Small Business, Enterprise and Employment Bill

Lord Leigh of Hurley Excerpts

Monday 19th January 2015 Grand Committee

[Lord Phillips of Sudbury]

My Lords, I reiterate what the noble Lord, Lord Mitchell, has said. I spent the best part of my very long legal career acting for small businesses and start-ups, and nobody could be more in favour of them from virtually every point of view. However, we absolutely cannot leave a gap through which coaches and horses will ride with impunity. I am sure that the noble Lord, Lord Flight, does not need reminding of the fact that shell companies are a vehicle of choice for huge fraud. It is reckoned now internationally that fraud amounts to £27 trillion to £35 trillion, while our own fraud figures are rising at a startling rate. The amount of tax evasion—I shall not use the word “avoidance”, because it is discredited—is staggering and rising exponentially. The principal vehicle by which fraud, evasion, irresponsibility and immorality are effected in our country is the shell company. I am sure that I do not need to tell your Lordships that Barclays, I think it was the year before last, paid some derisory proportion of tax on its profits by using over 100 shell companies, in a huge chain, switching through virtually every tax haven on the globe.

If there is one thing that we really must do, and which I believe everybody in this House is determined to try to do, it is to prevent the evasion of the intention of us as legislators over a whole raft of measures—particularly tax but not by any means confined to tax. At present, because of such companies largely using the considerable wits of thousands of lawyers and accountants in the City, with the aid of the tax havens throughout the globe that sit with open mouths looking for funds to pass through them, we are in a parlous state. The highly beneficent intention of this legislation is to do something about that, and I hope that we will not be engaged in yet another legislative self-delusion, of which I have sat through so many. I hope that the noble Lord, Lord Flight, does not misunderstand me—I totally go with his basic proposition—but we cannot leave this Bill in a state that facilitates the very thing that all of us are determined to try to deal with.

Even if we got the legislation right, for us to rely on the proper implementation of the law that leaves this place would be another self-delusion. Our implementation agencies are so terribly underresourced that it is not David and Goliath in this country—it is so often David without his sling and Goliath. To my mind that means that, when we are in doubt, we should screw the template tighter to the intention that we have for this legislation. I am afraid that that leads me to be unhappy with the amendment.

[Lord Leigh of Hurley (Con)]

My Lords, I draw your Lordships’ attention to my entry in the register of interests, which includes directorship and ownership of a number of small companies within the thresholds.

I agree with the noble Lord, Lord Phillips, that the measure’s intention is clear and its purpose very noble and needed. However, like the noble Lord, Lord Mitchell, I am keen to ensure that bureaucracy on small companies and SMEs is minimised. The case of a national bank, which I shall not append by name because I am sure that there are many others, using lots of subsidiary companies to avoid tax, is not caught here, because a subsidiary company would not be a small company.

My concern is the small family company where, perhaps by the second or third generation, there are multifarious ownerships, possibly through a trust or directly. Indeed, the Institute of Chartered Accountants in England and Wales, of which I am a fellow, helped clarify my thinking by giving the example of a number of family members who own a company but one of them habitually votes in accordance with the directions of his or her spouse. In such a case, would the spouse be a significant controller and what lengths would the company need to go to so as to establish that? This is just an extra layer of complication and administration that our SME companies should not have to face.

[Lord Phillips of Sudbury]

Is the noble Lord sure of what he just said? He said that a subsidiary company in a chain of subsidiaries would not be a small company. I would want to be absolutely certain of that. My impression is rather the reverse: if it has minimal paid-up capital, as indeed it could, how would it be caught?

[Lord Leigh of Hurley]

As I understand it, if it is a subsidiary of a much larger company then it is not a small company as defined in the Companies Act. I stand to be corrected but that is how I understand it.

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[Lord Flight]

My Lords, on the specific point, I just add the following. First, it would be perfectly possible to operate a non-UK shell company as the Bill stands so the Bill is completely avoidable for those intent on doing evil. Secondly, with regard to UK companies, it might be possible to include a definition. The point of a shell company is that it does not have a business. I am very clearly talking here about small companies that have an active business. Finally, anyone with evil intent will not register a small company, even if it is a UK company, for the reasons the noble Lord just pointed out: the chances of being discovered are very small.

