New obligations for companies under the Political parties, Elections and Referendums Act 2000

The Political Parties, Elections and Referendums Act 2000 has introduced provisions into the Companies Act 1985 which, with effect from 16th February 2001, place new obligations on companies and their directors.

• New Part XA (sections 347A-K) of the Companies Act 1985 imposes a requirement to obtain prior shareholder consent to the incurring by the company or any of its subsidiaries of any non-exempt political expenditure, or the making of any political donation(s) to the extent that such donations have, in any qualifying period, an aggregate value in excess of £5,000; and
• The disclosure requirements for political donations and expenditure (set out in Part I of Schedule 7 to the Companies Act 1985) are extended by new wider definitions which, among other things, enlarge their geographical scope.

The following is a summary of the new requirements.

NEW, WIDER DEFINITIONS

The types of donation and expenditure caught by the new provisions are more extensive than merely donations to the main political parties and cover activity not only in Great Britain but also in EU member States. The new definitions are contained in sections 347A and B of the Companies Act 1985. In particular it should be noted that:

"Donations" can be of money or property and include any gift, sponsorship, subscription or other fee paid for affiliation or membership, money spent (otherwise than by or on behalf of the party) in paying any expenses incurred directly or indirectly by the party, any money lent to the party otherwise than on commercial terms and the provision otherwise than on commercial terms of any property, services or facilities for the use or benefit of the party (including the services of any persons). Subscription payments for membership to EU trade associations formed for furthering the purposes of their members are excluded.

"EU political expenditure" includes any expenditure incurred by a company:

(i) in preparing, publishing or disseminating any advertising, promotional or publicity material whatsoever which at the time of publication or dissemination could reasonably be regarded as intended to affect public support for any EU political organisation (see below); or

(ii) in respect of any activities carried on or proposed to be carried on by the company which could reasonably be regarded as intended to:

(a) affect public support for:

• any political party registered under the new Act; or
• any political party which carries on, or proposes to carry on, activities for the purpose of or in connection with the participation of the party in elections to public office in any EU member State (other than the UK); or
• any independent candidate at any election to public office in any EU member State; or

(b)

influence voters in relation to any national or regional referendum held under the law of any EU member State.

"EU political organisations" include:

(i) political parties registered under the new Act and any political party involved in (or proposing to be involved in) activities for the purpose of or in connection with the participation of that party in elections to public office in any EU member State (other than the UK); and

(ii) any other organisation which carries on or proposes to carry on activities which could reasonably be regarded as intended to:

• affect public support for any of the bodies mentioned in (i) above, or of any independent candidate at any election to public office in any EU member State (other than the UK); or
• to influence voters in relation to any national or regional referendum held under the law of any EU member State.

An all-party parliamentary group composed of members of one or both of the Houses of Parliament (or of such members and other persons) will not be an "EU political organisation".

Although the interpretation of the term "EU political organisation" has yet to be tested in court, it appears likely that a wide variety of "organisations" (in addition to political parties) will be caught, potentially including many charities and trade or other organisations which undertake any kind of activity which can reasonably be perceived as intended to influence a person’s political views or allegiance or the way he or she votes.

Nonetheless, it would appear that in many instances where (and to the extent that) a company has involvement with organisations which undertake activities with the purpose or intent of influencing the thinking or decision-making process of the Government or any governmental body or organisation (rather than directly or indirectly to affect public support for, or influence the public’s opinion of, political parties or organisations), such involvement is likely to fall outside the mischief which the new Act is intended to prevent.

NEW DISCLOSURE OBLIGATION

The new disclosure obligations replace provisions formerly set out in Schedule 7 to the Companies Act 1985 which required the disclosure of gifts of more than £200 to (broadly) UK political parties (the existing requirements relating to disclosure of charitable gifts are merely restated).

Under the revised obligations, every company incorporated in Great Britain (which is not itself a wholly owned subsidiary of another company incorporated in Great Britain) must disclose in the directors’ report for the year, in respect of the company itself and in a separate disclosure for each of its subsidiaries, any donations to EU political organisations and any incurred EU political expenditure, in each case made or incurred in the relevant financial year, the aggregate of which exceeds £200.

Details must be given of the identity of the recipient of any such donation and the total amount given and of the total amount of any EU political expenditure.

Disclosure is also required of the amount of any contribution to a political party which carries on or proposes to carry on its activities wholly outside the EU member States (whether by way of gift, subscription or similar fee or money spent in paying expenses incurred by that party).

