Company Law Reform Bill [Lords]

Public Bill Committee, 20 July 2006.

Standing Committee D

Clause 540

Eric Illsley (Labour, Barnsley Central)

With this it will be convenient to discuss the following: clauses 541 to 592 stand part, Government new clauses 45 to 160, Government new clauses 162 to 240 and Government new clauses 412 to 416.

Vera Baird (Labour, Redcar)

Good morning, Mr. Illsley. We propose that parts 18 and 19, which deal with the allotment of shares and share capital generally, should be completely replaced as part of the restatement exercise. Assuming that the Committee agrees to the changes, I intend to oppose clause 540 standing part, and similarly to oppose the Question on clauses 541 to 592.

The Government new clauses replace clauses 540 to 592, with the following exceptions: those elements of clause 583 relating to the allotment of debentures and the transfer of shares in debentures; clause 584, which will be restated in the new clauses dealing with debentures and transfer of securities; and clause 585, which is being restated in the new clause dealing with distributions.

In addition, the new clauses restate various provisions of the Companies Act 1985. Without exhaustively listing them, they relate to the allotment of shares, alterations to a company’s share capital, variations of class rights, reductions of share capital, shares no bar to damages, serious loss of capital, general rule against acquisition of own shares, financial assistance, redeemable shares, purchase of own shares, Treasury shares, capital redemption reserves and various associated provisions, and provisions relating to the persons who may be appointed to conduct valuation of non-cash assets.

As we explained when debating clause 675 stand part, this restatement exercise has necessarily resulted in some reordering and restructuring of parts 18 and 19. In some cases, the new clauses are different in structure from their counterparts in the Bill, but our starting point is the restatement exercise. We are not making substantive changes in the law unless they are needed to ensure that the restated provisions are compatible with the other provisions of the Bill. However, a small number of changes to provisions that are restated have been required to ensure compatibility with European Union law. A very small number of changes are also required to give effect to what would have been Government amendments to existing clauses had the clauses in question not been restated in the new clauses in this group. I shall turn to those and take hon. Members through them.

First, we have removed the requirement imposed in clause 582 for a private company that makes a purchase of own shares out of capital to file a statement of capital with the registrar. It is unnecessary because such a company is already under an obligation to file a statement of capital when buying its own shares; there is no need for an additional requirement.

Secondly, we have taken the opportunity in the restatement of what are currently clause 561 about the reconversion of stock into shares and clause 589 concerned with the form of notice that must be given to the registrar, when a company has redenominated its share capital, to clarify that the requirement applies only to limited companies.

Finally, clauses 414 and 415 restate the law on the independence of persons required to value non-cash assets, for example in connection with an allotment of shares by a public company. The new clauses have the same effect as section 108 of the 1985 Act, but spell out the full statutory auditor qualification requirement rather than cross-referring to the statutory auditor provisions to be restated in part 35 of the Bill.

We are seeking power to make changes to some of the restated provisions in the group, in particular the provisions on capital maintenance, which have been foreshadowed in debates in the other place. I shall say more about that when we debate clauses 161, 241 and 306. It is the largest group of restated provisions and we are clearly not expecting members of the Committee to consider the issue in detail now. As we said during the debate on clause 675, we shall be consulting interested parties on the new clauses during the summer with the limited purpose of making sure that we have not made any unintended changes to the law. None the less, it is an important job that must be done and we are grateful that the Law Society, in particular, has offered its assistance.

On the basis that there will be further opportunities to amend the restated provisions, if necessary, will members of the Committee lend their support to our approach to the restatement exercise and vote in favour of the amendments in new clauses 45 to 160, 160 to 240 and 412 to 416 when we reach them? On the assumption that that will happen, I ask them to oppose clause 540 and clauses 541 to 592 standing part of the Bill.

Jonathan Djanogly (Conservative, Huntingdon)

We have now reached part 18 and the Minister has set out how the Government intend to deal with the new clauses. I have set out our party’s position and I shall not repeat our general stance. It will, in effect, equate to our abstaining on the votes on the basis that we shall need the summer to consider the new clauses and take advice on their implications.

As for part 18, of all the various parts, consolidation is as welcome there as anywhere. There is no doubt that, when practitioners complained about the lack of consolidation it was often the fact that the allotment provisions would be in one piece of legislation and the pre-emption provisions would be in another piece of legislation that was the upsetting aspect of non-consolidation. To that extent, the general move is welcomed and we can discuss some more specific aspects as we proceed.

Quentin Davies (Conservative, Grantham and Stamford)

On a point of order, Mr. Illsley. I am confused about how we are to proceed this morning. If the Government intend to vote against clauses 540 to 592 standing part, are we to debate the amendments to them first and then vote on the clauses standing part in a block at the end? Is that to be the procedure?

Eric Illsley (Labour, Barnsley Central)

The Government intend to negative clauses 540 to 592. The selected amendments will be debated as we progress through the morning.

Clause 554

Jonathan Djanogly (Conservative, Huntingdon)

I beg to move amendment No. 529, in clause554,page267,line3,leave out ‘conditions are’ and insert ‘condition is’.

Eric Illsley (Labour, Barnsley Central)

With this it will be convenientto take the following amendments: No. 530, in clause554,page267,line8,leave out ‘conditions are’ and insert ‘condition is that’.

No. 528, in clause554,page267,line10,leave out paragraph (b).

No. 532, in clause554,page267,line12,at end insert ‘or

(iii) the amount or rate approved by members,’.

No. 531, in clause554,page267,line13,leave out ‘less’ and insert ‘least’.

Jonathan Djanogly (Conservative, Huntingdon)

We now move on to commissions, discounts and allowances. The clause deals with companies paying commission, and states that the payment must be authorised in the articles and must not exceed 10 per cent. of the share issue price. In practice, the provision, which seems to have been around for ever and a day, has little purpose in this day and age. If a company wants to get round it in its commission arrangements with, say, an investment bank on a placing, in addition to the 10 per cent. commission a corporate finance fee could be charged, effectively topping up the amount paid to the stockbrokers doing the placing.

More to the point, if there is to be a cap on commission, what is the relevance of the figure of 10 per cent? In the Lords Grand Committee, Lord Sainsbury simply said words to the effect that the provisions had been around for 100 years and the Government were not persuaded to change them. I see some merit in making it necessary for commission payments to be authorised in a company’s articles, but not in making it necessary to operate a cap on the amounts payable. On that basis, we have tabled our preferred amendment No. 528, which would delete the requirement for a cap on commission. As a second preference we have tabled amendment No. 532, which provides for the cap to be overruled with the specific approval of the company’s members. In such circumstances we see no reason why a cap should apply.

Vera Baird (Labour, Redcar)

As the hon. Gentleman said, the clause restates the existing rules in sections 97 and 98 of the 1985 Act, which limit the amount of commission that a company can pay to those who subscribe for its shares to 10 per cent., or such lower amount as may be specified in the articles. Amendments Nos. 528 530 and 528 would relax the provision by removing the 10 per cent. cap, and by allowing commission at any level as long as its payment was authorised by the articles. It would thus create a way round the prohibition on issuing shares at a discount. That prohibition is part of the capital maintenance rules, the purpose of which is to protect creditors. When a company is new, creditors can assume that it has raised at least the value of its nominal capital. Allowing deep discounting, even if that is disguised as a large commission, enables the unscrupulous company promoters to create an empty shell that has the appearance of a well funded company but which in fact is not one. That can be a particular disadvantage for longer-term creditors.

The other amendments in the group would marginally tighten the rules, enabling members to approve a rate of commission that would be effective as a limit if it was smaller than 10 per cent. I am not sure whether that is intended to be an extra element of the authority given to directors under clause 542, but the option of a provision in the articles and a 10 per cent. maximum are, in our view, sufficient. Setting the rate in the articles also has the benefit of increased transparency. Given that explanation, I hope that the hon. Gentleman will withdraw the amendment.

Jonathan Djanogly (Conservative, Huntingdon)

I accept the Minister’s explanation, but the purpose of the clause would be to stop unscrupulous companies charging high commissions. As I explained, one could drive a coach and horses through that in any event by charging fees rather than commissions. I feel that my point is still valid, but I hear what the Minister said. I beg to ask leave to withdraw the amendment.

Clause 558

Jonathan Djanogly (Conservative, Huntingdon)

I beg to move amendment No. 465, in clause558,page268,line37,after ‘capital’, insert

‘or convert shares into shares of a different class provided this does not constitute any variation of rights attached to the shares so converted.’.

Eric Illsley (Labour, Barnsley Central)

With this it will be convenient to consider the following amendments: No. 466, in clause558,page269,line27,at end add—

‘(6) Any conversion of rights pursuant to subsection (3)(a) shall not constitute a variation of the rights attached to the shares in question and rights attached to such shares will only be varied in accordance with sections 125 and 125A of the Companies Act 1985 (c. 6).’.

No. 468, in clause564,page272,line12,at end insert

‘and any other restrictions, whether more or less onerous than the restrictions set out in this section, on the variation of rights.’.

No. 469, in clause564,page272,line27,at end add—

‘(7) Nothing in this section affects a company’s power to vary the rights attaching to shares under section 125(2) of the Companies Act 1985 (c. 6) where the company has already obtained the requisite consent under section 125(2)(a) or convened the general meeting under section 125(2)(b).’.

No. 470, in clause565,page272,line38,at end insert

‘and to any other restrictions, whether more or less onerous than the restriction specified in this section, on the variation of the rights.’.

Jonathan Djanogly (Conservative, Huntingdon)

As we are talking about share capital generally, I should like to point to the statement in clause 557(3) that

“shares may be denominated in different currencies.”

That is certainly helpful. We welcome the reform of authorised share capital, or what one legal commentator called the “tedious fiction”. It has become meaningless, so on its abolition it will not be missed. However, will the Minister explain the transitional arrangements for existing companies—for instance, those whose authorised capital is stated in their memorandum and articles of association? Will that simply be ignored once the Act comes into force, and will companies be required to make changes?

Clause 558 deals with the alteration of the share capital of limited companies, and relates to section 121 of the 1985 Act. That section refers to a company limited by shares or by guarantee, whereas clause 558 refers only to a limited company. Under section 121, a company can alter its share capital in accordance with the section only if so authorised by its articles. Clause 558 does not contain the same restriction or include a provision to cancel shares, as section 121 does.

In debates in the Lords, the Opposition wanted a statutory framework for the conversion of one class of shares into another with the same nominal value. The Government’s view was that the clause does not deal with rights attached to shares but with the level and value of the share capital. The Government did not want a company to allow for the alteration of rights by way of an ordinary resolution, but there was a strong practitioners’ request for a mechanism to convert classes of shares.

The Law Society’s June 2005 paper suggested that there should be a provision for a procedure to convert one class of shares into another in which the nominal value of the shares into which they were converted was greater. The Law Society wanted a mechanism to deal with the difference in nominal value, so that there was no unauthorised reduction in capital.

I appreciate that it is a very technical matter, but it is an important one in practical terms, especially when a company has not been doing well and needs fresh capital. That often initiates a reorganisation of share capital, sometimes with an intake of venture capital. Venture capitalists normally require preferred shares of one form or another, and the share capital problem often arises as a result of the conversion of existing shares. Amendments Nos. 465 and 466 would reflect that by providing that a conversion does not constitute a variation of rights.

Amendments Nos. 468 and 469 deal with clause 564 and the variation of class rights of companies with share capital. Section 125 of the 1985 Act deals with the same issue, saying that the rights attaching to a class of share can be altered in accordance with any provision of the company’s articles. Clause 564 states that there must be at least 75 per cent. agreement between the shareholders within a class before their share rights can be varied. However, it is questionable whether the clause as drafted sets a statutory minimum. Clause 564(3) simply says:

“This is without prejudice to any other restrictions on the variation of the rights.”

There is nothing to say that the restrictions must be more onerous, which seems to be the Government’s intention as stated in the notes to the Bill. Could not such restrictions therefore be less onerous? Furthermore, why did the Government decide to abolish the 1985 Act right to allow class rights to be varied with less than 75 per cent., if the articles so provide, in what we thought was meant to be a deregulatory Bill? Those provisions are reflected in amendments Nos. 468 and 469.

Amendment No. 470 deals with clause 565, which is a more specific addition to section 125 of the 1985 Act relating only to companies with no share capital. The same issues in clause 564 apply here. The Government seem to be trying to introduce a statutory minimum level of agreement between members of the same class. A similar amendment, No. 470, has been tabled to clause 565.

Vera Baird (Labour, Redcar)

As the hon. Gentleman said, amendments Nos. 465 and 466 would expressly permit a company to convert its shares from one class to another by passing an ordinary resolution. That is expressed to be subject to the caveat that such a conversion would not amount to a variation of class rights. The driver is clearly a desire to facilitate the re-designation of shares—for example, where a company wants to convert As to Bs—without changing the rights enjoyed by the holders of those shares.

The matter was debated in Grand Committee, and my noble Friend Lord McKenzie subsequently wrote to Lord Hodgson on 2 May 2006. The letter is in the Library of the House, and I expect that the hon. Gentleman has had the opportunity to read it. Having discussed the point with the Law Society, we concluded that what Lord Hodgson described as the conversion of shares from one class to another, which has implications for minority shareholders and is therefore subject to a more restrictive statutory regime than that envisaged by the noble lord, appears to amount to no more than the re-designation of a class of shares.

Section 128(4) of the 1985 Act clearly envisaged a company assigning a name or other designation to any class of shares, as it requires a company to give notice to the registrar. However, the Government do not see the need for the Bill to regulate how the company takes that decision.

Amendments Nos. 468 and 470 concern how class rights may be varied under the Bill. Clauses 564 and 565 will insert new sections 125 and 125A into the 1985 Act to prescribe the minimum requirements for variation of class rights: either the consent in writing of three quarters of the holders of the class or a special resolution of that class. However, if and to the extent that a company has adopted a more onerous regime for the variation of class rights, it must comply with the more onerous regime.

The amendments would enable a company’s members to make provision for less onerous as well as more onerous conditions to apply to variation than those prescribed in statute. Variation of class rights might reduce the relative power of one class of shareholders vis-Ã -vis another, and might amount in the worst-case scenario to a fraud on the minority. That is clearly undesirable, and it is only right that stringent conditions should apply to a proposed variation of class rights.