Therefore, I beg to suggest that the Bill is ineffective in this area as it stands. What would be effective is a significant burden on the innocent—the runners of small family businesses. As my noble friend Lord Leigh pointed out, the issue of who has control is sometimes quite debateable because there may be more than one person holding 25% and the way family affairs are organised may be complicated.

For some reason, my Amendments 48 and 49 are also included within this group. I did not really want to combine them with Amendment 36A, which is very different in nature, but nor did I want them not to be aired by default. These two amendments, together with Amendment 51, are practical proposals which emanated essentially from the BVCA, which I believe has had some practical discussions with government about possible ways of handling the points raised.

Amendments 48 and 49 extend the provision in the Bill applying to English limited partnerships to include other limited partnerships without a legal personality which are comparable to an English limited partnership. Many overseas limited partnerships invest in UK companies and, unless there are arrangements along the lines of Amendments 48 and 49, the effect would be to require information on all limited partnership investors to be put into the register. This would create confusion about who was the controller of the English company the partnership was investing in as well as creating unnecessary and costly administration. The main relevant overseas companies to which this applies are Channel Islands limited partnerships which are frequently used by private equity firms to invest in UK companies. This is a practical issue which it is necessary to deal with, or where there are non-UK limited partnerships investing in UK companies we could end up with a wealth of unnecessary and quite confusing information.

[Lord Leigh of Hurley]

I, too, shall speak to Amendments 48 and 49, as they are grouped together, and express the same reservations as my noble friend Lord Flight about not wishing to have the two connected. The reason for my amendment is principally to ensure that the policy objectives of the Bill are met. I seek to manage and mitigate unintended consequences as much as possible, in this case by making sure that only individuals who meet the criteria set out are disclosed and not many others by dint of legislative accident.

It is worth noting here that the Bill has already been improved in this regard. The original draft would have missed out partnerships entirely, because they have no legal personality, and forced the disclosure of hundreds of investors, none of whom owned 25% of the business, but all of whom would have been deemed to have owned that amount through their investment vehicle.

A particular concern is private equity, as my noble friend Lord Flight said. Funds raise money from many investors of different types and different geographies, but normally none of their investments as individuals would be anywhere near 25% of the fund. The private equity fund, typically known as the general partner, takes responsibility for investing that fund in a portfolio of businesses and managing those businesses. It is the fund run by the general partner and not any individual investor who exercises significant control. It is right that the public and, indeed, Governments know who that is. It is not necessary for them to know who the individual investors are behind it.

The merits of this point were accepted in the other place and there is an exemption for English limited partnerships. This amendment seeks to apply that to other limited partnerships that are similar to English limited partnerships in structure but are governed by other laws. I am thinking in particular of partnerships structured in the Crown dependencies. It is very important that we offer a level playing field in this context. Funds structured particularly in the Channel Islands and elsewhere are direct drivers of inward investment into the UK. To be clear, we are not talking about tax avoidance or tax evasion. It is simply a mechanism for investment. It is typically used by pension funds, which would not pay tax in any circumstances. My amendment would allow any partnership deemed similar in structure to an English limited partnership to be treated the same as one and not have to disclose the hundreds of investors underneath it.

In his excellent Budget in 2013, the Chancellor commendably launched a new initiative to make our asset management industry as competitive as possible. It was about encouraging our financial services industry to be drivers and attractors of inward investment in the real economy. These partnerships are great channels for such investment and must be encouraged. That is why they should be treated the same as English limited partnerships. If the amendment in my name and that of my noble friend Lord Flight is accepted, investors in partnerships, which are of huge benefit to the UK economy, will be treated as if they had invested in an English limited partnership or one that is similar in spirit.

[Lord Mitchell]

My Lords, I shall speak to Amendments 37ZA, 37B, 37C, 47B and 50A.

I congratulate the Government on coming forward with these provisions that provide for a register of beneficial interests in companies that are not listed on the Stock Exchange. Transparency in the governance of companies is essential, as is fair taxation. They are essential for providing a level playing field on which all businesses are able to compete. Anything else undermines the kind of entrepreneurship and creativity that we want to see driving growth throughout our economy. However, transparency goes beyond the issue of business competition. It also matters from the point of view of knowing who owns a company. Who owns whom is vital to know and we will return to this issue as today’s discussions continue.

