UK Parliament / Open data

Company Law Reform Bill [HL]

My Lords, let me reiterate that the Government are committed to promoting a long-term investment culture through the wide participation of shareholders and the responsible exercise of share ownership rights. To that end, the Bill implements a comprehensive package of provisions to ensure that voting processes are more transparent and to help enfranchise those, such as ISA or PEP investors, investing through nominee accounts. The provisions in Part 9, as the first element of this package, are intended to ensure that companies can, through their articles, enable indirect investors to exercise and enjoy varying levels of shareholder rights as suits their needs. In addition, the Bill enables brokers to confer voting and other governance rights on indirect investors. Brokers will be able to use the enhanced proxy rights introduced by Clause 303 in Part 13 to give indirect investors rights to attend, speak and vote at general meetings. That will give investors the option to choose brokers who pass on all such participation rights. I very much agree with the noble Viscount, Lord Bledisloe. There is an issue of choice here. When we are talking about shareholder democracy, it seems strange to say that shareholders should not be in a position to exercise that choice. When shares are held in nominee accounts, we believe that it is for individual investors to ensure that the terms and conditions under which their accounts operate suit their particular needs. One of the keys to enhancing the position of indirect investors is to ensure that they have access to the information that they need. The Bill therefore includes further measures which will improve the position of investors. First, all quoted companies will be required to publish on a website their annual report and accounts, thus enabling indirect investors to have the same access to annual company information as registered members. Secondly, while e-communications are legally available now, the Bill will permit companies subject to shareholder approval to default to sending shareholder communications electronically. That should encourage greater use of e-communications, making it easier and cheaper for nominee operators and brokers to forward information to their account holders. We understand that the UK Shareholders Association, The Share Centre and some other brokers and intermediaries are pressing for the enforcement of legal rights for indirect investors. They argue that it is a matter of principle about shareholder democracy. We could not agree more with their aim. As I said, it is the Government’s aim to enhance shareholder engagement and to encourage the responsible exercise of governance rights. However, amendments that impose a compulsory provision on companies are not the way to achieve greater enfranchisement of indirect investors. Business groups, including the CBI, the Institute of Chartered Secretaries and Administrators and the Association of Investment Trust Companies have consistently opposed a compulsory approach to enfranchising indirect investors. They point to the high administrative burden that such an approach would impose on companies and raise some key concerns. First, on practicality, the systems required to allow the nomination by members of parties to exercise shareholder rights are expected to be complex and costly. The Registrar of Companies would have to maintain details of any third parties via a sub-register for each member who has nominated them. Both the main register and these sub-registers would have to be updated on an ongoing basis. A company would have to invest in putting such systems in place, even though the number of indirect investors wishing to exercise full shareholder rights may be very small. Estimates for likely take-up of governance rights vary from just 0.3 per cent to 5 per cent of investors. Secondly, on the principle of compulsion, should it not be the shareholders as a whole who decide whether the company should bear the administrative burden of setting up and maintaining systems to enfranchise indirect investors, when the vast majority of them may never exercise their new rights or take note of information they receive? Noble Lords may argue that under a voluntary approach to enfranchisement, companies will still need to implement appropriate changes to their administrative systems. The point is that companies will be able to develop the most efficient, cost-effective systems to suit their needs, rather than incurring the costs of complying with a ““one size fits all”” legislative approach. The Government believe that the better way to achieve greater enfranchisement of indirect investors is to work with the industry—the companies, brokers and investor groups—to promote an environment in which it becomes standard practice without creating an inflexible bureaucracy of enforcement. We have reached that view after considering carefully the arguments and interests of the many different business and investor groups and other interested parties on this issue. As the noble Lord, Lord Hodgson, noted in Grand Committee, good practice in this area is beginning to emerge in the UK. We are encouraged by some excellent examples of the market developing solutions to enfranchise those investing in ISA schemes, and other indirect investors. Several brokers are already taking voting instructions from underlying investors, while many London Stock Exchange listed companies are making additional copies of their corporate information available to third parties on request. We do not agree that little has been happening; it is wrong to think that there is little appetite among the industry to enfranchise indirect investors. A number of PLCs have been actively engaged in the debate on shareholders’ rights through the industry-wide shareholder rights working group. That group, comprising members of the CBI and the United Kingdom Shareholders’ Association as well as intermediaries and brokers, has been considering solutions that work in line with the proposals in the Bill. So, we are seeing the market working here, with people making choices of the kind that the noble Viscount, Lord Bledisloe, mentioned and shareholders choosing which way they want to go on this issue. A voluntary, market-based approach seems the best approach to be taken in this situation. As I explained at Second Reading and in Grand Committee, the Bill’s reserve power under Clause 137—for the Secretary of State to compel companies to provide information to indirect investors—is intended as an additional tool towards encouraging and achieving greater enfranchisement. Better informed investors will be better equipped to demand voting and other governance rights from nominees and the companies in which their investments are made. The scope of the power was strengthened following consultation through the Company Law White Paper of March 2005, to ensure that indirect investors could be given parity of treatment in information rights with those holding shares indirectly. We would prefer market solutions to develop, but if they do not the power will be available—and, in that context, we do not have to wait for another Company Law Reform Bill. My own view is that one of those is enough in one’s lifetime. The powers will be there so that, if we find things are not moving, we can take things forward. By deeming certain provisions to be within a company’s articles without necessarily being written in, the noble Lord’s amendments would simply create more confusion for companies, shareholders and indirect investors. In short, I fear that, as before when we debated the clauses in Grand Committee, these amendments would impose disproportionate cost burdens on industry compared with the benefits to be gained for the relatively small number of indirect investors who want to but find that they cannot exercise full governance rights. On the basis of a market-based, voluntary approach being better than heavy-handed regulation, I urge the noble Lord to withdraw the amendment.
Type
Proceeding contribution
Reference
681 c818-21 
Session
2005-06
Chamber / Committee
House of Lords chamber
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