§ 3.58 p.m.
§ The MINISTER of STATE, DEPARTMENT of INDUSTRY (Viscount Trenchard)
My Lords, I beg to move that this Bill be read a second time. This is my first Bill which I introduce with some trepidation. I am not a lawyer and I was not involved in the debates or discussions on the previous Administration's Bill. I find myself reading with some astonishment my name printed on the back of this Bill; but I have been made happier by the Lord Chancellor's reference to gobbledygook and also to his phrase on the previous measure that one can be too learned about these things. I reflected that all these remarks are relative, but I hope that the noble and learned Lord, Lord Elwyn-Jones, who is to speak after me, will, if necessary, pronounce the words in Clause 48 in the language of the Principality.
This Bill deals with the implementation of the EEC Second Directive on company law and certain closely related matters. The Directive, and hence this Bill, is concerned with the formation of public companies, the subscription and maintenance of their capital and the payments of dividends. The House will recall that the Select Committee on the European Communities in their 24th report in the 1974/75 Session made a detailed study of this draft Directive, which was debated along with several others on 8th April 1976. I shall be dealing with the main provisions of the Bill and referring to the points raised in the Select Committee's report in a few minutes' time. In moving this Bill, it might be helpful to your Lordships if I first explain the Government's wider intentions for the reform of company law.
The Bill which we are debating today is the first of two Bills which we intend to introduce. A second Companies Bill will be brought forward in 1980. This first Bill omits a number of important measures of company law reform which were included in the Companies Bill 1239 introduced by the previous Administration and which were debated at length in Standing Committee in another place. This does not mean that subjects like the law relating to loans to directors, the proposals on insider dealing and the new provisions for the protection of the interests of minority shareholders have been dropped. They have not been dropped; but several of the more important proposals are being re-examined in the light, for example, of the recent Inspectors' reports into the affairs of Peachey Property Corporation and Dow-gate and General Investments.
However, the United Kingdom are already out of time, as noble Lords will know, in implementing the EEC Second Directive which was adopted in December 1976, with the requirement that our law should have been amended to implement it by December 1978. So in order not to delay further our obligation to implement the Second Directive, this Bill is confined in major part to that purpose, and it is hoped that it can be enacted quickly. This will clear the way for a further substantial Companies Bill in 1980 which will need to cover the implementation of a further EEC Directive, the Fourth Directive which deals with company accounts as well as a number of other measures of reform, including those that I have mentioned from the previous Administration's Bill.
The Government intend, before the Summer Recess, to publish a consultative document on company accounting and disclosure which will put forward detailed proposals for implementing the Fourth Directive. If I may just reiterate: the consultative document will be published before the Summer Recess in relation to the Fourth Directive, and there will be a further Bill in 1980 covering that and the main points which are not in this Bill.
So turning now to the content of the legislation that we are debating today, Part I of the Bill provides new definitions as a basis for classifying companies as public or private companies; and new machinery for registration and re-registration of companies, together with certain transitional provisions which will apply during the changeover to the new classification of companies. Clause I introduced an important change into our 1240 law. At present, private companies are defined as those which meet the three tests set out in Section 28 of the Companies Act 1948, which means that public companies at present in our law form a residual category. But the EEC Second Directive now applies only to public companies and imposes a number of new requirements upon such companies.
Many companies at present classified as public companies in Britain could not be expected to meet the conditions required by the Directive. Therefore Clause I of the Bill defines a public company, and private companies will thus in future form the residual category with Section 28 of the 1948 Act being repealed. The main requirements which companies will have to meet in future in order to qualify for registration as a public company are as follows: first, the memorandum of association must state that the company is a public company. Second, its name must end with the designation: "Public Limited Company" or "PLC", with an appropriate alternative in Welsh as required by Clause 2 of the Bill. Third, the company must have a minimum authorised capital as required by Clause 3.
The minimum capital is set out in Clause 52 at £50,000. Before commencing business, a newly-formed public company will have to obtain a certificate from the registrar as provided in Clause 4. To obtain the certificate, the issued share capital must be not less than £50,000, paid up to not less than 25 per cent. of the nominal value together with the whole of any premium. The requirements for private companies intending to convert into public companies are set out in Clauses 5 and 6, and the position of existing public companies is dealt with in Clauses 8 and 9.
I should perhaps explain that Clause 8 has been extensively re-drafted from the previous version of the Bill in order to deal with a defeat drawn to our attention by the Law Society; namely, that it will be necessary to know whether a company which is a public company now has, after the coming into force of the legislation, become a private company, or whether it is a public company which has not yet taken the necessary steps to re-register as a public limited company. In making this change. Clause 8 has been extensively recast and the consequences of failure are 1241 set out separately in a new Clause 9. These changes, it is believed, will also make this provision easier to follow.
Before leaving Part I of the Bill, I should also mention for the benefit of those who followed closely the Committee proceedings in another place on the 1978 Companies Bill that the definition of proprietary company inserted into Clause 1 of the Bill by the then Opposition has been dropped. This should not be taken to indicate a change of heart on the part of the Government in relation to relieving the legislative burden on small private companies; it is merely a change of method. We shall be dealing specifically with the question of disclosure and audit of small companies and with the definition of a proprietary company for these purposes in the consultative document on company accounting and disclosures, which I mentioned earlier, which is to be published before the Summer Recess.
Part II of the Bill deals mainly with the requirements of the Second Directive relating to the share capital of public companies. Certain of these requirements are, however, based on principles which apply equally to all companies, and therefore in appropriate cases the provisions are applied to private as well as public companies. This is the case with Clause 14, which provides that directors may not issue shares or other securities without proper authority from the company in general meeting. The importance of Clause 15 is that it makes it a new criminal offence for private companies to offer their shares and debentures to the public. Under our present law if a private company were to make such an offer no criminal penalty would be incurred.
Clauses 17 to 19 deal with pre-emption rights and require companies to offer equity securities to their existing equity shareholders in proportion to their present holdings before they offer them to other people for cash. The principle that an equity shareholder should have a right to maintain his proportionate stake in the company when shares are issued for cash has, I understand, wide support, and there is a Stock Exchange requirement along these lines. Indeed, the clauses extend to the private companies, because we feel the protection they provide for shareholders is valuable and is needed. Of course flexibility is important, and the clauses 1242 provide for the restriction or withdrawal of rights to pre-emption with the consent of shareholders. There is also provision for preserving pre-existing arrangements which are not compatible with these new rights. Under those clauses, in a large number of cases an annual general meeting or a special meeting of shareholders can override this general protection.
There were a number of difficulties with the earlier versions of these clauses. These have been eased, for example, by the removal of bonus shares from the scope of the provisions. However, some problems do remain where offers are made to overseas residents, particularly in the United States of America. The means of overcoming these remaining difficulties is already provided in Clause 18, but we are still exploring the possibility of improving Clause 17—and having tried to read it three times, I myself am glad to hear that—so as to avoid the problem altogether.
Clauses 20 to 31 of the Bill deal with the payments of share capital, and the underlying theme of the Second Directive provisions on which these clauses are based is that a public company's share capital must be properly paid for in money or money's worth. Shares may not be issued at a discount—that is Clause 21; nor may the consideration for shares in the case of public companies include an undertaking to perform work or provide services—that is Clause 20. Where the consideration includes a non-cash asset, the Directive requires that an independent expert's report must be obtained to ensure that the value of the asset is at least equivalent to the value of the shares obtained for it. This provision of the Directive has been implemented in Clauses 24 and 25.
When the Select Committee on the European Communities examined these provisions in 1975, they considered them to be rather too detailed and rigid. They were particularly concerned about the proposal that an expert's report must be prepared where the consideration included a non-cash asset, and felt that such a provision would put companies to unnecessary delay and expense. I am afraid that it did not prove possible during the final stages of negotiations on this Directive to secure any substantial amendment to 1243 these proposals which, as I have indicated, are intended to ensure that the capital of a public company is subscribed on a sound basis—an intention to which I am sure we would all subscribe.
I should like to mention a new feature of Clause 24. This now provides that where a non-cash asset is valued by a sub-valuer, that sub-valuer must be independent of the company and may no longer be an officer or employee of the company, as was the case in earlier versions of this clause. The change has been made to bring the clause into line with the provisions of Article 10 of the Directive, and I am given to understand that it will not give rise to difficulty.
Finally in relation to Part II of the Bill, I should mention Clause 35, which prohibits a company from acquiring its own shares. Clauses 36 to 38 deal with related matters. The Government intend to review the question of whether and, if so, under what conditions, a company might be permitted to buy its own shares. This review will cover both the position of small family companies, where problems can arise if, for example, a member of the company wishes to retire and sell his shares, and also the question of whether listed companies with surplus cash resources might be permitted to buy in a proportion of their shares, as in the United States of America. I do not expect that this review will he completed in time for it to affect these clauses but any amendments necessary will be incorporated in the later Bill.
Part III of the Bill contains new rules governing the distribution of profits to shareholders. This is one area where the adoption of EEC Directives has provoked a long-overdue reform of our law. The new provisions on dividends cover both private and public companies and implement both the Second Directive and certain provisions of the Fourth Directive on company accounts.