REQUIREMENT TO OBTAIN THE APPROVAL OF THE COMPANY’S MEMBERS

Political donations

All companies (including, where appropriate, subsidiary companies) are now required to seek prior shareholder consent before making any donations to EU political organisations to the extent (if any) that the amount or aggregate amount of any such donation or donations made in any particular qualifying period exceeds £5,000. A "qualifying period" is the period of twelve months from the date which is the earlier of (i) the date of the company’s first annual general meeting after 16 February 2001; and (ii) 17 February 2002; and each succeeding period of 12 months.

EU political expenditure

All companies (including, where appropriate, subsidiary companies) are now required to seek prior shareholder consent before incurring any EU political expenditure.

The Secretary of State has, however, exercised his power under the new Act to make an order by statutory instrument (SI 2001/445) conferring an exemption on companies whose ordinary course of business includes, or is proposed to include, the preparation, publication or dissemination to the public, or any part of the public, of material relating to news, and to public and political affairs and events, and to views, opinion and comment on the news and on public and political affairs and events.

The exemption only applies to the extent the company incurs EU political expenditure in respect of the preparation, publication or dissemination of material of the type referred to in the paragraph above where that material contains matter which would render that preparation, publication or dissemination on the part of the company an activity of that company which is capable of being reasonably regarded as intended to:

(i) affect public support for:

• any political party registered under the Act; or
• any political party which carries on, or proposes to carry on, activities for the purpose of or in connection with the participation of the party in elections to public office in any EU member State (other than the UK); or
• any independent candidate at any election to public office in any EU member State; or

(ii)

influence voters in relation to any national or regional referendum held under the law of any EU member State.

The exemption would, therefore, appear to apply to business activities such as the publication of newspapers which, by its very nature, involves the publication and dissemination of material which seeks to influence the political views of members of the public.

Shareholder approval

Approval must be obtained by ordinary resolution of the members of the company in general meeting or, if the directors or the articles of association of the company so require, by a special resolution (or other resolution passed by any percentage of the members greater than that required for an ordinary resolution). Wholly owned subsidiaries do not require consent of their own shareholders but must obtain the consent of the shareholders of their holding company. A non-wholly owned subsidiary may not lawfully make any donation or incur any expenditure which has not been approved in general meeting by both its own shareholders and those of its holding company.

The resolution must be expressed in general terms authorising the company (or, in the case of a subsidiary, that subsidiary) to make donations to EU political organisations and/or to incur EU political expenditure, stating a maximum aggregate amount in each case, for a period of not more than four years from the date of the resolution. The resolution may not authorise specific individual donations or expenditure. A separate resolution is required in respect of each subsidiary.

Where a subsidiary is incorporated or otherwise established outside Great Britain the holding company must take all steps reasonably available to it to ensure that the subsidiary does not make any donation or expenditure which has not previously been authorised by resolution of the members of the holding company.

No ratification

A company which fails to obtain the approval of its members (or the members of its holding company, where applicable) before making any donation or incurring expenditure in breach of Part XA will not be able to have that act ratified by its (or its holding company’s) shareholders, or otherwise nullify the breach.

Liability of directors

If a company makes any donation or incurs expenditure in breach of the requirement for shareholder approval under Part XA, each of the directors of the company (including any shadow directors) at the relevant time is jointly and severally liable to pay to the company that part of the amount of the donation or expenditure in question which was made in breach, together with damages in respect of any loss or damage sustained by the company as a result of the breach. Interest is payable on the aggregate of such amount(s) from the date when the donation was made and/or the expenditure was incurred to the date of payment. Where the company is a wholly owned subsidiary, the holding company has equivalent rights of action against its own directors (including any shadow directors) at the relevant time, who will also be jointly and severally liable.

Where a subsidiary was established outside the UK the directors of the holding company will be jointly and severally liable to the holding company if they have failed to take all steps reasonably available to them to ensure that the subsidiary did not make any donation or incur any expenditure in breach of Part XA.

Although there are a number of exemptions from and defences to liability available to directors under the new provisions, the power of the court under section 727 of the Companies Act 1985 to grant relief to directors in certain circumstances is excluded in respect of breaches of Part XA.

Actions by members

In addition to the company (or its holding company) itself bringing an action (i.e. one brought by the directors in exercise of the management powers conferred by the articles of association), the new sections 347I, J and K of the Companies Act 1985 make provision for an authorised group of members of the company to bring proceedings against directors and former directors (and shadow directors), and to seek an order that the company indemnify the authorised group against the costs of bringing such action. The authorised group is entitled to require the company to provide all information relating to the subject matter of the proceedings in the company’s possession, or under its control or which is reasonably obtainable by it.

For further information, please contact Ian Stevens at ian.stevens@cms-cmck.com or on +44 (0)20 7367 2597.