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Companies Act 2006 (Commencement No. 3, Consequential Amendments, Transitional Provisions and Savings) Order 2007

Volume 694: debated on Tuesday 17 July 2007

rose to move, That the Grand Committee do report to the House that it has considered the Companies Act 2006 (Commencement No. 3, Consequential Amendments, Transitional Provisions and Savings) Order 2007.

The noble Lord said: The Companies Act 2006 will bring major benefits to business by modernising and simplifying company law. This commencement order represents an important milestone in its implementation. It will commence some of the key provisions of the Act, including those relating to part of the statutory statement of directors’ general duties, derivative claims and proceedings, the business review, and resolutions and meetings.

Provisions being commenced by the order will play a major part in meeting two of our key objectives for the Act: ensuring better regulation and a “think small first” approach, and enhancing shareholder engagement and a long-term investment culture.

Let me first look at our aim of better regulation. The provisions in Part 13 on resolutions and meetings will deliver some of the most important benefits for business in the Act. In particular, they will simplify decision-making for private companies by making it easier for decisions to be taken by written resolution and by making annual general meetings opt-in rather than opt-out through the abolition of statutory AGMs for private companies.

Other parts being commenced on 1 October 2007 will deliver deregulatory benefits for business. It will, for example, be possible for holding companies to seek authorisation of political donations and expenditure in respect of the holding company and one or more subsidiaries through a single approval resolution. Companies will be permitted to make loans to directors, subject to member authorisation.

The other objective at the heart of the provisions to be commenced by the order relates to effective shareholder participation and a long-term investment culture. We believe that it is vital that there is a good understanding and effective engagement between those who own companies and those who run them on their behalf. The Act will therefore provide better guidance for directors on their duties and responsibilities and make it easier for shareholders, including investors who hold indirectly through nominees, to exercise their rights of ownership. It is essential for this country’s long-term prosperity that company decisions are based on the longer-term view and not only the medium term.

The length and complexity of the 2006 Act and its phased implementation have resulted in an order which is itself long and complex. I should make it clear that the Government decided to implement the Act in stages so that companies could take advantage of some of the deregulatory benefits as soon as possible. I apologise to noble Lords, especially members of the Joint Committee on Statutory Instruments, that it was necessary to take up and re-lay the order. In view of its complexity, it may help if I briefly outline its structure.

Schedule 1 contains transitional adaptations of the provisions of the Companies Act 2006 brought into force by this order, which are needed because the order brings only some of the provisions of the Act into force. Schedule 2 brings some of the repeals in the Act into force. Schedule 3 makes traditional provisions and savings. Schedules 4 and 5 make consequential amendments and repeals. The transitional provisions are essential to ensure that the Act operates in a reasonable way for existing companies and for ongoing activities or arrangements in which they might be involved around the time of commencement.

One of the key areas of interest in respect of transitionals has been that relating to derivative claims and proceedings in Part 11 of the 2006 Act. These are claims and proceedings brought by shareholders of a company, on behalf of the company, against its directors. Under the transitional provisions, the new derivative procedures must be used for all claims started on or after 1 October 2007, but the courts must ensure that the outcome of any claim based on acts or omissions by a director before 1 October 2007 will be what it would have been under the old common law that applied at the time.

The Companies Act 2006 is, by any standards, major legislation of great importance to corporate life in this country. The order will, as I have said, deliver some of the key benefits introduced by the Act. I beg to move.

Moved, That the Grand Committee do report to the House that it has considered the Companies Act 2006 (Commencement No. 3, Consequential Amendments, Transitional Provisions and Savings) Order 2007. 23rd report from the Statutory Instruments Committee.—(Lord Evans of Temple Guiting.)

I thank the Minister for introducing the order. I declare interests as a shareholder and a director of companies.

While it is not controversial, the order is complicated, as the Minister said, and I have some concerns about the ability of lay people who run companies to interpret it without expensive legal advice. I suspect that the problem has been exacerbated by the Government’s decision to activate the Act in stages, some but not all of which is due to causes outside their control. The consequence is a very complicated order. With the benefit of hindsight, would the Minister ideally have done it like this? I ask this in the hope that he can use the experience from the No. 3 order to the benefit of everyone when bringing forward the No. 4 order. He might also let us know when that one is coming.

It is perhaps unfortunate that the Minister, the noble Lord, Lord Jones of Birmingham, is not here today to speak to the order. I think I am right in saying that the position of the CBI when he was its director-general—particularly, for example, on Section 172, which deals with the duty of directors to promote the success of the company—was directly contrary to that of the Government. Many noble Lords would benefit from his explanation of how he has reconciled his personal position on this point.

Although I do not object to the order, which in many ways is a good piece of work, it is worth dwelling on one or two other points it deals with, resulting from an enormous Act introduced by a Government who, I observe, claim to be in favour of deregulation. I am talking, for instance, of Section 261, relating to derivative claims—or class actions, as they are called in the United States. The Minister referred to that. Our principal concern was that this section might be used by malcontents to obtain publicity for their causes which did not genuinely have anything to do with a particular company.

An example might be where a group of activists pursued a company’s directors under Section 172(1)(d) when the company was operating perfectly legitimately and in good faith in the Amazon basin, or some such place, on the basis that it was possible to imply that its actions somehow had an impact on the habitat of the aboriginals. During the progress of the Bill, the Government showed some worrying innocence about how sophisticated groups of campaigners used legislation like this, for instance, in the United States. It was only after sustained pressure from the Conservative and Liberal Democrat parties that the Government accepted the introduction of some safeguards into the Act.

