Company Law Reform Bill [HL]

moved Amendment No. 136:"Page 110, line 8, at end insert ““, or" (   )   that the directors have decided not to pursue the claim, unless the court considers that there is a substantial risk that in reaching their decision they acted in breach of their duties to the company, or (   )   that the claim is one which the company in general meeting could validly decide not to pursue, unless the court considers that there is a substantial risk that a decision not to pursue the claim would only be taken as a result of votes cast by members with a personal interest, direct or indirect, in the decision, or (   )   that pursuing the claim would not be in the interests of the company.”” The noble Lord said: My Lords, as I explained a minute ago, this relates to derivative claims, which we debated in Grand Committee at some length. As the noble Lord, Lord Sharman, and others have said, there has been a lot of interest in this from City practitioners and other interest groups. We wish still to explore whether the right balance has been achieved in this part of the Bill. As I explained in Grand Committee, one of our major concerns about the Bill has been the double-whammy effect of codifying directors’ duties and at the same time creating a statutory basis for members to bring a claim against company directors. Although it is easy to get hooked up in this area, a real issue is whether it will act as a disincentive to men and women of quality and experience being ready to serve on the boards of public companies. If it does, this cannot be in the interests of UK plc. As I said, we recognise that the Government have made a series of steps forward in the amendments that we debated in the previous group. But the changes do not meet all our concerns. It is because of that that we have tabled this amendment on which I will be grateful for the Attorney-General’s response. How did we get into this difficult position with people outside the House being very concerned? It is now agreed that the Minister, Alun Michael, was wrong to claim in his letter of 9 November 2005 to the Financial Times that this Bill will make the law in this area clearer and more accessible, but will not result in a major change in the law. In fact, we now know that the proposed statutory claim has been widened from the current common law position to include claims of negligence. There have also been a number of other changes, such as the removal of the concept of fraud on the minority. We have been through all this before and I will not go any further, because we spent some time on it in Grand Committee. Therefore, I turn to our amendment. We are extremely grateful to the Law Society for its help in drafting it. The amendment seeks to insert into Clause 242(2) three new provisions obliging the court to refuse permission to continue a claim: first, where the decision not to pursue the claim has been taken by the directors of a company, unless in reaching that decision the court considers that they are in breach of their duties—that is, the court should not second guess the commercial judgment of the directors unless the court considers that they breach their duties as directors in so deciding not to proceed; secondly, where the decision not to proceed could be taken by the shareholders, always ignoring votes cast by shareholders with a personal interest in the decision—that is, the court believes that the generality of shareholders, excluding those with a personal interest on either side of the argument, would not have wished to proceed with the claim, which, in part, parallels one of the points that the noble and learned Lord made in his amendment; or, finally, where the court concludes that pursuing the claim will not be in the company’s interests. In Grand Committee, we debated a number of amendments which were intended to limit the scope of the court to grant permission to bring a derivative action. This amendment is designed to achieve the same aim by adding to the list of grounds on which the court must refuse permission in Clause 242(2). The purpose of our new subsections (2)(d) and (2)(e) is to introduce a threshold test which does not involve either a mini-trial or the delay and expense of holding a general meeting. The essence of any derivative action is that the company is being or would be prevented improperly from bringing the claim, as a result of which justice will be done only if the claimant is permitted to bring the claim on the company’s behalf. In the absence of such impropriety, no injustice is done. All that the threshold test requires is that the claimant satisfies the court that there is a substantial risk that a decision of the company not to pursue the claim, whether at board or shareholder level, was or would be improper. Such a test strikes a proper balance between the company’s need for certainty and the shareholder’s need for protection. Unless the claimant can pass that test, he should not be permitted to continue. New subsection (2)(f) will require the court to refuse permission if in its view it would not be in the company’s interest for the claim to be pursued. That would enable the court to reach its own view on the matter rather than being required to revisit the directors’ decision-making process, as required under Clause 242(3), which is in contrast to the provisions of Clause 242(2)(a). We remain concerned that the Government’s current approach of putting considerations of this kind in subsection (3) is inappropriate because it will be only after several years of jurisprudence that it will be possible for firm advice to be given on the court’s approach to the exercise of its unfettered discretion in relation to the matter set out in that subsection. In the meantime, we run the risk of damaging uncertainty with all that that entails for the attractions of the UK as a place to incorporate and operate a company. I therefore look forward to hearing from the noble and learned Lord. I beg to move.