors will not be successful in promoting the success of the company if they focus on only the short-term financial bottom line. Successful companies see business prosperity and responsible business behaviour as two sides of the same coin. That is why, in line with the recommendation of the Company Law Review, the Bill adopts an approach known as "enlightened shareholder value", under which a director must, in promoting the success of the company, have regard to factors such as the long-term consequences of business decisions and the impact of the company's activities on employees, the community and the environment.
The duty to exercise reasonable care, skill and diligence mirrors the tests laid down in Section 214 of the Insolvency Act 1986. As such, it reflects the judicial development of this duty in recent years and includes an objective assessment of a director's conduct.
The duties relating to directors' conflicts of interest introduce two changes to the very strict principle in the current law that directors must not place themselves in a position in which there is a conflict between their duties to the company and their personal interests or duties to others: first, transactions between a director and the company will not have to be authorised by either the members or the board, but will instead need to be declared to the other directors; secondly, board authorisation will be permitted in respect of most conflicts of interest arising from third-party dealings by the director.
Chapter 8 of this part implements the Company Law Review's recommendation that it should be possible for any director to have his home address protected. It will no longer be necessary first to show risk of violence or intimidation.
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Part 11 describes the mechanism by which members may enforce directors' general duties on behalf of the company. It implements the recommendation of the Law Commission that there should be more modern, flexible and accessible criteria for determining whether a shareholder can pursue such an action.
Part 12 removes the requirement on private companies to appoint a company secretary. Some such companies may wish to keep a secretary; this will be for them to decide.
The provisions in Part 13 on company decision-taking are an example of our "think small first" approach. The key changes are that the Bill is drafted on the basis that private companies will not need to hold annual general meetings (AGMs); it will be easier for private companies to take decisions by letter, e-mail or other electronic means; the law will extend shareholders' rights to appoint proxies; shareholders of public companies will have the right to have AGM resolutions circulated at the company's expense if tabled before a certain date; and shareholders of quoted companies will have the right to request an independent report on a polled vote.
Parts 15 and 16 cover the accountability of officers to members. The provisions on reports and accounts have been reordered and redrafted to make it easier for companies of whatever size to find the requirements relevant to them.
Noble Lords will be aware that, since the Bill was introduced, the Chancellor announced the Government's intention to repeal the operating and financial review provisions that apply to quoted companies, and amending regulations were laid on 15 December. These companies will need to comply with the requirements for a business review, which are in most respects very similar. I must stress that our commitment is as strong as ever to improving strategic, forward-looking narrative reporting by companies and to enhanced dialogue with shareholders based on such reporting.
We intend to bring forward appropriate amendments to the Bill to reflect this change of approach. Before doing so, we have invited comments on whether any particular requirements of the business review need to be clarified to achieve more effectively the Government's objectives regarding the business review and on any other considerations that we should consider in deciding how to frame suitable amendments for the Company Law Reform Bill on these matters. Some companies are considering whether to publish an OFR on a voluntary basis or to provide voluntary supplements to the business review in order to provide all the information for shareholders and others in one place. We welcome an approach that further increases transparency and the information available to shareholders.
The business review requirements should also be seen against the background of the new statutory statement of directors' duties in the Bill. Views have
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been invited by 15 February and we intend to take them into account before bringing forward amendments to these provisions.
Part 16 brings together and clarifies the existing provisions on auditing and adds a number of important new provisions. It will enable a company and its auditor to agree a limitation on the latter's liability, which has until now been prohibited. A limitation will require shareholders' approval, and must be fair and reasonable. If not, it can be challenged and the court may substitute its own limitation. There is a new offence for those who knowingly or recklessly cause misleading, false or deceptive audit reports to be made.
In response to concerns expressed by some of those we consulted, we have taken the opportunity to reinforce, in Parts 15 and 16, the "true and fair" principle that underpins the preparation and auditing of all company accounts. This is a common-sense principle that if the accounts do not provide a "true and fair" view of the company's financial position, directors should not sign them off and the auditors should not give an unqualified report. There are other changes designed to improve the quality of audit service.
Parts 17 to 22 deal with raising share capital and takeovers. There are a number of deregulatory measures for private companies, including abolishing the prohibition on the giving of financial assistance by private companies and enabling private companies to reduce their share capital using a new solvency statement procedure for capital reductions. This part also clarifies the circumstances in which companies may make an intra-group transfer of an asset at book value. Part 20 extends the existing power relating to transfer of securities under Section 207 of the Companies Act 1989 so that it could be used to require, as well as to permit, the paper-free holding and transfer of company shares. This reflects the work of an industry working group that has been looking at options.