Nevertheless, it must be more than coincidence that the major US law firm Cohen, Milstein, Hausfeld and Toll, which specialises in class actions, has recently set up a London office, publicly stating that it is lining up huge British-based class-action lawsuits. It would be helpful to hear from the Minister what action the Government intend to take if there is a flood of derivative claims, which could threaten Britain’s attractiveness as a place to do business.

I have a question relating to investigations under Section 1035. What information gateways exist to permit information gathered in the course of an investigator’s work to be passed on to other government departments and elsewhere? This section is not as clear as Section 948, which deals with the analogous point regarding investigations by the Takeover Panel, under which it became clear during the passage of the Bill that information might be—and, apparently, is—passed, for example, to takeover authorities in other EU countries where privacy standards are noticeably slacker than here. Our concerns focus on commercially sensitive information that companies legitimately conceal from their competitors, which from time to time comes into the possession of investigators. Is there a risk that such information might, for example, find its way into the hands of overseas authorities?

My only other question is rather technical, for which I apologise. Am I right in thinking that, while Section 116(4), dealing with transitional arrangements relating to disclosures of the register of a company’s members, is activated under the order, Section 811(4), which deals with the almost exactly analogous provisions relating to disclosures of the register of interests, is not? I may be wrong; if so, I apologise. If not, should not the two sections have been synchronised, and is there a genuine reason for this difference?

Having said all that, the Companies Act has detained your Lordships quite long enough already, and despite the fact that not all the concerns expressed from these Benches have been wholly satisfied, I do not propose to detain the Committee further today.

I thank the Minister for his explanation of this order. I was not involved in the Companies Bill as it passed through the House and, therefore, do not have the background that some other noble Lords here have. I know that it was a long process involving a great deal of time and knowledge. Even this order is 52 pages long and, as the Minister said, is rather complicated and includes important matters such as directors’ duties, annual general meetings, pre-emption rights and even political donations.

I note that the order requires a number of transitional adaptations. It seems unfortunate how the transitional arrangements for the implementation in stages of the major, complex changes in the Companies Act have worked out in practice for real businesses and business people, particularly directors, who wish to understand what is going on and how and when the provisions will apply. I would be interested to hear from the Minister how the new department is communicating the staged application of these very detailed regulations to the business community. How are otherwise very busy company secretaries, particularly in medium-size private businesses, to be kept in touch with these complex changes?

As the noble Lord, Lord De Mauley, asked, how many more implementing orders are there likely to be, and when will they be made? Given that the business community has in many ways already adjusted to, and is ready for, the changes in the Companies Act, perhaps there is a need to get on with implementing it as a whole rather than this awkward, complicated and many-phased approach.

I am grateful to the two noble Lords for their questions, which I shall attempt to answer. I was interested by the opening remarks of the noble Lord, Lord De Mauley, about how lay people running companies will understand these provisions. The noble Lord, Lord Teverson, said that it was unfair that this was how they were going to be told what is happening. Companies are run by professional people who have professional advisers, whether they are lawyers or accountants. We had lengthy discussions on the Companies Bill and, with the other place, produced a major Act that was welcomed by the business community.

I was asked about the target date for implementation. It is our intention to commence all parts of the Act by October 2008. Both noble Lords asked why the Act was introduced in stages rather than in one fell swoop. The commencement timetable seeks to strike a balance between early introductions of benefits for business, such as those on resolutions and meetings, and the need for companies, their legal advisers, auditors and accountants to familiarise themselves with its provisions and make proper preparation for full implementation. We also wish to ensure that we implement EU company law requirements falling due during the implementation period, while implementing the Act in a way which minimises the number of changes for business.

I was asked when the department will lay the commencement orders for April 2008 and October 2008. We aim to make all secondary legislation, including commencement orders, or lay it in draft if parliamentary approval is required, by the end of this year.

The noble Lord, Lord De Mauley, raised a number of interesting questions on derivative claims. Derivative claims are brought by a member or shareholders against a director on behalf of the company. If the action is successful, damages are paid to the company, not the individual member or members who brought the action. They are therefore not equivalent to an American class action.

I was asked whether, if we put derivative action on a statutory footing, it would lead to more claims against directors. It is important that there is greater clarity about how a shareholder may bring a derivative action, but we do not believe that this will lead to a significant increase in the number of actions brought. Shareholders will still want to consider very carefully the case for bringing such actions.

The noble Lord, Lord De Mauley, argued that derivative claims might be used by malcontents. This risk is anticipated by Sections 262 to 264 by requiring the permission of the court for a derivative action. Permission must be refused if a person acting in the interests of promoting the success of the company would not continue the claim.

A very interesting point was raised on investigations, but the answer is long and complicated and we will have to write to noble Lords on that. We will also put a copy in the Library.

I was asked why we have commenced only Sections 116 to 119 and not the rest of Part 8. We have been asked to implement as soon as possible the safeguards for companies’ members which these sections provide. In so far as the remainder of this part involves changes to the law, we consider that those affected should have more time to adapt their procedures.

Why is Section 811(4) not being commenced yet? The rest of Section 811 was commenced in January this year; subsection (4), however, must await the commencement of other provisions relating to the inspection of information held by companies, which will be covered by the fourth commencement order we will table.

I hope that I have answered all noble Lords’ questions.

On Question, Motion agreed to.