Order for Second Reading read.
in moving the Second Reading said the Bill was one which had come down from the other House. It was based on the recommendation of a Committee appointed by Mr. Gerald Balfour when President of the Board of Trade, and it embodied practically all the recommendations made by that Committee. The principles underlying the Bill were very fully explained in the Memorandum attached to it, and therefore he did not propose to go through the various propositions. The Bill had been thoroughly canvassed and discussed in financial circles during the last few weeks and months, and it was quite unnecessary to enter into explanations of the various clauses. He thought he had better say at the very outset in reference to one or two provisions in regard to which there had been some controversy that it was not-proposed to proceed with those. Ore was the provision with regard to the filing of private companies. Considerable objection had been taken to that, and the Government did not propose to proceed with it. Some criticism had been offered with reference to the provision dealing with those who now audited accounts of companies who were not accountants, but were appointed rather as experts is such matters. In the circumstances the Government were prepared to drop that provision. These were the only two provisions to which he had heard any objection taken, and as the Government proposed to drop them, he assumed that the Bill was now in the nature of an unopposed measure. It had been fully discussed in the other House, and he asked that House now to give it a Second Reading.
Motion made, and Question proposed, "That the Bill be now read a second time."—( Mr. Lloyd-George.)
said the importance of the Bill would be denied by no one. It affected the property of tens of thousands of people in this country and it affected the investments which tens of thousands of other people in the future would make. He believed the amount now invested in joint stock companies exceeded that of all other investments in the country, and it was increasing far faster than any other form of investment. The object of the Bill was to remedy certain difficulties which had been found under the Bill of 1900 and to improve on that Bill. That Bill was intended to protect the investors. In some ways it had prejudiced their interests. Provisions were embodied that prospectuses of companies should give fuller information than they did up to that time, that more material points should be disclosed. The result of making that so stringent was that instead of the partial protection which even these prospectuses gave, they were left in many cases without any prospectuses or facts at all. Since the Act of 1900 was understood it had become a very common practice to issue no prospectuses and not to advertise the companies at all. Whatever protection had existed before was consequently lost by the attempt of the Act of 1900 to give greater protection. That showed how extremely necessary it was to discuss the matter thoroughly from the very bottom. They must take care that in the attempt to give too great safety they did not give any protection at all. He would point out one piece of evidence which was pretty conclusive as to that. There had always been a difficulty, that intermediate contracts were not disclosed and that contracts did not go back far enough to show the large profits that were being made by some person who did not appear in the prospectus at all. The attempt to have such contracts inserted so that people applying for shares might know exactly where the money went, had simply resulted in lawyers advising that every contract should henceforth be put into the prospectus. The consequence was that there was such a multitudinous lot of agreements in small print inserted that they might just as well not be there at all. It was perfectly possible for the ordinary investor to go through those contracts and inspect them and to come away no wiser. He was confident that the great thing in regard to a prospectus was, not that it should get everything into it, but that it should be correct and should as shortly as possible express truly the state of the business. If they tried to cover such an extraordinary amount of ground as was done by the Act of 1900 they rendered the whole thing nugatory. The object of the new Bill was to force the prospectus to be correct or if no prospectus was issued the company would have to register a statement of its affairs. The statement of the company must consist of the precise points of interest which were required to be set out in a prospectus. In the schedule a draft statement of what was expected was set out, and he believed that in that statement they were asking a great deal too much, and the result would be that they would get nothing at all, or that they would get such an amount of information that they would be confused by it, and it would be practically of no value. He quite agreed that a great deal of the schedule was good, and might be of great advantage, but they were trying to get too much into it, just as they tried to get too much into a prospectus and consequently spoilt it. If they read a prospectus now they found it perfectly impossible to find out what the business was because the ordinary lay mind could make very little out of it. They could not use their intelligence at all. That was the first point that would want careful consideration and possibly some amendment. The next point was with regard to the issue of shares at a discount. The importance of that could not be overrated. He believed it was legal in all other countries to issue shares at a discount. In the colonies they did so, and in America it was a common practice. In America they sold dollar shares, at ten cents., and as a company got on they sold them perhaps at twenty-five cents. It was frequently quoted that companies were selling their dollar shares at twenty-five cents. In England that was impossible. He did not know whether there was any Act of Parliament prohibiting it but the decision of the Courts had been to the effect that shares must not be issued at a discount, and many companies had suffered grievously in consequence of that obligation. The ingenuity of the legal mind had been sufficient to get over the difficulty, and it had been got over. It had not been possible without a little help from the authorities, who received very large sums on the registration of those companies which were reconstructed. He was quite sure, how ever, that the Government and officials would not really desire a cumbrous method, such as reconstruction of companies in the present way, to be adopted, but would much rather that everything was done honestly. Pound shares in the old company were at present exchanged for £1 shares in a new company with 15s. or whatever the amount might be paid up, leaving 5s. or whatever the amount might be, to be assessed on the new shares. Under the new Act it would be possible to issue further shares at 5s. While on that point he desired to point out that it was perfectly clear that