Clause 39 defines profits available for distribution as the accumulated, realised profits of the company, so far as they have not previously been utilised, less the accumulated, realised losses, so far as these have not been previously written off. No distinction is made between capital and revenue profits or losses. A 1244 new rule in this clause is that unrealised profits may not be distributed. At present, under English law I understand that such distribution is permitted, but in Scotland it is not. As long ago as 1962 the Jenkins Committee recommended that the distribution of unrealised capital profits should be prohibited, and this reform is clearly overdue. Noble Lords on the Select Committee will realise that their point has not been fully met here on differentiating between capital and revenue accounts for this purpose. We frankly believe that, in line with modern accounting, it is probably wrong to do so.
Public companies will also have to comply with an additional test in paying dividends. This is laid down in Clause 40 and requires that a dividend may be paid only if the net assets of the company are, after payment of the dividend, at least equal to the capital of the company plus any reserves which are not available for distribution. The principle which lies behind this provision is the capital maintenance concept, which is closely linked to the principle in Part II of the Bill that the capital of a public company must be paid up for proper consideration. The effect of this new rule is that public companies will have to cover net losses, whether realised or unrealised, from realised profits before paying a dividend.
Clauses 41 and 42 deal with special classes of company. Clause 41 provides special exemptions for investment trust companies, and Clause 42 clarifies the definition of "realised profit" as applied to insurance companies. A change has been introduced into Clause 43, which deals with the accounting aspects of dividend distribution, to remove the requirement that interim accounts of public companies should be audited. This was a point where the Select Committee's views have been fully met. Clause 44 provides for the recovery of dividends which have been made in contravention of the provisions of the Bill—that is, if in the interim dividend too much has been paid under the rules which I have just explained, then there is the ability for shareholders to be required to repay. But they would be required to repay only that part of the distribution which was unlawful and not the whole of it.
Of the miscellaneous and general provisions in Part IV of the Bill I will mention 1245 only one—Clause 46, which permits existing public companies to use both their old and new designations for a period of six months after re-registration as a public limited company, in order to allow them to use up stocks of stationery and the like. This six months period of grace has now been extended to cover any other legislative requirement relating to the display of a company's name; for example, under certain labelling regulations.
I have described the Bill as briefly as I can. It is largely, we believe—and I hope it will be agreed to be—a technical measure, although there have been considerable difficulties, which the Select Committee's report rightly foresaw, in the matching of the more detailed and prescriptive legal approach of most other EEC countries embodied in the Second Directive with that of the United Kingdom, which in company law matters leaves a great deal to the discretion of the courts. The Bill does, however, contain a number of useful measures of reform. Before I ask your Lordships to give it a Second Reading, I should like to say that I hope noble Lords will accept what is included, and what is not included, in this Bill and, if possible, in the main, concentrate upon it.
I have questioned my noble friend and his department quite closely on the demarcations. They stem from the Second Directive. But the Bill has to include changes to British law in a slightly wider field, in order to make a compatible package. The Directive also makes necessary, or almost necessary, the repeal of some of our existing legislation and this, in turn, dictates the inclusion of some of the clauses in this Bill. It may be argued that we could have included more, but speed and the factors which I have just outlined have been our guide. My Lords, I ask the House to give this Bill a Second Reading.
§ Moved, That the Bill be now read 2a.—(Viscount Trenchard.)
§ 4.22 p.m.
§ Lord ELWYN-JONES
My Lords, this is not the first time on which the noble Viscount, Lord Trenchard, and I have discussed company matters across the Floor of the House. We did so at some length on the Patents Bill, and I recognise his experience in company matters. If I 1246 may say so—if I may repeat the language of the noble and learned Lord the Lord Chancellor—there was a good deal of gobbledygook in that. At the end of the day, I at any rate, began to understand.
But I am bound to say, bearing in mind the noble Viscount's own experience in company matters and his knowledge of the long-standing need for more fundamental and significant reform than this Bill contains, that I have been disappointed with the little morsel of reform that he has offered the House. It is a morsel of great size but of little substance, although I quite agree that it must be done to give effect to the EEC's Second Directive. The Long Title of the Bill is very encouraging—no holds are barred—on the field for law reform. It is described as "An Act to amend the law relating to companies", so we may look forward to a fruitful period in Committee when the matters requiring law reform, which my noble friends and other noble Lords in the House may wish to bring forward, can receive careful consideration.
One of the curious things about the history of company law is how reluctant Conservative Administrations have been to introduce any companies Bills. I think that their last one was in the time of Mr. Baldwin, and it is quite a long time since then. They nearly had one in 1973, but they did not get through with it owing to the effluxion of time and the course of events. When I heard the noble and learned Lord the Lord Chancellor earlier, describing the previous Bill as, perhaps, being introduced in order to give the Administration and the House something to do in the earlier part of the Session, I wondered whether that was the explanation for this rather tenuous Bill. But I accept that the more positive explanation is that it is brought forward because we are under a mandatory duty to implement the EEC's Second Directive on company law of 1976. Otherwise, without that compulsion, I doubt whether we should have had a Bill on company law at all even now.
The sadness about the matter is that there is readily available for Parliament a Bill introduced by the previous Administration in November of last year, after massive consultations with interested bodies. It was unopposed in another place on Second Reading. It underwent 1247 no less than 24 sittings in the Committee stage in another place, after Second Reading in November, and almost all the points of substance which were raised on that Bill were, I submit, dealt with and most of the criticisms had been met. As I understand it, legitimate concerns that were raised were capable of being dealt with by comparatively minor drafting Amendments. Now it seems that that good work that was done last year, and the beginning of this year, is in danger of being thrown away.
It is quite true that the noble Viscount has expressed the Government's intentions to legislate on the vitally important matters, in addition to those relating to the EEC's Second Directive, which were contained in the Companies Bill of last year. But the difficulty is that things always crop up in slotting things into the parliamentary legislative timetable, which, again, may present very grave difficulties for the Government's intended Companies Bill, and I warn the noble Viscount of the dangers that lie ahead. The general experience has been that Ministers who want to bring forward Companies Bills fight the Government unsuccessfully in the legislation committee, they tend to come in right at the end of the Parliament and then founder. Perhaps I ought to speak of this in sackcloth and ashes, because that was precisely the experience of the previous Administration, and it concerns me very much that what could be accomplished now may be the subject of indefinite postponement.
There are matters about which I think we are entitled to get a view from the Government at this stage, and perhaps the noble Viscount will be a little less coy about not lifting the veil of the promised land that is to come in 1980 to deal with the highly important matters, which I shall identify in a moment, which were included in last year's Bill but which we do not find in the present Bill. After all, company law represents the legal framework for most of our commercial and industrial institutions, and one wonders many times why it is that Conservative Governments have been so reluctant to change matters. Perhaps we shall have an explanation of that. Some of my noble friends behind me will, I have no doubt, suggest some explanations that occur to them, and my noble friend Lord Wedderburn gave a 1248 clear warning in an earlier speech of what is in store in this field.
But there is one preliminary matter about which I should like to ask the noble Viscount, and that arises from a statement by my right honourable friend Mr. John Smith when he introduced the Labour Bill in another place. He put forward the proposal that, instead of continuing the practice of intermittent reports on company law by ad hoc committees, there should be an independent and public body—a standing advisory committee on company law—on which not only the professions but industry, the City and the trade unions would be represented to undertake a continuing review of company law. I believe that that proposal was widely accepted in the City, in industry, in commerce and by the trade unions, and I hope that in the course of this debate the noble Viscount may be able to enlighten us with regard to that basic proposal. We should like to know the response of the Government and what they propose to do in that field.
So far as the Bill seeks to implement the provisions of the Second Directive, we can examine in due course the extent to which it fails to do so and the extent to which, if any, it departs from the requirements of that directive.
Quite apart from the non-EEC Directive matters to which I shall be referring but which the Bill does not deal with, I should also like to know the extent to which the present Government's Bill differs from the previous Bill in dealing with the EEC Directive. My impression is that it is mainly a question of drafting differences, but if there are differences of substance perhaps the noble Viscount will amplify the position—I think he mentioned one or two—when he comes to reply. If, however, it is preferable to deal with that matter at the Committee stage, I shall of course understand.
Coming to the lost opportunity, to which I have already referred, of introducing proper company law reform now, the fact is that the present Bill omits wholly a substantial part of the earlier Labour Government's Bill dealing with the duties of directors and conflicts of interest. I did not note that there was any reference to that subject in the preview which the noble Viscount gave of what is 1249 in store, if and when we see a Companies be expressed in statutory form in what Bill in 1980.
I submit that the proposals contained in Part IV of our Bill expressed succinctly the rules with regard to a director's fiduciary duty as they have been developed in a wide variety of court decisions over the past 100 years. A statutory statement of the kind which was set out in the Bill was recommended by the Jenkins Committee in 1962 and endorsed by the Bullock Committee in 1977. We also took the view that, as my right honourable friend Mr. Smith said on Second Reading in another place, it is no longer acceptable that company law should require directors to act solely in the interests of shareholders. This does not reflect the reality of business operations in the 20th century, or the practice of responsible boards of directors, and we believed that the law should be amended to reflect those changes.
We proposed in the Bill that the statutory duty relating to the definition of directors should require directors to take into account the interests of the company's employees generally as well as the interests of the shareholders. After all, an employee who works for a company for many years, perhaps for most of his working life, has an immense stake in that company—in many respects a more significant stake than many of the shareholders. We think that this is a fundamentally important matter. I hope that even at this stage the noble Viscount will be able to give us some assurance that this is something which the Government have in mind.
