Company Law Reform Bill

moved Amendment No. 173A:"Page 70, line 19, leave out third ““the”” and insert ““a specific””" The noble Lord said: In moving Amendment 173A, I wish to prove how far Clause 159 follows the reasoning of the Company Law Review. This is one of the clauses that, far from making fiduciary duties more onerous—as many speakers seemed to assume in Monday’s Committee, which I was unhappily unable to attend—in fact makes them less severe. There is no clearer case of conflict of interest than a director appropriating contractual or other business opportunities that are directed to his company, and no more obvious principle than that the possibility of such conflict cannot be allowed in a fiduciary. Traditionally, the way to cure that breach of duty and absolve any secret profit has always been to have it ratified by the company in a resolution of the members—the shareholders. But the limits of shareholder ratification have been a cause of some concern in the case law as it stands. Most decisions and commentary have for decades drawn a distinction between cases of mere secret profit from such exploitation, for which the directors are personally liable to account, and misappropriation of the company’s property, which is more akin to a breach of trust. I shall read the conclusion, arrived at after a long review of the case law, to be found in Gower’s Principles of Modern Company Law—the book I cited when I previously spoke in Committee—which states that,"““it would seem that a wide range of breaches of duty by directors may be ratified””—" that is, of course, by the shareholders—"““whether arising out of lack of bona fides, improper purposes, conflict of interest or negligence, provided that””—" this is an important proviso—"““no dishonesty or expropriation of corporate property is involved in the transactions which are approved””." The first point to notice about Clause 159 is that it allows for exploitation by a director and subsequent—according to requirements—approval of that, whether the opportunity is corporate property or not, and whether or not the company could take advantage of it, which it expressly states. This to some extent is rather uncharted territory. When Clause 159 adopts this model on public companies, it speaks throughout of ““the matter””—authorisation in a public company where the constitution has, under subsection (5)(b),"““provision enabling the directors to authorise the matter, by the matter being proposed to and authorised by them in accordance with the constitution””." But the provision in the constitution will speak in more general terms about the ““matter””, permitting directors to take advantage of profit in certain situations generally described. But when—as the clause goes on—the ““matter”” is put to the board, that will surely be a specific transaction or opportunity. The safeguard described by the Company Law Review was that,"““authorisation should be specific approval by an independent board””." The matter being proposed should obviously, in that formula, be clear and specific in its terms. That is the intention of the amendment. The CLR steering group ultimately recommended that the law should be changed in this respect and that directors not interested in the transaction should be empowered to authorise what would otherwise be a breach of duty. It is surely clear that that authorisation must be specific to the proposal; it would be a safeguard, as the final report of the CLR steering group spoke of it. It said:"““The possibility of collusion would point to preserving the requirement for such cases to be authorised by the members””." Traditional approval by members, which was its first choice, would be, it concluded after some pressure and argument from the consultees, ““onerous”” and inconsistent with the power of the board to make ““business assessments””, and it might ““stifle entrepreneurial activity””. Therefore, the power to absolve should, in the new law, be in the hands of directors independent of the transaction—in a public company where the constitution permits it and in a private company where the constitution does not specifically invalidate it. The group said:"““The mechanism for such authorisations should be specific approval by an independent board and . . . in the case of a public company approval should only be permitted if explicitly provided for in the constitution. This is a new proposal, though it follows logically from the development of policy in the light of consultees’ views””." It offered a new balance between encouraging efficient business opportunity and,"““providing effective protection against abuse””." As my noble and learned friend the Attorney-General put it, this,"““is one of the changes being made””.—[Official Report, 6/2/06; col. GC288-89.]" He was referring to changes to the law on the subject. What is more, although Clause 164 will preserve the ability of the company in general meeting to give authority, Clause 164(1) provides that, once the directors have used their new power to approve the matter, shareholders normally lose any right, if they had it before, to have it dealt with by them. In my submission, it is therefore imperative that, in this new power for the directors, the specific matter should be set out, without ambiguity, for authorisation. There is, of course, the subsequent point that it is arguable that Clause 159(5)(a), which deals with private companies, should also include the word ““specific””, although the issue might not be so important in the case of private companies. However, the amendment does not seek perfection. It probes the Government’s view on an important matter, where public companies with a dispersed shareholding release a director in a situation of conflict of interest in a new way under the new law. I beg to move.