The Lough Erne declaration was signed in 2013 and reflects a good understanding of the importance of the above and I am glad to see some of the thoughts reaching fruition in the Bill. The third point from that declaration is perhaps the most relevant to our proceedings and I think it came from the Prime Minister. It reads:

“Companies should know who really owns them and tax collectors and law enforcers should be able to obtain this information easily”.

That is a sound principle with which I am sure the whole Committee will agree. Parts 7 and 8 of, and Schedule 3 to, the Bill reflect this. Today we will be testing the provisions within the Bill to try to ensure that its provisions match these principles and that they are drawn tightly enough to deliver them. I hope the Minister appreciates that our intention is to support the proposals and to contribute to their effective working.

The main mechanism through which the principles are to be put in place is the PSC register—that is, “people with significant control”—which has our backing. The briefing that Christian Aid has provided—I wish to place on record my thanks to it for having done so—points out that only 9% of the British public believe that company ownership should be allowed to remain a secret. Given the reputation this country has for respecting the value of fair play, I can readily believe that.

The Government have also helpfully published and concluded a consultation on the regulations which will be issued governing the PSC register, which will aid us as we scrutinise the provisions in Committee. As the preamble to that document makes clear, PSCs—individuals with more than 25% of the company’s shares or voting rights—will have to be on the register and there will be a statutory obligation to update that. I struggled to find a proper definition of PSC. I think I found it in the wording but it should be clearly defined and positioned in the Bill so that there is no ambiguity on this.

Turning to Amendment 37ZA, I am sure noble Lords will appreciate that what we are doing here is to test the boundaries of Schedule 3, specifically the exclusions. It is right that the Secretary of State should be able to leave out certain companies that may already have more comprehensive disclosure requirements like those that are publicly listed. However, that is the underlying principle. Only companies that already disclose the information that this part of the Bill requires should be subject to exclusion. Otherwise a Secretary of State could, by order, essentially produce a definition that excludes companies that should in the spirit of the legislation be covered. I welcome the fact that doing so would require the affirmative procedure, but the fact that it would still have to be limited in that way would be a useful instruction to put into primary legislation. It would also create the kind of certainty that the playing field will remain level, as it were, and that would be helpful to businesses.

On the subject of delegated legislation, noble Lords will see that I have two recommendations from the Delegated Powers Committee in this group. The first concerns guidance about the meaning of “significant influence or control”, which is obviously a core part of the provisions. The committee stated:

“There is no provision however for Parliamentary scrutiny of the guidance. The reasons given in paragraph 285 of the memorandum for not making the guidance subject to scrutiny are the fact that it will be worked up in consultation with stakeholders and the fact that it will not conflict with the statutory provisions in Part 21A. We do not find these reasons convincing. Section 790F of the Companies Act 2006 will make it an offence if a company fails to comply with the duty to gather information about persons who exercise significant control. It seems to us that the existence of the offence will give greater importance to the guidance, since those involved are likely to see compliance with the guidance as necessary in order to avoid the risk of committing an offence. Accordingly, the guidance is liable to play a significant role in determining the meaning of ‘significant influence or control’ and therefore the range of persons who fall within the scope of the new Part 21A of the 2006 Act. In the light of this, we consider that guidance under paragraph 24(2) of Schedule 1A should be subject to Parliamentary scrutiny”.

We agree, and hence we have tabled this amendment.

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[Lord Phillips of Sudbury]

My Lords, my name is on two of these amendments, Amendments 44 and 47. My noble friend Lord Watson has introduced them very fully, but I would like to add a few further points. As a first general point, some have commented—the noble Lord who has just spoken made the point that this is imposing a huge liability on limited companies—and asked why any member of the public should have access to the information on this register. The answer is simple but has not been referred to. Too often we overlook the fact that limited liability is an entirely state-provided privilege—and what a privilege it is. It protects those who own companies from the normal results of one’s own lack of success and, in some respects, even worse. Major conditions must surely be attached to the enjoyment of such a privilege. I believe that the Government are correct in the general purport of the provisions that we are now talking about. However, the way in which they have been constructed and, indeed, some of the drafting, leave a lot to be desired. I support some of the proposals made by my noble friend Lord Flight and the noble Lord, Lord Leigh of Hurley.

