House of Lords - Explanatory Note

Company Law Reform Bill [HL] - continued	House of Lords

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COSTS TO BUSINESS AND REGULATORY IMPACT

1714. The draft Regulatory Impact Assessment (RIA) published alongside the White Paper in March 2005 suggested that savings to business would be of the order of £250m per year, and direct costs would be around £6m. The Department has continued to refine the analysis, in the light of responses to the White Paper and further work by DTI and Cabinet Office economists. The RIA now published alongside the Bill now estimates benefits in the range £165m - £340m and costs of £3m - £11m. The RIA can be accessed on the DTI website at http://www.dti.gov.uk/cld/pdfs/clrbria.pdf

EUROPEAN CONVENTION ON HUMAN RIGHTS

1715. Section 19 of the Human Rights Act 1998 requires the Minister in charge of a Bill in either House of Parliament to make a statement before Second Reading about the compatibility of the provisions of the Bill with the Convention rights (as defined by section 1 of that Act). The Lord Sainsbury of Turville (Parliamentary Under Secretary of State at the Department of Trade and Industry) has made the following statement:

"In my view the provisions of the Company Law Reform Bill [HL] are compatible with the Convention rights."

1716. The Department has considered all aspects of the Bill from the perspective of compatibility with the European Convention of Human Rights (ECHR). All criminal offences created by provisions of the Bill are compatible with the requirements of Article 6 ECHR (right to a fair trial). In relation to powers contained in the Bill, it is not provided expressly that they must be exercised in a way compatible with ECHR rights, because this obligation is already imposed by section 6 of the Human Rights Act 1998. Other aspects of the Bill which have raised issues of substance are described below.

Company names adjudicators

1717. Clauses 70 to 74 provide for the appointment of adjudicators in cases where there is dispute over the registering of a company name. Clause 71 safeguards the independence of the adjudicators and clause 74 provides a right of appeal to the court. Accordingly, it is considered that these provisions are compatible with Article 6 ECHR (right to a fair trial).

Company directors

1718. Clause 152 provides that a director may be removed from office, notwithstanding anything in the company's articles or in any agreement between the director and the company. It is considered that this provision is compatible with Article 1, First Protocol ECHR (right to peaceful enjoyment of possessions), as it safeguards the director's right to compensation or damages.

1719. Several provisions in Part 10 require directors to avoid conflicts of interest and to declare their interests in proposed transactions with the company. Although this may require the disclosure of personal information, it is required in order to safeguard the company's interests. Further provisions here and in Schedule 1 apply to persons connected to directors (such as their spouses and family members), to prevent conflicts of interest. This may require the disclosure of a director's personal relationships, in order to prevent a director abusing his position. It is considered that these provisions are compatible with Article 8 ECHR (right to private and family life).

1720. Provisions in Part 10 require directors to record their home address in the public register, but any director may apply for a certificate ensuring non-disclosure of his address. Further safeguards are provided as to the circumstance in which the registrar may use or disclose the address. It is considered that these provisions are compatible with Article 8 ECHR (right to private and family life).

Derivative claims and actions by members

1721. Clauses 239 to 242 apply to court proceedings brought by a member of a company on behalf of the company (a "derivative" claim). A derivative action may only be brought in respect of a cause of action arising from the negligence, default, breach of duty or breach of trust by a director, and the court's permission is required (which will usually be granted only where the directors control the company and the breach may otherwise go unremedied to the detriment of the company as a whole). It is considered that these provisions are compatible with Article 6 ECHR (right to a fair trial).

Register of company secretaries

1722. Clause 254 requires that a public company's register of secretaries must contain the name and address (which does not have to be a home address) of any secretary, and clause 252 requires that this must be open to inspection by any person. It is considered that this provision is compatible with Article 8 ECHR (right to private and family life).

