Clause 228: Minutes as evidence

458.     This clause makes provision in respect of the evidential value of the minutes of directors' meetings.

Meaning of "director" and "shadow director"

Clause 229: "Director"

459.     This clause restates the definition of "director" in section 741 of the 1985 Act.

Clause 230: "Shadow director"

460.     This clause restates the definition of "shadow director" in section 741 of the 1985 Act.

Other definitions

Clause 231: Persons connected with a director

461.     This clause sets out the definition of "connected person" which is used in many of the clauses in this Part in relation to the regulation of directors. The persons who are "connected" for this purpose with a director include:

• certain family members (see clause 232);

• certain companies with which the director is connected (see clause 233);

• trustees of a trust under which the director or a relative mentioned in clause 232 or a companies with which the director is connected is a beneficiary (but not if the trust exists for the purposes of an employees' share scheme as defined in section 743 of the 1985 Act or a pension scheme);

• certain partners; and

• certain firms with legal personality (such as a Scottish firm in which the director is a partner).

This clause, together with clauses 232 to 234, replaces section 346 of the 1985 Act.

Clause 232: Members of a director's family

462.     This clause sets out those members of a director's family who fall within the definition of persons connected with the director. The list includes all those family members currently falling within the definition of connected person in section 346 of the 1985 Act, and in addition it covers:

• the director's parents;

• children or step-children of the director who are over 18 years old (those under 18 were already included under section 346 of the 1985 Act);

• persons with whom the director lives as partner in an enduring family relationship; and

• children or step-children of the director's unmarried partner if they live with the director and are under 18 years of age.

This implements the Law Commissions' recommendation that the definition of connected person be extended so as to include cohabitants, infant children of the cohabitant if they live with the director, adult children of the director and the director's parents. The recommendation that the definition be extended to siblings has not been implemented.

Clause 233 and Schedule 1: Director "connected with" a body corporate

463.     This clause determines whether a company or other body corporate is a person connected with a director. Broadly speaking, the director, together with any other person connected with him, must be interested in 20% of the equity share capital, or control (directly or indirectly through another body corporate controlled by them) more than 20% of the voting power exercisable at any general meeting.

464.     Schedule 1 contains the rules for determining whether a person is "interested in shares" for this purpose.

Clause 234: Director "controlling" a body corporate

465.     This clause defines the circumstances in which a director is deemed to control a body corporate for the purposes of clause 233. These circumstances involve two cumulative hurdles. First, the director or any other person connected with him must be interested in the equity share capital or be entitled to control some part of the voting power exercisable at any general meeting. Secondly, the director, fellow directors and other persons connected with him must be interested in more than 50% of the equity share capital or be entitled to control more than 50% of the voting power exercisable at any general meeting.

466.     Schedule 1 contains the rules for determining whether a person is "interested in shares" for this purpose.

Clause 235: Associated bodies corporate

467.     This clause explains what is meant by references in this Part to associated bodies corporate. A holding company is associated with all its subsidiaries, and a subsidiary is associated with its holding company and all the other subsidiaries of its holding company.

Clause 236: References to company's constitution

468.     This clause company makes provision as to the meaning of references to a company's constitution in this Part.

469.     The clause is relevant to a number of provisions in this Part, including the duty to act within powers (clause 155) and the duty to exercise independent judgment (clause 157).

General

Clause 237: Power to increase financial limits

470.     This clause deals with the power of the Secretary of State to increase financial limits in this Part of the Bill. All the financial limits appear in Chapter 4 (provisions regulating transactions with directors requiring approval of members). This clause restates section 345 of the 1985 Act.

Clause 238: Transactions under foreign law

471.     This clause makes clear that the rules under this Part of the Bill apply whether or not the proper law governing a transaction or arrangement is the law of a part of the UK.

472.     This provision is necessary to prevent parties seeking to avoid the application of the rules relating to approval of long-term service contracts, substantial property transactions and loans and similar transactions by choosing a foreign law. This clause restates section 347 of the 1985 Act.

PART 11: DERIVATIVE CLAIMS AND ACTIONS BY MEMBERS

473.     Clause 154 (Scope and nature of general duties) provides that directors' general duties are owed to the company rather than to individual members. It follows that, as now, only the company can enforce them. There are three main ways in which the company can take legal action against a director (or, more usually, a former director) for breach of duty:

• if the board of directors decides to commence proceedings;

• if the liquidator or administrator following the commencement of a formal insolvency procedure such as liquidation or administration decides to commence proceedings;

• through a derivative claim or action brought by one or more members to enforce a right which is vested not in himself but in the company.

This part of the Bill is concerned with the third of these types of action.