I want to concentrate on new Section 790O, from which Amendment 44 would remove the last lines. That removal is justified on the grounds that what is required by this subsection is unrealistic and, I would say, impractical. How does one provide information about the future which may not be in one’s control? I refer to new Section 790O(4)(d), which says that where a member of the public requests access to the company’s PSC register to see what is in it, they must say with that application,

“whether the information will be disclosed to any other person”.

How on earth can one do that? One could say, “I want it for this and that reason”, but one cannot tell whether in future it will be disclosed by someone else, or if one would want to disclose it for a purpose as yet unknown to a person as yet unknown.

It then it goes on to say that in making the application for access to the PSC register, one must give,

“the purpose for which the information is to be used by”,

any person to whom it is disclosed. Again, that is not realistic. For those reasons alone, it is entirely right that this part of the section be removed, as the amendment requests. There may be some residual need for something that is currently within that subsection and my noble friend the Minister may want to highlight that. Indeed, a lot of what we say today needs reflection and it may be that she will come back on Report and say, “Okay, we will remove sub-paragraphs (i) and (iii) but we need sub-paragraph (ii) and something else”.

Then, new Section 790P(3) says:

“If on an application under this section the court is satisfied that the inspection or copy is not sought for a proper purpose”—

without defining “proper purpose”, which is not good enough. These are important provisions. There are remedies and consequences for not complying with the law. Not to have a definition of a “proper purpose” must be wrong. Having said that, I am not entirely happy with the definition provided by my noble friends Lord Flight and Lord Leigh of Hurley, but I will not detain the Committee any longer. I just confine myself to those points. However, the drafting of this whole area of the Bill is extraordinarily opaque in places and lacking in proper clarity. I am concerned at the bureaucratic effects of some provisions while strongly in favour of the general purport of the Government in producing this part of the Bill.

[Lord Leigh of Hurley]

My Lords, I just make the point that this amendment is not in my name, as was previously suggested, although I rather wish it was. I thank my noble friend Lord Flight for that back-handed compliment.

It is worth recalling that the PSC register in the UK in fact relies on self-reporting information that is not subject to independent verification. My noble friend the Minister indicated that it will be accurate because it is public but I struggle to rationalise that. The important point is that it is not subject to independent verification and, as my noble friend Lord Flight mentioned, that does not comply with Financial Action Task Force recommendations 24 and 25. None the less, that is the chosen route of Her Majesty’s Government and one has to consider the ramifications of allowing full public access to this unverified data. It means that people will take as read information supplied by companies, which of course could be completely incorrect, and they will assume that, as it is on an official register, it has validation when it is not the case. While recognising that tax and law authorities must and should—

[Lord Watson of Invergowrie]

I do not see why the information might be inaccurate if the companies themselves provide it. Surely, they will provide accurate information.

[Lord Leigh of Hurley]

That is an important point. We are here worried about rogue companies. We are not worried about companies that are abiding by the law or those that inadvertently make mistakes. Here, we are trying to pursue rogue companies that attempt to mislead. That was my point.

[Lord Watson of Invergowrie]

Are not those precisely the companies that we need to catch with legislation like this?

[Lord Leigh of Hurley]

Indeed, that is my point. If we are going to do it, we should follow the recommendations of the Financial Action Task Force and have that information verified. However, it does not mean that the register needs to be public. The tax and law authorities not just must but should have all this necessary information to deter misuse. I am not clear why it should necessarily be public. The noble Lord, Lord Watson of Invergowrie, referred to the G7, I think, but the document containing the G20 high-level principles of beneficial ownership transparency, which was published after the meeting in Sydney last year, makes no requirement for any public transparency. It makes a requirement for beneficial ownership to be on a register but, in its carefully worded 10 points, it does not suggest that it should be made public. We are in danger of becoming the only country in the whole of the G20 to insist on public disclosure—and one has to ask why on earth we would do that.

Would not it therefore be advisable to defer the requirement to make the information public until after the report required from the Secretary of State in the Bill? That might permit a better assessment of the quality of data being submitted through the self-reporting mechanism and an assessment of the competitive implications for UK businesses once other countries have had an opportunity to decide how they are going to address their compliance with the G20 report.