shares would be issued at a very great discount. Companies whose shares had fallen heavily would resort to that method, and they would have companies which had perfectly good businesses, which required further capital to pull them round, and ensure a very successful future, availing themselves of it, and issuing their shares at a small price. It would require 3 great deal of care in carrying out. There was a stipulation that it was to be done when a company had continuously carried on a business for more than two years. He thought some alteration might be necessary there. Clause 8 could hardly stand, for it provided for the repayment out of profits of the whole of the money which had been lost by companies in issuing shares at a discount. He did not think that, however prosperous a company might be, it could reasonably be expected out of its profits to make up the 15s. which had been lost, and to bring those shares up to par. He thought some change would be necessary there. Another important point was the payment of interest out of capital. They had of course become accustomed to that in railway companies, etc., but in the case of ordinary companies, such as gold mines, or industrial companies, but more particularly gold mines and exploring companies, it would be very difficult to draw the line. Those companies were to pay interest out of capital during construction, but a successful gold mine was always under construction, and it was impossible to say when it had finished its work. All progressive companies were the same. A great company like Rio Tinto could never say it had closed its capital account. It might be possible to introduce some words to make that provision with regard to payment of interest out of capital feasible. It was certainly a point they must consider. There was a safeguard in the fact that the Board of Trade had to give their previous sanction. He thought there was a doubt whether they would give it in the case of gold mines. The clause applied rather to a constructive work like a railway or a canal than to a gold mine. It was provided that if those shares were to be issued and to have the benefit of 4 per cent. interest during construction that that fact must be set out in the prospectus, otherwise the company would not get the benefit of placing its capital in that way. As they had in addition to get the previous sanction of the Board of Trade many companies could not make use of the clause. The most successful companies were frequently those whose shares were the most rapidly issued. When the time was ripe, and the market in a proper condition, there must be no delay whatever if the work was to be successfully done. That being so it would be difficult to get the Board of Trade sanction. The registration of foreign companies over here was provided for in the Bill. It had always been a matter of surprise to him that we had never previously insisted on their registration. The very first thing we had to do if we wanted to do business abroad was to get the sanction of the country with which we wanted to do business, but we had let companies from abroad open their offices here without paying fees or duties of any kind, and without any provision of any kind for control over them. He thought from the wording of the clause that it really pointed to companies in our own Colonies, such as companies in South Africa. He did not think it was meant to apply to small French or German companies which had agencies or branches in this country. There might be a difficulty in regard to that class. The large companies, however which really did business in this country ought to be registered, ought to have an authorised agent who could be sued, and ought to put on their note paper that they were registered in Paris or elsewhere. That was all he would trouble the House with at that late hour of the night. While entirely agreeing that the Act of 1900 did require amendment, and very considerable amendment, he thought it was also clear that they would have to go very warily and take the greatest care over the two or three points which he had brought before the House. He had very little doubt that if they did take care they might make an Act which in the future would be of very great benefit to investors. But when all was done for them the investors must rely on themselves.
said he only rose to speak on the Second Reading of this measure because he thought it was necessary after the observation of the President of the Board of Trade, to the effect that it was practically an unopposed Bill, to say that, while he fervently hoped it might prove so, it was within his knowledge that a body of lawyers of considerable eminence in this country had very serious points to raise which they wished to be considered. He did not think it was for a moment an unopposed Bill in the sense that it could be disposed of in a very short time merely by way of alteration. In the first place—and this was really a Second Beading principle—the first clause of the Bill went on lines which, he was sorry to say, he had regretted for a great number of years, and which were initiated by the Act of 1867. It tried to prescribe what people were to say in a prospectus in order to be honest. They were to give the dates of and parties to every material contract, but as long as these were in the prospectus they might make it as obscure as they liked. They might, in fact, bury practically all the principal points which they ought to have revealed. The Bill was undoubtedly needed to supplement the shortcomings and correct the blunders of previous legislation, but it was to be regretted that such legislation was ever initiated in the way it was. There was another point as to the issue of shares at a discount, regarding which he would like I to say a few words, and which required a good deal more attention than the last speaker gave to it. He defied anyone on reading the clause to say what would be the effect if the provision contained in it was not fulfilled. Supposing the provision was not complied with, who could say from the clause whether the issue was void or not, whether the share was allotted at all, or whether the man held a share but, had not got the benefit of the discount? Another point, and a more serious one, was that under Clause 11 it was provided that all mortgages and charges should be void unless within twenty-one days certain particulars were furnished. People who had subscribed their money would not, however, know whether this had been done or not. It appeared very strange that such a clause should ever have passed the other House, and in any event it certainly should not pass in the House of Commons. There were other things in the Bill which raised questions of unnecessary interference with the ordinary course of business, all of which, he thought, might be properly dealt with by way of Amendment in Committee. He hoped with the good will of the Board of Trade and by confining themselves to what was really essential there might be no difficulty in carrying out the wishes of a large body of people in this matter.