EXISTING LAW

England and Wales or Northern Ireland

474.     In England and Wales, it is possible as a matter of common law for a member to bring an action, in certain circumstances, on behalf of the company of which he is a member. This is known as a derivative claim. As noted above, a member might bring such an action to enforce liability for a breach by one of the directors of his duties to the company.

475.     The ability to raise a derivative claim is an exception to the general rule in England and Wales that it is for the company, acting through the will of a majority of its members, to bring any such proceedings (as a result of the principles known as the rule in Foss v Harbottle). If, for example, wrongdoing directors control the majority of the company's shares they would be in a position to prevent legal proceedings being brought by the company to address the breach. The exception allows the wrong to be remedied on behalf of the company at the instigation of a minority shareholder.

476.     The law in Northern Ireland in this area is the same as that in England and Wales.

Scotland

477.     In Scots law, the member's right to raise action is conferred by substantive law. Accordingly, a member has title as a matter of substantive law to raise proceedings in respect of a director's breach of duty to obtain a remedy for the company. The action is raised in the name of the member but the remedy is obtained for the company and the rights which the member can enforce against a director or third party are those of the company.

478.     The member's right arises where the action complained of is fraudulent or ultra vires and so cannot be validated by a majority of the members of the company. This remedy is not available if the majority of members acting in good faith have validated or may validate the act complained of.

479.     Two rules of substantive law apply to actions brought by the member to protect the company's interests (as well as to actions brought to protect the shareholder's personal interests such as enforcement of rights in the articles of association). First, the directors of a company owe duties to the company and not to the members. Second, the court will not interfere in matters of internal management which may be sanctioned by a majority of the members. The effect of these rules is similar to the first two legs of the rule in Foss v Harbottle.

CHAPTER 1: DERIVATIVE CLAIMS IN ENGLAND AND WALES OR NORTHERN IRELAND

480.     The clauses do not formulate a substantive rule to replace the rule in Foss v Harbottle, but rather a new procedure for bringing such an action which set down criteria for the court distilled from the Foss v Harbottle jurisprudence.

481.     The law relating to the ability of a member to bring proceedings on behalf of the company is not written down in statute. The general principle - commonly known as the rule in Foss v Harbottle - is that it is for the company itself to bring proceedings where a wrong has been done to the company. However, where there has been conduct amounting to a fraud on the minority, an exception may be made to the rule, so that a minority shareholder may bring an action to enforce the company's rights (for example, where there has been an expropriation of company property or dishonest behaviour and the company is improperly prevented from bringing proceedings by the majority shareholders, perhaps because the wrongdoing director(s) control the majority of votes).

482.     The clauses in Chapter 1 of this Part do not seek to overturn these well-established principles. Rather, they implement the recommendation of the Law Commission that there should be a "new derivative procedure with more modern, flexible and accessible criteria for determining whether a shareholder can pursue an action" (Shareholder Remedies, paragraph 6.15). These clauses will also be supplemented by amended Civil Procedure Rules.

Clause 239: Derivative claims

483.     This clause sets out the key aspects of a derivative claim.

• Subsection (1) defines what is meant by a derivative claim. There are three elements to this: the action is brought by a member of the company; the cause of action is vested in the company; and relief is sought on the company's behalf. (A "member" is defined in clause 112. Subsection (5) provides that references to a member in this Chapter include a person who is not a member but to whom shares in the company have been transferred or transmitted by operation of law, for example where a Trustee in Bankruptcy or Personal Representative of a deceased member's estate acquires an interest in a share as a result of the bankruptcy or death of a member.)

• Subsection (2) provides that the claim may only be brought either under this Chapter or in pursuance of an order of the court in proceedings under section 459 of the 1985 Act (subsection 2).

• Subsection (3) provides that a derivative claim "may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company". As such, a derivative claim may be brought in respect of an alleged breach of any of the general duties of directors in Chapter 2 of Part 10, including the duty to exercise reasonable care, skill and diligence.

• Subsection (3) also provides that the cause of action may be against the director or against a third party, or both. Derivative claims against third parties would be permitted only in very narrow circumstances, where the damage suffered by the company arose from an act involving a breach of duty etc on the part of the director (e.g. for knowing receipt of money or property transferred in breach of trust or for knowing assistance in a breach of trust).

• Subsection (4) provides that a derivative claim may be brought by a member in respect of wrongs committed prior to his becoming a member. This reflects the fact that the rights being enforced are those of the company rather than those of the member.

• Under subsection (5), the reference to a director in this Chapter includes a former director; and a shadow director is treated as a director.

Clause 240: Application for permission to continue derivative claim

484.     This clause provides that, once proceedings have been brought, the member is required to apply to the court for permission to continue the claim. The court has a discretion to grant permission, to refuse permission and dismiss the claim, or adjourn the proceedings and give such directions as it thinks fit.

