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Company Law Reform Bill [HL]

My Lords, my noble and learned friend the Attorney-General has said that the provisions relating to derivative claims in Part 11 of the Bill have their origin in the Law Commission’s 1997 report on shareholder remedies. I readily acknowledge this and also acknowledge the argument that this amendment reflects a Law Commission recommendation, although I have to say that I am not wholly persuaded that it is what it intended. Either way, as noble Lords opposite have frequently reminded us, we have to consider proposals on their merits in the context of today. There are two important reasons why we cannot support this amendment. In the first place, it seems to us that an offer to buy the petitioner’s shares is not an appropriate remedy in the circumstances of a derivative claim. Such a remedy derives from provisions relating to winding-up, and it is a perfectly fair and reasonable remedy in that context where some members want the business to continue and others do not. However, we are dealing here with claims which are brought in the name of the company against a director for breach of duty. The court may in due course find that the director has been negligent or has put his own interests ahead of those of the company. In such circumstances, we believe that the appropriate remedy would be one of the usual consequences of breach of duty, such as damages or compensation where the company has suffered loss or restoration of the company’s property. It is the company that has suffered as the result of the director’s breach of duty and we therefore do not believe that the court should be required to take account of an alternative remedy available essentially between the members, such as an offer to buy the petitioner’s shares. Secondly, we do not think that the proposed amendment is in the interests of companies or of their shareholders as a whole. Noble Lords have in previous debates in this House rightly drawn attention to the activities of vulture funds. Their arrival is a new element that needs to be taken into account. We believe that there is a strong possibility that the insertion of this additional factor in the list of matters of which the court must take account might encourage such funds to tell companies that they must either buy them out or face a possible derivative claim. In short, we fear that it would be open to abuse. I hope that the noble Lord, Lord Hodgson, will be willing to withdraw his amendment in the light of these concerns. In inviting him to do so, I put on record again our gratitude to all those who have commented on the clauses in this important part of the Bill and have helped to ensure that we have got the balance right.