We think that it would be helpful to make clear what the law expects of a reasonably conscientious director with regard to his company's employees, and I do not believe that what I have proposed would receive serious opposition from responsible company directors. Indeed, it is very interesting that the right honourable gentleman, the present Secretary of State for Employment, said in an open letter to Conservative trade unionists dated 15th May 1978 that:Company law should be amended to reflect existing practice in industry, which is that in furthering the interests of their company the board of directors should have particular regard to the interests of employees".I ask whether that is still the Conservative Government's view and whether it will 1250 be expressed in statutory form in what they have in mind to introduce.
The Labour Government's Bill also proposed important new provisions with regard to loans to directors. The provisions of Sections 190 and 197 of the Companies Act 1948 have long been recognised as inadequate. The Jenkins Committed proposed that Section 190 should be strengthened, and again, as my right honourable friend the Secretary of State said, investigations following the recent secondary banking crisis revealed a number of cases where abuses had occurred.
The accountancy profession has repeatedly urged the need to tighten up on loans to directors. Our Bill extended prohibition on loans to directors to cover, in the case of public companies, loans to a director's immediate family and the companies in which the director or his family have a substantial interest. Indeed, it was proposed to make a breach of those provisions a criminal offence where the company concerned is a public company.
But perhaps the most important omission from the present Bill is its failure to deal with insider dealing. We believe that this should be made a criminal offence, accompanied by realistic contemporary penalties. I meant to say a word earlier about this in relation to the prohibitions contained in the present Government's Bill. I have been unable to discover from it what are the proposed penalties for the matters prohibited under the Bill. Perhaps at some stage the noble Viscount would give us an indication as to whether they are to be the penalties which were fixed 30 years ago, or whether they have caught up with contemporary relevance and inflation. But that is a separate matter.
At any rate, we believe that insider dealing should be made a criminal offence and, if I may say so, there is nothing unique in this point of view. It was supported by an impressive report from Justice. It was supported by the Council for the Securities Industry, which represents a wide range of financial and business interests. Their chairman, Patrick Neill, Q.C., has said that it is absolutely right for insider dealing to be legislated against. 1251 The view that is now, I think, generally accepted is that dealing in securities by a person who has privileged information which he can exploit for personal benefit is wrong. We believe that insider dealing is insidious, that it threatens public confidence in directors and that it is unfair to other shareholders and investors alike. It is, indeed, forbidden under the rules of the Stock Exchange and the City Panel on Take-overs and Mergers. I believe I am also right in saying that they all agree that criminal sanctions should he introduced.
The view that the Labour Government took was that these proposals ought not to make it impossible for legitimate activities to continue. American provisions in this field go much further than what the previous Government proposed. Our proposals would, however, have underlined the fact that insider dealing is wrong, and they would have been an effective deterrent to potential wrongdoers.
I make no apology for raising these matters which are certainly within the scope of the Long Title of the Bill, even though they do not come within the limited ambit that the Government presently have in mind. I was interested in what the noble Viscount, Lord Trenchard, said about the Conservative proposals with regard to the proprietary company. Two days were spent on that in Committee. It was described as a "new animal" and we shall be interested to see what emerges from its reconsideration. Then there was another interesting Conservative proposal on which in due course perhaps the noble Viscount will enlighten us. It was moved by Sir Brandon Rhys Williams and it required large public companies to establish audit committees and to have a certain number of non-executive directors. These are both interesting proposals, and again we shall keep a watchful eye to see whether the great dawn of Conservative thinking on company law ultimately breaks and on the horizon we see daylight, and not a dark and uncertain cloud.
§ 4.41 p.m.
§ Lord MOTTISTONE
My Lords, I should like to welcome this Bill. It seems to me to be wholly sensible to concentrate 1252 on the parts of the Bill of the last Administration which dealt with the Second Directive of the EEC and to put back to the next year the question of the more contentious issues that were in that Bill. I think the noble and learned Lord, Lord Elwyn-Jones, would agree that at the Committee stage in another place they were only just coming to what might be called the difficult part, so there is no knowing how long they might have taken over it had they been allowed to do so, Therefore I should have thought it was wholly sensible for a new Government, while they were settling in, to put off these more contentious points for mature consideration, more especially because the Fourth Directive is not yet ready for discussion, nor indeed is it necessary for it to he discussed yet in view of the fact that it is not to be implemented until 1982. So altogether I think the Government are taking a sensible course, and it is of interest that my noble friend gave an undertaking that this further Bill would be introduced in 1980. This is much earlier in the Parliament than either this Administration or earlier Labour Administrations have ever set out before, as the noble and learned Lord reminded us.
Having said that, I too, think that it looks as though the alterations to the remainder of the previous Administration's Bill appear to be mainly tidying up and unobjectionable. However, we have not had the Bill long and people are studying it. There are some parts of the Bill which seem to be unnecessarily obscure and, interestingly enough—and I hope that my noble friend will not take this amiss—the very clause which he said should be easier to understand is one that I and my friends picked out as being more difficult to understand, to wit, Clause 8 and its associated Clause 9. We would ask, if it is at all possible from a legislative and drafting point of view, that it should be made much clearer to the old public company just exactly what it has to do, and ideally in a tabular form—perhaps a schedule. It is extremely important for the old public company to readily and easily understand what is required of it, and I suggest that in the present Clauses 8 and 9 that is not the case.
On another point, we rather felt that Clause 18(6), which has the toughest penalty in the Bill, so far as we can see is being unduly severe, but that is very 1253 much on a first reading and it would be helpful if the Government could give thought to that and give an answer later on.
The most important point which I wish to make relates to Clause 46(3), trading under misleading names, which my noble friend mentioned, and it concerns the very short time of six months for changing to the full new name of a company. This really seems difficult. As your Lordships will be aware, many companies will buy in stationery and packaging material a year or so in advance, saving cost to themselves and, of course, to the consumer. Whereas I suppose stationery, rather scruffily, can be modified by something being scratched out and something else being typed at the bottom, people do not like to do that. It is the packaging which is the more important item, and I was interested to hear my noble friend say—and I should be delighted if he could elaborate on it slightly—that this would not be insisted upon in relation (if I heard him aright) to EEC Directives which have yet to be implemented. I read into that remark that perhaps the labelling Directive was what he had in mind.
Be that as it may, even if there are not Directives to condition this issue, six months is a very quick time, for packaging materials particularly; and of course there are all sorts of packages. If we take a milk bottle, for example, which has the name of the company embossed upon it, that might last quite a long time—two or three years. Not all milk bottles last that long because some get broken, but some do and it would be tragic to have to destroy them just because of this relatively short period of time. I think that is a very important point for consideration. If my noble friend is suitably taken with my argument, he himself might perhaps think in terms of amendments at a later stage.
At this stage that is all the contribution that I can reasonably make and I would commend it to your Lordships. I suggest to the Opposition that they should not waste too much thunder on the parts of the old Bill that they would have loved to see in this one because it is really rather a waste of time. We have to get this Bill through quickly, and there is another Bill coming along within twelve months.
§ 4.48 p.m.
§ Lord WEDDERBURN of CHARLTON
My Lords, when I first addressed your Lordships' House I had the pleasure of following the noble Lord, Lord Mottistone, and as is the custom I tried to be unprovocative. I am afraid I somewhat distressed him on that occasion, and I cannot promise him any better this time because, as the noble Viscount has explained from the Government Benches, although the aim of this Bill, is to implement the Second Directive which should have been implemented in 1978 and must now be speedily implemented, and many difficulties remain in regard to the extent to which this Bill does adequately implement the Second Directive, which we shall no doubt deal with in Committee, as my noble and learned friend has pointed out the long Title is—and no doubt deliberately—in the following terms:An Act to amend the law relating to companies".So we may legitimately ask the Government why those measures of the 1978 Bill, which reached an advanced stage in Committee in another place in the last Parliament, are not included. The noble Lord, Lord Mottistone, has said that they had not reached the controversial parts. With great respect they had reached Clause 57, and nothing after Clause 66 could remotely be regarded as being a controversial clause. Indeed, as I hope to show in my remarks to your Lordships' House, the most controversial measure, dealing with insider dealing, had reached a stage where some kind of agreement might well have been thought to have been reached.
The noble Viscount told us that a second Companies Bill is coming in 1980, because of the Fourth Directive on accounts. But as my noble and learned friend pointed out, parliamentary time is notoriously limited for company law reform. It is not a popular subject for any Administration. Who knows what kind of position we shall be in, in terms of parliamentary time, by 1980? Some of the proposals for company law reform which are hardly controversial, such as those made by the Jenkins Committee in 1962, have been kicking around in the dustbins for years, waiting for statutory rescue. It seems quite extraordinary that the Government have not seen fit on this occasion to include a number of the 1255 measures which were there ready for them to put in from the previous Administration's Bill.
With one exception, to which I shall come, I shall suggest four areas of law that have been fully discussed and which are reasonably agreed on both sides, subject to Committee work. I agree with the noble Viscount who has suggested that the kind of proposals made by the Dowgate Inspectors recently, in a report to which I made reference in my previous speech on 16th May, may raise some new issues. I am not asking that the Government should have given—although they are, we know, an energetic Government—such speedy consideration to those matters, but surely the matters in the 1978 Bill merited a place in a Bill to amend company law?
I wish to address your Lordships' House taking a lesson from the noble and learned Lord the Lord Chancellor—namely, that when one intends to deal with something in Committee one should, as he put it, give public notice during the Second Reading debate of the matters that one intends to raise. I wish to bring to your Lordships' attention four areas on which the Government can expect to be confronted with matters in Committee, however urgent the implications of the Second Directive may be.