said the interest in joint stock companies was enormous, no less than £2,000,000,000 being invested in them. Legislation which affected them was, therefore, of very great importance. He was very much surprised at what had fallen from the hon. Member who had just sat down and who looked with very great sympathy on the imposition of restrictions upon the promotion and management of joint stock companies. Personally, he did not believe that by these precautions they ever did what they desired, for by them they merely hit the honest fool, whilst they missed the clever rogue. The mesh of their net had to be so wide in order to catch the clever rogue, that they would really destroy enterprise altogether. He, therefore, looked with suspicion upon any of these precautions, and he thought they would do better if they left the companies alone altogether and allowed the investors to look after themselves. If they suffered, it would be their own fault. The moment they legislated by imposing restrictions, the foolish investor, in whose interest the precautions were taken, imagined that the legislation had protected him. As a matter of fact, it did not. Some ingenious swindler would find his way round the law, and the last state of the investor would be worse than the first. It was not only that, but there was very little doubt that some of the precautions produced a very serious effect indeed upon company enterprise in the country. The Committee to which the President of the Board of Trade had referred were very much struck by the decrease in joint stock company business in the country. They pointed out that since 1896 it had fallen off very considerably. After the passing of the Act of 1900 the decrease was exceedingly rapid and severe. The number of companies went down from 4,500 to 3,900, and the amount of money subscribed fell from £206,000,000 to £137,000,000. The nominal amount of capital of each company had also gone steadily down since 1896, and it was now very much less than half what it was in that year. He saw that among the causes assigned by the Committee for this was the following: They said that the diminution had been caused in part by the Companies Act of 1900, which introduced very stringent precautions and made the issue of prospectuses more difficult, and brought in new and heavy liabilities upon promoters and directors. He called attention to this fact, and the materiality of it in relation to this Bill was that they called especial attention to the fact that a large number and an increasing number of companies issued no prospectuses at all. The majority were of opinion that such a statement should be made, but they were not very sanguine about it. That was only the extent to which they recommended it, and he confessed that the reasons they gave did not appear to him to be very satisfactory. After all, if a company came before the country without a prospectus it made no statement which could deceive the public. It was for the public then to inquire into the prospects of the company, and he, personally, did not see what harm would be done. It would be for the public to make what inquiries they pleased. The moment they required a statement to be issued, he agreed that it must not only be true in the sense of not stating anything which was false, but it must be complete. The Government proposed by the Bill to require a statement which he agreed would give some information, but it evidently would not give that full information which might be desirable, and without which the statement in the hands of an ingenious person would probably be made to give very little information at all of any value to the investor. It appeared to him that such a statement would be a trap to the investor. He did not see why the Government had inserted the first three clauses in the Bill, and he trusted that when they got into Committee the Government would drop them. He very earnestly pressed upon the Government's attention the consideration whether it was really in the interests of the public—taking the public in its widest sense, not only the investors but all the people in the country who depended upon the prosperity of this great branch of enterprise in the country—and whether it was desirable to impose these restrictions on the formation of companies. Would it not be better to leave the thing alone and allow the public to find out themselves what was really the law and to take their own precautions accordingly?
protested against the Government bringing on at that late period of the session a Bill of such very great importance to the commercial community. It was not, as had been suggested, an entirely uncontroversial Bill, but there were points in it—matters which must be discussed and debated—which would meet with considerable opposition from more quarters than one. He did not think it was quite fair to the business community that matters of this importance should be brought on at a time when discussion could not be really adequate for the purpose. There was one other matter to which he wished to refer. He wanted to know exactly where the House was with regard to certain clauses of the Bill. He understood from the right hon. Gentleman that two of the clauses at least would be abandoned. He supposed that one was Clause 21.
The latter part of Sub-section (1.)