Amendment No.469 to clause 564 concerns the transitional arrangements that must be made for existing companies that have sanctioned the variation of class rights under section 125 in circumstances in which the variation has not taken effect at the date that the Bill comes into force. As we have said before in Committee, the Bill is not the place to make such transitional arrangements.

Section 125 provides that, in certain circumstances, a variation provision in the articles will prevail, notwithstanding the fact that it is less onerous thanthe statutory regime—and we accept that. The circumstances in which this exception to the general rule applies are constrained under section 125(4) depending on where the rights are attached to the shares—whether in the memorandum or elsewhere—and when the provision with respect to their variation was included in the articles.

It is also understood that companies rarely make use of the current flexibility to have less onerous conditions for a variation of class rights. We therefore took the view that a minimum requirement for a 75 per cent. majority of the class in question should be imposed to simplify the provisions on variation, as recommended by the company law review.

Quentin Davies (Conservative, Grantham and Stamford)

On a point of order, Mr. Illsley. I do not wish to be discourteous to the Minister, but she is going through some quite complex stuff and mumbling rapidly into her brief with the sort of diction that one associates with an old-fashioned Roman Catholic priest saying the Tridentine mass. It is quite difficult to follow every word, but each word may have some significance. Through you, Mr. Illsley, would it be possible to ask the hon. and learned Lady to lift her voice and enunciate her words a little more clearly?

Eric Illsley (Labour, Barnsley Central)

That is not technically a point of order, but I am sure that the Minister will have heard the hon. Gentleman’s comments.

Vera Baird (Labour, Redcar)

I have never been accused of having a soft voice or of being anything other than a person who projects themselves well. I am not speaking in Latin, in which the Tridentine mass is recited. So I will open my mouth, the hon. Gentleman will open his ears and we will get on amazingly well, as we have before. Does he want me to go over anything?

Quentin Davies (Conservative, Grantham and Stamford)

No.

Vera Baird (Labour, Redcar)

I will try to accommodate the hon. Gentleman.

Crispin Blunt (Conservative, Reigate)

Translation is an issue.

Vera Baird (Labour, Redcar)

I am sure that the Bill team could provide briefing in Latin if we asked them, if that would add to the entertainment of this final day. The hon. Gentleman is testing fate because I understand that we have a PhD in Greek on the team who is even now working to make life more complicated.

On the point raised by the hon. Member for Huntingdon (Mr. Djanogly) about share capital in clause 557(3) and transitional arrangements, we hope shortly to put out a consultation paper on those arrangements, to set a general approach, and we will then will consult in more detail on draft regulations after Royal Assent. I hope that that satisfies the hon. Gentleman on that point.

Jonathan Djanogly (Conservative, Huntingdon)

I thank the Minister for her reply. As this is the last day in Committee, we can move on. However, as my hon. Friend the Member for Grantham and Stamford (Mr. Davies) rightly said, those are complicated provisions. To that extent, we will wish to have a careful look over the summer at what the Minister has said and reserve our position until proceedings on Report. On that basis, I beg to ask leave to withdraw the amendment.

Clause 560

Jonathan Djanogly (Conservative, Huntingdon)

I beg to move amendment No. 467, in clause560,page270,line14,after ‘up’, insert ‘or treated as paid up’.

The clause deals with notice to the registrar of sub-division or consolidation. It relates to section 122 of the 1985 Act. Under the notice provision of section 123 of the 1985 Act, there is no requirement for a company to file a statement of capital. The aim of the amendment, which comes from the Law Society, is to have the fact that any share capital following reorganisations that is to be treated as paid up should be recognised on the form. Would it not be possible to comply with the related company law directive, 77/91/EC, by giving a short, specific notification at the time and then combining a full return with the annual return?

Vera Baird (Labour, Redcar)

The amendment relates to information that is to be stated in the statement of capital to be filed following the subdivision or consolidation of share capital, and seeks to make it clear that paid up includes amounts treated as paid up. That distinction is currently drawn in section 88 of the 1985 Act.

We take the approach that it is unnecessary in the context of the statement of capital to draw a distinction between amounts paid up and amounts treated as paid up. The reference in clause 560(3)(d) to amounts paid up is, therefore, intended to apply not only to amounts paid up in cash but to amounts paid up by the transfer to the company of a consideration other than cash. I hope that that clarification is sufficient for the hon. Gentleman to think that the proposed amendment is unnecessary.

Jonathan Djanogly (Conservative, Huntingdon)

I hear what the Minister says. It is a difference in approach, and I do not wish to pursue it, so I beg to ask leave to withdraw the amendment.

Clause 570

Quentin Davies (Conservative, Grantham and Stamford)

I beg to move amendment No. 357, in clause570,page275,line22,leave out ‘private’.

Eric Illsley (Labour, Barnsley Central)

With this it will be convenient totake the following: Amendment No. 358, in clause571,page276,line8,leave out ‘private’.

Amendment No. 461, in clause580,page286,line15,leave out ‘private’.

New Clause 437—Distribution out of company share premium account (No. 2)—

‘(1) Section 263 of the Companies Act 1985 is amended as follows.

(2) In subsection (1) after “purpose” insert “except as provided for in section 263(6)”.

(3) After subsection (5) add—

“(6) A company may make a distribution out of the company’s share premium account provided that—

(a) the directors certify that the proposed distribution in its totality amounts to less than the operating cash flow minus depreciation defined as—

where—

S is sales,

CGS is the cost of goods sold,

G+A is general and administration expenses,

NI is the net interest charge,

T is the tax charge,

WCR is the working capital requirement, and

D is the depreciation charge of the company in the relevantyear; and

(b) the directors have made a solvency statement in accordance with section 135B of the Companies Act 1985.”.’.

Quentin Davies (Conservative, Grantham and Stamford)

It would be remiss of the Committee to pass new company legislation without considering in detail two important matters. One is a theoretical problem of long standing, an issue of principle that underlies not only this clause but a number of others. The other is a very practical problem in relation to which people outside this place will look to Parliament to produce a solution. In the two amendments and the new clause I am trying to bring together both those problems with a view to trying to solve the practical one.

The theoretical problem concerns what constitutes equity capital, and to what extent equity capital should constrain the payment of dividends. Although it is theoretical, it has enormous practical significance and it relates directly to this clause, which deals with the ability of companies to reduce their capital.

All Committee members with business experience will have been brought up with the notion that equity capital, shareholders’ funds and net worth are all equivalent expressions. It is divisible into four categories: paid-in nominal share capital, the share premium account, reserves and the profit and loss account. We were all also brought up on the principle that dividends are paid only out of reserves or those reserves that are distributable—I do not have time to go into the distinction between distributable and non-distributable reserves—or the profit and loss and account, in other words the current profit for the year.

Paying a dividend out of reserves is an exceptional thing to do. It requires some justification and explanation. It would be deeply shocking to pay dividends out of any other aspect of capital, out of the share premium account or out of nominal share capital. That is a principle that everyone has been brought up on and I am not sure that everybody has thought it through very clearly.

If one thinks about it—we owe it to ourselves and others to think about it quite carefully—these distinctions make no conceptual sense and no economic sense either. They are merely semantic distinctions. They are a matter of the conventional use of language. It actually does not matter at all whether a company issues a million shares at £1 at par and then has a nominal share capital of £1 million and no share premium account or whether it issues 500,000 shares at £2 and ends up with £500,000 of nominal share capital and £500,000 of share premium account. It makes no economic difference at all.

Let me go further. It actually makes no economic difference whether a company retains a substantial amount of its earnings, or perhaps all its earnings, and never pays a dividend and thereby accumulates substantial reserves, but maybe has no share premium account as all it did initially was to issue its shares at par and it has never raised share capital since and is entirely dependent upon retained profits for its increase in shareholder funds, or whether a company has done the exact reverse.

By doing the exact reverse, the company would have distributed a large proportion of its profits by way of dividend and then, from time to time, when it needed to replenish its share capital, issued rights issues. In that case it would have a substantial share premium account because it would not have been able to go to the market successively to raise capital in that way unless the share price had performed well and gone well above the par value. It would have a substantial share premium account and perhaps small reserves. It has absolutely no significance in terms of the value of the company and its operations which of those two options the company chose.

Let us take a company that has been around for 100 years. I cannot think of one offhand but I can think of companies that have been public-quoted companies for 80 years, such as BP or what remains of ICI. Who cares whether in 1938 or 1953 BP or ICI did a rights issue or whether at that stage in their life they retained a large amount of their earnings? It is not even a matter of historical interest as the phrase “historical interest” implies some causal significance. It is a matter of merely antiquarian curiosity at best.

If that is the case, we have to look again at the whole issue of the extent to which the payment of dividends should be restrained not by share capital as a whole, but by the amounts of specific share capital that are defined as being nominal capital or share premium account or reserves or whatever. Of course, equity capital as a whole is extremely important. The total to which those four categories amount is extremely important in the life of a company, but the artificial categories into which the equity capital is traditionally divided are not. In fact, the only economic interest is twofold: in a company’s total equity capital in relation to its financial liabilities—in other words, its gearing and financial risk, which we all know is important—and in its equity capital in relation to its trading risks. We all know that a well-managed company will match and balance the two. If a company has, by the nature of its activities, a high degree of trading risk and a high volatility of earnings, it would be wrong for it to add financial risk to that operational risk through high leverage. If, on the other hand, a company has a very low volatility of earnings, it may be not only responsible but desirable for it to increase its debt to bring the weighted average cost of capital down to the minimum level. The total amount of equity capital is enormously important, but the rather curious distinctions that we traditionally make are of no importance whatever.

The second matter that I wish to raise is a practical problem that we must address. Under the European directive—I think that it is the fourth accounting directive, but someone will correct me if I am wrong, for instance my hon. Friend the Member for Putney (Justine Greening), who is an expert on such matters—international financial reporting standards have been introduced throughout the European Union for all quoted companies in their consolidated accounts. That came in last year, so this year is the first in which every such company has had to produce consolidated accounts according to IFRS. Some of them will have been doing so for a year or two. The provision applies only to consolidated accounts of quoted companies.

IFRS is a form of so-called true value accounting. In other words, it is intended to show the real value of a company much more accurately than did previous general accounting principles. It therefore requires that companies mark to market their liabilities and assets, including derivative liabilities and assets—derivative finance may be an asset or a liability, depending on whether a company is in the money. Companies must market, for example, non-realised real estate assets that might previously have been carried at historic costs with some adjustments. Importantly, it also requires companies to market long-term liabilities such as pension liabilities. It is no longer possible for companies to understate or smooth those liabilities, as they could under the previous system of general accounting principles.

The effect of IFRS, true value accounting, marking to market and the full force of the provisions is an inevitable increase in the volatility of a company’s earnings. They also have the effect, of which public companies are conscious, of an increase in the risks and volatility of earnings derived from factors beyond the control of a company’s directors. It is often beyond the ability of directors to make clear and comfortable predictions about the risks involved. Such risks can be, for instance, an actuary’s decision to revalue a pension deficit or what happens in the markets to the value of derivative liabilities or assets carried in a company’s balance sheet, and they can be difficult to predict. In many cases such volatility has meant that a company with constant or growing trading earnings from its normal operations has found itself unable to pay a dividend from its profit and loss account because that account has been wiped out by the provisions in question.

The second aspect of IFRS is that it has involved the introduction of new, much stricter rules in the important matter of taking profits out of acquisitions. Pre-acquisition profits must be accounted for as a reduction in the net cost of an acquisition rather than as a dividend from the company concerned. I do not want to go into the merits or demerits of that. Some interesting intellectual arguments can always be had about all those accounting rules and conventions. That is a fact; it is the way in which IFRS has determined that one should account for profits of acquired subsidiaries. That again substantially reduces the ability of certain companies to show profits from those dividends and therefore to declare a dividend.

It is extremely undesirable that companies should, as a result merely of the change in accounting standards, have to change their distribution policy, in other words that they should have to decide that they can no longer pursue what they otherwise would pursue by way ofa pay-out of dividend, whether by use of a dividend, a share-buying programme or other ways of giving a current return to shareholders. Why is it undesirable? It is undesirable in principle because it reduces capital mobility in the economy and is likely over time to reduce the average return on capital employed in the economy, which is a serious matter for us all. It is undesirable for certain types of shareholder, such as investment trusts, which can pay out by way of dividends only what they receive by way of dividends, and, indeed, pension funds, which require dividends in order to pay pensions. We have every interest, I think, in maintaining the viability of pension funds to the extent to which we can as they have faced a lot of threats, challenges and handicaps in the past few years, as we all know. I do not need to go into that.

The application of IFRS is introducing a degree of artificiality. I do not wish to challenge IFRS, as much of it is well conceived. I most certainly do not wish to challenge the EU accounting directors, because it is highly desirable that we should have the same rules and playing field throughout the single market. It is very important for the operation of the single market and the integrity, comprehensibility and transparency of our financial markets that that should be the case.

We face a practical problem. Over the past year or two, companies facing that problem have been able to find a particular way round it. The directive in question—I see that my hon. Friend the Member for Putney has come back and perhaps she can remind me whether it is the fourth directive—to which I have already referred, provides that from this year public quoted companies must present their consolidated accounts according to IFRS. They do not have currently to present their subsidiary accounts, including their holding company accounts, according to IFRS. They will have to do that in three years’ time, in 2009, in relation to the 2008 trading year. I believe that that is the year in which it will come in.

That means, since it is not the consolidated companies, or the consolidated group, but the holding company that pays the dividend, that it has been possible for companies to continue to account in their subsidiaries and their holding company according to the previous generally accepted accounting principles, or GAAP, and then to present their consolidated accounts according to IFRS. Within the area covered by GAAP, they simply have their subsidiary companies declare dividends, pass them up the chain to the holding company and the holding company decides to declare a dividend to shareholders on the basis of the stream of dividends that it has itself received from the operating subsidiaries of the group. One might say that that is fine, but there are two problems.