It is clear, thanks to the long-term economic plan and the success of the coalition Government’s policies, that the UK is an extremely attractive country to invest in. I declare an interest in my professional capacity. I talk to overseas investors all the time who seek to acquire and invest in UK companies. There is unparalleled interest in seeking to invest in the UK. Likewise, I declare that I went on the UKTI trade trip with the Prime Minister to China, where there is an enormous amount of interest from Chinese companies that wish to invest in the UK. We seem to be obsessing over disclosure of their potential investment in UK companies when, should they choose to invest in a limited partnership or directly into real estate, there will not be any disclosure. These investors will simply be deterred from investing in the UK because this transparency of ownership is an alien culture to them. I wonder whether the concerns over privacy will leave them not just dissuaded but unhappy with the actual cost and regulation that it will require, which is not the case for Delaware companies, for example. I fail to understand why a company should have to bear the onus of a request that might be flippant or irrelevant or just unnecessarily nosy.

[Baroness Neville-Rolfe]

I thank my noble friends for their amendments and for the wide-ranging debate. It is good that the noble Baroness, Lady Wheatcroft, and the noble Lord, Lord Borwick, added their voices to the Committee’s discussions, which I found very interesting and illuminating. Of course, the common thread in this group is that of access to information in the PSC register, albeit from very different perspectives.

I start by responding on a couple of general points. The noble Lord, Lord Watson, asked about the response to our discussion paper on PSC rights. Last week, I laid a Statement before the House setting out how we will take the policies and discussion paper forward. We intend to publish draft regulations this summer. This sort of consultation, which we have applied throughout the Bill, helps to limit unintended consequences. The noble Lord also asked why a person needs to tell the company how they are using the information. This is essential to ensure that data are used for a proper purpose. It is important to remember that the full date of birth will be publicly available from the company, even though this will not usually be on the public register at Companies House, and we do not want people passing these data on to fraudsters or identity thieves, for example.

There was also a question about the inspection provisions. Concern was expressed that the PSC register would not necessarily be available for use by journalists and NGOs. Any person may inspect the PSC register for a proper purpose. The purpose of the PSC register is to provide transparency of company ownership and control, so a person may inspect the register in the interests of finding out that information, including in the context of journalism, for example. Someone working with a journalist could pass on the information, provided that they had stated the purpose. I agree with my noble friend Lady Wheatcroft that, once things are made public, they are public, but I think that we will reflect on the debate that we have had this afternoon on this point.

My noble friend Lord Flight said that he felt that the protection regime needed extending and that the current proposals were too limited. We are building on the existing directors’ protection regime, which we believe works well—that is, the current one for companies, to which there have been a number of references and of which I have had experience in my company life. It has improved over the years and generally works well. However, as I set out last week, we are considering whether we need to extend it further. The ultimate objective is transparency, so purely commercial reasons, for example, would not be valid.

I now turn to the amendments, starting with Amendment 37D. The noble Lord clearly appreciates the need for the Secretary of State to be able to grant exemptions from the PSC register in genuinely exceptional circumstances. The amendment provides some examples of such circumstances, such as in relation to national security, with which I agree. In these rare cases it would be damaging to require the fact of that exemption to be publicly stated. This could cause people to try to obtain the information in question by other means, which is not what we would want.

Turning to Amendment 44, I know that the noble Lord will want to ensure that civil society is able to obtain PSC information. As my honourable friend Jo Swinson made clear during Committee in the other place, these provisions will not prevent them doing so. The Bill already allows companies to apply to the court to refuse inspection when information is not sought for a proper purpose. This provision will help to prevent misuse of information in the register by fraudsters and those who simply wish to send people junk mail—whoever they are. If the company’s application were upheld by the court, access to the information would be denied.

In Amendments 44A to 44H and 44J, my noble friend Lord Flight obviously comes to the group from a different perspective, seeking to severely restrict the ability of people to inspect a company’s PSC register. I recognise the concerns raised around allowing public access to this information, including the points that my noble friend mentioned—notably the impact on UK competitiveness and personal privacy. However, I remind him that the Government consulted on the question of public access to PSC information and acted on the basis of the responses that we received. I do not think we will be able to agree to an entirely different approach today. It is not our policy to respond to any lobby but to make real and important changes to tackle the criminal use of UK companies, which is a significant problem, made worse in the international digital world. We want to lead in this area, as the Prime Minister has made clear. I hope that the sketch made by my noble friend Lord Leigh proves to be wrong.