Duty to keep accounting records

1723. Clause 360 creates a criminal offence for every officer of a company who is in default, where the company has failed to keep adequate accounting records under clause 359. The offence is subject to the officer showing that he acted honestly and that in the circumstances in which the company's business was carried on, the default was excusable. In this way, clause 360 partially reverses the burden of proof for prosecuting the offence. Case law relating to Article 6 ECHR (right to a fair trial) provides that a law reversing a burden of proof may do so if confined within reasonable limits, taking into account the importance of what is at stake and the rights of the defence. Clause 360 is subject to the limits that a prosecution must first prove that the company has failed to keep adequate accounting records and that the officer is in default. It also reflects the importance for effective company regulation of ensuring that companies keeping accurate records. Accordingly, it is considered that this provision is compatible with Article 6 ECHR.

Disclosure of information by tax authorities

1724. Clause 436 provides for the disclosure of information by the Commissioners for Her Majesty's Revenue and Customs to a person authorised under clause 435 (currently the Financial Reporting Review Panel) to apply to the court in respect of defective accounts and reports. The provision contains important limitations, including criminal offences for use or disclosure of the information other than for permitted purposes. Accordingly, it is considered that this provision is compatible with Article 6 ECHR (right to a fair trial) and Article 8 ECHR (right to private and family life).

Disclosure of services provided by auditor

1725. Clauses 480 and 481 enable the Secretary of State to make regulations concerning the disclosure of certain aspects of the arrangements between auditors and the companies they audit. This pursues the public interest of the prevention of crime and the rights of shareholders, since whether an auditor can be trusted to act independently and identify any corporate fraud will depend partly on the terms of his contract. It is considered that these provisions are compatible with Article 8 ECHR (right to private and family life).

Removing auditor from office

1726. Clause 497 provides that an auditor may be removed from office, notwithstanding anything in the company's articles or in any agreement between the auditor and the company. It is considered that this provision is compatible with Article 1, First Protocol ECHR (right to peaceful enjoyment of possessions), as it safeguards the auditor's right to compensation or damages.

Prohibition of public offers by private companies

1727. Provisions in Part 17 prevent private companies from offering their shares to the public. If they do so, an application may be made to the court for the re-registration of the company as a public company or the compulsory winding up of the company. Although this restricts the property rights of members of the company, it does so in order to offer greater protection to the public, because only public companies, which are subject to greater regulation, should offer their shares to the public. Accordingly, it is considered that this provision is compatible with Article 1, First Protocol ECHR (right to peaceful enjoyment of possessions).

Disclosure of share interests

1728. Under the provisions of Part 21, a public company may require individuals to disclose their interests in its shares. Where the disclosure requirements are not required with, there may be restrictions on members' voting rights and their ability to transfer the shares. These provisions pursue the public interest of ensuring that public companies know who their members are, and that members know who other members are. The Department is satisfied that these provisions are compatible with Article 8 ECHR (right to private and family life) and Article 1, First Protocol ECHR (right to peaceful enjoyment of possessions).

Takeovers

1729. Clause 643 provides that, where a company is the subject of a takeover bid, agreements between shareholders, or between the company and its shareholders, are invalid to the extent that they place restrictions on the transfer of shares or on the exercise of voting rights in circumstances connected with the takeover bid. Subsection (5) gives the court the power to award compensation for losses which result from this. Although this provision interferes with the property rights of shareholders, it does so in the public interest of facilitating cross-border takeovers within the EU pursuant to the Takeovers Directive. It is considered that this provision is compatible with Article 1, First Protocol ECHR (right to peaceful enjoyment of possessions).

1730. Clause 650 introduces Schedule 3, containing amendments to Part 13A of the 1985 Act, which provides for a successful takeover bidder who holds 90% of the shares bid for to be able to compel the remaining shares to be sold to him at the bid offer price. The court may order a higher price to be paid if the bid offer price would be unfair. These provisions interfere with the property rights of shareholders, but they do so in the public interest of facilitating takeovers by preventing a small proportion of minority shareholders increasing the cost to the majority shareholder of exercising control of a company, in circumstances where they cannot limit the extent of that control. Accordingly, it is considered that these provisions are compatible with Article 1, First Protocol ECHR (right to peaceful enjoyment of possessions).