First, I do not think that any of us should be satisfied with a situation in which companies essentially account according to two different sets of principles within the same group. There cannot be good transparency and it is impossible for shareholders to follow what is going on because they cannot relate the dividend that they receive, which is related to the holding company’s profit, to the profit that appears in the consolidated accounts that they are sent. That is an undesirable situation in the first place.

Secondly, such accounting is expensive, particularly in this country where, unfortunately, companies have to produce a separate set of accounts for the Revenue. Essentially, companies will undergo the costs of preparing in parallel three different sets of accounts according to different accounting principles—as we know, the Revenue has its own accounting principles, with taxable profit defined separately from accounting profit. Of course the change will be good for the accounting profession and I will lose a few friends in that profession by saying this, no doubt, but I do not believe that it can be in the country’s interest to impose statutory levels of additional, gratuitous and unnecessary compliance costs on companies that have that particular system.

The other problem with that solution is that it is coming to an end. The party is coming to an end—we are going to run into the bumpers in three years’ time, and companies will quite rightly no longer be able to account according to different principles in their operating subsidiaries and holding companies. They will have to apply IFRS throughout the groups.

How will dividends be paid out in those circumstances? That is the practical problem. There is also the philosophical problem—the problem of the principal, and the problem of the definition of equity capital and of the extent and modalities according to which it should define the ability of a company to pay a dividend. The practical problem is the problem imposed by the introduction of IFRS on companies continuing to pay dividends at the present time.

I brought those two problems together and produced two separate solutions. One solution is included in my amendments Nos. 357 and 358, and a quite different one is set out in my new clause 437. Even if we were not in the peculiar situation of everybody voting against their own clauses, I would still not put amendments Nos. 357 and 358 to a vote, for reasons that I will explain. However, they would provide a solution, in the sense that they would permit public and private companies, as well as quoted and unquoted companies, to pay dividends out of their capital, provided that the directors made a solvency statement in accordance with clauses 570 and 571.

That would solve the problem. In that situation, the directors could decide what would be a responsible level of payout to make to their shareholders. They could make that payment as long as the money was there, whether it was in a share premium, reserves, a nominal capital or a profit and loss account. The money could all come out of the equity capital, in which case the directors would have to make the statement as set out clause 571 as it is, in which they say that the company, having paid that money out, will nevertheless be able to meet its debts and remain as a going concern for 12 months.

Is that a solution? Well, it is a theoretical solution, which we have to consider, and that is why I brought it forward in the way I did. However, I will not put the amendment to the vote, and if anybody else did so, I would vote against it. I shall explain why. The solution is not adequate, nor is it right. I would not follow it if I was a director of a company, as it is not sufficiently prudent. The solvency statement provides that the directors take the view that the company can continue to meet its liabilities for the following 12 months, which might give some comfort to the creditors. Of course, it is not reasonable to expect directors to take a view beyond that period.

I can see why the solvency statement is defined as it is in both the 1985 Act and the Bill, but it does not provide a responsible way to manage a company. There is no concept at all of the sustainability of the company or of the company retaining the resources required to ensure that it has the capacity to create value in the future, which is a short-termist concept. What happens after 12 months? Who cares what happens after 12 months? That kind of attitude is not acceptable. No responsible company director would want to declare a dividend in normal circumstances in that situation. If a company was going to be wound up—part of clause 571 provides for that eventuality—different considerations would apply.

The proposed solution is therefore not satisfactory from that point of view, and it is not legally possible in any case, because it would conflict with the second company law directive, which says that companies cannot pay dividends out of their share capital, which the jurisprudence interprets as nominal share capital. I am therefore not putting forward that solution.

Having rejected that solution, I had to think of a better one, which is set out in new clause 437. At first sight it might look complicated, but it is not complicated at all. I simply propose that, in so far as a company pays a dividend out of its operating cash flow—that is, its cash flow from trading operations—after depreciation, so that it takes account of the need to renew its existing fixed or other assets and maintain them at least at the same level of productive capacity, that company can pay a dividend to shareholders out of the remaining sum. I define that in what is actually a simple linear equation, although it might look slightly intimidating. I only do linear equations; I do not do differentials. Such things are not difficult to follow.

I have set out a standard definition of operating cash flow: sales amounts costed with sales, minus general administrative expenses, minus the interest and tax charges, minus the difference in the working capital requirement. Anybody can know what those quantities amount to for any company, because they are all declared in the profit and loss account. If there were changes to the working capital requirement, two successive balance sheets would be required. That is simple. One takes the sum of those calculations—a company’s operating cash flow—and then provides for the depreciation charge. An accountant may say, “I am mixing cash-flow quantities with an accruals item and I should not be doing that. But I am deliberately doing so, because I am taking the operating cash flow and saying that one provision that a company must make is to renew its capital equipment and keep going as a capital concern.” A company may be investing in addition to the depreciation charge, which is normally healthy. That is fine; it can borrow or raise new equity capital for that purpose, because that is outside the operating cash flow area.

I take the operating cash flow, minus the depreciation charge, which could be defined as the operating profit, and say that a company can responsibly pay a dividend out of that. However, it is fine if that eats into the capital and reserves—currently regarded as non-distributable—or into the share premium account. I understand that that situation applies elsewhere in the European Union. The second company law directive has been interpreted elsewhere—certainly, in France—to allow companies to pay a dividend out of the share premium account.

We have a proposal that stands up in terms of financial theory and good business practice and also stands up against the current requirements of EU law. That is my contribution to resolving this problem.

Jonathan Djanogly (Conservative, Huntingdon)

My hon. Friend spoke eloquently about what he believes to be the relevance of the share premium account and the UK anti-capital reduction laws. I have some sympathy with what he said, although his amendments deal with rather more specific points than the overall share capital laws. If we were to consider this matter in more detail, we would need a full debate on the value of the share premium account, which he came round to in his closing remarks.

Perhaps something happened during the consultation at some point; I should be interested to hear if that was so. However, today we are considering whether a public company should have the same carve-outs from the protection of capital rules that a private company current has. That applies to my hon. Friend’s amendments Nos. 357 and 358 in relation to the reduction of share capital and to the amendment tabled in my name and the names of my hon. Friends the Members for Reigate (Mr. Blunt) and for Hornchurch (James Brokenshire), dealing with the power of a company to redeem or purchase the same shares out of capital.

These probing amendments are useful in finding out the extent to which the Government reviewed the existing law in introducing the relevant clauses. If a public company undertook a statutory declaration and the resolution and complied with all the other requirements, why should it not be permitted to do the same as a private company?

Vera Baird (Labour, Redcar)

The hon. Member for Grantham and Stamford advanced an excellent and hugely impressive analysis. First, on his new clause 437, he advanced an issue of principle, or a theoretical problem, by asking what equity capital is and how it should constrain the payment of dividends. We acknowledge that the distinction between nominal share capital, share premium account, equity reserves and so on, does not make a great deal of conceptual sense. The hon. Gentleman puts forward an arguable case and is right to say that that complex matter requires more thought.

As the hon. Gentleman rightly said, our public arrangements are constrained by Europe, which makes it difficult to propose radical reform. We do not think it would be right to make piecemeal reform of the kind proposed here. In essence, that is why we want to take the powers proposed later in the Bill. That will allow for a good deal of further thought on that complicated analysis, and for broader reforms, rather than piecemeal ones such as those proposed here.

Quentin Davies (Conservative, Grantham and Stamford)

I am most grateful for those kind remarks about my suggestions, but the remedy that the Minister is proposing is not satisfactory. In relation to the matters I have raised this morning, how can we have a serious discussion in a statutory instrument Committee on to which people are press ganged at the last moment and without preparation, that has a time constraint and in which no one can propose amendments? Such parliamentary scrutiny is an affront to democracy—it happens every day and, frankly, it is a scandal. She is suggesting that those complex issues, on which she acknowledges the importance of preserving real discussion and debate, should be treated in such a dismissive fashion.

Vera Baird (Labour, Redcar)

It is not dismissive and it is folly to make such a fuss about a procedure that has been used for an extraordinarily long time. I have cogent views on how statutory instruments are taken through the House. The point has less to do with the procedure and more with the consultation that comes before it.

I was seeking to indicate that the hon. Gentleman has put forward a complex and persuasive case—indeed, at one time he almost persuaded me to accept the amendments that he then was not sure would suffice. I cannot overestimate the extent to which he has made a persuasive case for having a close look at those two issues. This is a question not of procedure, but of having help to alert us to the need for a further look at those matters and the consultation that will follow, which will be substantial.

Of course, we looked at those issues in the company law review and, realistically, that is as much as I can say about new clause 437. It is, on the face of it, a cogent proposal to address the theoretical criticisms and problems that the hon. Gentleman presented, but we are not satisfied that thought has gone into it sufficient for us to accede to his request.

As I said, the hon. Gentleman persuaded me practically that his amendments Nos. 357 and 358 meet what I think he referred to as the “practical problem”—we acknowledge, the potentially major problem—but there is no easy solution. Clearly, the detail and complexity of his analysis and his obvious experience and expertise led him to believe that the two amendments would meet that problem. The fact that he now argues away from them—for a second time, convincingly—demonstrates the immense complexity of the matter that he rightly raised.

We need to look at that matter, although there is no simple solution, as I said. If the hon. Gentleman is prepared to assist us to reach a better solution than even he has yet arrived at, we would be immensely grateful. However, I think he can appreciate, from the generous—not overgenerous—way in which I addressed his arguments, that we take the point that this is a major issue requiring further thought.

Altogether simpler to deal with is the question that the hon. Member for Huntingdon asked about the extent to which we have considered the import of the amendments tabled by the hon. Member for Grantham and Stamford, those being about the extension to public companies of the solvency statement preceding a capital reduction, which would mean that they did not have to apply to court to reduce their share capital.

Jonathan Djanogly (Conservative, Huntingdon)

On the conclusion of the Minister’s remarks on the point made by my hon. Friend, is she saying that she intends to initiate such a review?

Vera Baird (Labour, Redcar)

I shall carry on dealing with those points, if I may, and find out the procedure that we intend to follow, having acknowledged that the point is serious.

On the point about extension of solvency statements to public companies, the company law review recommended that the solvency statement procedure for capital reduction should be available, and we developed that recommendation in the 2002 White Paper, “Modernising Company Law”. However, to meet unavoidable EU requirements that apply to reduction of capital by public companies, it would have been necessary to build substantial additional safeguards into the procedure. In particular, it would have been necessary to give creditors of public companies the right to object to the court. The proposed procedure would therefore of necessity have been significantly more complicated than that for private companies.

The response to the consultation was mixed. Although many respondents were in favour of simplifying the procedure for capital reductions for public companies, it was felt that the required additional safeguards would make the solvency statement procedure significantly less attractive and that very few public companies would be likely to want to use the procedure.

Jonathan Djanogly (Conservative, Huntingdon)

Is that because the procedure applicable to private companies, combined with the requirement to go to court, would have been more complicated than the existing system for public companies, which involves going to court anyway?

Vera Baird (Labour, Redcar)

Yes. It seemed that there was not much of an advantage, given that the issue would be bound to end up in court. The Government therefore concluded that there would be little point in extending the solvency statement procedure for capital reductions to public companies.

To return to the question whether the Government intend to initiate a review on the point raised by the hon. Member for Grantham and Stamford, we will have further discussions with interested parties. In light of those discussions, the European position, and the international accounting laws to which the hon. Gentleman referred, we shall look keenly for a solution to what are complex problems. I acknowledge that the problems have not been solved by this discussion, but they have been expanded on and elucidated—certainly for me. We shall proceed as I have indicated and I invite the hon. Gentleman not to press the amendment.

Quentin Davies (Conservative, Grantham and Stamford)

I am certainly grateful for the Minister’s kind and, more importantly, considered and reflective response. I am delighted that she will now be launching a discussion and a consultation. If the remark that she made just now was an invitation to participate in such a consultation—other than in the context of a statutory instrument Committee, which I consider an insulting waste of time for any parliamentarian on any subject, particularly a complicated one like this—I would be delighted to do so. In any event, in light of the Government’s response, I shall not press the amendment.

Jonathan Djanogly (Conservative, Huntingdon)

I am impressed with the Minister’s response and her offer of further consultation will be well received. I understand and agree with what she said about procedures for public companies being more complicated if the amendments were made.

Quentin Davies (Conservative, Grantham and Stamford)

I beg to ask leave to withdraw the amendment.

Clause 574

Jonathan Djanogly (Conservative, Huntingdon)

I beg to move amendment No. 349, in clause574,page279,line30,after ‘person’, insert

‘(other than the company itself)’.

Eric Illsley (Labour, Barnsley Central)

With this it will be convenient to discuss the following amendments: No. 350, in clause574,page279,line35,after ‘person’, insert

‘(other than the company itself)’.

No. 351, in clause574,page280,line18,after ‘person’, insert

‘(other than the company itself)’.

No. 352, in clause574,page280,line24,after ‘person’, insert

‘(other than the company itself)’.

No. 353, in schedule16,page543,line30,at end insert

‘in section 153(3)(d), the words “or purchase”.’.

Jonathan Djanogly (Conservative, Huntingdon)

We come to the provisions on financial assistance. As every practitioner will know, this is one of the more complex and difficult provisions in the 1985 Act. It is the bugbear of many a corporate lawyer, and causes bewilderment to many a company. The basic premise of the Government’s approach is therefore welcome.

Clause 574 will replace section 151 of the 1985 Act with proposed new sections 151 and 151A—I presume that those numbers will change on consolidation. The prohibition on the giving of financial assistance by private companies for the purchase of shares is to be abolished. Proposed new section 151(1) retains the prohibition on public companies giving financial assistance, and extends the provision on post-acquisition assistance. The latter is prohibited for public companies if they are public at the time the assistance is given. That will be hugely welcomed by companies and practitioners, who have to spend a lot of time dealing with such matters.

The amendments, which were suggested by the Law Society, are designed to make it clear that the financial assistance rules do not apply to the purchase by a company of its own shares on the basis that a statutory regime applying capital maintenance to the purchase of own shares already exists.

The prevailing legal view is that the financial assistance rules do not apply to the purchase of own shares, but although section 155(3)(d) of the 1985 Act provides specifically that section 151 does not prohibit the redemption or purchase of shares in accordance with that Act, there is some doubt, reinforced by comments made in the Chaston case, as to whether the financial assistance rules have no application in those circumstances, or whether anything done for the purpose of enabling a purchase of own shares to take place might nevertheless contravene the financial assistance rules.