Again on privacy, we have carefully considered the impact that this policy has on the privacy of individuals through the conduct of a full privacy impact assessment. That document has been published and is on the GOV.UK website. The assessments indicated that the proposed measures are necessary and proportionate. In reflecting further, it is important that we also revisit that assessment. We firmly believe that a central, public register is the most appropriate option for the UK, and allowing people to access the company’s own PSC register is an important part of that. I will not repeat what I said in opening today, but increased trust is good for business. Making sure that the UK maintains its reputation as a clean and reliable place to do business and invest is very important. We have taken clear steps to protect personal information wherever appropriate.

On effectiveness, which my noble friend Lord Flight raised, we are looking closely at how Companies House and law enforcement agencies can work together to enforce the regime. The criminal sanctions and public nature of the register will also help to deter criminal activity.

On the issue of compliance costs, a final stage impact assessment estimates a net cost to business per year of £97.5 million, which over 10 years is around £1 billion. Those costs are spread over a population of 3 million companies. Of course, some small businesses are not companies and are not covered by this particular provision. In addition, for companies with simple ownership structures that already know their PSCs—that is, the vast majority of companies—the costs will be minimal. For example, the final impact assessment found that there would be a cost of £10 to small, simple companies in updating beneficial ownership information annually, and a cost of £10 in providing information to a central register annually.

On Amendments 47 and 47A, I would have serious concerns about allowing third parties to ask the registrar of companies to review a person’s right to protection. It is important to remember that applications will only be granted in very limited circumstances, for example when someone is placed at serious risk of violence or intimidation as a result of a company’s activities. On that basis, I do not think it would ever be in the public interest to override that decision.

I hope that I have responded to the key questions raised. I have said that we are happy to reflect on the detail of the debate on Amendment 44. I am not sure what the conclusion of that will be, but I listened to what was said today. I hope my noble friend and noble Lords are reassured by this discussion and will agree to withdraw or not move their amendments.

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[Lord Flight]

My Lords, Amendment 51 seeks to address the issue of the duties of shadow directors and to limit the extension of their duties to what is fair, reasonable and appropriate. The current wording in the Bill goes too far in making the condition that the duties apply,

“where … they are capable of so applying”,

whatever that actually means. The territory relates to the doctrine of avoiding conflicts of interest and, in particular, the situation for full directors, but unfortunately the ground rules there do not apply to shadow directors who sometimes may not even be aware, subjectively, that they are shadow directors. This amendment seeks to tie the conditionality of the duties of shadow directors to what is reasonable, just and equitable. I understand that the Government are sympathetic to these issues but may prefer to address the territory via regulations. As the Bill stands, I suggest that the position of shadow directors is not reasonable. I beg to move.

[Lord Leigh of Hurley]

My Lords, Amendment 51, which is tabled in my name and that of my noble friend Lord Flight, is to Clause 86 and concerns shadow directors. Shadow directors are individuals who influence a company without actually being a director. I do not think I have to declare an interest as being a shadow director of any company, as far as I am aware, but—

[Lord Flight]

The noble Lord might be!

[Lord Leigh of Hurley]

That is the point. Shadow directors can be significant shareholders who have chosen not to sit on the board—in particular, a lender who has become active in the affairs of a business—or simply someone in whose interests and according to whose instructions the directors act, without the person actually being a director. The Bill seeks to clarify the rules governing shadow directors so that people do not deliberately assume that status in order to avoid a lighter touch corporate governance regime. Indeed, the definition of shadow director is not changed by the Bill, only the extent to which they should enjoy the same duties as directors.

At present, the duties of directors apply to shadow directors to the extent permitted by common law rules and equitable principles. These are set out in Section 170 to 177 of the Companies Act and offer up a code of conduct. Clause 86(3) would enable the Secretary of State to make regulations to apply any duties of directors to such shadow directors. The Bill makes provision for the duties of directors to apply to shadow directors,

“where … they are capable of so applying”,

as my noble friend said. This wording, quite apart from adding certainty, will do the opposite and leave the courts little discretion to allow them to apply said duties in a proportionate manner. This wording, “capable of so applying”, amounts to some sort of blanket application of duties from one to the other since it is difficult to conceive of a situation where the duty would be incapable of applying.

