Company Law Reform Bill [HL]

I agree with the noble Lord, Lord Hodgson, that this is a very important part of the Bill. Clause 136 is part of a package of measures designed to encourage the enfranchisement of indirect investors. These include provisions that enhance the ability of proxies to exercise full meeting participation rights, in Clause 299, provisions to encourage voting transparency, in Clause 316, and provisions to improve accessibility to company information, such as annual reports and accounts, in Clause 406. The amendment to Clause 136 moved by the noble Lord, Lord Hodgson, supported by the noble Lord, Lord De Mauley, and the noble Baroness, Lady Murphy, seek to compel all companies trading on a regulated market—that is, quoted companies—to recognise any person nominated by the registered member to enjoy or exercise all rights of the member. The amendment to those amendments moved by the noble Lord, Lord Sharman, supported by the noble Lord, Lord Razzall, takes a different approach; when a company passes a resolution to use electronic communications with its members, the company is compelled to recognise indirect investors. The Government fear that all these amendments would impose disproportionate cost burdens on industry, compared with the benefits to be gained—and I emphasise that point very strongly. Let me take Members of the Committee through the Government’s approach on this important matter. We believe that the benefits of greater enfranchisement of indirect investors can and should be achieved by working with the industry to promote and develop standard practice, not through a one-size-fits-all legislative regime. Clause 136 ensures that all companies can enable indirect investors to enjoy and exercise all or certain governance rights of the registered member. When companies make provision in their articles to extend rights to those nominated by the registered member, such provision is legally effective in relation to various statutory requirements. Investors today wishing to invest in discrete holdings of shares have the choice of which companies they invest in and which broker they invest through. Some companies already make provisions through their articles to recognise and enfranchise indirect investors, and some brokers also enable indirect investors—including those investing through ISAs and PEPs—to opt into exercising certain governance rights. Clause 136 ensures that such arrangements are not undermined and that there are no legal obstacles to preventing companies and participants down the investment chain making similar arrangements to extend certain governance rights to nominee investors. The amendments in the names of the noble Lords, Lord Hodgson and De Mauley, and the noble Baroness, Lady Murphy, propose to compel a traded company to enfranchise anyone whom the registered member nominates to exercise all or any governance rights. We believe that this is not a workable solution. Let me highlight our greatest concerns. First, this would impose disproportionate cost and burdens on industry, such as the practical need to maintain, not one, but at least two registers—one for registered members, the other recording those with governance rights. Secondly, and importantly, we would be concerned at the scope for abuse that these amendments open up. Safeguards would be needed to ensure that Clause 136, if amended in this way, could not be misused by a member to compel companies to provide information to, and enfranchise, anyone, whether or not they had any beneficial or economic interest in the company. Any safeguards would involve imposing obligations to provide evidence of being a genuine indirect investor. This brings us back to the problems of definition that I mentioned at Second Reading. Moreover, it would lead to further costs. The noble Lords, Lord Sharman and Lord Razzall, propose to compel traded companies taking advantage of the electronic communications provisions in the Bill to enfranchise automatically any persons nominated by the registered member to exercise all governance rights. The extension of governance rights to indirect investors and the provisions enabling companies to use e-communications are entirely separate measures. E-communications present great opportunities not only to reduce costs, but also to enhance the immediacy of dialogue between companies and their shareholders and indirect investors. This will, for example, enable nominee operators to forward company information more easily, quickly and cheaply to indirect investors. We have seen that making enfranchisement of indirect investors mandatory would impose disproportionate cost burdens. We should not put this kind of obstacle in the way of companies, shareholders, nominees and indirect investors benefiting from the e-communications measures that the Bill will facilitate. That is why we prefer market solutions to develop. However, if the market does not develop appropriate solutions, the Secretary of State may exercise the power under Clause 137 to compel companies to provide information to indirect investors. The power is intended as an additional tool towards encouraging and achieving greater enfranchisement benefits. We are not convinced that the benefits for the relatively small number of indirect investors who want to, but cannot, exercise governance rights justify the regulatory cost burdens these amendments would create. This is the view we have reached after considering carefully the interests of many different business and investor groups and other interested parties. Essentially, what the argument comes down to is that we believe a facilitative approach, which we are delivering through Clause 136, is a better way to achieve general enfranchisement of indirect investors. We want to work with industry to promote an environment in which enfranchising indirect investors becomes standard practice. As the noble Lord, Lord Hodgson, pointed out, there are already many examples of good practice in the market; he mentioned the case of GSK. Some companies already have in place, through their articles, provisions to recognise and enfranchise indirect investors, such as depository receipt holders. Some brokers also enable indirect investors to opt into exercising certain governance rights. Our approach ensures, first, that existing best practice and contractual arrangements are not undermined and, secondly, that there are no legal obstacles to prevent companies moving forward in this area. The system in the United States and Canada is quite different; we believe it to be complex and costly. United States securities legislation requires intermediaries, regulated by their financial authorities—which would include those acting as nominees—to forward company information to, and solicit proxy instructions from, underlying beneficiaries. Such intermediaries may or may not be registered members of the company, but company law is not the place to impose similar obligations on securities intermediaries in the UK.