A typical example is when, to finance the purchase of own shares, a company borrows money or gives security. Considerable additional legal costs and expenses are being incurred by companies and their financiers on that point.

Vera Baird (Labour, Redcar)

The prohibition is on the giving of financial assistance to a person acquiring shares in a company when the financial assistance in question is by the company. The amendments would mean that references to “person” did not include the company, and anything that the company did to buy back its own shares would therefore not constitute unlawful financial assistance.

The hon. Gentleman has acknowledged the predominant view, which is that construing references to “person” to include the company is not commonly accepted. It is at odds with article 23 of the second directive, implemented by section 151, which envisages a “person” as being a third party. In our view, references to “person” do not include the company itself.

The hon. Gentleman might say that we should put the matter beyond doubt by accepting the amendments, but he, like all lawyers, knows the risk of amending existing statutory provisions; it implies that the existing provisions meant something else—for instance, that references to “person” included the company before the change occurred. In the long run, that might lead to more difficulties.

Amendment No. 353 is consequential to the other amendments, so I shall not argue them separately. I hope that the hon. Gentleman agrees that the proposed change is unnecessary and the ever-present danger that I have pointed out makes it undesirable.

The hon. Gentleman will be amused to hear that I have read the case of Chaston—the first company law case that I have read since I was a 19-year-old undergraduate. I am massively impressed by the learned reasoning of Lady Justice Arden, who seems to be the ultimate company lawyer. If it is helpful—I know that the case was raised in the Law Society’s submission—I shall do my best to take him through what I have concluded her paragraph 47 refers to. I have been immensely assisted by the advice of officials.

Paragraph 47 of the judgment of Lady Justice Arden on Chaston v. SWP Group plc could appear to contemplate that a company could provide assistance to itself. It has to be read in context. Lady Justice Arden explains why the reasoning of Mr. Justice Davis in paragraph 14 of Chaston—he referred to it as the second reason for his finding—which Lady Justice Arden and her colleagues were overturning was wrong or too strongly expressed. Mr. Justice Davis, the first instance judge, had pointed to the words “by that or another person” in section 151(2) in support of his view that a liability incurred bona fide in what the directors believed was the best interests of the company was not directly or indirectly for the purpose of acquisition of its shares. With respect to the learned judge at first instance, that seems to be an over-broad view to take. Lady Justice Arden points out that if Mr. Justice Davis’ construction—that the liability being referred to could not be that of the company—was correct, it would have the result that even liabilities incurred by the directors in the name of the company in breach of duty would be outside the reach of section 151. That would be both undesirable and nonsensical, so she shows that the reasoning of Mr. Justice Davis was defective by going beyond what was needed for his finding.

Having conceded the possibility that, as a matter of statutory construction, “person” in section 151(2) could include the company—we have already argued that for reasons of consistency with EU law that is not the way in which it should be read—Lady Justice Arden goes on to refer to the grant of a security by an unlimited company. She contextualises it pretty effectively in paragraph 47 of her judgment, in which she says, referring to the first instance judge:

“The judge’s second reason was based on section 151(2). I agree it would be an unusual case where a company provides assistance to itself. On the other hand, it is possible that an acquisition of shares may be an acquisition of shares by the company itself.”

She compares the use of the word acquire in that instance to its use in other sections of the 1985 Act and continues,

“In those circumstances, the liability referred to in the opening clause of section 151(2) may be a liability incurred by the company itself in order to purchase shares in itself, for example, the grant of security by an unlimited company to secure a borrowing raised to purchase its own shares.”

Of course, unlimited companies are not subject to the general prohibition on companies acquiring their own shares and it follows that there is no need for unlimited companies to be subject to the special rules enabling limited companies to purchase their own shares in particular circumstances. If Lady Justice Arden thought that a purchase of own shares in accordance with the special rules applying to limited companies could fall foul of section 151, there would have been no reason for her, extraordinarily, to refer to unlimited companies, which are relatively rare and are not subject to those rules at all. She seems to have set up an argument in order to show that Mr. Justice Davies was wrong and then posited very unusual circumstances—the only way in which her argument could apply. She sets the case up only to undermine it and knock it down; at the same time she very successfully demonstrates the flaw in Mr. Justice Davies’s argument. It seems pretty clear to us, although it is a complicated process of reading and following to arrive at it, that the hon. Gentleman has nothing whatever to worry about.

Jonathan Djanogly (Conservative, Huntingdon)

I thank the Minister for that very comprehensive response. I find her arguments very convincing. I beg to ask leave to withdraw the amendment.

Jonathan Djanogly (Conservative, Huntingdon)

I beg to move amendment No. 354, in clause574,page279,line31,after ‘subsidiaries’, insert

‘incorporated in the United Kingdom’.

Eric Illsley (Labour, Barnsley Central)

With this it will be convenient to discuss amendment No. 355, in clause574,page279,line39, after ‘subsidiaries’, insert

‘incorporated in the United Kingdom’.

Jonathan Djanogly (Conservative, Huntingdon)

The purpose of the amendment is to make it clear that the prohibition does not apply to financial assistance given by a foreign subsidiary of a UK company. The amendment is designed to give statutory effect to the decision in Arab Bank plcv. Mercantile Holdings Ltd 1994 in which it was held that the statutory prohibition on a company giving financial assistance for the purpose of acquiring shares in the company or its holding company does not apply to the giving of assistance by a subsidiary incorporated in an overseas jurisdiction to a person acquiring shares in its British parent company, not least because we are now revising the law and would not wish to leave room for this to be interpreted again. It would be helpful if the decision were reflected in the statute. The textbooks have that position as stated law and the amendment is a belt-and-braces provision.

Vera Baird (Labour, Redcar)

We agree. If the hon. Gentleman would be kind enough to withdraw his amendment, we intend to look at the matter again and, in the context of the restatement exercise over the summer, to do what we can to address the problem.

Jonathan Djanogly (Conservative, Huntingdon)

I am grateful for that response. I beg to ask leave to withdraw the amendment.

Jonathan Djanogly (Conservative, Huntingdon)

I beg to move amendment No. 471, in clause574,page280,leave out lines 6 to 15.

Eric Illsley (Labour, Barnsley Central)

With this it will be convenient to discuss amendment No. 472, in clause574,page280,line11,leave out ‘twelve’ and insert ‘six’.

Jonathan Djanogly (Conservative, Huntingdon)

The purpose of the amendment is, first, to query the appropriateness of criminal sanctions for offences under the clause. I thought that there were proposals to change them to civil penalties. It would be helpful if the Minister told us how many criminal charges there have been in this respect. I imagine it is not many. Secondly, if the offences are to remain criminal offences, why is the sentence half as long if the crime is committed in Scotland?

Vera Baird (Labour, Redcar)

Amendment No. 471 would completely remove the penalty that attaches to the offence of a public company providing prohibited financial assistance. Obviously it would be pointless to say that something is unlawful if there is no sanction for doing it. Should the penalty be imprisonment or some lesser penalty? We believe that a constraint must be kept for public companies and that it would be most effective if associated with a criminal penalty at the proposed level.

The hon. Gentleman is asking why the offence is a criminal offence, but I think that I have summed up our view. Comment has been made on proportionality in relation to the law reforms that we are making. The Hampton review and the company law review considered decriminalising some regulatory offences and giving greater emphasis to administrative penalties. However, consultation and evaluation found that the use of criminal offences was the more proportionate and efficient way to enforce regulatory requirements. Offences are less likely to be committed if they are backed up by criminal penalties. Criminal sanctions are appropriate, proportionate and essential for effective enforcement of breaches, but the underlying threat of prosecution enables authorities to exercise a progressive approach to enforcement that secures compliance without prosecution. The element of criminality behind the provision enables that approach.

Standing Committee D

Clause 574

John Bercow (Conservative, Buckingham)

I remind the Committee that with this we are discussing amendment No. 472, in clause574,page280,line11,leave out ‘twelve’ and insert ‘six’.

Margaret Hodge (Labour, Barking)

I shall deal with amendment No. 472, because I believe that amendment No. 471 was dealt with before the break.

We have established that we believe it necessary to retain the criminal sanction for public companies, but hon. Members might be wondering why the penalty on summary conviction appears higher for an offence committed in England and Wales. We do not consider the offence more heinous if it is committed in England and Wales, but we wish to recognise here and elsewhere in the Bill the changes that were introduced by the Criminal Justice Act 2003. That Act increased the sentencing powers of magistrates courts in England and Wales so that the maximum sentence that they can impose has increased from six months to 12 months. We see no reason to limit the sentencing powers of such courts in the case of a breach of the financial assistance provisions, as there is no qualitative difference between the offences in question and any other criminal offence.

The apparent discrepancy between the sentencing powers in England and Wales and those in Scotland and Northern Ireland is simply because criminal law sentencing is a devolved matter. The clauses therefore reflect the different approaches adopted in Scotland and Northern Ireland. There would, however, be nothing to prevent the courts in Scotland and Northern Ireland from imposing a higher penalty than six months, but that would necessitate the offence being tried by jury.

Finally, I should add for the sake of completeness that section 154(4) of the 2003 Act has not yet been commenced. Accordingly, clause 784 of the Bill makes transitory provision for Companies Acts offences committed before the commencement of that section. The maximum on summary conviction for an either-way offence will be six months. I hope that, in the light of that effective explanation of the reasons underlying the provision, hon. Members will not press the amendments.

Jonathan Djanogly (Conservative, Huntingdon)

This Minister has been saved by the bell. In her remarks this morning the Under-Secretary of State for Constitutional Affairs commented that as financial assistance is a criminal offence, people will not breach the law. In practice, that is not the case. The reality is that people are breaching the provision regularly across the corporate world. In the vast majority of cases they do not know that they are doing so, and normally it involves small amounts of money. However, breaches happen all the time, so I thought that changing criminal liability to civil liability would be appropriate. We will look at the Minister’s comments in more detail and might return to the matter on Report. On that basis, I beg to ask leave to withdraw the amendment.

Jonathan Djanogly (Conservative, Huntingdon)

I beg to move amendment No. 324, in clause574,page280,line44,at end insert—

‘(6) It is not unlawful, by reason only of any rule of law relating to maintenance of capital, for a private company to give financial assistance directly or indirectly for the purpose of an acquisition of shares in its capital or in the capital of its holding company or to give any such financial assistance of the kind referred to in subsection (2) of section 151 where the acquisition in question is an acquisition of shares in the company or its holding company, provided that either—

(a) the company has net assets which are not thereby reduced and which are not less than the aggregate of its paid up share capital, share premium account and capital redemption reserve (if any), or

(b) to the extent that the net assets of the company are thereby reduced the assistance is either provided out of distributable profits or is authorised as a reduction of capital in accordance with sections 135 to 139.

(7) In this section “net assets” has the meaning ascribed by section 154(2).’.

The amendment makes it clear that, notwithstanding any law to the contrary, a private company can provide assistance for the purchase of its own shares or those of its holding company, as long as its net assets are not thereby reduced or, where they are reduced, the assistance is paid out of distributable profits or, where the assistance gives rise to a reduction of capital, it is first approved.

Vera Baird (Labour, Redcar)

The amendment relates to a matter raised with us by the Law Society. We are grateful to it for sending us a paper in connection with that point and for its help generally in scrutinising the Bill.

The general principle of capital loans is a part of company law and dates back a long time. Capital has to be maintained while profits can be distributed to shareholders as a return on their investments. The aim is to protect creditors and ensure fairness between shareholders, and under the rules on the distribution of profits, procedures are available for reducing capital.

Under the principle of capital maintenance, a company cannot buy its own shares. However, there is now a procedure, subject to safeguards, and under a statutory provision on the prohibition of such financial assistance, others may provide it. A company might have a good reason for providing financial assistance for the purposes of someone else buying shares that do not go against the general principle. The Bill will allow that for private companies.

Until now, financial assistance could be provided only in limited circumstances using the whitewash procedure, which enables private companies to provide assistance as long as there is confirmation that the company’s net assets will not be reduced as a result or, to the extent that the assistance reduces the company’s net assets, it is provided at a distributable profit.

The amendment raises the question of whether the whitewash procedure served a further purpose: the provision of a statutory exception to the general principles of capital maintenance. If so, and in the absence of an equivalent to the whitewash procedure in the Bill, removing the prohibition on private companies giving financial assistance for a purchase of its own shares would tighten up, rather than deregulate—the intention—the law on private companies.

I shall not go into the legal reasoning—we had plenty of that this morning. Our view is that the whitewash procedure did not enable or make it lawful for companies to do anything that under the Companies Act 1985 can be done only within certain safeguards. That is an exception on the prohibition on giving financial assistance, not a means by which to make lawful that which, apart from the prohibition, would not be so. I hope that that is sufficient to satisfy the hon. Gentleman.

Jonathan Djanogly (Conservative, Huntingdon)

The Minister’s explanation is helpful and makes absolute sense. I beg to ask leave to withdraw the amendment.

Clause 575

Jonathan Djanogly (Conservative, Huntingdon)

I beg to move amendment No. 325, in clause575,page281,line23,at end insert—

‘(3A) In subsection (3), after paragraph (g) insert—

“(h) the payment of a commission which is permitted by the Companies Acts,

(i) indemnities given in connection with any issue of shares (whether in respect of defaults by the company itself or in respect of defaults by third parties and including indemnities in respect of losses arising in connection with activities carried out as a broker, underwriter, placing agent, adviser or sponsor to an issue),

(j) representations or warranties given by a company in connection with any issue of shares in its capital,

(k) the payment of any fees or other costs, charges or expenses by a company in connection with an issue of shares in its capital.”.’.

Briefly, the purpose of the amendment is to make it clear that certain arrangements cannot amount to unlawful financial assistance. I draw attention to the categories suggested.

Vera Baird (Labour, Redcar)

This again is a Law Society issue. In order to address its concerns, which relate to the impact that the financial assistance provisions have on business transactions, it would be necessary to start from scratch, perhaps by adopting a different approach to the requirements of article 23 of the second directive from which section 151 of the 1985 Act derives. Article 23 makes no reference to the items described in the amendment, and we consider that it would not be helpful to add further to a list which arguably already gold-plates the directive. Moreover, the difficulty with extending the list in that way is that it raises a question about the status of arrangements that do not fall within the exact terms of the exceptions.