Offences

1731. Part 27 contains general provisions related to offences which are compatible with the procedural requirements of Article 6 ECHR (right to a fair hearing). In particular, clause 738 guarantees that, in proceedings against a person for an offence, nothing in the Companies Acts is to be taken as requiring a person to disclose any information covered by legal professional privilege.

Company law reform power

1732. The power to make company law reform orders in Part 31 is subject to important restrictions on creating new offences or increasing the penalty for existing offences. Furthermore, in accordance with section 6 of the Human Rights Act 1998, the power must be exercised in a way which is compatible with ECHR rights. Accordingly, it is considered that the provision is compatible with Article 7 ECHR (no punishment without law).

Supervision of statutory auditors

1733. Clause 815 exempts auditors' supervisory bodies and their officers from liability in damages for matters connected to the discharge of their functions. However, subsection (5) prevents the exemption from applying in cases where it would prevent an award of damages against the supervisory body made in respect of an act or omission which was unlawful under section 6 of the Human Rights Act. Accordingly, it is considered that the provision is compatible with Article 6 ECHR (right to a fair hearing).

Supervision of actuaries

1734. Clause 863 amends section 16 of the C(AICE) Act 2004 so that actuaries' supervisory bodies and their officers are exempt from liability in damages for matters connected to the discharge of their functions, by virtue of section 18 of that Act. However, section 18(4) of that Act prevents the exemption from applying in cases where it would prevent an award of damages against the supervisory body made on the grounds that it had acted unlawfully under section 6 of the Human Rights Act 1998. Accordingly, the Department is satisfied that the provision is compatible with Article 6 ECHR (right to a fair hearing).

Expenses of winding up

1735. Clause 868 amends the Insolvency Act 1986 to provide that the expenses of winding up a company should be paid out of a company's assets, with priority over debts secured by floating charges. This effectively reverses the judgment on Buchler and another v Talbot and others, re Leyland Daf [2004] UKHL 9. The provision will apply to a winding up which takes place after commencement of the provision. The extent to which clause 868 will apply to a floating charge created before commencement will depend upon the transitional provisions to be included in the necessary order under clause 885 commencing clause 868. Any such order must be compatible with ECHR rights, in accordance with section 6 of the Human Rights Act 1998. In particular, such an order would need to take account of the property rights of creditors who have secured sums loaned to a company by way of a floating charge, in accordance with Article 1, First Protocol ECHR (right to peaceful enjoyment of possessions).

ANNEX A: TRANSPOSITION NOTES

Part 22: Takeovers, etc. - Directive on Takeovers Bids (2004/25/EC)

1736. Part 22 of the Bill implements Directive 2004/25 EC of the European Parliament and of the Council of 21st April 2004 on Takeover Bids (OJ L142, 30th April 2004).

1737. The Takeovers Directive lays down, for the first time, minimum EU rules concerning the regulation of takeovers of companies whose shares are traded as a regulated market. The Directive was one of the measures adopted under the EU Financial Services Action Plan and aims to strengthen the Single Market in financial services by facilitating cross-border restructuring and enhancing minority shareholder protection.

1738. The Takeovers Directive contains general principles that Member States must adhere to in regulating takeover activity and a framework relating to the functions and jurisdiction of takeover regulatory authorities. It also lays down provisions relating to the mandatory bid (a requirement whereby a party gaining control of a company must make an offer to all shareholders at an equitable price), takeover bid documentation, time allowed for acceptance of the bid, the obligations of the board of the offeree company and other matters related to the bid.