However, before doing so, may I make two preliminary points rather prompted by what the noble Lord, Lord Mottistone, had to say about wasting time. What is the context of the reform of company law? Today the giant public company which is dealt with by the Bill, as well as the important but other type of private company, deals with a vast concentration of capital. To pick two references at random, in the Green Paper of 1978— A Review of Monopolies and Merger Policy, (Cmnd. 7918)—your Lordships will find in Chapters 1 to 3 a most useful survey of modern times since the rapid concentration of capital, particularly in Britain in recent decades. So, by even 1972 the 100 largest companies accounted for 41 per cent. of net output, and of course the number today is even less. As was pointed out in Table 3of the Bullock Report in 1977, to which my noble and learned friend dared to make reference —Cmnd. 6706—these large companies are 1256 financed much less by the equity market or even by loan capital: they are financed to the extent of about 75 per cent. by their own internal funds, by retained capital. So, these are massive concentrations of wealth and social power.
Company law reform is not a mere technical matter. Company law is that part of our law which sets down the conditions upon which those personified aggregations of capital may operate in our society for the 1980s with the privileges of incorporation and limited liability-privileges which are frequently forgotten but which have been available to them since 1855. Therefore, this is a most important subject. A Bill to amend company law may properly have confronted to it the question: Why have you left this and that out, especially when it has been fully debated, as have so many matters?
Merely as a preliminary point—because I cannot think of anywhere else to put it—may I make a minor plea to the Government in regard to the form of legislation. My plea is that there is a need to consolidate company law, but can the Government help us. When we find in Schedule 2 to the Bill 40 amendments made to seven statutes, could there not be printed in the statute not only the additions, insertions, substitutions, subtractions and particular sections and subsections of those seven statutes, but also as a separate Part II to the schedule, the full text of each section or subsection as amended? There are good precedents for that. As regards the Companies Act 1967, in the schedule which amended Schedule 8 to the 1948 Act there is set out the full text as amended. The Sex Discrimination Act 1975 sets out, as amended, the Equal Pay Act 1970. It is not often that I claim to speak on behalf of businessmen, but one would have thought that if the Government do not wish to waste the time of both businessmen and legal practitioners, they would surely be led to this approach in any Bill dealing with company law where there are some dozen statutes through which practitioners and businessmen have to weave their way by reference from one clause to another. Every time something is amended surely the amended section should be set out in full.
I now come to the first part of my major four points. Here I omit some part of 1257 my argument in that I wholly support the case made by my noble and learned friend on the Front Bench that the parts of Part IV of the 1978 Bill which dealt inter alia with contracts and loans to directors—hardly controversial matters except for their drafting—should surely have found a place. And, above all, surely the clauses dealing with insider dealing should have found a place in the Bill, as my noble and learned friend suggested.
Some of us have been pressing for 20 years for legislation on insider dealing, and we took heart in 1972 when the noble Lord, Lord Shawcross, who was then chairman of the City Takeover Panel, swung round in favour of the view that it should be a criminal offence. There may be few directors or "Tippers" or "Tippees", as the new jargon has it, who make large profits out of dealing in the securities of their own companies or the companies in respect of which they have confidential information. We just do not know. There may be few, but some observers suggest that there are many. Whether few or many, the practice should plainly be unlawful.
The Council for the Securities Industry has called it evil. It is contrary to the Stock Exchange regulations. What more encouragement do the Government want before they legislate upon the matter in a Bill to amend company law? Indeed, the Conservative Party put forward in the Standing Committee in another place—the noble Viscount will find the reference on 20th March in column 1093 of Standing Committee "F"—three conditions which it said must be met before insider dealing legislation could be regarded as satisfactory. They were roughly: the definition of "insider" must be appropriate; the law must not stop proper provision of information, especially to employees, which I would heartily support; and thirdly, the law must not inhibit legitimate investment activities especially by institutional shareholders or investment advisers.
What is so extraordinary is that not only did they put forward those three conditions, but Mr. Renton, the honourable Member who spoke for the Conservative Party on that Standing Committee, put forward amendments which he said would meet those three requirements. 1258 So, the Government have in the bag the text which they could put on the Statute Book. It is no great effort, it seems to me, to take one's own amendments and put them forward if they are satisfactory. For what strange and esoteric reason the Government chose not to do so, I still await the noble Viscount's explanation.
Indeed it is interesting that the noble Viscount made it clear that insider dealing and the other problems of directors and their fiduciary duties, are not to be discussed in the consultative document. He said that the consultative document is to deal with the Fourth Directive on accounts—that is understandable—and the new problem of the notion of the proprietory company, which does indeed need a great deal more discussion. But there is no need for a consultative document on these matters. It seems that they are just going to be put forward in the Bill. If I am wrong the noble Viscount will correct me when he comes to reply, and we shall see why it is necessary to have another consultative document especially on insider dealing in respct of which the Conservative Party spokesman in Standing Committee "F" of another place had what he called a satisfactory text, having welcomed the Bill and having welcomed the idea of legislation on insider dealing.
Indeed, the Council for the Securities Industry in its first annual report dated 29th May 1979 stated in paragraphs 47 and 48 that the 1978 Bill not onlyafforded a useful opportunity for dealing effectively with the evil of insider dealing",but stated that the 1978 Billwent some way to meet the point raised by the Council and othersand appeared to be in support of the kind of amendments which Mr. Renton had in mind, because it said later in paragraph 49 that:Further discussion on the Bill has shown that one of the first tasks is to examine the basic structure of the legislative proposals.".As it mentions there "tippers and tippees", with which some of Mr. Renton's Amendments dealt, presumably the consent of the Council for the Securities Industry for Mr. Renton's text would not be difficult to find. So the difficulty for the Government in this matter seems to me to be rather hard to find.
1259 Perhaps, at this stage, I may interject a further law reform point and, I hope, a purely non-controversial law reform point, which I give notice I shall wish to press upon the Government in Committee. I beg them to consider reintroducing what was Clause 65 of the 1978 Bill. That clause attempted to improve the rights of a minority shareholder who may petition the court for an appropriate remedy in what are now called "cases of oppression" in the conduct of a company's affairs. The right so to do was introduced by Section 210 of the Companies Act 1948 on the recommendation of the Cohen Committee. But it has proved a restricted utility, largely for two reasons. First, because as the law stands, the petitioner must prove that the facts would allow for a just and equitable winding up; and, secondly, because the interpretation of "oppression" has been somewhat narrowly interpreted by the courts, although in view of the current text of the statute, one can have some sympathy with the courts in having to make that interpretation. Section 210 is particularly important because of the difficulties which a shareholder has in bringing minority action outside Section 210, due to the arcane niceties of the rule in Foss v. Harbottle, with which I shall not detain your Lordships, and the rather arrested development in Britain of what is known in North America as the "derivative action", despite the valiant efforts of the Court of Appeal in the case of Wallersteiner v. Moir (No. 2), 1975 Queen's Bench, page 313, led at a canter by the noble and learned Lord the Master of the Rolls but still I am afraid far behind the developments in other jurisdictions.
As far back as 1962 the Jenkins Committee proposed a reform of the law to allow a minority shareholder to petition the court for a remedy for something which was unfairly prejudicial—where the affairs of a company were being conducted in a manner unfairly prejudicial to some part of its members (Cmnd. 1749, paragraph 212(c)). Clause 65 would have gone a little way in that direction. It has been done elsewhere. Movements in this direction took place in Australia, in the Act of 1961; throughout the Commonwealth: in the Singapore Companies Act 1967 and in the Federal Canada Corporations Act 1975—which 1260 probably contains a better provision than Clause 65, if the Government wish to improve upon it—and only last year Section 168A of the Hong Kong Companies Ordinance introduced something equivalent. Cannot the Government do as well for British Company law as they can do for Hong Kong? It is time to introduce this measure and so far there has been no explanation whatever of the Government's failure to do so from their Front Bench. If it be said—as is sometimes said, and as, indeed, I have been at fault in saying myself—"Oh, this is just a matter of lawyers' interest and it all applies only to very small companies", then the Hong Kong case shows how untrue that is for only last month the Ordinance section was involved in a most important piece of legislation involving a takeover bid of some 450 million Hong Kong dollars.
Meanwhile the condition of English law has become worse and worse. After the decision of the Judicial Committee of your Lordships' House in the case of Ebrahimi v. Westbourne Galleries in 1973 (Appeal Cases, page 360) it is now easier to obtain the winding-up of a company on a just and equitable ground than it is to obtain a remedy for oppression when a company wants to keep going. It is time for that state of affairs to be put right.
I turn to my second quarrel with the Bill and, to some extent, this leads me to quarrel with my noble friends on my own Front Bench, in that it implies some criticism of the 1978 measure as well. Perhaps I may put this in the form of another question. Why was it impossible to reintroduce in this Bill Clause 70 of the old Bill and the schedule 2? That clause and schedule performed a very important task for which we have waited some 20 or 30 years; it updated very nearly every serious penalty imposed for breaches of company law. If there is one area where British company law is ludicrous, it is in the inadequacy of the penalties imposed for breach. Let us take, for example, Section 54 of the 1948 Act, which prohibits financial assistance by a company for the purchase of its own shares, which is, so it is supposed, a bedrock principle of our law. Time and again in report after report that is exposed as being broken by the manipulators and the operators of company law and those 1261 engaging in fraudulent or questionable transactions.