There was an extensive discussion in the other place, and the various concerns that the Law Society and others have about the way in which the current exemptions are framed may point to a reworking of the provision so that it is to have the intended effect. Such a provision could refer to concepts along the current lines or be framed on an entirely different basis. That would not matter as long as we keep our obligations under the directive. Such a reworking would be much more suitably addressed by the use of the power that we are seeking as part of the restatement exercise than by piecemeal amendments. Therefore, I invite the hon. Gentleman to withdraw his amendment. This provision, like the others in this part, is subject entirely to the restatement procedure, so there is a summer—as it were—yet to come.

Jonathan Djanogly (Conservative, Huntingdon)

I thank the Minister for her clarification; her points make sense. On that basis, I beg to ask leave to withdraw the amendment.

Clause 577

Jonathan Djanogly (Conservative, Huntingdon)

I beg to move amendment No. 431, in clause577,page283,leave out lines 25 and 26.

John Bercow (Conservative, Buckingham)

With this it will be convenient to discuss amendment No. 432, in clause577,page283,line26,at end insert—

‘(3) Where a limited company purchases its own shares, the shares may be paid for in cash or non-cash consideration.’.

Jonathan Djanogly (Conservative, Huntingdon)

We turn to the power of a company to purchase its own shares. Amendment No. 431 probes why shares must be paid for on purchase. Does the clause as it stands allow for delayed payment provisions, which could help the company’s cash flow? Amendment No. 432 suggests that the consideration should be in cash or non-cash.

Vera Baird (Labour, Redcar)

We are not aware of any evidence that there are companies that are in a position to purchase their own shares but find it difficult to pay for them in cash. We believe that the requirement for cash payment makes sense, and unless there is some real problem, we do not see any reason to change the provision.

Jonathan Djanogly (Conservative, Huntingdon)

The difficulty could be cash flow—the amount that the company has to pay at a certain time.

Vera Baird (Labour, Redcar)

I do not know that we have found that that is a problem. I said that we are not aware of any evidence of that situation occurring readily. The point is to pay cash at the time of the purchase. There is a framework of rules around the purchase of own shares to ensure that it does not undermine the company’s capital, which has to be maintained to protect the interests of creditors or shareholders. It is important that the value that is being transferred is visible and clear. That is best achieved by requiring the consideration to be satisfied by a payment of a monetary sum. I repeat that we cannot see any reason why it should not be paid in cash at the time. Let me see whether there is anything further that indicates that we are at all aware of such a problem. No, we are not aware of any such evidence, and therefore invite the hon. Gentleman to withdraw the amendment.

Jonathan Djanogly (Conservative, Huntingdon)

The point is that if, for example, a company is paying a dividend and it does not have the cash to pay that dividend, it will seek a loan to pay that dividend. It has the reserves to pay the dividend but not the money. I should have thought that giving the company the adaptability to defer payment terms might, in relation to a purchase of shares—where, of course, the reserve situation is pretty much the same as with paying a dividend—be helpful to it. However, on the basis of what the Minister has said I beg to ask leave to withdraw the amendment.

Jonathan Djanogly (Conservative, Huntingdon)

I beg to move amendment No. 455, in clause586,page291,line26,at end add—

‘(8) Where a company proposes to redenominate its share capital or any class of its share capital into another currency pursuant to this section it may by the same resolution convert any share premium account, capital redemption reserve or redenomination reserve into the same currency at the same time and at the same rate of exchange.’.

The purpose of the amendment is to provide a simple method of converting a share premium account, a capital redemption reserve or a redenomination reserve into the same currency if share capital is being redenominated pursuant to the clause. The amendment is tabled at the suggestion of the Law Society.

Vera Baird (Labour, Redcar)

While the proposition may seem attractive, the amendment is unnecessary because, in contrast to the position on a company’s share capital, there is nothing in the Bill, or for that matter in the 1985 Act, to prevent companies from redenominating their statutory reserves. The introduction of such a scheme may reduce the flexibility that is currently available to companies to redenominate as they think fit. In short, as there is no statutory bar to redenomination there seems to be no reason to amend the Bill in this way, and I hope that the hon. Gentleman will not press the amendment.

Jonathan Djanogly (Conservative, Huntingdon)

On the basis of the Minister’s clarification, I beg to ask leave to withdraw the amendment.

Clause 590

Jonathan Djanogly (Conservative, Huntingdon)

I beg to move amendment No. 476, in clause590,page292,line42,leave out ‘resolution effecting the’.

John Bercow (Conservative, Buckingham)

With this it will be convenient to discuss amendment No. 477, in clause590,page292,line43,after ‘redenomination’, insert ‘taking effect’.

Jonathan Djanogly (Conservative, Huntingdon)

The purpose of the amendments is to provide companies with slightly more flexibility as to the deadline by which they must pass a special resolution to effect the redenomination of share capital. They, too, are tabled at the suggestion of the Law Society.

Vera Baird (Labour, Redcar)

The effect of the amendments would potentially be to give the company an additional 28 days—in addition to the three months from the date on which it passed a resolution to redenominate its share capital—to reduce its share capital in connection with that redenomination. The clock would begin ticking when the redenomination took effect, rather than from the date of the resolution to redenominate it. In our view there is already ample time under the Bill to make arrangements for adjusting the value of shares following a redenomination. Most companies will, in any event, want to renominalise the value of their shares at the time when they redenominate. I do not suppose that they would want shares valued at 1.23 or anything of that kind, so they would want to act as quickly as possible. We are not, therefore, persuaded that the amendment is necessary.

Jonathan Djanogly (Conservative, Huntingdon)

I thank the Minister for her clarification and I beg to ask leave to withdraw the amendment.

Clause 593

John Bercow (Conservative, Buckingham)

With this it will be convenient to take clauses 594 to 599 stand part and Government new clauses 242 to 258.

Vera Baird (Labour, Redcar)

Clause 593 and clauses 594 to 599 are included with no change whatsoever in new clauses 242 to 258. I propose that clause 593 should therefore not stand part of the Bill, and new clauses 242 to 258 should. They fall into two groups, those that simply restate provisions that would have been left in the 1985 Act and those that replace clauses in the Bill. New clauses 242 to 244, 246 and 254 to 258 are simply restatements, new clause 245 replaces clause 583 in so far as it applies to the allotment of debentures, new clauses 247 to 253 replace clauses 593 to 599 and new clauses 247 to 251 are substantially different from the current law but provide similar protection for a register of debenture holders to that which the Bill provides for a register of members. I hope that my fluent persuasion has persuaded everybody that that is the course that we should take.

James Brokenshire (Conservative, Hornchurch)

We move briefly to part 20, which concerns debentures. They are obviously instruments that create rights of holders in respect of the company, often constituted by deed polls and other instruments. I have a couple of questions on the clauses and I reserve our rights to further reflect on the new clauses over the summer recess.

In the existing clauses, which are in large part repeated in the new provisions, clause 595 provides a right of challenge by the company in the event that there is a request for inspection or a copy of a register of debenture holders. In many ways, it reflects clause 116, which concerns the rights of inspection of a share register and the ability of the company to challenge on that. Obviously, the clause mirrors in part the regime that governs the share register, but clause 119 provides a provision on share registers whereby the company must provide a copy and must inform on the most recent date to which the register has been made up to. I note that there are certain differences between the registers, but I seek clarification on why such a provision does not appear to be included in the clauses and in the new clauses.

Clause 599 entitles the holders of debentures on request to be provided with a copy of any trust deed for securing the debentures. The term “debenture” in law unfortunately has a number of different definitions. The reference to “securing” prompts a slight conundrum in that regard, as a debenture can denote almost a loan note or some kind of loan stock that a company has constituted to the holder thereof, or a type of security—in other words, a charge over the company’s assets. Although I did not table an amendment to the new clauses, I ask the Minister to consider the phrase “securing the debentures” in clause 599, given the possible double meaning, and consider whether the phrase “regulating or otherwise constituting the terms and condition of the debentures” might offer further clarity when we come back to the more detailed examination of the provisions on Report.

Vera Baird (Labour, Redcar)

I certainly accept the second point and, yes, we shall reflect on that. On the first point, I may have to write to the hon. Gentleman. [Interruption.] Or I may not.

Crispin Blunt (Conservative, Reigate)

It is in Greek.

Vera Baird (Labour, Redcar)

I shall look at it the other way up. The provision to which the hon. Member for Hornchurch (James Brokenshire) refers is no longer in existence. The date on which someone becomes a member is much more important. Does that help? If it does not I shall write with a fuller explanation.

James Brokenshire (Conservative, Hornchurch)

I am grateful for the Minister’s initial response. I appreciate that there is sensitivity about the time when someone becomes a member. There could also be sensitivity about the time when someone becomes a debenture holder, and the question was therefore whether consideration could be given to reflecting clause 119 in the debenture holder regime. Nevertheless, I am comforted by the Minister’s comments.

Clause 600

John Bercow (Conservative, Buckingham)

With this it will be convenient to consider clauses 601 to 603 stand part and Government new clauses 259 to 280.

Margaret Hodge (Labour, Barking)

I turn now to the part of the Bill that relates to the holding and transfer of shares and other securities. The Government have welcomed the work of industry groups that are examining options for greater use of paper-free holding and transfer. The response to the March 2005 White Paper showed strong support for the initiative, but it is also clear that more information is needed on the costs and benefits of using a paper-free approach more extensively. At this stage the Government do not wish to rule out any option. We therefore propose to extend the existing power relating to evidencing of transfer of securities without a written instrument under section 207 of the Companies Act 1989, so that the power will be capable of use not just to permit, but to require, paper-free holding and transfer of company shares. If the power were used in that way, the Government would want to ensure that the new arrangements for paperless holding and transfer did not deprive individual shareholders of existing rights that might be important to them.

Amendments were tabled in another place to clarify the relationship between section 207 and the provisions in part 21 of the Bill, which make further provision in respect of section 207, and extend it. The Government said that they would seriously consider addressing those concerns by some form of consolidating amendment to part 21, and that is achieved through new causes 270 to 280. We are satisfied that section 207 can be repealed and the new clauses brought into force without in any way affecting the existing regulations made under section 207, or the systems that rely on them.

Finally, clauses 259 to 273 restate provisions of section 183 to 189 of the 1985 Act, which relate to certification and transfer of shares and other securities.

James Brokenshire (Conservative, Hornchurch)

I am grateful for that explanation, because the issue is sensitive. At the moment, there is the facility for public companies whose shares are traded on the market to trade through the CREST mechanism, under the Uncertificated Securities Regulations 1995. Part 21 obviously envisages a move towards all such holdings being uncertificated.

I recognise what the Minister has said about protecting existing rights, and it is important that the provisions are not introduced in a way that would cause any problems in that regard. Although some 85 per cent. of shares are held in uncertificated form, taking advantage of the CREST arrangements, there are still some 9 million small shareholders who hold their shares in certificated form, so it would be helpful to have a further explanation of how the provisions might be introduced and, in particular, how they will interrelate with the provisions in part 9 on nominee shareholders and their rights, which we shall discuss shortly.

It would seem logical for the part 9 rights to be introduced first and given an opportunity to bed down, so that if the certificated regime later no longer applies, the range of alternative ways of holding shares is clear to the individuals affected. That aspect ties in clearly with the shareholder democracy issues that we shall debate shortly. In connection with that, further provisions in this part deal with regulations that may affect certain types of company.

It would be helpful if the Minister could elaborate on, or explain the thinking behind, the references to specific types of company and individual or specified companies. Are we talking about the size of the company or would that type of provision be used in other ways? It would be helpful to receive further clarification on the thought behind the regulation and the order-making process, which refers to certain companies perhaps being exempting, and on how things would work in practice.

Such procedures are valuable and important in ensuring greater deregulation, facilitating trade and reducing the burdens on companies in respect of how they relate to their shareholders. However, we need a proper opportunity to ensure that any details are properly consulted on, that shareholders are properly presented with their choices and that, for shareholder democracy, their rights are protected under the new regime that would operate if and when part 21 is brought into effect.

Margaret Hodge (Labour, Barking)

I do not think that there is much difference between us on that. There are about 10,000 paper transactions a day, so a lot of people clearly still prefer to use that method. We need to see what comes out of the consultation paper that the Institute of Chartered Secretaries and Administrators produced in April. We are committed to making any necessary cost-benefit calculations before taking any step forward. All that we are doing at this stage is taking a power that will enable us—of course, after appropriate consultation with all parties and ensuring that all shareholder rights are firmly entrenched—to move from a voluntary to a compulsory paperless transaction environment.

The hon. Gentleman made a perfectly valid point about various forms of different companies. As we take the consultation forward and move in that direction, we need to ensure that we look at the specific requirements, depending on the company form, so we are with him on that one.

Clause 681

John Bercow (Conservative, Buckingham)

With this it will be convenient to discuss clauses 682 to 693 stand part and Government new clauses 376 to 410.

Margaret Hodge (Labour, Barking)

I shall be brief. This is a further batch of restated clauses. As things stand, the provisions relating to the ways in which the registrar may strike a company off the register are contained in the 1985 Act, while provisions relating to the ways in which companies, once struck off the register, can be restored to it are contained in the Bill. It is logical to bring together the two sets of provisions, and the new clauses will do so. No change of policy is intended, and as we reflect on the wording of the clauses during the summer, we will ensure that that is the case.

Jonathan Djanogly (Conservative, Huntingdon)

As the Minister says, this is one for the summer.

Clause 683

Jonathan Djanogly (Conservative, Huntingdon)

I beg to move amendment No. 373, in clause 683, page 339, line 8, leave out subsection (3).

John Bercow (Conservative, Buckingham)

With this it will be convenient to discuss amendment No. 374, in clause 683, page339,line9,at end insert

‘, or by his relatives or beneficiaries under his will’.

Jonathan Djanogly (Conservative, Huntingdon)

These two probing amendments would provide a new mechanism for restoring a struck-off company to the register. I note that subsection (3) says that an application

“may only be made by a former director or former member of the company.”