1739. Additionally, the Takeovers Directive has provisions addressing barriers to takeovers (such as action that might be taken by a company or its board before or during a bid to prevent a takeover), requiring disclosure of certain information by companies traded on a regulated market and dealing with the problems of, and for, residual minority shareholders following a successful takeover bid (so-called 'squeeze-out' and 'sell-out' provisions).

1740. Since 1968, takeover regulation in the UK has been overseen by the Takeover Panel administering rules and principles contained in the "City Code on Takeovers and Mergers and The Rules Governing Substantial Acquisition of Shares". In order to bring UK takeover regulation within the requirements laid down in the Directive, Part 22 of the Bill is designed, for the first time, to place it within a complete and coherent statutory framework.

1741. Provisions related to disclosures by companies are contained in Part 7 of the Companies Act 1985 and amendments to that Part will be made to give effect to the additional disclosure requirements imposed by the Takeovers Directive on companies traded on a regulated market.

1742. 'Squeeze-out' and 'sell-out' provisions are prescribed by Part 13A of the Companies Act 1985. These will be amended to ensure they are wholly consistent with the Takeovers Directive requirements.

1743. It is intended that the detailed rules relating to takeover regulation in compliance with the Directive will be prescribed by the Takeover Panel under a statutory rule-making obligation to be imposed upon the Panel by the Bill (clause 618(1)). The Panel will be consulting separately on the necessary changes to the Takeover Code.

1744. Responsibility for the measures, described in this transposition note, taken to implement the Takeovers Directive lies with the Secretary of State for Trade and Industry.

