---

Companies Bill [Lords]

I am surprised that so many Members are present now that we have got on to Foss v. Harbottle, the heart of lawyer’s company law. To re-emphasise the point made by the hon. Member for Huntingdon (Mr. Djanogly), the whole point of the rule in Foss v. Harbottle is to save time. It is to prevent shareholders—particularly minority shareholders—trying to sue in the company’s name to enforce the company’s rights against somebody else in circumstances where the company could easily get rid of the wrong itself, does not want to sue or can validly prevent the action from going forward. As I understand it, the Government have said that they are trying to clarify the law without codifying it. As the hon. Member for Huntingdon has said, the trouble with that is that it will tend to cause some confusion in areas where the statute does not mention the previous law. Would the courts reconstitute the previous law? It might be argued that it will be several years before we end up back where we started. As the hon. Member for Huntingdon said, the law on this matter is not entirely clear. I have a problem with his amendment No. 417, simply on the ground that the concept of fraud on the minority is so difficult and so contested in the courts and academic journals that it is not really worth putting into a statute. Most academic writers think that it is too confusing to use, and many point out that what it really means is fraud against the company. Perhaps we should not put into statute a phrase of such contested meaning. Other amendments that have been tabled have varied merit. The idea of amendment No. 412, which would leave out the word ““proposed””, is, as the hon. Member for Huntingdon said, to prevent derivative actions in advance of the harm being done. That seems to me a useful aspect of the current draft, as it is frequently cheaper for all concerned to prevent harm from being done than to try to cure it later. Obviously, the word ““proposed”” does invite possible extra legal actions. The question, however, is whether the safeguards in the rest of the clauses with which we are dealing prevent abuse. To a large extent, I think that they do. I would not therefore support amendment No. 412. Amendment No. 413 would take away the ability of a derivative action to cover rights that the company has against third parties. In the past, that has always been thought to be possible, and the amendment would impose a restriction on such action. This area of law is always about the company’s rights, not the personal rights of the individual shareholders or directors. The question is whether derivative action should be used to allow shareholders to enforce the company’s rights, and it seems to me perfectly sensible to propose that it should, given the other restrictions on the possible use of such action. Amendment No. 415, however, seems to be a more sensible proposal. As has been said, the whole point of Foss v. Harbottle is to prevent shareholders in a minority action from wasting everyone’s time by bringing a derivative action that is unnecessary or has no chance of succeeding. The amendment allows the company—in particular, the board of directors, the organ of the company that normally has such a right—to decide first whether it wants to proceed with the action. It seems to me to be straightforwardly correct, and in the spirit of the existing law that goes back to the original 19th century cases, to allow the company in the form of the board of directors to have a pre-emptive right of first refusal on whether an action should be brought. Amendment No. 416 would reconstitute the details of the rule itself. Its ambition is admirable, and proposed subsections (d) and (e) are clearly linked to legal developments in the 19th century—the former to the Atwool case of 1867, and the latter to the Menier v. Hooper’s Telegraph case of 1874. The intention behind the amendment is good, but it is difficult to encapsulate very complex cases in statute. In a way, the amendment is vulnerable to the objection expressed by the hon. Member for Huntingdon against the whole thrust of the Bill—that it tries to put into statutory form a very complex area of case law. One could argue that he has not got it quite right.