Of particular interest is the duty to avoid conflicts of interest. It is not often possible to prevent a conflict from arising, and therefore the prima facie duty to avoid conflicts is typically addressed by having some mechanics: for example, one frequently sees a director excusing himself from any meetings considering such matters which might present a conflict and thus being prevented from voting. The Companies Act specifically considers these mechanisms but, of course, it will not be possible to apply them to shadow directors, who may not seek to be shadow directors and may not even be aware that they are. This could result in an automatic breach of the duty by entirely innocent shadow directors, so I would argue that more flexibility is required.

This is why the amendment offers up an alternative wording, which says that duties will apply,

“to the extent it is reasonable, just and equitable for any such general duty to apply”—

it certainly sounds reasonable to me—and caters for examples such as conflicts of interest. It still allows for the Secretary of State to make an intervention, as well as giving the courts the requisite discretion, but it will prevent the inherent unfairness in the situation that I have just described.

[Baroness Neville-Rolfe]

My Lords, in responding to Amendment 51, I thank my noble friends Lord Flight and Lord Leigh. Like my noble friend Lord Leigh, I have been a director in the past, but never a shadow director. It may be helpful if I set out how directors’ general duties currently apply to shadow directors and how Clause 86 will improve this position.

The current provision in Section 170(5) of the Companies Act 2006 states that the directors’ general duties apply to shadow directors to the extent that the,

“common law rules or equitable principles so apply”.

This makes it confusing for anyone who may be acting as a shadow director to know whether any duties apply to them and the extent to which those duties apply. Clause 86 clarifies that the same standards of behaviour are expected of shadow directors as of appointed directors, wherever possible.

I am sympathetic to the intention behind this amendment that shadow directors should not be put in a disadvantaged position compared to appointed directors. The Government recognise that there may be circumstances where the directors’ general duties may not be capable of applying to shadow directors in the same way as appointed directors. One example could arise in the context of the duty to avoid conflicts of interest, as set out in Section 175 of the Companies Act 2006. In principle, we would expect any director to avoid a conflict of interest wherever possible. However, Section 175 of the Companies Act also recognises that there are cases in which a director should be able to act in cases of conflict. It therefore allows for authorisation by the company for a director to continue acting on a matter where they have a known conflict in certain circumstances. A shadow director may not be able to seek authorisation in this way.

Clause 86 does not introduce a blanket application of the duties to shadow directors. A shadow director will be able to rely on Clause 86 to demonstrate that, in their circumstances, a duty or part of a duty is incapable of applying to them. Officials have discussed this with the British Private Equity & Venture Capital Association, and in light of the points that have been made, I now wish to consider the issue more fully and reflect on whether there is a need to adapt the way the general duties of directors apply to shadow directors so that they do not find themselves in a worse position than directors. This would be achieved by using the power already included in Clause 86(3). I will write to noble Lords before Report to give an update on my conclusions. I hope that my noble friends are reassured by this explanation and that, on this basis, my noble friend Lord Flight will withdraw his amendment.

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[Lord Mendelsohn]

I shall speak also to Amendment 60B. The Bill offers us a tremendous opportunity to look at directors’ duties. It is a useful time to examine some of the areas which have been a matter of public debate and which have a bearing on our deliberations. We have tabled two probing amendments for consideration.

At Second Reading in the other place, the Secretary of State raised concerns about whether in mergers and takeovers there are the correct provisions in the code under which companies act. Indeed, public concern over the takeover of Cadburys by Kraft and the AstraZeneca/Pfizer situation led the Secretary of State at that time to say that this Bill would address those matters.

Since that time, the Takeover Panel has been hard at work bringing forward a tightening of directors’ duties in respect of takeovers and of undertakings made during takeovers. The Takeover Panel has long said that a target company’s directors may take factors other than price into account. We are all aware that very often the commentary has been that there is always pressure to focus on price alone. The Takeover Panel has now amended the code to make that point explicit and to allow boards not to consider the offer price as the determining factor. This is progress, but we retain concerns that are not assuaged. This offers boards partial protection when the price alone does not meet all the considerations for the long-term interests of the company or its shareholders.

In relation to binding undertakings, the Takeover Panel’s suggestions are to be welcomed. We agree with a distinction being drawn between post-offer undertakings, which are binding, and intention statements, which are not. Intention statements are required to be accurate statements of the parties’ intentions at the time they are made and to be based on reasonable grounds. The panel will require clarity by companies making an offer, which should help boards to consider their duties properly when evaluating bids made by those companies.