Will the Minister explain why? Why should a creditor or litigant, or the relative or beneficiary of the will of a former director or member, not have the same right?

Margaret Hodge (Labour, Barking)

The answer is simply that we are introducing a new administrative procedure recommended by the company law review. It will in no way prevent people from using the courts to pursue their rights in other ways. If one tried to extend the right to relatives or other people, definitions would become extremely difficult. We chose to use easy administrative procedures for former directors or members and not to extend the law beyond that, allowing court procedures for other cases.

Jonathan Djanogly (Conservative, Huntingdon)

I hear what the Minister is saying. In practice, it is a rapid procedure that works well for shell companies or companies with no liabilities. However, at times, companies can still be left with assets or liabilities, and creditors can be left short. I appreciate that other mechanisms that can be used, and I thought that they might be pulled together, but on the basis of what she said, I beg to ask leave to withdraw the amendment.

Clause 138

Jonathan Djanogly (Conservative, Huntingdon)

I beg to move amendment No. 71, in clause138,page61,line31,leave out from beginning to ‘deemed’ and insert

‘Where a company is entitled by virtue of paragraph 7(2) of Schedule 7 to use electronic communications, the company is then’.

John Bercow (Conservative, Buckingham)

With this it will be convenient to discuss the following: amendment No. 74, in clause138,page61,line31,leave out subsections (1) to (3) and insert—

‘(1) The Secretary of State shall by regulations, make provision to ensure that a nominated person, where he—

(a) is the beneficial owner of the interest in the company;

(b) retains the right to transfer or otherwise dispose of the whole or part of that person’s beneficial interest in the company;

(c) has elected to—

(i) receive documents and information that the member is entitled to receive from the company; and

(ii) enjoy or exercise all or any specified rights of the member in relation to the company if he so wishes; and

(d) is entitled to—

(i) receive all the documents and information that the member is entitled to receive from the company; and

(ii) enjoy or exercise all other rights of the member in relation to the company.

(2) Those regulations shall apply, in particular, to the rights conferred by—

(a) in the case of subsection (1)(a)—

(i) sections 268 and 270 (right to be sent proposed written resolution);

(ii) section 286 (right to notice of general meetings);

(iii) section 399 (right to be sent a copy of annual accounts and reports); and

(b) in the case of subsection (1)(b)—

(i) section 269 (right to require circulation of written resolution);

(ii) section 279 (right to require directors to call general meeting);

(iii) section 290 (right to require circulation of a statement);

(iv) section 299 (right to appoint proxy to act at meeting);

(v) section 313 (right to require circulation of resolution for AGM of public company); and

(vi) all such other rights (not within subsection (1)(a)) as a member would otherwise enjoy (in accordance with any provision of the Companies Acts).

(3) The regulations referred to in subsection (1)—

(a) shall be made by statutory instrument before 1st May 2008, and

(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.’.

Amendment No. 68, in clause138,page61,line31,after ‘companies’, insert ‘whose shares are’.

Amendment No. 251, in clause138,page61,line31,after ‘companies’, insert ‘whose ordinary shares are’.

Amendment No. 69, in clause138,page61,line34,leave out paragraphs (a) and (b) and insert—

‘(a) receive all the documents and information that the member is entitled to receive from the company; and

(b) enjoy or exercise all other rights of the member in relation to the company’.

Amendment No. 70, in clause138,page62,line3,leave out subsection (3) and insert—

‘(3) This applies, in particular, to the rights conferred by—

(a) in the case of subsection 1(a)—

(i) sections 268 and 270 (right to be sent proposed written resolution);

(ii) section 286 (right to notice of general meetings);

(iii) section 399 (right to be sent a copy of annual accounts and reports);

(b) in the case of subsection 1(b);

(i) section 269 (right to require circulation of written resolution);

(ii) section 279 (right to require directors to call general meeting);

(iii) section 290 (right to require circulation of a statement);

(iv) section 299 (right to appoint proxy to act at meeting);

(v) section 313 (right to require circulation of resolution of AGM of public company); and

(vi) all such other rights (not within subsection 1(a)) as a member would otherwise enjoy (in accordance with any provision of the Companies Acts).’.

Amendment No. 250, in clause138,page62,line3,after ‘rights’, insert

‘to attend a general meeting and to vote at it, and’.

Amendment No. 72, in clause138,page62,line19,at end add—

‘(5) For the purposes of section 138 of this Act, the nominated person shall include only those individuals, or their representatives, where:

(a) the nominated person is the beneficial owner of the interest in the company;

(b) the nominated person retains the right to transfer or otherwise dispose of the whole or part of that person’s beneficial interest in the company; and

(c) the nominated person has elected to

(i) receive documents and information that the member is entitled to receive from the company; and

(ii) be able to enjoy or exercise all or any specified rights of the member in relation to the company if he so wishes.’.

Amendment No. 73, in clause138,page62,line19,at end insert—

‘(6) A member may only nominate a person whom the member knows or has reasonable cause to believe to be interested in the shares in relation to which the nomination will operate, or a person specified by that person.’.

Clause stand part.

Government new clauses 36 to 44.

Jonathan Djanogly (Conservative, Huntingdon)

We move on to part 9, “Exercise of members’ rights”. The list of amendments gives some indication of the interest that all parties take in the provisions. They have proved to be some of the most controversial and widely reported provisions in the Bill. The exercise of members’ rights is an important issue, and the Conservative party feels strongly about it.

The position has moved on significantly since we tabled the amendments. I shall address the issues in the context of the Government’s new clauses, which we welcome and which form the substantive position for debate today. In our view, there should be a link between a person who has chosen to invest in a company’s shares and that company. Once a person invests his money in a company, a line of trust is created; it is a thread that runs directly between the company and the person who has chosen to risk his money by investing in it. The law should acknowledge and respect that.

There are myriad ways of investing one’s money in a company. While it is still possible to buy shares in one’s own name, it is increasingly common, especially among small investors, to arrange instead for the shares to be held in the name of a nominee. However, where group arrangements are used, it is often the case that a nominee account holder is put down as the legal owner of the shares, whereas the beneficial or actual owner of the shares is somebody quite different—the person who has paid money to invest in the company rather than that nominee or broker.

Let me give an idea of the extent of the practice by mentioning some statistics. We are told that nearly 50 per cent. of all private shareholdings are now administered by nominees. Whereas there are 26 million certified shareholdings, there are now 24 nominee-based shareholdings. It is estimated, therefore, that £100 billion-worth of share capital is held in that way. The owners of those 24 million shareholdings held in nominee accounts should benefit from shareholder democracy. At present, they have no rights in the companies in which they have chosen to invest money. They cannot vote on matters that are normally voted upon by shareholders, nor do they have a right to receive any of the information that is normally received by shareholders.

The Government have now gone some way towards heeding our calls, but it is only fair to set out the views to those who have campaigned hard on both sides. Over the past 20 years, while shareholder groups such as The Share Centre, the United Kingdom Shareholders Association and the Association of Private Client Investment Managers and Stockbrokers have lobbied for such enfranchisement, registrars and various corporate groups have lobbied against it. Although many of the briefings that I have received relate to the old drafting of the clause, the groups’ points are still pertinent. We have received a great deal of information from a wide range of companies and groups that feel strongly. The CBI and some of its members have expressed concerns about the clause in relation to indirect investors and have mentioned the costs and burdens that they feel could be imposed on listed companies should it come into effect.

We have listened carefully. Mechanisms are already in place for beneficial shareholders to choose to vote in some circumstances, and more and more publicly listed companies place their annual reports and other information on their websites. Many of the companies to which we have spoken have indicated that they would be happy to provide information to any beneficial shareholder who might contact them. However, although systems are in place, we need to do more to encourage active shareholder participation. A representative of one major public limited company told us that the clause was not necessary because few of the private investors in his company vote. We would support an update in the law because the corporate environment is not healthy; private investors do not engage enough in the running of what are, essentially, their companies. In some limited companies, only 7 per cent. of private investors vote. That should be just as unacceptable as falling national and local electoral votes.

James Brokenshire (Conservative, Hornchurch)

My hon. Friend makes a powerful point about the need for greater shareholder democracy. Does he share my dismay that, at plc AGMs, the advisers often significantly outnumber the shareholders? That starts to bring the process into disrepute, so there is a need to encourage greater participation, engagement and involvement of shareholders in their companies.

Jonathan Djanogly (Conservative, Huntingdon)

My hon. Friend makes a good point. We have all been there, and that is often the norm for small and medium-sized listed companies. However, while that situation is typical, we should not accept it; we want to move away from it. The Conservative party stands for increased shareholder democracy. In an ideal world, all private shareholders would use the avenues there are to obtain the information available, but in practical terms, unless they are given the choice to opt in, few will. In an ideal world, all issuers would take a positive interest in the beneficial owners of their shares and give them the option to receive information. Unfortunately, that does not occur. A voluntary system is in place and it does not work very well. Electronic communication and CREST are delivering significant cost-savings to companies, but the success of technology should not mean that members’ rights are destroyed. The system needs to be adapted to cater for technology.

Many of the anxieties that businesses have expressed about the clause concern the cost to the issuer. We believe that it will not be as great as many fear. Thevast majority of communications, for voting or information, will be electronic, which is quick, easy and far cheaper than conventional postage delivery systems. As issuers already send electronic communications to those with a full shareholding who want them, it would not be a significant cost burden to increase the volume of those communications to take into account those with a beneficial interest.

There have been various criticisms from the Institute of Chartered Secretaries and Administrators, the Royal Institution of Chartered Surveyors, the Law Society and the Institute of Directors. The ICSA expressed reservations, including concerns about the practical implementation of the new system and the lack of obligations imposed upon the member, but its primary concern is about cost. The Law Society expressed anxiety about the legal workings of clause 138. It is important to hear from the larger brokers themselves, and I mention one in particular. We received an e-mail from the Halifax, on behalf of Halifax Share Dealing Ltd which states:

“We are delighted with the new clause 138. It has proposed a Government amendment to the Company Law Reform Bill... covering shareholders’ right. HSDL is one of the UK’s largest execution-only stockholders with regulatory responsibility for a number of nominee companies in which we hold shareholdings on behalf of 2.3 million retail investors. Whenever and where possible we try to obtain for our customers the same rights as they would have if they were registered in their own right. However, to do so we have to depend on the whim of registrars and regrettably all too frequently they are not willing to help us provide these rights which we strongly believe that our customers, who are investors in these companies, are entitled to. We have campaigned long for these rights and as you are aware we are part of the Shareholders’ Rights Alliance.”

The e-mail ends by saying:

“On behalf of our customers and those of other nominee operators it is our fervent hope that the amendment will remain in place and that the moral right of investors will prevail over the profit motives of a small number of interested parties.”

The depth of feeling on the issue runs deep; only a couple of weeks ago my hon. Friends on the Committee, the shadow Secretary of State and I joined a rally just outside Parliament supporting the people campaigning for these rights. We are glad, and many shareholders are relieved, that the Government have seen the right way forward on the issue and tabled a new set of amendments to the Bill. Having said that, they were tabled very late in the day, which allowed little time for a contribution on the clauses.

I shall explain briefly why we do not support the voluntary extension of shareholders’ rights. Our view is that when possible the industry should lead without the need for the Government to legislate. However, in this case, if the extension of shareholders’ rights was allowed to be voluntary for companies, the status quo would simply remain. The shareholder groups we have spoken to have been lobbying for nominee shareholder enfranchisement for nearly 20 years. In that time, relatively few companies have chosen to extend normal shareholder rights to nominee shareholders. If little has changed in the last 20 years there seems little reason to believe that it will change much in the next 20 years before this House considers company reform again.

We are glad that the Government are coming round to our point of view, but I want to note some of the problems that have arisen as a result of the measure, because ultimately it has become reactive law, made somewhat on the hoof. Although we support and welcome the reversal, it should have come sooner so that all interested parties could have been given a proper amount of time to consider this important issue.

We were provided with draft clauses on 11 July and the Minister set out the significant consultation that there has been on the proposals. Although it is probably going too far to say that every party has everything it wanted, we are much closer to consensus than we might otherwise have been. We recognise the Minister’s efforts in that regard.

The Minister will recognise that we will need to hear what interested parties have to say. Although we reserve our right to return to this matter on Report, the measure is only possible in relation to detail, rather than form, which is broadly acceptable. However, I should like to mention some specific points.

Yesterday afternoon, we received comments from the Law Society, which moved very fast, dealing with various issues that the Government will need to consider over the summer. Perhaps the Minister has not received those comments yet; although I am sure that she will, I shall mention some of them so she can hear what the Law Society is saying. I have not had time to consider those comments in detail myself, so that is another thing to do in the summer.

The Law Society, in respect of clause 2(3), says:

“The definition of ‘information rights’ refers to a right to receive ‘a copy of all communications that the company sends to its members generally’. It is not linked to the information rights that the shareholder, as a matter of fact, possesses. For example, articles may include a provision stating that overseas shareholders are not entitled to notices of meetings unless they provide an address for communications in the UK.”

In respect of clause 2(5), it says:

“In Clause 2(5)(a), replace ‘(2)(a)’ with ‘(3)(a)’. In Clause 2(5)(b), replace ‘(2)(b)’ with ‘(3)(b)’.”

I do not expect the Minister to respond immediately to these technical points; I am putting them on the record.

The Law Society says that clause 3

“should provide that a nomination ceases to have effect if the nominated person ceases to own the shares beneficially. Equally, it seems that the member or nominated person should be required to notify the company of this situation.”

On clause 3(2) it says:

“It is not clear whether in the case of shares held by more than one member, all those members need to request the nomination to be terminated. Clause 3(2) should provide that the member or nominated person must notify the company of the termination of a nomination.”

The Law Society says that the provisions in clause 4

“do not encompass the concepts in the articles of association for how notices are served and communications made to shareholders which would also need to apply to the information rights of nominated persons.”

It wants to

“Delete the last reference to ‘appointed’.”

in clause 5(2)(a).

