Lord Mendelsohn
Main Page: Lord Mendelsohn (Labour - Life peer)Small Business, Enterprise and Employment Bill
Lord Mendelsohn Excerpts
Lord Mendelsohn (Lab)
I draw attention to my interests recorded in the register and my connection to small businesses. This section of the Bill has our broad support. We welcome any attempt to reduce the burdens of reporting while maintaining the integrity and transparency required to make such registration effective. Clause 89 provides for a new filing requirement instead of the annual return. The new confirmation statement is outlined in some detail in the Bill. I am bound to say that I did not find the old annual return such a hardship, and I hope that I will feel the same with the new statement.
Amendment 54B is a probing amendment. It ensures that sanctions would be the same for companies that do not have and maintain a record of their PSCs and those that did not provide information to the public register. The intention of the amendment is to help to probe and to ensure that the information makes it to the register and can be used meaningfully. We would be grateful if the Minister will set out the thinking behind the difference between these two and why the enforcement is slightly different and provide us with an understanding of how the Government see the mechanisms for enforcement and how they will work over time.
Baroness Neville-Rolfe
My Lords, I am grateful to my noble friend for so graciously moving his amendment and to the noble Lord, Lord Mendelsohn, for his remarks. The confirmation statement in Clause 89 is a replacement for our friend the annual return to Companies House. It will contain important information about the company, in particular about the register of people with significant control, which we have just been debating.
Amendment 54B would increase the criminal penalties we provide for not filing a confirmation statement at Companies House. It is important that penalties should be sufficient to deter and sanction those who do not provide Companies House with a confirmation statement. However, I do not believe that increasing the penalty is necessary in this case, which I think is what the noble Lord may be seeking. Enforcement activity by Companies House is focused on ensuring that information is delivered to it and put on the public register in a timely way. Companies House sends reminders to the company in good time before the company is due to file the current annual return. If a company fails to deliver information, the first aim of Companies House is to seek compliance. In the event of continued non-compliance, Companies House prosecutes the company and its directors. Last year, Companies House prosecuted almost 2,000 companies for failing to file the annual return. This approach to enforcement works. Compliance rates for the annual return are currently running at 98%.
The penalties in Parts 7 and 8 are designed to be consistent with the level and approach of existing Companies Act penalties. The penalty for failing to deliver a confirmation statement to Companies House is equivalent to the existing penalty for failing to deliver an annual return. The Government do not consider that there is a case to increase these penalties. Of course, we take the failure to file information at Companies House extremely seriously. It is important that people should be able to obtain up-to-date information about companies with which they may wish to do business. A continuing failure to deliver a confirmation statement could incur a daily default fine of £500. This would quickly add up to a significant amount. I understand concern that there should be sufficient incentives to ensure that information about people with significant control is put onto the public register. In practice, however, we judge a prison sentence to be highly unlikely to be proportionate to failing to deliver a confirmation statement, even were the law to permit the judiciary to impose such a penalty. It is, of course, important that people should have confidence in the public register. When necessary, enforcement includes the prosecution of criminal activity. Consequently, we consider that the sanctions set out Clause 89 are sufficient. I hope that explanation helps to clarify issues and that my noble friend feels able to withdraw his amendment.
Lord Mendelsohn
“Director’s duties: factors to be considered in takeovers and mergers
In applying the City Code on Takeovers and Mergers, the offeree board circular must set out the opinion of the board on the offer (including any alternative offers) and the board’s reasons for forming its opinion which must include its views on—(a) the likely consequences of any decision in the long term,(b) the interests of the company’s employees,(c) the need to foster the company’s business relationships with suppliers, customers and others,(d) the impact of the company’s operations on the community and the environment,(e) the desirability of the company maintaining a reputation for high standards of business conduct, and(f) the need to act fairly as between members of the company.”
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.
Lord Mendelsohn
My Lords, I thank the noble Lord, Lord Leigh of Hurley, for his very useful intervention. As someone who is a doyen of the corporate finance industry and whose business office is just round the corner from my own, I am aware that his reputation is very distinguished in these matters.
Indeed, I thank the noble Lord for what he had to say in relation to incentive payments and their provision in the code as overseen by the Takeover Panel. As I said, this takes forward an existing arrangement that incentive payments be identified and I hope there was some genius in our crafting that allowed it to extend slightly further than just the situation, if there was to be a situation, with an offer where payments were to be considered during the course of a transaction, as is sometimes the case, that they would also have to be disclosed in some format. It is also why I referred to whether there should be some reason to report after the fact as well.
I am very grateful to the Minister for her responses to this, which were very helpful. I want to make a couple of things very clear. We will consider her comments much more carefully. It is certainly true that one wants to make sure that any disclosure is meaningful and that there is very limited boilerplating—as we have both been in business we know an awful lot of boilerplating takes place. Currently, I would say from this side we see that the argument could be applied to both situations equally but we will take that back and consider it further.
In relation to the incentive payments, that is an invitation that will be very hard to resist and over time I am sure that we will come forward with that. In general, the advisory market is probably one—even though this may well be a case of poacher-cum-gamekeeper too much—where the whole market requires some broader assessment and elements of competition and transparency in that would be not unopportune. However, this is not the time for that and these are matters that we may return to in due course. In the current circumstances I beg leave to withdraw the amendment.
Lord Mendelsohn
Lord Mendelsohn
My Lords, I will speak also to Amendment 60D. First, I want to set out our support for the introduction of this clause. I will then briefly set out our amendments and raise some of the recommendations of the Delegated Powers and Regulatory Reform Committee that we support.