Part 22 includes provisions implementing the European takeovers directive. These will place the activities of the Takeover Panel within a statutory framework for the first time. The constitutional and operational autonomy of the Takeover Panel will be maintained. However, important new powers are to be extended to the panel, including statutory rule-making powers, the right to have its decisions enforced through the courts and the ability to prescribe sanctions against those who transgress its rules. The Bill's provisions aim to ensure that tactical litigation seeking to delay or frustrate a takeover bid will not become a feature of our takeover markets. The directive needs to be implemented by 20 May. Given the length of the Bill, we have given thought to the need for interim provision, should the Bill not receive Royal Assent before that date.
Part 28 provides for greater use of electronic communications, which will enhance the immediacy of dialogue between companies and their shareholders and produce significant cost-savings. Subject to
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shareholder approval, companies will be able to use e-communications as the default position. Individual members will retain the right to request continued communication on paper if they wish.
Part 31 covers flexibility for the future. Modern legislation in technically complicated fields often leaves the more detailed provisions to subordinate legislation. Much of company law, by contrast, has been written into primary legislation. This is simply a side effect of history, but has meant that updating the law to reflect the changing business environment is not always straightforward. The Company Law Review recognised this problem, and one of its key recommendations was that in future only the principles of company law should be placed in primary legislation and the detail should be written into secondary legislation. We examined this proposal carefully but found that it was not always straightforward in practical terms and concluded, after wide consultation, that the issue would be better addressed by the creation of a Reform Power for Company Law that could be used to amend primary legislation by super-affirmative procedures. The proposed reform power is set out in Part 31 of the Bill.
We recognise that the power is wide and novel, and raises significant issues which will need to be carefully considered by the House. We are grateful for the report of the Delegated Powers Committee, and the views provided by the Select Committee on the Constitution. The important contributions from these committees have raised powerful arguments against the proposal, and the Government are carefully considering the points made. At the same time, there seems to be common recognition that the problem of keeping company law up to date needs to be resolved, and the Government believe that the underlying rationale for the power remains a strong one. This is a crucial and difficult area, and I look forward to debating it.
Part 33 implements aspects of the eighth Company Law Directive on the statutory audit of accounts. We are also implementing the recommendation contained in the report Holding to Account by the noble Lord, Lord Sharman, that the Auditor General should be able to carry out statutory audits on non-departmental public bodies.
Part 34 inserts provisions into the Financial Services and Markets Act 2000 that will allow the Financial Services Authority to make rules for the purposes of the Transparency Obligations Directive. This part takes the first step in implementing the central recommendation of the Morris Review of the Actuarial Profession, that the Financial Reporting Council should oversee the actuarial profession. It is intended that oversight of actuaries will be put on a statutory basis in due course; in the mean time, these clauses aim to facilitate the effective operation of a voluntary regime. The Government also take a power to be able to require institutional investors, through whom the public invest in long-term savings products, to disclose how shares they own, or have an interest in, have been
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voted. Some institutional investors are already making such disclosures. We want to see such practice extended.
Part 35 provides that companies in Northern Ireland will be covered directly by the Bill, which legislates for the whole of the UK. At the moment, the law in Northern Ireland is virtually identical to that in Great Britain, but it is made by separate legislation specific to Northern Ireland. This inevitably follows on behind the legislation in Great Britain and means that companies in Northern Ireland face delays before they can get the benefits of the changes being made. Recent public consultation showed that businesses and their representatives in Northern Ireland would welcome simultaneous legislation, and this is what the Bill provides. This does not affect the underlying position that company law remains in formal terms a transferred matter, and a future Northern Ireland Assembly will be able to legislate separately if it so chooses.
This is a long Bill but it will bring significant improvements in many areas of company law. It has the potential to bring significant savings for business, delivers on the "think small first" principle, and updates the law for the benefit of our largest companies. It also benefits investors. Many people have been involved in the thinking behind this Bill and we are very grateful for all the input we have received. The reason why the Bill has been so widely welcomed is due to the close involvement over a number of years of so many interested parties. I trust that it will attract a similar degree of support from this House, and commend the Bill to the House.
Moved, That the Bill be now read a second time.—[Lord Sainsbury of Turville.]
4.20 pm
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