Company Law Reform Bill [HL]

My Lords, we have gone a long way to meet these concerns. I believe that the amendments we have put forward present a package that strikes the right balance between a degree of long-stop accountability for the directors—which is what derivative action is, not a first resort but the last—and freedom from frivolous claims. As a preliminary point, the noble Lord referred to a letter from Alun Michael. I do not have that letter in front of me and it is not accepted that what he said there was wrong. I am not going to speak further but that is for the record, particularly because of the amount of time that Alun Michael put into the Bill, which should certainly be recognised and appreciated. However, given the point that the noble Lord made I will write to him a little further with the detail and place a copy of that in the Library. The first two paragraphs of the amendment would add new reasons why the court would be obliged to reject a derivative claim—not something to be taken into account but an obligation. Those are strong tests. However, in both cases they would require the court to reject the claim unless it considered that there was ““a substantial risk”” either of directors having acted in breach of duty, or of the shareholders’ vote not being independent. My concern is that it would be difficult for the courts to form a view on that. For example, under the second of the proposed paragraphs, the court would have to try to form a view on how votes would be cast by particular members at a notional extraordinary general meeting, which poses a great difficulty. In any event, it seems that as the applicant will have to establish a prima facie case before he can obtain permission to continue a claim, by definition he will have to have established that there was a risk of a breach of duty in what the directors did. The other problem with the amendment is that it is really a backdoor way of trying to get to the wrongdoer control test. We made a conscious decision not to continue that as part of the derivative claim procedure. We do not think it helpful or right. We believe that the factors that the court will need to have regard to provide adequate protection. I emphasise particularly in that respect the new factor that we have included by the amendment that has now been agreed, which looks to any evidence of the views that independent members would have. I would anticipate that it is for courts to decide but if, for example, the courts knew that there was a substantial and highly respectable institutional investor who knew what the circumstances were and thought that the directors were doing the right thing in not pursuing the claim, then that would be influential with the court. I turn to the third limb, which again would be an absolute bar on bringing a claim. But would it not do exactly what the noble Lord and, indeed, others have been concerned about in the past by requiring the courts to second guess what is in the company’s interests? It directly requires the courts to take that view. It also conflicts rather unhelpfully with what is provided in Clause 242(2)(a). In that respect it also forms a difficulty. I recognise why the noble Lord, Lord Hodgson, and, indeed, the noble Lord, Lord Sharman, want to consider it. But I hope that as a result of considering in more detail the government amendments that have now been accepted by the House they will agree that those provide an acceptable compromise and that they will not need to bring Amendment No. 136 back. As I understand it, the noble Lord will not be pressing it now.