It would be useful if the Minister could provide us with her assessment of whether the changes made by the Takeover Panel are suitable and adequate and whether they meet all the action planned within the context of the ambition set out by the Secretary of State in his comments at Second Reading. It would be interesting to have the Minister’s assessment of the extent to which the Government consider that if such additions were in place at the time they would have dealt with AstraZeneca/Pfizer and Kraft/Cadbury situations and what impact they would have had on them.

Amendment 60A probes these matters further. The current position is governed by note 1 to Rule 25(2) of the takeover code. Our amendments suggest an alternative framework on which we seek the Government’s views. As it is currently defined in negative terms, the code does not limit the factors or provide a framework under which the board may consider these matters. While not limiting them, we propose factors that should be positively taken into account. We are keen to hear the Government’s views on such a formulation.

Amendment 60B takes forward an existing arrangement that incentive payments should be identified. As the shadow Secretary of State said in another place, there are clear cases and concerns that the lucrative nature of advising on such arrangements creates incentives which may not be desirable and lead to poor outcomes. Our change would amend the current situation, which is that they are identified in the offer document. That is in the code under Rule 24(16). We make clear the need to disclose in full payments which are contingent on the outcome. This will provide for an accurate reflection of what is paid, as opposed to the current arrangements, which relate only to fees and expenses.

I would be grateful to know whether the Government would be minded to change the current rules to ensure proper transparency. In addition, although this is not in the amendment we have proposed, we would be interested in whether the Government would be sympathetic to finding the right place for the reporting of such payments—the actual payments made, that is the fees, expenses and incentive payments—to be made in the context of a transaction. I beg to move.

[Lord Leigh of Hurley]

I am not sure that it is in the register of interests but I further disclose that I used to sit on the Takeover Panel appeal committee some eight years ago, as the alternate to the president of the Institute of Chartered Accountants and in my capacity as the chairman of the Corporate Finance Faculty—finally, I stand up in your Lordships’ House to speak on my one area of expertise. Having said that, the vast majority of my time is spent working with private companies rather than public companies, but I thank the noble Lord, Lord Mendelsohn, most sincerely for raising a matter on which I can speak.

I take this moment to commend the Takeover Panel on the role it undertakes in City life and in the UK economy. It is an extraordinary organisation, which works extremely effectively and well, and which is genuinely the envy of the world. When overseas—in particular, American—potential purchasers of UK companies come to these shores, and the nature and working of the Takeover Panel is explained to them, they are absolutely amazed. They cannot understand how it is we can have such a system, where an organisation exists without any real power and without any real teeth but simply survives through the ability to cold-shoulder an adviser. It is a phenomenon which defies real explanation. Many people would be extremely reluctant to see the good workings of the Takeover Panel interrupted by legislation in any way.

In particular, Rule 24.16(a) provides that an offer document must contain an estimate of, first,

“the aggregate fees and expenses expected to be incurred”—

as has been suggested—and then, separately, a breakdown of those fees and expenses by category, including,

“financial and corporate broking advice”.

Rule 24.16(b) provides that:

“Where any fee is variable between defined limits, a range must be given in respect of the aggregate fees and expenses … setting out the expected maximum and minimum amounts”.

The takeover code already requires the matters specified in Amendment 60B and covers all situations where the payment of such fees would be contingent on the outcome of the offer. It specifies the conditions under which they are payable and the estimated value or range of those payments. We have taken the trouble to look at the last 10 documents that were live in respect of such takeovers, and they all included the fees, costs and expenses—some of those seem high, but contingent fees will be high. They are all there, in the documentation. It may be that Amendment 60P is not required as envisaged.

[Baroness Neville-Rolfe]

My Lords, I thank the noble Lord for his amendments, the clarity of his introduction and the opportunity to briefly debate the matter of company takeovers. First, in view of his wider points, I will reflect on the changes that the Takeover Panel has made, both recently in response to AstraZeneca/Pfizer, and in response to Cadbury/Kraft earlier in the Parliament, a deal which, as a businesswoman at the time, rather shocked me. I share my noble friend Lord Leigh’s warm words about the strength of the Takeover Panel—we are lucky to have it in this country.