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Company Law Reform Bill [HL]

moved Amendment No. 156:"Page 69, line 7, leave out subsection (1) and insert—" ““(   )   A director of a company must act, in good faith, in what he considers to be in the interests of the company.”” The noble Lord said: We now come to one of the most important clauses in the Bill. It is somewhat symbolic and significant that we are on Amendment No. 156. I am sure that our debates will follow the three key sections. The first, to which I shall move Amendment No. 156 and speak to Amendment No. 157, deals with the key duties of a director. It may help Members of the Committee if I read out subsection (1):"““A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole””." The two amendments in this group, of which, on reflection, Amendment No. 157 has the better drafting, are designed to elicit from the Minister a clear explanation of what is meant by the success of a company for the record and what is meant by,"““the benefit of its members as a whole””." Amendment No. 157 would restore the well understood principle of acting in the best interests of the company to the exposition of the general duties of directors, thereby avoiding the uncertainty of a new formulation with no grounding in the common law. The introduction of a new concept of the promotion of,"““the success of the company for the benefit of its members as a whole””," will cause considerable uncertainty. I remind Members of the Committee that the existing law merely refers to the duties of directors to promote the best interests of its members. Unlike the phrase,"““in the interests of the company””," it is not supported by any existing body of case law. The principle that a person who owes a fiduciary duty to another must act in the interests of that other is well understood and is applied across the many other circumstances where such a duty arises; for example, in the relationship between a trustee and his beneficiary and an agent and his principal. It is a matter of great concern that it is proposed that different terminology be used in relation to directors. In addition, the concept of the company as an entity separate from its members in whose interests the directors must act is also well understood. These changes are likely to result in a significant burden for businesses both in terms of time and cost. The changes are also likely to mean that directors will have to decide certain matters differently from the way in which they decide them at present. For example, where they are responding to a hostile bid for their company, we note that Clause 159 (1) continues to refer to the ““interests of the company””. It would help if the Minister could be encouraged to provide an explanation of precisely what ““success”” means, as I have already indicated in the context of Clause 156 (1), and who judges whether and when it has been achieved. Success is a particularly difficult concept to apply in relation to events such as a takeover or winding-up, which will result in the company ceasing to exist or its current members ceasing to have a stake in it. It is also commonplace for directors to take action in an inter-group context; for example, sales of assets within the group at book rather than market value, which may not promote the success of the individual company even though they may be for the benefit of the group. So the two key questions for the noble and learned Lord the Attorney-General are: how are we defining ““success”” and what is the significance of the difference in moving from ““interests”” to ““the benefit of its members as a whole””? I beg to move.