1745. The table below describes the substantive provisions implementing the Takeovers Directive.

Part 22: Takeovers etc: Transposition Measures
Article	Objective	Implementation
1	Defines the scope of Directive in terms of transactions and types of company to which it applies ("takeover bids for the securities of companies governed by the laws of Member States, where all or some of those securities are admitted to trading on a regulated market").	No specific implementing provision necessary.
2	Contains key definitions for the purposes of the Directive (such as, "takeover bid", "offeree company", and "securities").	No specific implementing provision necessary.
3.1	Lays down general principles which Member States shall ensure are adhered to for the purpose of implementing the Directive.	Clause 618(1) requires that the Panel give effect to the general principles set out at article 3.1 of the Directive in the exercise of their statutory rule-making duty.
3.2	Provides that Member States may, in ensuring that the minimum requirements laid down by the Directive are adhered to, lay down additional conditions and provisions more stringent than those of the Directive.	No specific implementing provision necessary.
4.1	Requires Member States to designate supervisory authorities (which must act independently of parties to a bid).	This will be achieved by administrative designation of the Takeover Panel as supervisory authority for the purposes of the Directive.
4.2	Lays down jurisdictional rules in relation to takeover regulation	Clause 618(1) requires that the Panel give effect to the jurisdictional provisions of the Directive in the exercise of their statutory rule-making duty.
4.3	Requires Member States to ensure that persons employed or formerly employed by takeover regulatory authorities are bound by professional secrecy (information covered by this obligation should not be disclosed other than under conditions laid down by national law).	Clause 624 makes it a criminal offence to disclose information provided to the Takeover Panel other than under the circumstances and gateways laid down in clause 623 and schedule 2.
4.4	Lays down cooperation obligations in relation to EU takeover and financial markets supervisory authorities.	Clause 625 requires the Takeover Panel to cooperate with EU takeover and financial services regulators. The existing cooperation duties of the Financial Services Authority under section 354 of the Financial Services and Markets Act 2000 are extended to include relevant authorities (clause 639).
4.5	Requires that takeover supervisory authorities be provided with all powers necessary for carrying out their duties and provides that Member States may, provided that the general principles are respected, permit derogation from the rules of the Directive in certain circumstances and grant supervisory authorities the power to grant waivers.	In addition to the rule-making duty at clause 618(1) and rule-making powers at clause 618(2), the following powers are provided to the Takeover Panel: Clause 620 - power to make rulings Clause 621 - power to give directions Clause 622 - power to require documents and information Clause 627 - power to set down sanctions by rules Clause 629 - Power to order compensation in certain circumstances Clause 630 - Power to apply to the court for enforcement Clause 635 - Power to bring and defend proceedings. Clause 619(1) authorises the Takeover Panel to provide for derogations and waivers in certain circumstances from rules made under clause 618.
4.6	Makes provision for certain Member States' powers to be unaffected by the Directive (for instance, designation of judicial or other authorities responsible for dealing with disputes, the circumstances in which parties may bring administrative or judicial proceedings, any capacity of the courts to decline to hear legal proceedings and the liability of supervisory authorities).	Clause 620(2) provides that a ruling of the Takeover Panel is to have binding effect (subject to provisions in the Panel's rules and any review or appeal). Clause 626 provides for matters relating to reviews of and appeals from Takeover Panel decisions to be contained in the rules made by the Panel. Clause 631 provides that there shall be no action for breach of statutory duty, or any voidness or unenforceability of transactions, as a result of breach of rules made by the Panel. Clause 636 provides for exemption of the Takeover Panel (and those involved in its functions) from liability in damages in certain circumstances related to the regulatory activities of the Panel.
5	Requires that a "mandatory bid rule" is introduced requiring a person acquiring "control" of a company to make a bid to all holders of securities at an equitable price Contains rules related to the calculation of the equitable price.	Clause 618(1) requires that the Panel give effect to the "mandatory bid" and "equitable price" provisions in the exercise of their statutory rule-making duty.
6	Requires that the decision to make a takeover bid is made public. Contains detailed provision related to the contents of the takeover offer document. Requires that the parties to a bid are obliged to provide supervisory authorities with information related to the bid.	Clause 618(1) requires that the Panel give effect to the "bid" disclosure and documentation provisions in the exercise of its statutory rule-making duty. Clause 622 provides the Takeover Panel with power to require documents and information.
7	Lays down rules related to the time allowed for acceptance of the takeover bid.	Clause 618(1) requires that the Panel give effect to the offer "acceptance" period provision in the exercise of its statutory rule-making duty.
8	Requires that takeover bids are made public so as to ensure market transparency. It also provides for the disclosure of bid documentation to shareholders and employees' representatives (or, where there are no such representatives, the employees directly).	Clause 618(1) requires that the Panel give effect to the bid disclosure provisions in the exercise of their statutory rule-making duty.
9	Imposes obligations on the board of the offeree company, including the obligation not to take action to frustrate the bid without the approval of shareholders at the time of the bid and to draw up and make public a statement containing their views on the effects of implementation of the bid.	Clause 618(1) requires that the Panel give effect to the provisions relating to the obligations of the board of the offeree company in the exercise of their statutory rule-making duty.
