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Company Law Reform Bill [HL]

My Lords, I must first declare an interest: I am the chairman of two listed companies, and I sit on the board of two others. I, too, welcome the Bill. As the noble Lord, Lord Hodgson, said, it is long overdue. We have asked for it on many previous occasions. I welcome the aims behind the Bill, which the Minister has outlined succinctly, particularly those of simplicity in regulation. I give a particular welcome to the provision that implements my recommendation. This is a huge piece of legislation. The changes are very significant—it undertakes a root-and-branch reform of the law. Given the Bill’s importance to the business community, the investing community and other stakeholders, I would have liked to have been able to support it without any reservations. But sadly, I cannot. Some concerns have already been raised by the noble Lord, Lord Hodgson, and I will not repeat in detail what he has said. However, I join him in expressing concern—disappointment, really—that the Government have not produced a consolidating Bill. I note what the Minister says about the rationale behind the Bill, but I cannot agree with his reasoning. We still end up with the 1985 Act partly repealed, and company law contained in both the 1985 Act and this Bill—what the noble Lord, Lord Hodgson, referred to as an archaeological approach to company law, although it is to be hoped that we now have a shallower dig. I look at this rather like peeling back the layers of an onion—we do not have so many layers to peel back but we still have it to deal with, and I am not entirely convinced that this is the right way to go about it. My second major concern is the wide powers taken in Part 31 to introduce changes in future by use of regulation. I do not object to that in principle; in particular, I believe that the ability to respond quickly is a very valuable tool. But I am concerned that the Bill does not give us much guidance and I would like to hear about the processes of consultation. How wide will it be? Who will determine it? The Bill seems to indicate that that will be entirely in the hands of the Secretary of State. I would also like to hear about whether the outcome of that consultation and the regulations proposed will be subject to the affirmative resolution procedure of both Houses. Thirdly, I turn to the troubled issue of the Operating and Financial Review and its relationship with the business review for all companies. I thought I heard the Minister say that he would introduce proposals to eliminate the need for that. Sadly, as most people will acknowledge, the Chancellor’s statement abolishing the OFR simply did not earn him the brownie points from the business community that he anticipated. In my judgment, he had not understood that many companies are already a long way down the track in producing these kinds of reports. Investing bodies like the notion of an OFR and the issues that have given rise to concern did not involve whether there should be an OFR, but involved some of the data that were to be required—for example, the degree to which forward-looking data had to be included; whether confidential commercial information by way of key performance indicators needed to be in there; and an earlier concern which had been put right about the degree of care. All of those issues could have been dealt with and resolved. I do not believe that we have got to the right solution here. We have about a third of corporate value tied up in intangibles and we now have IFRS numbers being produced. They are highly volatile and not widely understood by the investing community. More than ever now there is a need for good quality corporate reporting. The expectations of investors and the NGOs in the corporate social responsibility community—if I can use that phrase—are high, which inevitably impacts on the reputation of business. We already have the Accounting Standards Board and the Institute of Directors talking about incorporating an OFR requirement within the combined code. I have no doubt whatever that companies will continue to produce OFRs regardless of whether there is a statutory requirement. It would be useful if the Minister could clarify, perhaps with more detail, where we are heading on this matter and whether it is to be left to the FRC or the ASB to produce something outside the legislative framework. Finally, on matters affecting the Bill as a whole, I return to the issue of European company law reform and the directives being issued. I understand that matters of company dividend distributions could not be dealt with in the Bill because they will be dealt with in the European fifth directive. Will the Minister confirm that the Government will continue to press for a change in the basis by which company dividends can be made away from a reserves-based distribution to a solvency test? The reason for that is again related to the issue of IFRS standards. As I said before, results are becoming extremely volatile. We have all sorts of funny things going through accounts today which previously did not. The result is that companies are beginning to engage in transactions to create distributable reserves at the right point within the group. It would be much better, and much simpler, if we moved to a straight solvency-based test for determining whether dividends can be paid. Those points cover the overall Bill. However, I want to draw the attention of the House to several areas in which we support the intentions behind the Bill but on which we have reservations whether the Bill as drafted will be workable or achieve the desired objectives. The first relates to directors, and the noble Lord, Lord Hodgson, has already referred to Part 10. The notion that corporate endeavour, on which old-style corporate legislation was based, is a partnership between the providers of capital and the management of an enterprise has been overtaken by a more broadly-based model, reflected in this Bill, commonly referred to as enhanced shareholder value. We welcome that, but the clauses in Chapter 2 of Part 10 in particular are flawed and not workable. Commentators such as the Law Society, while supporting the aims of clarification of directors’ duties—which I also support—does not believe that that has been achieved. The new provisions are said by the guidance notes to provide greater clarity on what is expected of directors and make the development of the law in this area more predictable. However, it is argued that the provisions are inflexible and will restrict the courts. The code has not adopted common law terminology and introduces new concepts that will make remedies more difficult to apply. For example, Clause 156(3) requires directors to fulfil their duties,"““so far as reasonably practicable””." We are advised that that it is both ambiguous and otiose. We question whether it will require senior directors to set up expensive and extensive internal procedures to create audit trails in respect of any authority which they delegate down the management chain. My second concern relates to the provisions creating a new regime under which shareholders may bring actions for negligence, default, breach of duty and breach of trust. While there are safeguards linked to the statement of directors’ duties, there are concerns about the potential for abuse and particularly the timing of court involvement. Why is it not possible to have the court involved earlier in the process so that you do not engage in a waste of time which the court then throws out? The third area of concern is the exercise of voting rights by institutional investors. Essentially, what is called a long-stop measure has been taken—a power to require voting disclosure. I am unsure why that is necessary. The Company Law Review said that it was desirable, for example, for beneficiaries, members of pension funds and so forth. However, in very many cases the voting policy of intermediaries is actually defined by contract. The pension fund has a contract with the investment manager telling them how they will and will not vote. So I am not sure what one gains by telling them that they have done the job. A good voluntary system is operating and it would be better to wait and see whether it produces the results that we want rather than legislate in advance. Finally, on auditor liability, the relevant clauses seem to require monetary capping. Certainly that is the advice that I have received. I understand that the policy—which was agreed by the companies, investing bodies and the auditors themselves—was to be a system based on proportional liability. I am advised that the clauses as drafted will require the inclusion of a monetary cap. If that is the case, then I believe that the result will be an acceleration of cap amount to a very high level which would probably be affordable by only one or two accounting firms and would naturally lead to a very significant reduction in competition. I do not endorse that. I think that the matter can be put right by a relatively simple amendment in Committee. There are many other areas of detail to which we will wish to return in Committee. I say again, however, that we welcome the Bill. It is long overdue and the House has our assurance that we will endeavour in Committee and at subsequent stages of the Bill to help ensure that it provides the foundation in law for the future competitiveness and success of British companies.