Clause 241: Application for permission to continue claim as a derivative claim

485.     This clause addresses the possibility that, where a company has brought a claim and the cause of action on which the claim is based could be pursued by a member as a derivative action:

• the manner in which the company commenced or continued the claim may amount to an abuse of the court (e.g. the company brought the claim with a view to preventing a member bringing a derivative claim);

• the company may fail to prosecute the claim diligently;

• it may be appropriate for a member to continue the claim as a derivative claim;

• the clause provides that, in these circumstances, a member may apply to the court to continue the claim as a derivative action.

Clause 242: Whether permission to be given

486.     This clause sets out the criteria which must be taken into account by the court in considering whether to give permission to continue a derivative claim.

487.     Subsection (2) provides that the court must refuse leave to continue a derivative claim if it is satisfied that:

a)     a person acting in accordance with the general duty of directors to promote the success of the company (clause 156) would not seek to continue the claim; or

b)     the act or omission giving rise to the cause of action has been authorised or ratified by the company. (Clause 164(4) preserves any rule of law enabling the company to give authority for anything that would otherwise be a breach of duty. Clause 216 preserves the current law on ratification of acts of directors, but with one significant change. The intention is that any decision by a company to ratify conduct by a director amounting to negligence, default, breach of duty or breach of trust in relation to the company must be taken by the members, and without reliance on the votes of those members with a personal interest in the ratification.)

488.     Subsection (3) sets out the criteria which the court must, in particular, take into account in considering whether or not to grant permission for the derivative claim to be continued.

489.     Subsection (4) confers on the Secretary of State a power to make regulations with regard to the criteria to which the court must have regard in determining whether to grant leave to continue a derivative claim and where leave of the court must be refused. Subsection (5) provides that, before making any such regulations, the Secretary of State must consult with such persons and organisations as he considers appropriate. The power reflects a recommendation by the Law Commission in its 1997 report on shareholder remedies in respect of analogous shareholder actions in Scotland. Under subsection (6), the regulations will be subject to the affirmative resolution procedure.

Clause 243: Application for permission to continue derivative claim brought by another member

490.     This clause addresses the possibility that, where the court has already decided that there is an appropriate case for a derivative claim and a member has commenced a claim:

• the manner in which the member commenced or continued the claim may amount to an abuse of the court (e.g. the member brought the claim with a view to preventing another member from bringing the claim);

• the member may fail to prosecute the claim diligently;

• it may be appropriate for another member to continue the claim (e.g. because the member who brought the claim has become very ill).

491.     The clause provides that, in these circumstances, another member may apply to the court to continue the claim as a derivative action.

CHAPTER 2: DERIVATIVE ACTIONS IN SCOTLAND

Clause 244: Derivative actions

Clause 245: Requirement for leave and notice

Clause 246: Granting of leave

492.     The clauses in respect of proceedings in Scotland seek to ensure maximum consistency between the position in England and Wales and Northern Ireland and the position in Scotland (although the clauses reflect the different procedural requirements which apply where proceedings are commenced in the Scottish courts). In view of this, they also put the rights of the member to raise actions on behalf of the company on a statutory footing.

493.     The Scottish action is called a derivative "action" rather than "claim". This is appropriate because the clauses confer the right to raise an action; that is, they confer the right to bring the proceedings in the first place, and then regulate the proceedings. (By contrast, the clauses relating to proceedings in England and Wales and Northern Ireland assume that there is already a right to bring such proceedings in England and Wales and Northern Ireland; they therefore regulate the proceedings rather than confer the right to bring them.)

494.     Subsections (3)-(5) of clause 246 (Granting of leave) confer on the Secretary of State a parallel power to that in clause 242 to make regulations with regard to the criteria to which the court must have regard in determining whether to grant leave to continue a derivative claim and where leave of the court must be refused.

PART 12: COMPANY SECRETARIES

General

Clause 247: Private company not required to have secretary

495.     This clause implements the CLR recommendation (Final Report, paragraph 4.7) that the requirement for a private company to have a secretary be abolished.

Clause     248: Public company required to have secretary

496.     This clause replaces section 283(1) of the 1985 Act. It retains the requirement that a public company must have a secretary. The secretary may also be one of the directors.

Clause 249: Direction requiring public company to appoint secretary

497.     This clause is a new provision, enabling enforcement of the continuing requirement for a public company to have a secretary. Where it appears that a public company does not have a secretary, the Secretary of State may give a direction to the company. The company must comply with the direction (by making the appropriate appointment and giving notice of it) within a specified period. The clause provides for an offence for failure to comply with a direction.