The Government are to be congratulated on bringing these matters forward. They address a number of weaknesses that have been identified as individuals have used ever more sophisticated ways either to continue to operate while in breach of the intent of the current law or to operate in ways that avoid it. There are some very difficult drafting challenges in these clauses and we may wish to return to these matters later with some more considered amendments. Today, we would like to raise a number of issues and get the Government’s view and a temperature check.
During our examination of the clauses for this Committee and in our discussions with small businesses, we were struck by the concern expressed by some about the problems of rogue traders. While this affects some sectors more than others, there was a much stronger feeling than we expected that this matter required strong legislative action. This does not mean that there is any appreciation of the scale of the problem or much evidence that the situation is acute or even getting progressively worse. Yet small businesses expressed the view, based on the risks that consumers take, that consumer confidence would be higher if the regime against rogue traders was seen and understood to be stronger than it currently is. In other words, small businesses sometimes feel the impact of rogue traders to be far greater than the actual consequences of them; they cast a shadow over some small businesses. If there was much greater and stronger consumer confidence that the regime available would deal with rogue traders, small businesses would be better off.
It was only when my attention was drawn to the Mail on Sunday this Sunday that this matter became very live. It is interesting from this side to say the “Mail on Sunday”, but anyway. There is a piece in the financial part of the paper written by Tony Hetherington, who is,
“Financial Mail on Sunday’s ace investigator”.
He covers a number of important matters. This Sunday, he identified a number of issues relating to rogue traders. I draw noble Lords’ attention to two stories. In one particular case, an individual ran a company,
“whose proper title was Palm Oil Investments Limited, but in June last year he changed its name to Quick Payroll Solutions. It still appears to be in business, but for how long is anyone’s guess”.
He,
“failed to file accounts that were legally due in 2013, let alone accounts due more recently for 2014. These are offences and it will be no surprise if Companies House strikes off his business”.
Tony Hetherington writes:
“I do not suppose this will bother”,
him.
“He was a director of a rip-off diamond investment company, Elite Gems Limited, which went bust in 2013. And he was also a director of scam carbon credit company Charles Stratton Limited, which has not filed any accounts since it was set up in 2011. It is about to be struck off”.
He writes:
“It would be nice to think that at some point the authorities will catch up with,
him,
“and either disrupt his activities or ban him from running future businesses, however I am not holding my breath”.
In relation to another series of companies—this is an important point—he identifies:
“Four companies involved in selling investment land with false claims about its development prospects”.
These companies,
“wound up in the High Court after they cheated investors out of £3.3 million. Complete Building Systems Limited, Rawtenstall CBS Limited, Evesham CBS Limited, and Hounslow West London Limited were linked to an earlier business, The Property Partnership”.
Hetherington had previously warned that this was,
“part of a network scam land firms that included Nationwide Land Developments, Burnhill Land, Portfolio Land Acquisitions, and Elite Land Developments. All have ceased trading and five bosses have been disqualified from acting as company directors.”
The four companies were able to cheat investors out of £3.3 million, but a lot of that money went into commission payments to sales staff, including a number of central figures behind a scam carbon credits investment company, Carbon Green Capital. These individuals were also behind a wine investment business, DS Vintners. The registered director of all four of the latest scam companies is another individual, who also pocketed a large sum. He was the named director when the others were unable to be, based on their previous conduct. Current measures do not seem to be effective or to deal with some of the ways in which people get round them.
Baroness Neville-Rolfe
I thank the noble Lord for the amendments in this group. He will perhaps be interested to know that we had a sweepstake to try to work out what he was getting at with these amendments. I am afraid we were not particularly successful, so I will make two or three comments on the amendments, which we looked at objectively in terms of the way that they had been drafted, and may take the opportunity to write to him afterwards to pick up some of the points, including the good points he made about rogue trading, which is a concern. The examples he drew our attention to were new to me. He asked what the Government are doing about repeat offenders in this area. The short answer is lots, including taking account of previous failures. The effect of Clause 103 will be to require the court to take misconduct and previous failures into account when deciding whether a director is unfit, especially where it demonstrates a pattern of unfit conduct through a number of companies.
Amendment 60C is in line with the recommendations made by the Delegated Powers and Regulatory Reform Committee, to which I would like to express my gratitude for the consideration it has given this long and complex Bill in a timely manner. We must thank it for the great work it does in aiding scrutiny in this House. I will consider this amendment and will return to it on Report.
Amendment 60D would restrict the consideration a court must give to the loss or harm that a person’s conduct has caused to a company solely to non-executive directors when deciding whether to disqualify a director. The concept of non-executive director is not recognised within the Companies Act 2006 or the Company Directors Disqualification Act. The noble Lord, Lord Mendelsohn, will know only too well that for the purposes of companies legislation, all de jure directors are considered equally, whatever their role on the board may be. Any individual who acts as a director of a company, in whatever capacity, owes duties in respect of the running of the company to, for example, shareholders, employees and creditors. Accordingly, if the actions of any director, executive or not, have caused demonstrable loss for which they are culpable, it is right that they should be liable to be disqualified and that the period for which they are disqualified should take account of the resulting loss to creditors.
To try to change the law on directors fundamentally and to bring in a new definition of non-executive director without extensive consultation would be quite a big ask. I am not sure whether that is being sought in this probing amendment, but perhaps we can discuss the matter further. In the mean time, I commit to study the points that have been raised and to write to the noble Lord, and I ask him to withdraw his amendment.
Lord Mendelsohn
I thank the Minister for her helpful reply. We, too, had a sweepstake on what her responses were likely to be. I have not done badly on some and lost quite badly on others. We also had a sweepstake on what the further replies might be, although I shall not reveal them for fear of putting anyone in a difficult position. In view of the current circumstances and the very helpful replies, we look forward to discussing these matters further. I beg leave to withdraw the amendment.