Am I to understand that apart only of Subsection (1) of Clause 21 is to be abandoned? I think that Subsection (4) of that clause ought also to be left out. I understand that Clause 23 will be dropped.
In so far as it refers to private companies.
thought that objection would be taken to the whole of the clause when the proper time came. He did not think that, even in the case of public companies, it should be the duty of a company to file a statement of all its accounts, and give the public access to them. Whether in the case of public companies or of private companies, those accounts ought to be confined to the shareholders and not thrown open to the gaze of everybody. Apart from these matters he also took strong objection to other clauses. There was for instance Clause 11, which required the registration of mortgages. He thought that clause objectionable so far as it applied to mortgages of land and possibly to mortgages of book debts. If the mortgage was not registered within a certain time, it was, according to the Bill, to become void. There ought to be introduced into the clause a provision whereby, if through inadvertence registration did not take place, the time might be extended. That had been found a useful provision in the Acts requiring registration of debentures, in connection with which it had been often employed, and it ought to be inserted in Clause 11. He was taking the matter very shortly because they were only on the Second Reading. Clause 19, which gave not only to creditors but to the public the right to inspect registered mortgages, he thought required consideration. Again in regard to Clause 26, which said that fourteen days notice must be given of all meetings, he thought that was wholly unworkable. In the case of many companies it was necessary that a meeting should be called for business purposes at very much less notice than fourteen days. That was another clause that required consideration. He was not going into other details that night, but he wanted to look at the matter from a business point of view, and from that point of view the Bill required a great deal of consideration. He hoped that both in Committee and on Report they would have a full opportunity of expressing their views.
said he rose for the purpose of dealing with one or two points only. He associated himself entirely with the view that everything for the protection of shareholders ought to be carefully scrutinised. All this vast machinery of registration and prospectuses and the inclusion of certain things in prospectuses was largely a snare. He-would only say a few words about the protection of creditors. He thought the Bill went too far in the direction of protecting creditors ft the expense of shareholders. The clause regarding mortgages, which had just been referred to, was for the protection of creditors. As to that, he did not quite see that a creditor ought to have any more rights against a company than he had against an individual, and an individual was not required to disclose his mortgages. He did not see any reason for the provision. Then there was the question of the balance sheet. It certainly seemed rather hard if all the people who cared to pay 1s. could come and see the balance sheet. It was rather hard on the company, for a balance sheet disclosed facts to rival traders that ought not to be known. It would have this dangerous effect, that it would induce a company to keep as much out of the balance sheet as it possibly could. Surely the shareholder was the only person who was really entitled to see the balance sheet. It was not a matter which the creditor had a right to see. There were certain clauses that increased the flexibility of a company, and these he supported most heartily. The provision enabling a company to issue shares at a discount was in accordance with present conditions and ought to be accepted. Shares were as a matter of fact issued at present at a discount, and it was far bolder and wiser to recognise that and to allow the company to issue shares in that way. The same thing applied to payment of interest out of capital. That was allowed in the case of statutory undertakings, and on the whole he thought it was a fair arrangement. Under the safeguarding in the Bill, the sanction of the Board of Trade and so on, he did not think it would work any harm. It also increased the flexibility of companies and cut away some of the stiffness and rigidity which certainly now increased expense and decreased efficiency. Now he came to the main point. The true ground of company reform seemed to him the increasing of the responsibility of directors. The only real safeguard was efficient and honest men to manage the company. At present the Courts had taken a very narrow view of the responsibilities of directors. In fact, if a director attended meetings and drew his salary, he had fulfilled his whole duty to the company. It ought to be made a much more responsible thing for a man to undertake a directorship. At present it was regarded lightly. He thought it was too badly paid as a rule, and men engaged in far too many undertakings. A certain decision of the Court in his judgment had had a most deleterious effect in this respect. The impression had been given that the real people who ran the company were not the directors, but the business managers. He was putting the matter shortly. The Bill was one in which he was deeply interested, and he hoped in Committee there would be ample time for discussing it.
said he would not discuss the details as he should wish, but he thought the right hon. Gentleman must see himself by now, that in dealing with such a Bill involving important legal and business questions, it was somewhat and that they should have to discuss it at that time of night, and that it should go to Committee at a time when the House was sitting late every night, as it did during August. Moreover, it was useless to think that the Committee could get from business or legal people in the month of August that information which was essential to a proper understanding of the details of the Bill. Having said that, he did not propose to detain the House, but he merely asked whether it was fair in the best interests of the Bill that it should be pressed through Committee and Report in the month of August.
Question put, and agreed to.
Bill committed to a Standing Committee.