On clause 6, the Law Society states:

“The rights introduced by this clause are highly likely to give rise to unforeseen practical difficulties and issues in relation to corporate actions. Clause 6 is also unclear. Does a member to whom the section applies ‘exercise his rights’ within the meaning of the section...only when he exercises all the rights directly himself...only in respect of those of the rights which he elects to exercise directly himself; or...also in respect of rights which are exercised directly by persons whom he has nominated?

If a member, without having made any nomination, exercises his rights in two different ways, does he automatically fall within this clause? If so, this should be made clear.

If the clause also applies to a member (A) who has nominated another person (B) in respect of certain of his shares, (a) does the member only ‘exercise his rights’ if he exercises them in respect of the remainder of his shares, or (b) does the member also ‘exercise his rights’ in respect of rights exercised by B?”

In clause 6(1), it would like to

“Replace ‘person’ with ‘member’.”

On clause 7, the Law Society states:

“At clause 7(2)(e) we question whether the computation of the total amount of the sums paid up will be mathematically correct. The members’ request must already have the support of ‘100 persons’...It is hard to understand, therefore, why the calculation requires the division of the relevant aggregate nominal value by the number of persons named in the request which will in any event ‘name’ the registered holder.

We also envisage uncertainties arising under Clause 7(2)(c)(ii) as to when the nominee holds shares “in the course of a business’”.

I have put those points on the record. We are where we are in terms of timing, but the Minister will have my party’s full co-operation in making clause 138 work, if the changes that are required arise.

Under the new clauses as they are currently drafted, there will be no compulsion on a broker to provide the relevant services. The relationship between the broker and the company, rather than the company and the customer, which is envisaged in the clauses, means that there is no compulsion on the broker to provide the services to shareholders. In reality, however, we appreciate that it will be for the shareholder to choose a broker who supplies such services. That needs to be put on the record.

It is also worth noting that the default position for the delivery of information under the new clauses is electronic delivery. From the cost perspective, that is the right approach, but we must consider the remaining issue of the cost to the company if a beneficial shareholder chooses to opt in for hard copies of information, rather than electronic copies. I would appreciate it if the Minister confirmed that her Department will keep that aspect under review.

The Government originally used the issue of cost against the approach that they are now taking; the implementation of the system may well involve increased costs to companies, especially if many shareholders choose to opt for hard copies of the information. However, I put it on record that we believe that those marginally increased costs will be greatly outweighed by the savings that companies have borne from the use of nominee shareholders and the CREST share trading system. Again, we agree that the issue should be reviewed in due course.

The electronic CREST system is used in the vast majority of those share owning situations, whether the shares are bought by means of an individual savings account, personal equity plan or other similar arrangement. That saves a lot of time and money, as all the information is held electronically. The enfranchisement of beneficial shareholders is a natural progression in the modernisation of our company law. Nominee accounts have brought a great deal of efficiency to the UK stock market and enabled more electronic trading and settlement.

If we put the estimated £6 million per annum that this new system will cost all UK companies against the savings brought about by CREST, it seems clear that we are evolving the UK shareholding system for very little real cost. That is an essential development if we are to have a participative public financial market.

The Government have not introduced any criminal sanctions into this part of the Bill. We accept that that is right in the circumstances; indeed, it is a pity that the Government have not taken that less heavy-handed approach to other parts of the Bill. We also recognise the fact that stockbrokers have the right and ability to split votes of shares that they hold as a block. That is the right approach. Previously, the Government had argued that the increasingly complex investment claims in place precluded a one-size-fits-all approach to the enfranchisement of indirect shareholders. At thetime, they missed the point that the vast majority of individual shareholders who are currently disfranchised hold their shares through nominee operators. The names of those operators appear on the register of members; it is not a complex investment chain.

I should also point out that under the Bill the company will need a list of people who require information. We should like to receive confirmation from the Minister that the law provides for that list to be kept confidential and that the list will not be used by the company for other or inappropriate reasons. The company will send out a letter explaining that people’s rights will need to be actioned through their nominees. Will that letter be in the standard Financial Services Authority format? Has the Minister devised the law in conjunction with the FSA? If she has not, will she confirm whether that will be done?

We also note that the provisions apply only to companies operating in regulated markets. They will not apply to unregulated markets such as the alternative investment market or the off-exchange market. Will the Minister justify why she took that decision? Will the Government inform us about when they intend to review the position in due course?

Overall, I should like to commend the Government for finally seeing sense on the issue and coming round to our point of view. I also recognise the swift work that the Minister and her officials, having made the decision to change the Government’s approach, did to produce the clause and consult relatively widely on it in the short time available.

The rights of shareholders are important, and not just within the narrow definition of allowing them to receive information and votes. Shareholder rights and responsible shareholder activism are the central drivers of increasing corporate social responsibility and ethical behaviour. An important step in furthering those goals has been taken today. There is still work to be done to fine-tune the clauses. As I said, I shall be happy to discuss that with the Minister over the summer. For now, I shall recommend that my hon. Friends support the Government’s amendments.

Quentin Davies (Conservative, Grantham and Stamford)

May I take up my hon. Friend straight away on his point about the lack of criminal sanctions in the clause? I read the clause to mean that articles of association are deemed to have those provisions, whether they are there or not, and that the redress for nominee or beneficial shareholders—

Margaret Hodgeindicated dissent.

Quentin Davies (Conservative, Grantham and Stamford)

But the clause states:

“All companies admitted to trading on a regulated market are deemed within the company’s articles to have a provision”

and so on. As I understand it, the clause deems that certain provisions exist in a company’s articles of association; they are there for the purposes of the law, whether the company bothers to put them in or not. The redress to nominee shareholders, beneficial shareholders or anybody else against the provisions not being observed is simply the sanctions against directors who act in breach of the articles of association already dealt with in an earlier part of the Bill. The Minister shook her head, so if my understanding is wrong, I hope that she will intervene on me or explain the position to the Committee. We should not go any further without understanding what the Bill purports to say.

Margaret Hodge (Labour, Barking)

I shook my head because from our discussions with stakeholders, it was clear that we would not make the provision a criminal sanction. I am trying to find the provision—I think that the hon. Gentleman might be referring to the Opposition clause that was inserted in the Bill in the Lords, rather than our new clause.

Quentin Davies (Conservative, Grantham and Stamford)

On the contrary, I am reading from the text. We all have the same text, volume I of the Company Law Reform Bill, and I shall repeat the details. Clause 138 states:

“Enjoyment or exercise of members’ rights

(1) All companies admitted to trading on a regulated market are deemed within the company’s articles to have a provision to enable members to nominate another person”,

and so on.

David Howarth (Liberal Democrat, Cambridge)

rose—

Quentin Davies (Conservative, Grantham and Stamford)

I give way to the hon. Gentleman.

Margaret Hodgerose—

Quentin Davies (Conservative, Grantham and Stamford)

Well—

John Bercow (Conservative, Buckingham)

Order. To whom does the hon. Gentleman want to give way?

Quentin Davies (Conservative, Grantham and Stamford)

I shall give way to the hon. Member for Cambridge (David Howarth).

David Howarth (Liberal Democrat, Cambridge)

Clause 138 was the result of a successful Opposition motion in the House of Lords. It is, I suppose, the Opposition’s text. The Government will presumably propose that it does not stand part of the Bill and that it is replaced by their new clause.

Quentin Davies (Conservative, Grantham and Stamford)

I give way to the Minister.

Margaret Hodge (Labour, Barking)

I suggest that the hon. Member for Grantham and Stamford looks at new clauses 38 and 39, which is where we want to end up.

Quentin Davies (Conservative, Grantham and Stamford)

I admit that this was a perverse thing to do in Committee, but I was addressing the text before us. Perhaps I shall return to the subject if I find a similar anomaly in the new clause.

The issue is important, because, as my hon. Friend the Member for Huntingdon (Mr. Djanogly) has said, an increasing number of people—beneficial shareholders and investors—choose to hold their shares via nominee accounts. In the overwhelming majority of cases, their reasons are entirely respectable—there are often economic reasons, to which my hon. Friend has referred, because modern technology often makes it the administratively cheapest way of holding shares.

We should note that in this country the Government have forced certain classes of investor to hold their shares through nominees. This Government have used Taxes Acts to compel people who want to obtain basic tax benefits to hold their shares in that way. Self-invested pension funds and ISAs are good examples—in both cases, if one puts one’s name on the shareholder register, one does not get the tax break. The Government have pushed investors in that direction, and it has been a mistake, because the shareholders, investors and savers have had to give away at least part, and sometimes a substantial part, of the tax benefit to the company running the vehicle—a toll to their scheme’s gatekeeper. A large proportion of the funds generated by those tax provisions have flowed not from the generality of taxpayers to those taxpayers who save, which was the purported intention, so as to increase the inducement to save, but away from the generality of taxpayers to a number of firms and institutions. Many of those firms and institutions are in the square mile, and they have done well out of selling those products.

I agree with the Government that there was a conflict between economic rationality and HM Revenue and Customs caution, which was arguably excessive, about the danger of tax avoidance. In that particular conflict, the Revenue won, and whatever the reason for that may have been, we have compelled certain classes of investor to invest through nominees, and it is therefore our obligation to ensure that they do not lose their shareholder rights as a result. It seems to me to be quite wrong economically, for shareholder democracy and in terms of equity for that to happen. The purpose of the clause—I can debate only the clause before us—is to redress that anomaly.

Two of the amendments to clause 138 are in my name. Someone is bound to tell me that they amend a text that will be voted against—in a few moments, the text will cease to exist—but I cannot anticipate the Committee’s decision and must debate the text before us. I shall endeavour to change the text, because I think that it can be improved.

I tabled amendment No. 251 at the suggestion and behest of the CBI, which lobbied me—I hope the CBI will not mind my passing on that conversation—to vote against the clause. I am not going to do so, as I very much support the idea of protecting shareholder rights, even if people decide or are forced to invest via nominees. However, having heard a litany of complaints from various companies about the cost of the imposition, I agreed to consider whether there might be merit in restricting the beneficiaries of the new rights to holders of ordinary shares. I am not sure whether that would greatly reduce the aggregate financial cost to companies, because the vast majority of shareholders hold ordinary shares. I think that a good case can be made for giving other forms of shareholder—preference shareholders and so forth—the same democratic rights in their companies. I do not wish to pursue that amendment any further.

Amendment No. 250 arises from an anomaly that struck me when I first read the Bill. The clause purports to preserve certain essential rights for those who invest via nominees. Subsection (1)(b) states that we are trying to provide for such shareholders to

“enjoy or exercise all or any specified rights”.

However, subsection (3) states that “This applies in particular” to a set of designated rights. The most curious thing—I still cannot understand how the omission could have occurred—is that the clause does not mention the most important right, which is the right to attend meetings, whether exceptional or not, and the right to vote at such meetings.

For the avoidance of all possible doubt, we should proclaim loud and clear to the public and to all investors that it is Parliament’s intention to provide in the clause for that right to be continued to be exercisable, even if people have invested via an intermediary or a nominee. That is the purpose of amendment No. 250. I may be told that I have missed the relevant provision and that that right is preserved elsewhere, but it is curious, when a large number of rights are spelled out in subsection (3), that arguably the most important right should be omitted.

David Howarth (Liberal Democrat, Cambridge)

As I said in an intervention on the hon. Gentleman, the existing text is the result of an amendment passed with Opposition votes in the other place, and I record my gratitude to Lord Razzall and Lord Sharman for their part in that.

The purpose of the clause is to further the enfranchisement of indirect investors, which it does for two important reasons. The first reason concerns the accountability of companies to society, not just to fund managers—with all respect to fund managers, they are less representative of society than the great mass of shareholders. The second reason is to encourage participation in the corporate side of the economy, which involves information being spread among the general public about how companies work so that they have an understanding of the problems that companies face.

The Government raised a number of practical objections to the clause, as passed by the other place, especially on cost and flexibility. For example, at the heart of the proposal about voting rights is the question of the cost and the difficulty of organising annual meetings and votes, especially of large companies, and at the heart of the proposal about information was the expense of preparing hard copy documents for large numbers of people. We said on Second Reading that we were fully prepared to think about those objections, and after consulting widely, the Minister has come back with these proposals as a replacement for clause 138.

We are content to go forward on the basis of the compromise that the Minister has brokered, although the information side of the compromise is clearer than the voting side. The proposal is now that the default option will be electronic communication and that that there will be an option to opt in for hard copy, although in normal circumstances information will be transferred electronically, which meets the cost objection. On voting rights, the Government have not accepted our view, but they at least accept that they have a role in helping to create a market.

As the hon. Member for Huntingdon has mentioned, the Government’s proposal effectively provides information for indirect investors about whether the nominee that they have chosen allows them to act as proxies in the company’s governance structure. That would allow individual indirect investors to choose a nominee or an institutional investor who offers that service, which helps to create a market for that service itself. It will then be for individuals to decide whether that is a service that they value. If they value it, they will be able to choose the nominee who offers that aspect of investment.

It remains to be seen whether that pure market approach will deliver the social benefits that I have mentioned. It is possible that it might do so, although it is also possible that it might not be enough. The benefits that interest us in clause 138 are essentially social benefits rather than benefits accruing to the companies or the investors themselves. It might be that a pure market approach does not deliver those social benefits.

Quentin Davies (Conservative, Grantham and Stamford)

Does the hon. Gentleman agree that investors choose fund managers on the basis of two criteria—first, the perceived quality of the fund management and, secondly, the cost? In the case of passively invested rather than actively invested funds, their choice will be based entirely on cost, and they will not take into account the offer to allow them to act as proxies at AGMs. If he wishes to give investors that right, he should vote for my amendment rather than for this new clause.

David Howarth (Liberal Democrat, Cambridge)

I accept what the hon. Gentleman has said to the extent that those two factors are the most important that investors will take into account. It is up to them what they take into account, and we will see the extent to which this right is exercised through the market. As I have said, if enfranchisement does not deliver the social benefits that we envisage, it might be necessary to propose a further move forward, perhaps to a default option, where voting rights are transferred but investors can opt out and give those rights back to the nominee. Nevertheless, I am perfectly willing to accept the Government’s present position as a starting point from which to move forward.

