Company Law Reform Bill [HL]

My Lords, the noble Lord, Lord Lea, gave that answer as indeed we have given it before—and which I may respectfully suggest some of the comments in the House suggest may be necessary—so that there is clarity on what the responsibilities of directors are. That is why their duties are to be put in statute. That is what the company law review said and what we have said. If there are people at the moment who do not have regard to these factors then—on the basis of the best business practices that we have had explained to us by some of the best business leaders in this country—they should. The next surprising part of the amendment tabled by the noble Lord, Lord Freeman, was the suggestion that these matters should instead by laid down in guidance from the Secretary of State. I almost felt like going to my colleagues and saying, ““Yippee, they have now decided that we can do all this by ministerial fiat””. On some other amendments we were taking the opposite line and being severely criticised for not putting all things to the decision of Parliament. I do not know where that matter in the noble Lord’s amendment comes from, unless from a belated intention to support Amendment No. 87 tabled by my noble friends for guidance to be put forward. It is simply not workable. It can only be envisaged that one day the Secretary of State will say that all company directors ought to have regard to the interests of the company’s fat cats for the next month or so: let us give them guidance to that effect. Surely that is not the way we expect this matter to be dealt with. Surely it is right to identify these factors in the way that has been done—through tremendous consultation—and put them into statute. None of the factors has been disputed. When we come to our amendment I will explain why. The next point that has been put forward is the one that has been consistent in the discussions that we have had with different groups. The noble Lord, Lord MacGregor, raised the point that it would be expensive and that there is a need for a proper audit trail, a paper trail. I have consistently said that I do not accept that. When we come to the derivative claims provisions, it will be seen that what is necessary for an individual shareholder to get a claim off the ground will be to persuade a judge that the shareholder has a prima facie case that he should be able to bring that claim. He will have to show that the directors are prima facie in breach of duty. I have never understood the proposition that it is necessary to have some particular form of paper trail. There is nothing in the Bill that says there is a need for a paper trail. Somebody says that a director did not have regard to the long-term interests of the company and the director responds, ““Don’t be stupid, of course I did””. But where is that written down? The director says, ““I don’t need to write down something like that, because that is the fact; that is the truth. If you want to write it down that is fine as well. But I do not accept this proposition””. Reference has been made to particular views that have been expressed in newspapers today. We have considered very carefully the arguments that have been put forward by certain lawyers from different places but I do not find their case persuasive. That is not because I want to see companies subjected to unnecessary bureaucracy. I do not believe that this clause will do that. I confess from my professional experience that legal advice can sometimes be very cautious, sometimes excessively so; but that is the point that has been put forward today in the newspapers—it is excessively cautious. But, answering directly the point put by the noble Lord, Lord MacGregor, I do not agree that the effect of passing this Bill will be that directors will be subject to a breach if they cannot demonstrate that they have considered every element. It will be for the person who is asserting breach of duty to make that case good. They will have to do so at their own expense if they bring a derivative claim and they will have to recognise that they cannot claim damages for themselves, as is the case in some other jurisdictions, but only for the company. The only effect of a derivative action by the shareholder, if it were successful, would be to obtain damages for the company. It is true that the shareholder might benefit from that—but he might not; he cannot obtain damages for himself. Due to our present court system in which, generally, the loser pays costs, it would not be a cost-free exercise in any event if someone brought such a claim. So we have listened very carefully to those concerns. We have sought to meet many of them in two ways. First, it will be made clear when I explain the government amendment that the factors presently in subsection (3) will be incorporated into subsection (1) so that they can be seen as part of a single duty. We never intended them to be separate duties. Secondly, we are strengthening the procedure for derivative claims so that there cannot be frivolous actions. They will be struck out if there is no decent basis for them. I started by saying that this amendment is going backwards—it is. A clear example of that, which I put respectfully to the noble Lord, Lord Freeman, is that it amounts to repealing something that has been in our law for more than 20 years. It has been a statutory requirement under Section 309 of the Companies Act 1985 that:"““The matters to which the directors of a company are to have regard in the performance of their functions shall include the interests of the company’s employees in general, as well as the interests of its members””." No one has said to us that that statutory provision that has been in place for 21 years is proving unworkable. No one has said to us that, as a result of that, ““we have unnecessary expensive paper trails””. No one has said ““we cannot make decisions in the best interests of the company””. No one has said to us, ““because of that duty, people are declining to do business in this country””. I say, respectfully, to the noble Lord, Lord Freeman—I shall not quite descend into the political arena—that if the Conservative Party stands on the proposition that it now wants to remove the duty of company directors to have regard to the interests of employees, that will be noted. My final point picks up on the comments of the noble Lord, Lord Razzall. We have tried hard to steer a constructive course between those who would want much more onerous duties to be placed on directors and those who would wish there to be no duties at all. I know that that is perhaps an exaggeration, but noble Lords will understand my point. We have tried to strike that middle ground. As the noble Lord, Lord MacGregor, rightly said, you have to look at derivative claim rights as well as the statement of duties. I genuinely believe that we have met that balance. I commend our substantial government amendments, which we will consider in due course and for which my noble friend Lord Lea has given notice he will exact some anger tomorrow, if not today. I respectfully invite the noble Lord, Lord Freeman, to recognise that enlightened shareholder value, which he says he supports, is what the Government are seeking to do. I ask him to withdraw his amendment.