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Lord Goldsmith: My Lords, not all adult children may be quite as independent as that of the noble Lord, Lord Sharman. The Law Commission looked at this. Children over the age of 18 are not currently included in the definition for these purposes. The Law Commission recommended that the definition be extended to include adult children, which was supported by their consultation. The Company Law Review endorsed that and the Government are seeking to implement it.

As the Law Commission pointed out, it seems somewhat anomalous that approval should be required for a loan to a director's 16 year-old child but not to his 20 year-old child. In many cases, adult children will continue to have strong emotional, and possibly financial, ties to their parents. There is
 
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obvious scope for avoidance if the definition is not extended to cover adult children. I entirely accept that there may be cases, such as that of the family of the noble Lord, Lord Sharman, where such independence is extreme—or strong, at least.

Lord Sharman: That is an unfortunate choice of words.

Lord Goldsmith: It was a slip of the tongue, my Lords. In any event, I cannot support the amendment. I therefore invite the noble Lord, Lord Freeman, to withdraw it.

Lord Freeman: My Lords, we have performed our duty in returning to this issue. If there are representations to the noble Lord, Lord Sharman, my noble friends or myself, we will consider returning to it. In the meantime, however, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 1 [Connected persons: references to an interest in shares or debentures]:

Lord Goldsmith moved Amendment No. 128:

The noble and learned Lord said: My Lords, in moving this amendment, I shall speak also to Amendments Nos. 129 and 130.

Schedule 1 explains what is meant by an interest in shares or debentures, where that phrase is used in the definition of persons connected with a director. Amendment No. 128 puts back some words which appear in the equivalent provisions of Schedule 13 of the Companies Act 1985. Amendment No. 129 replaces a reference to "the relevant proportion" in paragraph 5 of the schedule with a clearer explanation of what it means, and is in line with the position under the Companies Act 1985. Amendment No. 130 updates the legislation listed in paragraph 6 of the schedule. I beg to move.

On Question, amendment agreed to.

Lord Goldsmith moved Amendments Nos. 129 and 130:

On Question, amendments agreed to.

Clause 239 [Derivative claims]:

[Amendments Nos. 131 and 132 not moved.]

Clause 240 [Application for permission to continue derivative claim]:

[Amendment No. 133 not moved.]

Lord Goldsmith moved Amendment No. 134:


 
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"(1A) If it appears to the court that the application and the evidence filed by the applicant in support of it do not disclose a prima facie case for giving permission (or leave), the court—
(a) must dismiss the application, and
(b) may make any consequential order it considers appropriate.
(1B) If the application is not dismissed under subsection (1A), the court—
(a) may give directions as to the evidence to be provided by the company, and
(b) may adjourn the proceedings to enable the evidence to be obtained.
(1C) On hearing the application,"

The noble and learned Lord said: My Lords, we spent some time in Grand Committee discussing the provisions on derivative claims. Discussions have continued since then, and I thank all noble Lords and others who have participated. Essentially, the intention in Part 11 was to create a new statutory procedure with criteria for leave based on the Law Commission's recommendations, differing from the common law in some key respects.

First, we did not want the claimant to have to show wrongdoer control, as that may make it impossible for a derivative claim to be brought successfully by a member of a widely held company. We did want it to be possible to bring a claim in cases of negligence, even if it cannot be shown that the directors have profited from the negligence. We did want to achieve a proper balance between the ability of directors to take business decisions in good faith—that is absolutely important—and shareholders' rights so that shareholders could bring meritorious claims against directors on behalf of the company where appropriate. At the same time, we want unmeritorious claims to be dismissed by the courts at the earliest possible opportunity and without involving companies.

We very much supported, therefore, the views of the noble Lords, Lord Hodgson and Lord Sharman, and the noble Baroness, Lady Goudie, that the court should be able to throw out unmeritorious claims at an early stage without involving companies. We recognise the concerns that the Bill's provisions could do more to achieve this, and therefore we have tabled a package of amendments which will apply to proceedings in England and Wales, Northern Ireland and Scotland, which will have four main effects.

First, the amendments will introduce a two-stage procedure for permission to continue a derivative claim. At the first stage, the applicant would be required to make a prima facie case. The court would be required to consider the issue on the basis of the evidence filed by the claimant only, without requiring any evidence from the defendant. The courts must dismiss the application at this stage if what was filed did not show there was a good case. At the second stage, but still before the substantive action begins, the court would consider if the decision of the directors was one which the company could reasonably and independently have taken.

Secondly, the amendments make it clear that the court may make any consequential order it considers appropriate—for example, a cost order or a civil restraint order against the applicant.
 
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Thirdly, they give the court an explicit power to adjourn the permission application either for a specific event to take place, such as a general meeting or other soundings, or generally so that it can revisit the question of permission at a later stage.

Fourthly, they amend the factors which the court must take into account under Clause 242(3) in deciding whether to permit a derivative claim to continue so that it includes,

I believe that this will help to address concerns that it is not practicable or desirable for major quoted companies to ask shareholders formally to approve directors' commercial decisions.

I also believe that this package of measures, which has been the subject of very careful consideration, both delivers the Government's objectives in Part 11 and addresses concerns that the derivative procedure should not be abused. I express my thanks to those who have participated with us in our development of this package. I beg to move.

Lord Hodgson of Astley Abbotts: My Lords, I thank the noble and learned Lord for the trouble that he and the Minister have taken with the officials to take in the views on this complex and quite controversial issue. From these Benches, we welcome the changes that he has just outlined—the introduction of a prima facie case at two levels, and the ability to call upon the views of disinterested shareholders, which must be taken into account by the court in deciding whether to allow the proceedings to continue. We think that that is extremely helpful. We were chasing the prima facie case in our Amendment No. 250B in Grand Committee on 27 February 2006, when we asked that the civil procedure rules should proceed further only if the court is satisfied that a prima facie case is made out of a cause of action under Section 239(3). We are pleased to see that that is included now. The noble and learned Lord was slightly disobliging on that occasion—elegantly disobliging, as always—when he said,

We are delighted that he has found a way to reconcile that and to work his way through.

As I explained, this is a technical area. Inevitably, because of the tortuous nature of the negotiations the noble and learned Lord has been undertaking, the amendments were tabled quite late. We have therefore tabled a subsequent amendment, which we wish to explore further, to give us an opportunity to talk to interested parties to try to pull this thing together and put a pink ribbon around it, if possible. I would not want the Minister to think that, in moving Amendment No. 136, we are not grateful for what the government amendment represents: it is a very
 
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important and useful step forward. We are grateful to the noble and learned Lord the Attorney-General and his colleagues for tabling their amendments.


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