A number of smaller matters are outstanding, such as the list of drafting issues put forward by the Law Society, which the hon. Member for Huntingdon mentioned. I shall not repeat them, but I wish to mention one final small issue, which is of interest to a lot of small shareholders. It is how the arrangements will deal with shareholders’ perks. I remember once having a conversation with someone who is now a prominent economist, who told me that he had just bought shares in the channel tunnel company solely to get the perk of cheap rail travel. He envisaged that, given the size and difficulty of the project, the value of the shares was likely eventually to fall to zero. However, it was worth while buying the shares simply for the perks. Will the Minister address that aspect of shareholding?

As the hon. Member for Huntingdon said, we accept that the Government have moved a long way and accepted that they have a role in creating a market. We thought that they should have such a role in our other area of concern about the business review—the environmental and social practices of companies. That is a legitimate way forward, and we are happy to accept as a compromise the Government’s offer today.

Margaret Hodge (Labour, Barking)

We will end on consensus; I cannot believe it. It is a good way to end our lengthy consideration of the Bill. I shall start by saying that on this issue, on which I came in at a much earlier stage than on others discussed in Committee, I was grateful to all the stakeholders. They worked incredibly fast and hard to try to reach a compromise and consensus. I attended three meetings, and my officials attended others. There are conflicts in approach, and the issue of cost looms high on the agenda of the companies involved, and the compromise and consensus that we have reached is down to them, facilitated by us. I am grateful to all the stakeholders involved.

I agree that there is consensus on the importance of the matter. Part of the underlying thinking that led us to devise the Bill was the intention to strengthen shareholder rights. We have attempted to do so throughout, and the position that we reached before the House of Lords debate was that the costs involved provided an overwhelming argument to companies. Opposition Members recognised that the clause as it came to us from the Lords would not have been workable and would have imposed unfair burdens on companies. We have now found a good way forward, not going as far as the hon. Member for Cambridge would like, although I am told that Marks and Spencer has included a note with its recent vouchers inviting nominees to let them know details of indirect shareholders. We hope to see such practice spread to other companies.

We may well return to the issue, because there is consensus in the room that there will be growth in direct shareholders, so entrenching their rights will be ever more important.

Paul Farrelly (Labour, Newcastle-under-Lyme)

I congratulate my right hon. Friend and her fellow Ministers on the Front Bench on the fact that, in the many sittings of the Committee, when serious and credible comments have been made in our scrutiny of the Bill, the Government have sought consensus. That is demonstrated now.

Margaret Hodge (Labour, Barking)

I thank my hon. Friend for those remarks. My first duty as a new Member on entering the House after a by-election—this is a slightly old anecdote—was to sit on a Bill Committee, and any amendment tabled by the Opposition, who were us in those days, was simply ignored. I determined then that that would never be the way in which I acted when responsible for Committees. Good ideas, wherever they come from, need to be absorbed. We have done that during our consideration of the Bill. We shall return to the issue, but we have taken important first steps on a consensual basis.

I cannot avoid saying that I am delighted that the Conservative party supports increased shareholder democracy. However, that should stretch right the way through to include shareholders having the right to know about a company’s activities and policies when they impact on the environment, community and other issues discussed earlier in the Bill. I look forward to its wholehearted support for those clauses when we return to them on Report.

I shall respond to the Law Society’s amendments. I have not seen the letter, but my officials have. I think that it was responding to an earlier draft of the clauses—there have been a couple—but nevertheless, if it has pertinent concerns, we will of course come back to them. We will keep the cost of hard copies under review. I gave that commitment to the companies that negotiated with us and I am happy to put it on the record today. The list that companies will need to keep will ensure that information passed to their indirect shareholders is protected under the Data Protection Act 1998 and that confidentiality is maintained. Clause 42 contains powers to extend those indirect shareholder rights to the AIM list and others, if appropriate.

The hon. Member for Grantham and Stamford (Mr. Davies) asked about the voting rights of indirect investors. Clause 307 deals with that matter, but again we might want to return to it at a later stage. We looked at providing for such voting rights, but it would have required all indirect investors to be identified and reported. That would have been a huge job and would have added to the complications. I was anxious to build a way forward.

In the remaining minutes I shall take Members through what I have in front of me. We think that everyone who invests in shares—directly in a company or through a nominee broker—should be able to enjoy and exercise much the same rights as other shareholders. If indirect investors wish to exercise shareholder governance rights, they should be able to do so. I think that that is the unanimous view in Committee.

Our key concern, however, has always been that such enfranchisement be achieved in a way that is proportionate, offers flexibility and avoids imposing undue burdens on parties involved, whether issuers, investors or intermediaries. That is why, on Second Reading, we said that we would look at reversing the Opposition’s amendments and why we have tabled the new clauses. Also on Second Reading, we made it clear that we would meet interested parties to discuss other ways in which to strengthen the position of indirect investors. We have done that, which has enabled us to move to the new clauses.

Briefly, I shall outline how the new provisions will operate. The new clauses provide that indirect investors can be nominated to receive company mailings. It is up to the registered member—typically, a broker—to decide whether to nominate. The registered member will be able to appoint indirect investors as proxies under the provisions in part 13 so that they can exercise their voting rights.

Clauses at the end of new part 9 will make it easier for registered members to exercise rights in different ways to reflect underlying holdings and to allow indirect investors to participate in, for example, requests for resolutions at the AGM. We think that that is a balanced package. One of our key concerns in finding a way forward has been proportionality and avoiding unnecessary cost burdens on companies or any other parties. I was keen to explore cost implications in our discussions with interested parties, and I recognise that our proposals still involve extra costs being borne by different participants. There will be some incremental costs for companies in printing additional copies of their annual report and accounts, but we understand that roughly 70 per cent. of London listed companies are already happy to send copies of those to anyone on request.

The other extra cost for companies will be that of maintaining a list of those nominated to receive the company mailings under the new procedure. We have addressed those concerns by requiring a positive opt-in by indirect investors to hard copy information and by ensuring the validity of, for example, company meetings is not affected by failure to send communications to indirect investors.

As for brokers, they will need to bear the costs of marshalling, for example, proxy voting rights and instructing the company accordingly, if they wish to pass on such rights to nominee investors. It will be up to indirect investors, as the hon. Member for Huntingdon said, to choose a broker who offers such rights as part of their service.

In bringing forward the new clauses, I want again to put on record our appreciation of the organisations with which we negotiated: the CBI, the Institute for Chartered Secretaries and Administrators, the Association of Private Client Investment and Management Services and the London stock exchange, as well as a number of individual brokers and issuers. We have already—which is why I was surprised—received helpful input from the Law Society and the TUC. We have involved both those who inspired the Opposition amendment in the first place and those who subsequently objected to it, which was the right way forward. I am glad of the opportunity that we had to share our thinking on that and other developments with both Opposition parties in advance of our Committee debates.

New clauses 36 to 44 are good news for everybody—for both small investors and quoted companies. I therefore commend them to the Committee and oppose clause 138 standing part of the Bill. I hope on that basis that hon. Members will not press their amendments.

James Brokenshire (Conservative, Hornchurch)

I am grateful to the Minister for setting out the debate and how we have moved forward on this significant and important matter. I put on record the Opposition’s thanks for the work of Lord Hodgson in initially highlighting the issue. We have since sought to come up with a mechanism and a workable approach.

I note that there is still further reflection and consideration to be undertaken. I heard the reservations expressed by the hon. Member for Cambridge about whether the new clauses go far enough, but it is fair to say that a consensus has been reached, building on the input of various stakeholders, broadly reflecting the need to ensure that nominee shareholders are given rights and that that is recognised in the Bill.

I note that the Minister commented on cost. Gavin Oldman, chief executive of the Share Centre, a private client stockbroker, said:

“We think only 5 per cent. of shareholders would opt in to receive information from companies. That is 1.2 million nominee shareholders costing say £5 a year, a total of £6 million. That is an insignificant amount compared with the estimated £100 million companies would save from being allowed to disseminate information electronically, which would also be allowed by the Bill.”

I suppose that that shows one view on the cost issue. I recognise that various stakeholders expressed some concern about the implications of costs, but I hope that by virtue of the debate we have arrived at a broadly acceptable point.

My hon. Friend the Member for Huntingdon pointed out the implications on the AIM market and OFEX. We could give some further consideration to that. It is odd that shares traded on the official market and the nominee shareholders of those companies should be treated differently. We can reflect on that further.

The debate has been productive. I am pleased that we have been able to secure some positive steps forward, to put shareholder democracy and nominee shareholders at the forefront. I hope that, in so doing, we can ensure that more people take a much more active role in shareholder democracy and engage more readily with their companies.

Jonathan Djanogly (Conservative, Huntingdon)

I beg to ask leave to withdraw the amendment.

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Schedule 9

Margaret Hodge (Labour, Barking)

On a point of order, Mr. Bercow. As we are coming to the end of the proceedings, I could not let the sitting pass without extending a big thank-you to you and Mr. Illsley for the way that you have chaired the Committee. You have endless patience, consistent good humour and complete and constant fairness, and neither of you ever fell asleep. That is a brilliant performance.

I thank all Committee members, particularly those from the Government Benches. It is very difficult to be a Back-Bench Committee member on a Government Bill, particularly such a long Bill that has taken so many sittings. I thank my hon. Friends for their patience, time, endurance at some points and participation in Committee.

he Bill has made history. I am told by the Clerks that, so far as records can tell, it is the longest Bill ever taken in Parliament. It has made history for all sorts of other reasons, not least of which was a two-and-a-half-hour diversionary lecture on takeover panels and a shorter but also diversionary lecture on Eccles cakes. The Committee was extremely lucky not to be bored with the workings of Barking rugby club, although I am confident it will gain from the proceedings of the Bill.

I have learned a lot. We have cogitated at length on various issues. I shall pick out some that really stimulated me: the differences between success and effectiveness, “alters” and “amends”, assignment and assignation, costs and expenses, shares and stocks—that was an easy one—and de facto and shadow directors. They were all new words for me, and I am sure that I am much wiser for it.

I should also like to express huge thanks to our team of officials, who have supported us so brilliantlyand have worked exceedingly hard throughout consideration of the Bill, even when it was in the House of Lords. They have performed brilliantly. I thank them very much indeed.

I thank the Clerks and officials of the House for their customary excellence in ensuring that everything ran smoothly until Members of Parliament got involved, and particularly for the endless glasses of water that we have been given in this hot place. I thank the police for their courtesy.

Finally, our biggest thanks go to Lizzie Colley, who brought joy to all of us in our darkest moments during the course of the Bill, and who I am sure has benefited fantastically. Maybe she has even almost learned to walk during the last while.

Jonathan Djanogly (Conservative, Huntingdon)

Further to that point of order, Mr. Bercow. I too would like to say a few words on the conduct of the Committee. Despite its length—it is a long Bill—I have enjoyed it, mainly due to the general good nature and humour of the proceedings and of Committee members and the generally co-operative approach of the Ministers. The Minister’s offer of a three-day Report was well received in the Conservative party.

We have had exemplary chairmanship from Mr. Bercow, in his first Committee, and from Mr. Illsley. Both of them were calm and decisive when the Committee was occasionally less so. We have also been well helped on our way by the doorkeepers, police, Hansard reporters and Clerks, whom I thank.

I also thank the Bill team, which has always been efficient and helpful. I am sure that that will continue during the summer months as we review the new clauses. Some 30 to 40 City lawyers and accountants have provided me and Lord Hodgson with help on the Bill, and many other interested parties have given us briefings and help of one sort or another. There are too many to name, but I thank them all for their help.

Finally, I thank my hon. Friends for their excellent contributions to the Committee and their support for me. I wish everyone a happy summer break; we need it.

David Howarth (Liberal Democrat, Cambridge)

Further to that point of order, Mr. Bercow, may I add my thanks to all concerned in this exceptionally long Bill, including you and your co-Chair? It must have been an extraordinary introduction to the chairing of a Bill Committees. It used to be the case that, at the end of very long trials, judges would tell the jurors that they were excused future jury service. I do not know, Mr. Bercow, whether you might put yourself in the same position—and, of course, some members of this Committee might think themselves entitled to the same treatment.

I should like to thank my own colleagues, and everyone on both sides for their forbearance in what seemed something like a trial as we proceeded through the Bill. We have not quite discussed all the big political issues, but we just about managed nearly all of them. I thank the right hon. Member for Leicester, East (Keith Vaz) who, I am sad to say, is not with us, for the one thing that we did not manage to discuss: his excellent new clause, to which we might have to return at a later point. I add my thanks to all the staff and officials who have worked so hard on the Bill. It might not always have been a pleasure to be on this Committee, but it was certainly a privilege and an experience.

John Bercow (Conservative, Buckingham)

Perhaps I can conclude by echoing the thanks that have already been expressed from the those on the three Front Benches to all who have facilitated the smooth passage of the Bill. For my part, I am extremely grateful to a number of people. The first is my co-Chair, Mr. Illsley, a senior member of the chairman’s panel, with whom it has been a pleasure and privilege for me to work. He has been thoroughly collegiate, co-operative and helpful throughout and, as this is my first outing, I have been extremely grateful to him. I hope that it will not be judged by the powers that be that it should also be my last; I await the verdict in due course.

I echo the thanks that have been expressed to the police, to the door keepers and to all the members of the Committee for their helpful contributions and their accommodating attitude to the Chair. I want to thank senior executive officer Mark Oxborough, who was in the room until a few moments ago and who has done a great deal of work on the Bill behind the scenes.

From my personal point of view—I hope that others will understand the significance of this in my mind—I am grateful more than I will ever be able to say to three other people. The first is Dr. Mark Egan, who started the work of clerking on the Bill, but who was taken away from it because of family circumstances beyond his control. He is a very respected member of the staff of the House, and I am appreciative of his efforts, his guidance and his patience in dealing with me. The two others are those who, in practice, have clerked the Bill for much of the time, Dr. John Benger and Alan Sandall, who is now immediately on my left. They are very experienced Clerks and were no doubt chosen partly because of the significance, complexity and length of the Bill but possibly even, in part, on account of the knowledge of the powers that be that a completely inexperienced new Chair was going to be tested and needed to be looked after. They have certainly looked after me and I am very grateful.

Finally, I want to thank the Hansard Committee Sub-Editors who have done their jobs faithfully, conscientiously and effectively from start to finish.