What is the maximum fine available to impose upon these operators? The same as it was in 1948—£100. That is a deterrent of hardly nuclear proportions to encourage them to keep their fingers out of the till after a fat killing. Why is it impossible to reintroduce Clause 70 and Schedule 2? I give the Government notice that they will be pressed to do so. Indeed, the penalties elsewhere are quite inadequate. The penalties for failure to file annual returns under the Companies Act 1976 were recognised by the 1978 Bill as already being out of date, because in Schedule 2 the 1978 Bill itself would have brought them to a higher level. It is worth noticing that, on the most recent information I was able to discover, by reason of a Written Answer in another place on 7th June 1976, 40 per cent. of all listed companies—245,000 of them—were in breach by not having filed their annual returns for 1975. I noted that in 1975 there were some 1,500 convictions for failure to file returns; in 1977 there were nearly 1,700 convictions for failure to file proper returns. Therefore, the evidence seems to be that nothing done so far has cured that kind of problem.
In looking at the penalty of the new obligation in Clause 34 of the Bill, which has been brought to the attention of your Lordships' House, perhaps I may raise a third matter. As has been pointed out, Clause 34 imposes a wholly novel obligation upon directors of a company to convene an extraordinary general meeting of shareholders, where the net assets of a public company have plunged to half, or less than half, the amount of its called-up share capital. That is meant to be a great check upon the activities of the directors, I note that, although it is a novel introduction into our law, which I welcome, it reflects the rather naïve assumption of our law, which is shared by the EEC in its Second Directive, that the shareholders meeting is still the primary organ of control and accountability in company affairs. Indeed, the model of traditional British company law is perhaps that of the Athenian City State of shareholders being brought together to elect and control on occasion their 10, as they were then, Strategoi or, if one prefers, their generals. But in the giant or even medium-sized modern 1262 company that old model is rather inappropriate. The directors, quite properly—where we know nothing improper is being done—can normally hold enough proxies and friendly votes, especially in the day of the institutional investors, to have their way, except, of course, during a takeover battle—and that has less to do with shareholders' democracy than it has sometimes to do with efficiency, with tycoonery, and sometimes to do with worse. But the illusory nature of shareholders' democracy was pointed out as long ago as 1945, in the report of the Cohen Committee on Company Law, Cmnd. 6659, with:… the dispersion of capital among an increasing number of small shareholders".Since then we have had the advance of the institutional shareholder; but the model of shareholders' democracy has not worked any the more in the actual operation of company affairs. Indeed, the classic analysis by Berle and Means in 1932 in The Modern Corporation and Private Property is the starting point. If the noble Viscount wishes to emulate one of his other Ministers in Government by providing a reading list to those who advise him, I suggest that he starts with the 1932 Berle and Means book.
§ Lord HARMAR-NICHOLLS
My Lords, the noble Lord surely is not suggesting that the shareholders are not the final arbiters of what will happen to their company? He is not suggesting, is he, that the annual meeting is not ultimately able to decide the vital thing if it wants to? Is he suggesting that we should have some alternative to the shareholders speaking up for themselves at their annual meeting?
§ Lord WEDDERBURN of CHARLTON
Not exactly, my Lords. The noble Lord is leading me into territory on which I was about to comment, but if I may use two sentences instead of the one which I was about to use, I was about to say that the day will come when those of us who, as I did in your Lordships' House on 16th May, call for a companies commission to act side by side with the shareholders meeting as an element of control and a mechanism of accountability in the public interest as well as in the investors' interest, will be heard; because the traditional concept that only the shareholders meeting is capable of 1263 being the mechanism of control is really out of accord with the actuality of the modern giant, and especially the modern giant transnational corporation and its associated and conglomerate groups.
Applying that concept to Clause 34 the traditional philosophy is followed, but there could not be a more important meeting on that philosophy than the meeting which has to take place when the assets of the company have plunged. What happens if the directors fail to call such a meeting in good time? There could hardly be a more serious breach of their duty. No doubt the noble Viscount will point out that they could be dismissed by the shareholders meeting under Section 184 of the 1948 Act, and of course he would be right, but that would be shutting the door after the assets have bolted. What sanctions should they be subjected to? A criminal sanction, says the Bill. Quite right, a criminal sanction for failing to call this crucial meeting in the life of the corporate body. And how much may they be fined? The Bill says, a fine not exceeding one-fifth of the statutory maximum, which, unless I have misunderstood the statutory maximum, means £200. The assets are gone, the company is in ruins, the directors are in Biarritz having paid their price to society of £200 apiece. It is a nonsense. Company law penalties are absurd. Even on the fifteen occasions on which penalties are imposed in this Bill, your Lordships' House must surely consider carefully whether they should not be severely increased, compared with the other penalties in our criminal law for similar offences elsewhere.
That brings me to the third major point. What about the employees— or, I was tempted to say, what about the workers? In Standing Committee F in another place the Conservative Member for Hertfordshire, South, Mr. Parkinson, who is now no doubt the Minister of State for Trade dealing with this Bill (and since it is in the last Session, as I understand your Lordships' Rules of Order, I can quote what the Honourable Member actually said), stated on Clause 34, at column 407, relating to the control of directors by the shareholders' meeting where the assets have plunged:In an ideal world, in an ideal Conservative world, the workers would also have shares, so the 1264 meeting of the shareholders would in fact include the employees as well".My own studies of industrial democracy have not led me to believe that workers' shareholding is a satisfactory way to that conclusion. But at least Mr. Parkinson had the workers in mind. He knew that employees can no longer be excluded from the dramatis personae on the stage of company law. The Labour Government of 1978 knew it because in their 1978 Bill they had a clause which required directors to take account of the interests of employees as well as shareholders. The Conservative Government of 1973 knew it because they had a clause which at least enabled directors to take account of employees' interests. There is no clause in this Bill to liberate directors from the 19th century shackles of not being able to take into account—and I choose my words carefully here—directly, as opposed to indirectly, the interests of their employees.
Professor Gower's Modern Company Law, at page 522, which I was going to read to your Lordships, is perhaps not necessary to make the point, but it could be added to the noble Viscount's reading list for his advisers. Indeed the interesting thing is that the City Takeover Panel agrees, as I understand it, with this view, because General Principle 11 of the 1976 City Takeover Panel Code states, in regard to the directors' duties of an offerer or offeree company:It is the shareholders' interests taken as a whole together with those of employees and creditors which should be considered".So the Government are out on a limb. They are deserted by the previous Conservative Government of 1973 and by all others who wish, in effect, to reverse the decision—I believe, on the authorities as they stood, the perfectly correct decision in law—of Mr. Justice Plowman in the case of Parke v. Daily News in 1962 Chancery, page 927, where he rejected the view, perhaps rightly on the authorities, that although the prime duty of directors was to shareholders, they must take direct account of employees in these days.
This adjustment is no minor matter. It may appear a minor legal adjustment to the Government, but the failure to make this adjustment will be noted by employees in companies, and they will note that the 1265 Government have failed to bring in their interests into company law after other Governments of both parties have successively for six years agreed that it should be done. One can only ask why the Government are so curiously slow in coming forward on this matter.
May I now turn finally to my fourth heading of complaint about what is missing from this Bill. At least on this occasion it is not a complaint against the Government for failing to do what their predecessors did in 1978, because my noble friends on the Front Bench failed too to take the opportunity. There is a special opportunity in this Bill, for the very first time in British company law, to do something appropriate in regard to the rights of shareholders. It is the first time because, as the noble Viscount said in his address to your Lordships' House—this is in Part III of the Bill—there is a long overdue reform of our law by putting into statutory form the legal principles governing the computation of profits available for dividends and other distributions, and the restrictions upon distribution of assets other than profits. I agree with him that this is a long overdue codification on which, for once, the Second Directive has been of great value in stimulating us all into what should have been activity long ago.
In regard to this matter, there is one way in which the shareholder is not protected in a way in which the worker is. A shareholder is not protected in his company in a way in which the worker is protected in his trade union. Since 1913, by virtue of the Trade Union Act of that year, a trade union which wishes to make political payments must set up a separate political fund. Into that political fund must be paid only special contributions paid by the union's members as a separate political levy. Every member of a trade union has, since 1913, had the right to contract out and become an exempt member, relieved from contributing to the political fund.
The scheme is now administered by the Certification Officer, and his report for 1978 shows that 73 trade unions have political funds, unions with some 10 million members, of whom 19 per cent. have decided to contract out of the political levy. It is the same figure as over the last two or three years, which will be 1266 a matter of great discontent to noble Lords opposite who have been trying so hard to get people to contract out of the political levy, as is their right, and as is the workers' right, but not the shareholders' right.
Although there is a penumbra of doubt in certain cases which it is not appropriate at this time to go into, by and large it is normally quite lawful for British companies to give their funds to political purposes. Indeed, Section 19 of the Companies Act 1967 requires that political purposes donations, and subscriptions to political purposes, must be set out in particulars as they are defined in the directors' report for the relevant year, if they exceed £50. So they must be disclosed. But the shareholder has no right. When Rank, Hovis McDougall in 1978 gave £30,000 to the party opposite, or when Guest Keen and Nettlefolds gave £25,000, no shareholder could say, "I want to contract out. I don't like the Conservative Party". I was going to say that I was sure noble Lords on the Liberal Benches would assure me that there were shareholders who would say, "I don't like the Conservative Party", but unhappily they are not here to say it. However, I am sure that if they were here they would support my view. that such shareholders exist, and I am sure that my noble friends will also agree.