10	Requires that companies shall publish detailed information on their share and control structures, etc. in their annual report and present an explanatory report on such matters to the annual general meeting of shareholders.	Clause 649 (amending Part 7 of the Companies Act 1985) requires that the relevant information, including necessary explanatory material, is set out in the annual report of companies.
11	"Breakthrough" - This provision overrides, in certain circumstances connected with a takeover, provisions in the articles of companies and contractual arrangements related to restrictions on transfer and voting rights of shares, etc. It does not apply to special shares held by Member States or to cooperatives. This provision may be made optional by Member States for companies under the provisions of article 12.	The right to make these provisions optional for companies is exercised in the implementing provisions. Clause 641 and 642 define the types of companies, circumstances and mechanisms by which a company may opt-in to "breakthrough". Clause 643 lays down the effect on contractual restrictions overridden by "breakthrough".
12.1	Provides that Member States may make optional the provisions of articles 9(2) and (3) and/or Article 11.	Exercise of this option has been taken only in relation to the provisions of article 11 (the relevant implementing provisions of which are described above).
12.2 (and 12.4)	Requires, where optional arrangements are in place, that companies have the right to voluntarily opt-in to the provisions of the relevant articles. Such a decision must be communicated to the supervisory authorities and be disclosed.	Clause 645 requires that any opting-in decision be communicated to the Takeover Panel without delay. The opting-in resolution passed by the company must be filed with the Registrar of Companies under clause 31.
12.3 (and 12.5)	Permits Member States to provide that the effects of articles 9(2) and (3) and/or Article 11 only apply on a "reciprocal" basis, i.e. where the takeover bid is made by a company also subject to the effects of the relevant articles. Such restrictions on the application of articles 9(2) and (3) and article 11 shall be subject to the authorisation of the general meeting of shareholders of the offeree company.	The Member State option to provide for "reciprocity" has not been exercised.
13	Requires that rules relating to the lapsing or revision of bids, competing bids, disclosure of results of bids and irrevocability of bids be put in place.	Clause 618(1) requires that the Panel give effect to the requirement that such rules be put in place in the exercise of its statutory rule-making duty.
14	Provides that the Directive shall be without prejudice to various provisions relating to information and consultation of employees and their representatives.	No specific implementing provision necessary.
15	Requires Member States to put in place rules enabling a bidder to compulsorily purchase the shares of minority shareholders following a successful takeover bid ("squeeze-out" rights). The circumstances in which such a right must apply (including time periods and relevant thresholds) and relating to the price that must be paid are set out.	"Squeeze-out" rights are already contained in the Companies Act 1985 (Part 13A (sections 428-430)). Necessary amendments to ensure these provisions are consistent with article 15 are contained at clause 650 (and schedule 3).
16	Requires Member States to put in place rules enabling minority shareholders to require a bidder to compulsorily purchase their shares following a successful takeover bid ("sell-out" rights). The circumstances in which such a rule must apply (including time periods and relevant thresholds) and relating to the price that must be paid are set out.	"Sell-out" rights are already contained in the Companies Act 1985 (Part 13A). Necessary amendments to ensure these provisions are consistent with article 16 are contained at clause 650 (and schedule 3).
17	Requires that effective, proportionate and dissuasive sanctions be put in place.	Clauses 627 and 629 provide that the rules made by the Takeover Panel may confer power on the Panel to impose sanctions on those who transgress its rules or order compensation in certain circumstances. Clause 624 makes it an offence to contravene the provisions of clause 623 (relating to the restrictions on disclosure of information provided to the Takeover Panel). Clause 628 provides an offence where takeover bid documentation does not comply with Panel rules giving effect to articles 6.3 and 9.5 of the Directive. Misconduct in relation to takeover activity also needs to be viewed in the wider context of the overall regulatory framework and the protections available to shareholders and others. A robust market regulatory regime and company law framework is in place in the UK to investigate and pursue misconduct in relation to takeover activity (for instance, sanctions with stringent sanctions are already in place to deter fraudulent misrepresentation or market abuse).
18	Lays down a Committee procedure whereby the Commission may adopt rules related to the application of article 6.3 (contents of takeover bid documentation).	No implementing provision necessary (no such rules have been adopted).
19	Requires the EU Commission to establish a Contact Committee to facilitate the harmonised application of the Directive and advise the Commission, if necessary, on any additions or amendments to the Directive.	No implementing provision necessary.
20	Provides for the review of the Directive by the EU Commission five years after its entry into force. Requires that Member States provide the Commission annually with certain information related to takeover bids.	No implementing provision necessary. Such information will be provided to the EU Commission as an administrative process.
21	Requires that the relevant provisions of the Directive be transposed no later than 20 May 2006. Details of transposition measures shall be communicated to the Commission.	No specific implementing provision necessary. Details of the transposition measures will be communicated to the EU Commission by administrative process.
22	Provides that the Directive enters into force on 20 May 2004	No implementing provision necessary.
23	Addresses the Directive to the Member States.	No implementing provision necessary.

Prepared: 17 November 2005