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Companies Bill [Lords]

I thank the hon. Members for Huntingdon (Mr. Djanogly) and for Cambridge (David Howarth) for their comments on this part of the Bill. I particularly thank the hon. Member for Cambridge, whose erudite and helpful contribution has helped to clarify many of the issues. I should like to make a couple of points for the sake of clarification before I set out a brief outline of the Government’s position. The hon. Member for Cambridge is quite right to say that our aim is not to codify the whole of Foss v. Harbottle. That case states that a only company can sue for a breach of duty, and the courts have allowed shareholders certain exceptions to sue by various derivative claims. We are replacing the exceptions—rather than codifying—by means of part 11 of the Bill. As I have said, Foss v. Harbottle will survive. The hon. Member for Huntingdon is right to say that we need to ensure that we do not create a culture of litigation in this country. We believe that our provisions will strike a balance that will avoid the development of that kind of culture. Our aim is similar to his in that regard, but we disagree over the way in which the provisions will apply. Both hon. Members made the point that, in order to develop this area of law further, there would need to be more case law. They are quite right, and the new statute will bring new case law with it. The common law has developed through case law in any event. Even if we did not introduce these reforms or bring into operation the clauses in part 11, there would still be some case law. There will therefore be a degree of further development of the law, and the statute will help that development. That is our intention. I also agree with the hon. Member for Huntingdon that this is an important part of the Bill. Let me therefore outline the Government’s approach in this area. Our starting point has been the need to balance the ability of directors to manage the affairs of companies in good faith and the right of the members to bring an action on behalf of a company in circumstances in which a director has acted in breach of his duty to the company and in which an action would not otherwise be brought. I believe that part 11 achieves that balance very well. A derivative claim is not a shareholder action in the sense of an American class action. It is an action brought by a shareholder on behalf of a company. It follows from this that any damages arising from a successful claim would be paid to the company, not to the shareholders who have brought the action. Since shareholders who bring an action may also face heavy costs, a derivative claim is very much an action of last resort. It is not something that any shareholder is likely to embark on lightly, as they could put themselves in a very difficult position if they did so.