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Companies Bill [Lords]

I do not necessarily accept that it would be that easy. The hon. Gentleman should look at the details of the derivative claims provisions. I think that they provide sufficient safeguards against the development of a litigation culture, as our aim is to prevent a pressure-group level of litigation against particular companies. When I have developed my argument, perhaps he will see how we intend to do that. A breach of a director’s general duties to the company is a serious matter. Indeed, it may be extremely serious for the company, whose very existence may be put in jeopardy by the breach or threatened breach of duty. The general duties set out in chapter 2 of part 10 do not constitute guidance or a wish list. They are statutory duties, and every director must comply with them. It is therefore important that there be a clear and accessible mechanism by which shareholders can, if necessary, bring an action in the name of the company against a director for breach of one of those duties. For shareholders, there are two main problems in current law. First, as the hon. Member for Cambridge knows, the law is to be found in case law that stretches back more than 150 years and is anything but clear and transparent. That is why the Law Commission recommended that the right to bring a derivative action at common law should be replaced by a"““new derivative procedure with more modern, flexible and accessible criteria for determining whether a shareholder should be able to pursue the action””." It is essential that the procedural requirements for bringing a derivative action are accessible and clearly set out, so that they can be understood by both directors and shareholders. Secondly, the law is built on somewhat arcane legal principles relating to the concept of fraud on the minority. Those principles are difficult and obscure, even to lawyers, but they restrict the ability of shareholders to bring meritorious claims. That is why the new statutory procedure differs from the common law in two key respects. We do not want the claimant to have to show ““wrongdoer control””—that is, to show that the company is controlled by the directors whom the claimant believes to have acted in breach of their duties—as that might make it impossible for a derivative claim to be brought successfully by a member of a widely held company, including almost all major quoted companies. We also want it to be possible to bring a claim in cases of negligence, even if it cannot be shown that the directors have profited from the negligence. As the hon. Member for Huntingdon says, it is important that the Bill should not permit shareholders to bring a derivative claim that is motivated by reasons other than the commercial success of the company. We have made it clear from the beginning that we want such claims to be dismissed by the courts at the earliest possible opportunity, without the companies being involved. However, the general reforms to civil procedure introduced by Lord Woolf may mean that unmeritorious cases proceed further before being thrown out. Under those reforms, there is no requirement to obtain leave before a claim is issued. Instead, the claimant must apply to the court for ““permission to continue”” the claim. For that reason, in the other place, we tabled a package of reforms that ensure that the courts can dismiss unmeritorious claims at an early stage. The amendments in the other place introduced a two-stage procedure for permission to continue a derivative claim. At the first stage, the applicant would be required to make a prima facie case. The court would be required to consider the issue on the basis of the evidence filed by the claimant alone, without requiring any evidence from the defendant. The courts must dismiss applications at that stage if what is filed does not show that there is a good case. At the second stage, but before the substantive action begins, the court considers whether the decision of the directors was one that the company could reasonably and independently have taken. In addition, the Government amendments that were tabled to part 11 in another place made it clear that the court may"““make any consequential order it considers appropriate.””" Examples include a cost order or a restraint order against the applicant. That would give the court explicit power to adjourn the permission application, either for a specific event, such as a general meeting of the company and other soundings, or more generally, so that it can revisit the question of permission at a later stage. Thirdly, it provides that, in deciding whether to permit a claim to continue, the court should have particular regard to any evidence as to the views of members of the company who have no personal interest, direct or indirect, in that particular matter. That will help to address concerns that it is not practical or desirable for major quoted companies to ask shareholders formally to approve directors’ commercial decisions. I believe that these clauses, as amended in another place, strike the right balance between the ability of directors to take business decisions in good faith and shareholder rights, and they make this important area of law clearer and more accessible. I emphasise that they do not oblige the courts to involve themselves in business judgments or to reverse the burden of proof in any way.