| The Funding of Political Parties in the United Kingdom | ||||
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CHAPTER FIVE POLITICAL DONATIONS BY COMPANIES Shareholder approval 5.1 The Neill Committee recommended that a company wishing to make a donation to a political party should have the prior authority of its shareholders (R34). They further recommended that a donation for these purposes should be defined so that it covered not only monetary donations but other forms of financial benefits, including sponsorship and loans or transactions at a favourable rate. 5.2 The Department of Trade and Industry issued a consultative document in March 19991 which stated that the Government accepted these recommendations and sought views on their implementation. A number of helpful comments have been received. 5.3 The Government agrees with the Neill Committee's view that the regulations governing political donations will be ineffective unless a definition covering both money and non-monetary benefits is adopted. It also believes that, in line with the current disclosure requirements in the Companies Act 1985, the definition should cover both donations to political parties and donations to other organisations and individuals engaged in activities which could reasonably be regarded as likely to affect public support for a political party. 5.4 The Neill Committee's report recognised that money provided by way of sponsorship may be seen by the sponsor as marketing expenditure, fully justified on commercial grounds alone and the payment for which is not at a favourable rate. The Government believes that there may be a case for separating out genuinely commercial arrangements of this kind from other forms of sponsorship which can be more readily equated with a donation in the usual sense. It intends to consider this issue further. 5.5 The Department of Trade and Industry's consultative document sought views on whether shareholder consent should also be required for any advertising or other promotional material by a company which would reasonably be regarded as likely to affect public support for a political party. Some respondents argued that consent should not be required for such activities, principally on the ground that such advertising was usually in response to a clearly identifiable commercial need. However, most respondents - including the Neill Committee itself - took the view that there were not adequate grounds for exempting advertising which could reasonably be regarded as likely to affect public support for a political party. The Government agrees with this view, although it accepts that any detailed definition should exclude commercially justified advertising. 5.6 In the light of the consultation, the Government agrees with the Committee's conclusion that the board of directors should be permitted to seek a broad enabling power for the making of donations up to a prescribed limit. The Government is minded to agree with the Neill Committee that such a power should be valid for up to four years, but it will further consider this question before coming to a final view. 5.7 The Department of Trade and Industry's consultative document sought views on possible means of redress for shareholders in circumstances where a company has made a political donation without shareholder authorisation. On the basis of the responses to the consultative document, the Government has decided that directors who make a political donation without proper authority should be personally liable to make restitution and, where appropriate, to pay damages as compensation for harm caused to the company by the unauthorised donation. It should be open to companies to bring proceedings against defaulting directors; but, given the possibility that all of the directors of a company may be in default, there should also be a streamlined procedure available to shareholders to seek a remedy against them. The Government believes that these measures, taken together, would provide an effective and proportionate remedy to shareholders. 5.8 The Government believes that, in the case of subsidiary companies, there should be a requirement that the shareholders of both the subsidiary company and any parent company should give their prior approval. It would clearly be unacceptable if a requirement for prior shareholder approval could be circumvented by donations being made through a subsidiary company, particularly in cases where the parent company was the subsidiary company's only beneficial shareholder. Disclosure 5.9 The Government has decided to extend the disclosure requirements in the Companies Act 1985 to cover all forms of political donation made to political parties or organisations2. It believes that, in line with the current disclosure requirements, companies should be required to state the total amount donated to each party or organisation. They should, however, be permitted to separate out different types of "political donation", provided that the total amount is clearly identified. Companies would be required to disclose separately the amount spent by the company on advertising or other promotional material which could reasonably be regarded as likely to affect public support for a political party. 5.10 Given the view expressed in the consultative document that the key issue is whether a donation is in the company's interests rather than whether the donation is material to the company's finances, the Government has decided that the current disclosure threshold should not be changed. The directors of a company which has made political donations which, in aggregate, exceed £200 will therefore be required to make a disclosure relating to the company's political donations in the directors' report. 5.11 The Government has decided that, in line with the current disclosure requirements in the Companies Act 1985, disclosures by parent companies should be required to cover donations both by the company itself and by any of its subsidiaries. Donations to political parties in other countries 5.12 The Neill Committee's terms of reference were confined to the funding of political parties in the United Kingdom. The Department of Trade and Industry's consultative document, however, invited views on whether the definition of a political donation should, in relation to companies, include donations to foreign political parties or organisations. 5.13 The Government has concluded that there should be two separate regimes in respect of political donations by companies. The first regime would apply to donations to political parties or organisations carrying on political activities in the United Kingdom or in any other member state of the European Union; the second regime would apply to donations to political parties in the rest of the world. 5.14 The Government believes that donations to political parties in other member states of the European Union should be subject to the same requirements in relation to both prior shareholder approval and disclosure as donations to United Kingdom parties. This reflects the potential for the views of political parties based in other member states to have a direct impact on the commercial climate in the UK through bodies such as the European Parliament. 5.15 The issues relating to donations by companies to political parties in the rest of the world are complex. The Government accepts that there are strong arguments against extending the regime which will apply in respect of donations to political parties or organisations based in the European Union to donations to the political parties of countries in the rest of the world. 5.16 Some respondents to the Department's consultation argued that it would be wrong to extend a principle on political donations which is well understood in a United Kingdom context to all other countries of the world. It was pointed out, for example, that in the United States there is a much readier acceptance of political donations as a normal part of political life. Some major international companies said that they came under considerable pressure to make "political" donations where there was every reason to resist doing so, and that the disclosure that a company had made such a donation to one party or in one country could make it more difficult to resist giving donations to others. Respondents also suggested that British companies might be less able to compete internationally if they were subject to laws and regulations in relation to political donations which applied only to companies incorporated in the United Kingdom. 5.17 There are, however, also strong arguments for including donations to foreign political parties or organisations in the definition. Foreign donations may, for example, be more material in proportion to the scale of the company's overseas operations than are the company's donations in the United Kingdom or the European Union. It may also be argued that it would be illogical in corporate governance terms for shareholders to be asked to approve only donations to political parties in the European Union, given that shareholders are no more willing to treat donations to overseas political parties as routine business expenditure than donations to political parties within the European Union. 5.18 The Government has decided, in light of the responses to its consultation, that overseas donations should not require prior shareholder approval, but that companies should be required to disclose a single aggregate figure in respect of monetary donations to overseas political parties. This would provide a warning flag to investors if companies were making substantial overseas donations. 5.19 The Bill as introduced will amend the Companies Act 1985 to give effect to these conclusions. Parallel amendments will be made to the Companies (Northern Ireland) Order 1986 so that the requirements will apply to all companies incorporated in the United Kingdom.
1 Political Donations by Companies, DTI reference no. URN 99/757. 2 Section 234 of and Schedule 7 to the 1983 Act currently require companies to disclose only monetary donations.
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