Provisions applying to secretaries of public companies

Clause      250: Qualifications of secretaries of public companies

498.     This clause replaces section 286 of the 1985 Act. It makes it the duty of the directors of a public company to ensure that the secretary has both the necessary knowledge and experience and also one of the specified qualifications listed in subsection (2). The qualifications specified in this clause are the same as in the 1985 Act except that:

• they do not include the qualification of having held the office of the company's secretary (or assistant or deputy secretary) on 22nd December 1980;

• in subsection (3)(f), "Chartered Institute of Management Accountants" replaces "Institute of Cost and Management Accountants" as the Institute changed its name in 1986.

• There is no requirement for the company secretary to be a natural person. (Compare the requirement in clause 139 that a company must have at least one director who is a natural person.)

Clause      251: Discharge of functions where office vacant or secretary unable to act

499.     This clause replaces section 283(3) of the 1985 Act. It provides, in respect of public companies, for the situation where the office of secretary is vacant or there is no secretary capable of acting for any other reason. In these circumstances, if the company has an assistant or deputy secretary, then that person may fill the position of secretary; if not, any person authorised by the directors may do so. This clause differs from section 283(3) of the 1985 Act by permitting the directors to authorise any person to act as secretary, rather than only an officer of the company.

Clause 252: Duty to keep register of secretaries

500.     This clause replaces the requirement in section 288 of 1985 Act. Because, under the Bill, private companies need not have a secretary, it applies only to public companies. It requires every public company to keep a register of its secretaries containing specified details. Subsection (2) replicates the existing requirements as to where the register must kept and what information must be kept in it (see clauses 254 - 256); Subsections (3) - (6) retain the public right of inspection, sanctions and means of enforcement of the right of inspection. Clause 744 provides power to set fees for inspection and copies.

Clause 253: Duty to notify registrar of changes

501.     This clause replaces the requirement in section 288(2) of the 1985 Act. Because, under the Bill, private companies need not have a secretary, it applies only to public companies. It requires notification to the registrar within 14 days of any change in the company's secretary or any change in the particulars contained in the register of secretaries. It retains the existing sanction. This clause ensures that the public record is kept up to date as regards the secretary of every public company.

Supplementary

Clause 254: Particulars of secretaries to be registered: individuals

502.     This clause replaces section 290 of the 1985 Act insofar as it applies to secretaries who are individuals. It requires a public company to enter in its register of secretaries the name and address of any individual who is its secretary. The definition of name is the same as for directors (see clause 147): in particular, the register must include any name used or in use for business purposes. The clause retains a protective provision relating to the former names of peers but, as recommended by the CLR, not that for the former names of married women. The address to be registered is a service address: this implements the CLR recommendation (Final Report, paragraph 11.46) that the requirement for home addresses for company secretaries be abolished.

Clause 255: Particulars of secretaries to be registered: corporate secretaries and firms

503.     This clause sets out the details which must be registered where the secretary of a public company is either a body corporate or a firm which is a legal person. The requirements that apply in the case of an EEA company follow the recommendations of the CLR (Final Report, paragraph 11.39).

504.     The clause also determines the details which must be registered where all the partners in a firm are joint secretaries.

Clause 256: Particulars of secretaries to be registered: power to make regulations

505.     This clause is a new provision. It provides a power for the Secretary of State to make regulations that add or remove items from the particulars that have to be entered in a company's register of secretaries. A similar power is provided by clause 149 for directors' particulars.

Clause 257: Acts done by person in dual capacity

506.     This clause replaces section 284 of the 1985 Act. It applies only to public companies as, under the Bill, private companies need not have a secretary.

PART 13: RESOLUTIONS AND MEETINGS

507.     The provisions in this Part replace most of Chapter 4 of Part 11 of the 1985 Act on meetings and resolutions. The changes in the law derive principally from the CLR's consultation on "Company General Meetings and Shareholder Communications" and recommendations from Chapters 2, 6 and 7 of their "Final Report", together with two subsequent consultations; the Modernising Company Law White Paper of July 2002 and the Company Law Reform White Paper of March 2005.

508.     In addition to implementing detailed policy changes, the clauses implement two general changes.

• First, the law makes the current "elective" regime the default for private companies. This means, for instance, that private companies will no longer need to "elect" to dispense with the Annual General Meeting (AGM); they will not be required to hold an AGM in the first place.

• Second, the current law is drafted on the basis that the main way in which shareholder decisions are taken is in general meetings. The new provisions proceed on the basis that in future this will not be the case for many private companies. Private companies will not be required in future to hold general meetings; instead provision is made for new procedures for decisions to be taken by written resolution.

509.     The law relating to decisions has been restated in a way that deals first with private companies. Additional layers of requirements for public and quoted companies holding general meetings follow in subsequent provisions.

510.     There are provisions at the end of the Part about record keeping.

511.     In general, where this Part imposes an obligation or confers a power, it will apply notwithstanding anything in the articles unless otherwise indicated.