Why should the shareholder not have a right parallel to that of a worker in his union? Also, what about the Government public interest? When Allied Breweries gave nearly £27,000 to the Conservative Party and its associated bodies in 1977, a matter to which I shall come, it received over £1 million from the Government. And what about trade union pension funds? Consider, for example, a coal miner; he can choose whether he pays towards the political amounts paid by his union to the Labour Party, but neither he nor the trustees of his pension fund can choose whether a company in which that fund has invested gives its money to the Conservative Party.
Noble Lords may say or may hear the argument that the kind of sums I have mentioned arc fairly small: what do they matter? Consider what was shown in the most recent analysis by a journal called Labour Research, which is wholly independent and whose figures on this 1267 matter have never been challenged; if they are to be, I hope we shall hear that in Committee because an amendment will be moved on this matter. That recent analysis, in September 1978, showed that, from March 1977 to March 1978, 378 companies gave £1,439,594 in political donations, of which £771,000 went direct to the Conservative Party. I was about to say, had there been any Members of the Liberal Party present, that in the previous year they got £5,000, but, unhappily for them, in the year I am gouting they got nothing at all. The only party to which industrial money was given was the Conservative Party.
Of the rest, £172,000 went to what are generally acknowledged to be closely associated organisations of the Conservative Party—the Economic League; the Centre for Policy Studies; Aims, as it is now called; and Common Cause—and £425,000 went to British United Industrialists, which is a cloak and dagger elite of Conservative industrial establishments and which called off its registration as a registered company after the 1967 Companies Act was passed, when it was made to disclose further matters on political donations, because, to quote from The Times of 11th April 1973, it wanted:…to stop snoopers finding out more about us than they need to".It is generally agreed that we can add the £452,000 to British United Industrialists, which gives us a total of nearly £1,400,000 to the Conservative Party. I have looked up the report in the Financial Times for 7th October 1978, which deals with donations to the Conservative Party as a whole—which they revealed had gone up by 50 per cent. in 1978—and I have taken statistical advice on these matters. I am told by my statistical advisers that an appropriate conservative guesstimate of the amount going to the Conservative Party and its associated bodies in 1979 will be at least £2,500,000.
It so happens that, at page 51 of the Certification Officers 1978 report, it will be found that the expenditure from trade union political funds was £2,460,000, a fact I found out after receiving my statistical advice. So the problem is similar in size as well as in quality. It is comparable with one very significant difference— namely, that whereas trade unions may 1268 apply their assets to political purposes only out of their political funds, which at the moment stand at some £4 million, companies may use any funds for political purposes so long as they are reasonably incidental to the objects of their memoranda, which means hundreds of millions of pounds, if they wish to do so.
This situation led the honourable Member for Tower Hamlets, Bethnal Green and Bow, Mr. Mikardo, in another place, quite properly to say on the Committee stage of this Bill that here for the first time was an opportunity, because of the codification of dividends and the law relating to them, to move a new schedule concerning this matter. Although the Government had some sympathy with the issue, they raised 16 technical difficulties in the face of the honourable Member's new schedule. Unless the noble Lord can persuade me to the contrary, I give him notice that I and some of my noble friends will be moving a schedule to this Bill. I understand the agonised look on the face of the noble Lord, Lord Trefgarne, on the Front Bench opposite, but I must tell him that unless he can find some way out of the position we shall move a new schedule to try to deal with the matter, which we hope will not lead—
§ Lord MOTTISTONE
My Lords, perhaps I may interrupt the noble Lord to tell him that the reason why we on this side are looking rather fazed is that he has already taken twice as long as even very long speeches normally take and I was wondering whether it was really necessary for him to take quite so long to say not very much.
§ Lord WEDDERBURN of CHARLTON
My Lords, the noble Lord might care to read my speech in the Official Report to see whether in fact it contains not so much. If one is going to move a fundamental new clause in Committee, then the noble and learned Lord the Lord Chancellor has already told us today that it is right in relation to a limitation of actions Bill, a technical law reform measure—he took 20 minutes to do so and of course he did it with much greater clarity than I could claim—
§ Lord WEDDERBURN of CHARLTON
If one is to move an important 1269 amendment to a Bill which is concerned with the very bedrock of the law relating to manufacturing organisations in Britain, my Lords, it does not seem to me unfair to explain the point to the Government—who, if one reads the Official Report of Standing Committee F, do not appear to have any conception of what is going on in this sphere—in considerable detail. I shall resume my seat in a moment when I have said, as I was about to say when interrupted by the noble Lord, Lord Mottistone, that unless the Minister can persuade me otherwise, I and my noble friends will move such a new schedule in Committee. He might apply himself in his reply to this simple question: is there really any reason, in principle and if a provision can be drafted, why a shareholder should not have a right to contract out of political donations made by his company equivalent to that of the member of a trade union? That will be moved in Committee. Otherwise, apart from what I have said, I welcome the Bill.
§ Lord MOTTISTONE
My Lords, the noble Lord, Lord Wedderburn of Charlton, might recall the phrase: brevity is the best feature in the art of public speaking.
§ 5.27 p.m.
§ Lord MISHCON
My Lords, in following the marathon effort of my noble friend Lord Wedderburn of Charlton, my contribution will be a more jogging exercise, to last but two minutes by way of maximum, and therefore if your Lordships will take an average between my noble friend's speech and mine, we shall reduce ourselves to the length of speech to which the noble Lord, Lord Mottistone, referred.
I wish to be brief for two reasons; first, your Lordships have already been kind enough to listen to me once today and, secondly, much of what I wanted to say has already been said from these Benches and I therefore feel it no useful contribution to your Lordships' debate merely to repeat speeches that have already been made and points that have already been put.
The general point I wish to put briefly is this: there are those of us who realise the responsible part that the private sector of our economy plays in our affairs, and, in realising that, would plead with 1270 the Government to notice the very real concern there is among people in the City and elsewhere about the unacceptable face of the conduct and affairs of some of the companies that have recently come under review. That makes it essential that instead of it being a leisurely exercise to look at a revision of company law, it is an urgent exercise. And instead of the statement which the noble Viscount made— that we shall not be listening to a speech from him again moving the Second Reading of another Companies Bill until 1980—that excuse (that one has to reflect on the inspectors reports in recent cases) should bear in mind, if he will forgive me saying so, that it is the inspectors reports in recent cases that have made it even more urgent that a revised Companies Bill comes before Parliament. I therefore urge him, in relation to the expedition which I believe may be exercised in regard to a Bill to propose trade union reform, to use even more expedition in the case of this very necessary revision of the Companies Act which of course has already, as has been pointed out, been dealt with so fully in the previous Session by the Labour Government.
§ 5.30 p.m.
§ Lord HARMAR-NICHOLLS
My Lords, I fear that a two-minute intervention has been forced upon me by the revival of the old chestnut by the noble Lord, Lord Wedderburn of Charlton, who obviously wanted, at the beginning of the Session, to let it be seen that he is a loyal and extreme supporter of his party. What he has said can be made to sound so plausible. I do not think that the House would mind the noble Lord's schedule. Indeed, it is right that each House of Parliament, if it has any feelings at all on a matter, should use the Committee stage to make a Bill what it wants it to be. If the noble Lord wants to bring in a schedule, it is a good thing that it should be aired, as it was in another place. It was his Government who refused to accept the point that he made about shareholders being able to contract out of contributions made to a political party.
There is only one point that I should like to put to him. The way that he presented that side of the political argument was unfair. A large part of his previous argument was that he did not 1271 think that shareholders ought to have the power which they have in being able ultimately to decide what a company should do. He seemed to be suggesting that the shareholders needed someone else to tell them at an annual meeting what they should and should not decide upon. There is one power that the shareholders have in relation to contributions to political parties by a company. If such action is reported to them, as it must be under the Bill, they have the power to dismiss the directors from office. They have the power to do that every three years. If the shareholders feel that the directors are using their money in a way which is not in the best interests of the company—though it is often in the best interests of the company to spend money to prevent it being nationalised—they can then dismiss the directors.
The noble Lord represented the contracting out power in relation to trade unions as being something without blemish. 1 wonder whether he would produce another schedule, on the appropriate occasion in relation to the appropriate Bill, which would allow trade union members to dismiss their trade union leaders. So many of these leaders are appointed for life, and it seems that once they are appointed the trade union members do not have ultimate control as to how the union should be conducted.
All I say to the noble Lord is by all means let him produce his schedule and let us argue it out in detail and properly. But to raise phoney differences relating to the control of a union as compared with the control of a company does no service at all during consideration of a Bill as important and as serious as the one now before us.
§ Lord HATCH of LUSBY
My Lords, before the noble Lord sits down, I should like to ask him whether he is aware that in every trade union there is a constitution under which the general secretary and the president of the union are elected by the members and can be dismissed by them in exactly the same way as the shareholders he mentions can act? The big difference is that, whereas a member of a trade union can contract out of contributing to the funds of a political party, a shareholder cannot. He may object, 1272 but he cannot contract out of the contributing of money by the company to a political party, even if he dislikes that political party.
§ Lord HARMAR-NICHOLLS
My Lords, this is not the Bill on which to argue that particular point. However, the noble Lord knows as well as I do that in many unions the chances of getting a form to enable one to contract out are almost impossible because they are never supplied. On a number of occasions when they have been asked for they have never been sent. The noble Lord also knows that in a number of unions the leaders are in fact appointed for life and it is very difficult—indeed almost impossible—to dismiss them. I maintain that the shareholders of a company, under the existing law, have a greater control over their company than the members of a trade union have over the conduct of their union.
§ 5.34 p.m.
