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Companies Bill [Lords]

It will be clearer and more accessible in the sense that the constraints on someone using it in a way that we would not regard as justified—I am not sure that there is much difference in our view on that—are quite strong. Yes, the procedures that I have set out and the amendments that were tabled in another place make the procedure more accessible. If the hon. Gentleman’s argument is—I trust that it is not—that we ought to make the law inaccessible to ordinary shareholders in case they exercise their rights, it is a bad argument. Our aim should be to try to create clear law so that the directors know where they are, the shareholders know what action they can take and the general public can understand it. We are seeking to set out our view that the shareholders should, in restricted circumstances, be able to take a derivative action, but that the courts should have the ability to intervene to prevent frivolous actions or actions that are not aimed at ensuring the commercial success of the company. In other words, they are aimed at a pressure group pursuing a viewpoint that is not about the commercial success of the company. I think that we have struck a proper balance. The amendments that we have tabled and have had accepted in another place are able to deal with the main concerns that the hon. Member for Huntingdon raised. As I say, I do not think that there is any great difference of view of what we want. The hon. Gentleman fears that things will happen which we say we have provided protections against. Our view is that those protections will ensure that we are able to achieve the benefits of more accessible and clearer legislation without the problems caused by unnecessary litigation. I shall now look at the amendments to clause 260, beginning with amendment No. 412, which attempts to delete ““or proposed””. Amendment No. 412 is based on a misunderstanding of the current law and the position under the statutory statement of directors’ general duties. Clause 179 provides that the consequences of breach or threatened breach of the statutory duties are the same as would apply if the corresponding common law or equitable principle applied. The reference to threatened breaches is important. Under the present law, companies may be able to take pre-emptive action to stop a breach of duty from taking place before it actually happens and the damage is done. There could, for example, be a threatened breach of duty if a director was refused permission to exploit a corporate opportunity but then announced that he was going to go ahead and do it anyway. The remedies in such cases, which include an injunction or a declaration, provide an important safeguard of a company’s interest against wrongdoing by a director. A derivative action is an action brought by the company, and there is no sensible basis on which the remedies available to the court should be limited in the way proposed in the case of a derivative claim. Amendment No. 413 would remove the right to bring a claim against a third party. That provision in clause 263 flows from a clear Law Commission recommendation, which is explained in detail in part 6 of the Law Commission’s report on shareholder remedies. The principles are important. The claim should be allowed only if there has been a breach of a duty by a director, but the relief sought may be against a third party as well as against the director personally. 9.15 pm It might be helpful if I set out a couple of examples that have been cited by the Law Commission in its report on shareholder remedies. In the first example, a relief is sought from a third party for knowingly being in receipt of money or property or for property transferred in breach of trust or for knowing assistance in a breach of trust. It seems to us correct that the member should be entitled to pursue a remedy against the third party in circumstances where he is holding assets belonging to the company, which he has obtained in those particular circumstances. In the second example, a profitable company is a victim of a tort by a third party—perhaps another company. The directors, while otherwise committed to the well-being of the company, have ulterior motives of their own for not wishing to enforce a remedy for the tort. Although the directors would in those circumstances be in breach of duty, that breach would not have given rise to the claim, so it would not be open to a member to bring derivative proceedings against a third party. Again, we believe that that is an appropriate outcome. I hope that those examples show that it is possible to uphold important principles while placing reasonable constraints on the application of the provision and that this would not result in members seeking to bring derivative claims against third parties simply where they disagree with a decision of the board not to sue a third party. I believe that clause 263 achieves that. I now wish to deal with the provisions in clause 264, which respond to the requests from some respondents to the company law reform White Paper, including the Law Society, that part 11 should state clearly that it is immaterial whether the cause of action arose before or after the person seeking to bring or continue a derivative claim became a member of the company. That reflects the position in the common law derivative action, and the provision also makes it clear that current members, even if not members at the time that the corporate cause of action arose, are the only plaintiffs entitled to bring proceedings. In doing so, it accurately reflects the nature of the derivative action that is the company’s cause of action. As such, the point in time at which the member became a member is immaterial. I cannot therefore support the amendment proposed by the hon. Member for Huntingdon. Amendment No. 415 provides that a derivative claim may be brought only if the directors have refused a request by a member to bring a claim. The amendment goes to the heart of what we are seeking to achieve in our reform of the law in this area. At present, a derivative claim will not be available to the minority shareholder unless he can show that, to put it briefly, the wrongdoers are in control. The onus is thus on the claimant minority shareholder who seeks to bring a derivative claim to allege in his statement of case, and then to demonstrate, that those whose actions he complains of are in control of the company and will not permit its name to be used as claimant in the action. If the minority shareholder cannot demonstrate control, the action will be dismissed. However, the minority shareholder does not need to be able to demonstrate that the company has rejected a formal application to instigate proceedings, nor show that he has procured the summoning of a general meeting to consider the question, which has then rejected his request. As the Law Commission observed, the meaning of ““wrongdoer control”” is not clear, and as long ago as 1962, believe it or not—it sometimes takes us a long time to achieve things in this place—the Jenkins committee said that it would be"““extremely difficult to devise a satisfactory general provision””" expressing this concept and the remainder of the exception to the rule in Foss v. Harbottle in wider terms. That is why the Law Commission has proposed a new statutory remedy. Under the proposed statutory procedure, a member need not demonstrate wrongdoer control, but one of the factors that the court must take into account in considering whether to give permission to continue the claim is whether the company has decided not to pursue the claim. It may therefore be advisable for a member seeking to bring an action to ascertain the company’s intentions with regard to pursuing its cause of action before bringing a derivative claim, but we do not believe that that need be a mandatory precondition. The hon. Member for Huntingdon proposes that we enshrine in law such a mandatory condition. He takes the view that permission should be sought, at least. I have some sympathy with the proposal, but we do not believe that such a mandatory precondition would be helpful or necessary to bring a claim. We fear that going down that route would bring us right back to a number of the unsatisfactory and undefinable concepts that I have just mentioned. Although I have every sympathy with the aim in amendment No. 415, I cannot accept its mandatory nature, so I hope that it will not be pressed to a vote.