Lord BRUCE of DONINGTON
My Lords, the noble Lord, Lord Harmar-Nicholls, will forgive me if I do not pursue the matters that he has laid before your Lordships in connection with the remarks of my noble friend Lord Wedderburn of Charlton relating to political funds. This seems to me to be a matter which we should be capable of arguing more extensively in Committee. The House will be indebted to the noble Viscount, Lord Trenchard, for the account that he has given both of the Bill itself and of the reasons for its introduction in its truncated form.
I do not propose to enlarge upon the remarks of my noble and learned friend Lord Elwyn-Jones, with which I entirely concur. But unless it be thought that there is some impelling urgency for complying with the second EEC Directive on this matter, I ought to inform your Lordships that the only country out of the Nine that has so far enacted any legislation in connection with this matter is the Federal Republic of Germany. So in putting the legislation before the House at any time during the next few months we should be quite certain to be in advance of the remainder of our European colleagues. Thus I believe that on that account the question of the degree of urgency does not stand up. As my noble and learned 1273 friend Lord Elwyn-Jones said, the title of the Bill permits the introduction of clauses which not only restore, or partly restore, the contents of the previous Bill introduced in another place, but also entitle us to consider the various other matters, including those that have been made by my noble friend Lord Wedderburn.
I turn now to the omission of the disclosure items: that is, those relating to insider dealings. I believe that these could quite properly have been included in the existing Bill. Upon referring to the Committee proceedings in another place, one finds that the first three clauses involved (which were, I believe, Clauses 57, 58 and 59) were in fact assented to by the Committee without very much argument at all. Only Clauses 60 to 63 remain for consideration, and I am reluctant to feel that had a further day's time been given those clauses would not have been enacted.
There is a small political point involved here on which your Lordships may be sensitive. We know that when it comes to conduct relating to insider dealings there is a view that the City can somehow deal with such matters on its own by the application of a code of conduct that can be rigidly enforced by the powers that be within the City. That may well be so, my Lords, but this desire to have voluntary action when it comes to companies and insider dealings contrasts very sharply with the Conservative Party's opposition to the applicability of codes of conduct under voluntary action in regard to trade union legislation. In that case it much prefers to legislate, and no doubt we shall hear more about that in due course.
I do not intend to detain the House for long because so many of my views on the Bill have been stated by my noble friend Lord Wedderburn, whom I thought made a very adequate and penetrating survey of the position as we see it, which we on this side of the House therefore intend broadly to support. However, I should like to deal with one or two smaller points, one of which was raised by the noble Lord, Lord Mottistone, who thought that the penalties under Clause 18(6) of the Bill were a bit stiff. Of course, the penalties under Clause 18(6) relate to Clause 17, which, in relation to the allocation of equity securities, provides that a company shall not allot any such securities 1274on any terms to any person unless it has made an offer to each holder of relevant shares",and so on. Clause 18(6) merely says:A person who knowingly or recklessly authorises or permits the inclusion in a statement circulated under subsection (5) above of any matter which is misleading, false or deceptive in a material particular shall be liable…".The words of that clause, it seems to me, if a person falls within their ambit, in fact constitute a very serious offence. The words areknowingly or recklessly authorises or permits",and I should have thought that if a director does anything of that character, anything which falls within that definition, then the penalties (which are of course the maximum) are by no means too severe.
I now pass to Clause 34 of the Bill, which I should like the noble Viscount to elucidate. Clause 34(3) relates to the convening of an extraordinary general meeting where the capital falls below a certain level, which point has already been mentioned by my noble friend Lord Wedderburn. Subsection (3) provides:Nothing in this section shall be taken as authorising the consideration, at a meeting convened in pursuance of subsection (1) above of any matter which could not have been considered at that meeting apart from this section".I should like the noble Viscount to elucidate that if he can, because it rather seems to me, on the face of it, that the only thing that can be considered at such a meeting is what measures should be taken to deal with the situation, and that it would not be possible to discuss the reasons for the situation arising at all; in other words, it would not be permissible to hold an inquest. Of course, this may be a matter of legal gobbledygook, or whatever the term may be, but I must confess to some mystification in endeavouring to interpret it. I am a little worried about the provisions of Clause 34 as a whole. I know that Clause 34 has been inserted in the Bill to comply with Article 17 of the Second Directive.
§ Viscount TRENCHARD
My Lords, I wonder whether it would be helpful, in order to save time, to mention to the noble Lord that I understand—and I have just had it onfirmed—that Clause 34 is identical to one which was in the previous Government's Bill.
Lord BRUCE of DONINGTON
My Lords, I am grateful to the noble Viscount. 1275 The fact that it was in the previous Bill does not, I regret to say, make it any more comprehensible, and my views on it were offered in an entirely non-partisan spirit, without any desire to reflect upon Her Majesty's present Administration. I merely ask the question, and I should still like that subsection to be elucidated. The fact that there is a precedent for it is of no particular concern to me.
I am a little worried, though, about Clause 34 in its entirety. As I have said, I know it is in Article 17 of the Second Directive—a woolly EEC Directive if ever there was one, as indeed the noble Viscount will testify if he has examined it—but 1 sometimes wonder about the holding of an extraordinary meeting of a company, particularly where employees are not specifically represented, in th circumstances that are described in Clause 34. An extraordinary general meeting to advertise the woes of a company at a critical time may not invariably be the best way of improving the situation, and may in fact precipitate a worse circumstance than the circumstance which has to be disclosed. I am aware that in saying that I do not of necessity speak for the Opposition as a whole, but as a matter of practical and company experience over the past 25 years I can conceive of circumstances in which the application of this clause might possibly have ruined a company which would otherwise have recovered, and in which, in many cases, companies have indeed recovered. But it is in the EEC Directive, and we are loyal members of the EEC, so I would assume that this clause will go through without further amendment, apart of course from the possibility of my noble friend Lord Wedderburn introducing something into Clause 4 which enshrines the interests of employees.
I do not propose to go through the various other points upon which I have taken notes in the course of listening to the speeches which have been made this afternoon, because it would be repetitious for me so to do. From our standpoint, in spite of the limitations of the Bill we shall of course support it through its Second Reading in the House, and shall reserve to ourselves the right to introduce amendments on the lines that have been suggested by many of my noble friends 1276 this afternoon. However, we should like a little further information from the noble Viscount, Lord Trenchard, concerning the timing of future legislation. Are we to understand that the provisions which have been omitted from the previous Bill—provisions relating to the duties of directors, and so on, and to the penalties under the old Clause 70, to which my noble friend Lord Wedderburn referred—are to be included in the next Bill to come before your Lordships following the Fourth Directive? Are we to understand that these matters are to be dealt with promptly?
Then I should like to ask a question as to what efforts are anticipated in connection with the affairs relating to winding-up and insolvency which are at present being considered by a committee under the chairmanship of the distinguished accountant Sir Kenneth Cork. This committee has been sitting a long time, and many may think that the quicker we are able to get the report of that committee the better. I was surprised to learn that this committee was set up—and it was set up by a previous Administration, so I lay no blame on the Government—without having proper research staff available to it. Consequently, the honorary efforts which have been made by distinguished accountants and lawyers in order to investigate and bring up to date the whole question of insolvency and the winding-up of companies has proceeded, not only on an honorary basis but with the benefit of only a secretary provided by the Government. Any steps, therefore, that could be taken to provide this committee with assistance in order to enable it to arrive at its conclusions more speedily would, I am sure, be welcomed by all noble Lords. We should like to know how quickly the Government propose to produce their own conclusions, their own observations and their own White Paper on this report when it comes out. With those concluding remarks, we, too, on this side of the House commend the Bill on Second Reading.
§ 5.50 p.m.
§ Viscount TRENCHARD
My Lords, I should like to start by looking at the actual words of the Long Title of the Bill:… to amend the law relating to companies".I It does not, as I understand it, say, "To 1277 amend all the law relating to companies" —and a great deal of the law relating to companies which is outside the Companies Bill has been mentioned by various speakers. Indeed, speeches have ranged widely over all subjects that affect companies. I have to start by saying that this Bill before the House is therefore one which amends an important part, but only a part, of company law. Neither do I feel that the Government should dress themselves in sackcloth and ashes, bearing in mind the length of time we have been in office and the date at which a Companies Bill has been introduced.
The last Administration thought so highly of this subject about which we have heard so much of their views on priorities today that it took them until their last year in office to introduce a Bill. I suppose it is that their feelings are slightly hurt that it is our fault—and I have to admit to it being our fault—that it is not law. The noble and learned Lord, Lord Elwyn-Jones, talked about the great dawn of Conservative thinking in relation to company law. He himself admitted that it was not a great dawn in any event and we had a similar experience in 1973 to his own in 1948. At least this Administration has moved with alacrity to get on to the Statute Book in their first year of office a body of company law which all noble Lords have said is a major improvement.
There is a Fourth Directive of the EEC Commission and that means that there simply must be a second Bill. I hope noble Lords will note the terms which the Government authorise me to use in relation to the introduction of a second Bill in 1980 in what we believe will be the second year of our period in office. I hope that your Lordships will before the Committe Stage read the terms that I did use because they have been very deliberately and carefully chosen. I hope therefore that we shall not spend too much time discussing the reason why this Government wish to move in two stages rather than in one, but at least are moving with greater alacrity than has been the case in the past.
The fact that noble Lords have concentrated on a number of measures not included in the Bill does show that these are the ones that they want to go into in very great depth. I am not so well 1278 versed in the Committee stage proceedings in another place on the last Administration's Bill as are noble Lords opposite or noble Lords who supported me on this side, but it is my understanding, which I have had confirmed, that many of the points which have been raised by noble Lords as points they would wish to see in this first Bill were not fully agreed before, particularly as regards the best methods of achieving them without achieving other undesirable things. It is the Government's intention, therefore, to introduce a second Bill which will give a very full opportunity for noble Lords to discuss those items which are not in this Bill.
The noble and learned Lord, Lord Elwyn-Jones, asked me whether there were other differences in relation to this Bill and that of the previous Administration, particularly in relation to the EEC Directive. The answer is, very slight ones. I did raise some of them in my opening speech, but they are very small—mainly improvements in drafting and in clarity.
§ Lord ELWYN-JONES
My Lords, will the noble Viscount permit me to intervene? Does that not take some of the gilt off the gingerbread of his claim about the speed with which the Government have brought in this measure? It is really only a recap of what we did for them away back in November.
§ Viscount TRENCHARD
My Lords, I do not think so, bearing in mind the other problems that we have had to attend to in the first five weeks of our Administration. I think the record is fairly good.
I think it would be wrong at this stage for me to go through each of those points which some noble Lords opposite would like to see in this Bill but which are not there. I think it would be a waste of your Lordships' time if I were to go into the detail of those measures. I think that I am going to leave all those points quite simply with the defence that they are not fully agreed as to methods in the vast majority of cases. In the odd case, it could be argued that some points are not controversial. That is why at the end of my opening statement I said that we had deliberately drawn the limitation as close as we could to the EEC Directive and what flowed from it, in order that we could legislate in the shortest possible time.
1279 In relation to the penalties, I would mention—and I think it is Clause 54 which covers these—that the question of penalties is usually a subject for the Committee stage. The maximum penalties are not those which were mentioned in the debate. I think that the noble and learned Lord, Lord Elwyn-Jones, raised the question of the proposed standing advisory committee on company law and asked me particularly whether I could say something on this matter. The Government agree that the means by which they obtain advice on proposals for reform of company law and on the EEC harmonisation programme needs to he improved. We also accept that the bringing together of a number of representatives of the various professions and other bodies affected by company law would be a useful way of promoting the improvement we seek. The Department of Trade are therefore considering whether there is a way in which they can obtain the undoubted benefit of advice on company law from a representative group without setting up yet another advisory committee on a permanent basis. It is intended to make a further announcement about this before the Summer Recess. That is, I am afraid, as far as I can go at this stage.
The noble Lord, Lord Wedderburn of Charlton, ranged very widely over subjects which affect companies and, indeed, all of us in this country. It would be wrong of me to chase them to any great degree; I believe that they are outside the context of what we should be discussing. He mentioned the statistics of the rapid concentration of capital and the fact of 75 per cent. of investment being found from internal funds. There are many studies and discussions on these subjects. The Administration certainly believes that in the conditions it has started to create and intends to continue to create, with some growth of new business, we may move the concentration of capital in the opposite direction.
Furthermore, on the question of internal funds, I think I am right in saying—and I say this from my industrial background knowledge—that this situation has existed for a very long time not only in this but in many other countries. The vast majority at least of new investment has to be found from company funds, which is why it is so 1280 difficult to have adequate investment when profits are so appallingly low in real terms as they are now.
The noble Lord raised four areas—or I wrote that I noted he had raised four areas and then I found I had written down about eight. Again, it would be of no service to the House for me to follow each and every one of the items he thought should be in the Bill. We do not deny the importance of loans and contracts so far as directors are concerned, nor of insider deals. The method of controlling them is still being debated in many learned journals and important places. In our view, more thought and consultation on many of these measures is necessary. It is wrong to say that the present Government are fully in agreement or even that the Opposition—as we were at the time of the last Bill—were fully in agreement with many of these proposals.
Clause 34 covers the situation where there has been a great fall in the value of a company and a special shareholders' meeting is held to hear about it: this matter was raised by the noble Lord, Lord Bruce. Although this is clearly required by the EEC Directive, the argument that it may in some cases do the wrong thing is one that the Select Committee itself mentioned in the Twenty-Fourth Report. But it really can be argued both ways. If that argument is taken to mean that major falls in value which will affect shareholders can be kept quiet from them, the evil of that has to be contrasted with the danger of upsetting the applecart at a moment when in some case recoverys might be about to start.
The next point I should like to raise is the employees' interest. There is again no doubt of the importance of employees' interests. But I wonder whether this can be considered as one of those vital, urgent matters which must go into the first Bill when, if I may say so as an industrialist— and as noble Lords have already said— nobody wishes to avoid taking employees' interests into account or indeed can avoid taking them fully into account in this day and age.
We move from there to the rights of shareholders and to the contrast with the political levy where trade unionists have the right to contract out of the political levy but shareholders have apparently no 1281 such right. I wonder whether the noble Lord was really worried about the rights of shareholders or whether he was more worried about the political considerations at this point. There are differences, my Lords. Not only do all company considerations have to be declared openly, so that shareholders can and do raise such matters, but the individual shareholder is in an entirely free position as to where he places his investment. The individual employee in much of the trade union world is in no such a position. One could of course say that he could change his job but, in present conditions and with the levels of unemployment we have now reached, that is not a very practical suggestion. So the average employee is tied to his job. He can contract out of the political levy. I should be interested whether all such employees actually know that they can contract out of the political levy. As my noble friend Lord Harmar-Nicholls has already said, in effect, a very great number just pay it automatically. In the case of shareholders, they can raise the matter. It has to be declared. They can sell their shares individually and invest in another company.
So far as the political result is concerned, we know that a very large proportion of the funds of the party opposite are provided by the trade union movement, whereas—notwithstanding the figures which I shall read in Hansard and did not fully follow or at this stage exactly accept—company contributions to the Conservative Party are in the minority.
As regards codification, the noble Lord is far more knowledgeable than I am in this area; but he has used words before which indicate his acceptance of the daunting task that codification really involves. This is perhaps another occasion for me to point out that there is going to be more companies' legislation—there must be—as a result of the EEC Fourth Directive. Codification would seem to me logically to follow behind that.
Very quickly I should like to say to my noble friend Lord Mottistone that I have heard the point he mentioned in relation to the six-month period for the change of stationery and other notices. I will discuss this with my colleagues, particularly as he indicated so clearly 1282 that there is perhaps a difference between notepaper on the one hand and, on the other hand, embossed metal, durable milk bottle tops or other durable notices which are displayed in various places. I should like to take advice on that point.
I am advised that the noble Lord, Lord Bruce, is correct in saying that, so far as we know, only Germany has legislated at this moment. We understand that others are getting fairly close and we are overdue. We believe that the policy is to set a positive and good example in Europe so that by doing so we shall get more co-operation as regards the interests of this country. In any event, as I have said before, we believe that this enormous body of law, covering many important things which are not included in the Bill,is best dealt with in two parts. This will allow full and adequate consideration of method on the important points which are not included in this Bill.
I am advised that Clause 57, which he mentioned, was bitterly disputed in Committee in the other place: it refers to insider deals. On the question of winding-up and insolvency, we hope there will be a report from the body—whose name I have temporarily forgotten—early next year.
I would end by saying that we do not feel that any matters have been raised by noble Lords which actually bear on the legislation before your Lordships. All, or very nearly all, bore on legislation which is not before your Lordships. I hope this means that the legislation now before us is indeed, as we believe it to be, largely non-controversial and beneficial. We trust, therefore, with that in mind, that your Lordships will give the Bill a fair wind during future stages.
§ Lord MISHCON
My Lords, before the noble Viscount sits down, I wonder whether he would be good enough to deal with the question I raised: do the Government appreciate the grave concern in the City and elsewhere as the result of recent investigations into the affairs of certain companies, including those of Peachey, which lie mentioned? Do the Government therefore intend to treat the second Bill that the noble Viscount has mentioned as one of extreme urgency?—since many of us feel it is essential (and here I include people in the City) that the 1283 things which have emerged from the Inspector's report should be dealt with by legislation as soon as possible.
§ Viscount TRENCHARD
My Lords, I thank the noble Lord for reminding me of that. I certainly should have included in this winding-up a statement of complete agreement with the sentiment of extreme concern over what has been revealed in the Peachey case. So, yes, and furthermore, yes, we believe it to be urgent; we also believe that getting proper legislation in this kind of area is more complicated than has been suggested by noble Lords opposite. It needs a great deal of further consultation, including consultation with the City interests which, as the noble Lord mentioned, are very much concerned about this point.
§ Lord WEDDERBURN of CHARLTON
My Lords, before the noble Viscount sits down, may I raise one small point: being heartened by his silence on at least one matter—that is, the introduction of Clause 65—can he say whether the Government would at least consider not necessarily opposing a move in Committee to reintroduce what is in fact a non-controversial matter, namely, the protection of minority shareholders from oppression? At least I hope they will not shut the door upon that going into this Bill.
§ Viscount TRENCHARD
My Lords, I note what the noble Lord says. I believe it is going to he extremely difficult to draw the demarcation line, even for one small, apparently innocent reason, differently from the way we have drawn it—because I do not believe, if once one starts to argue about Clause 65, that it is not possible to start arguing about a very great many more. Nevertheless, I have listened to what the noble Lord said in relation to Clause 65 and I shall discuss it, but with absolutely no commitment and without holding out much hope.
§ On Question, Bill read 2a, and committed to a Committee of the Whole House.