GUIDANCE: directors may have to pay back money personally

Directors of companies making donations to political parties could be compelled by shareholders to pay the money back out of their own pockets if they fail to follow procedure properly, new Law Society guidance has suggested.

Measures incorporated into the Companies Act 1985 by the Political Parties, Elections and Referendums Act 2000 make it an offence for a company to make a political donation without the approval of shareholders.

The legislation has caused confusion as to what constitutes a political donation.

As a result, many companies have been tabling precautionary resolutions at annual general meetings to obtain shareholders' consent, even though they have no intention of making political donations as commonly understood.

Advice from London barrister David Mabb QC - produced for the Law Society's company law committee - indicated that companies are right to be cautious.

According to the advice, donations include money, sponsorship, gifts, and the provision of property or services - all estimated at market value.

Paid time off for an employee's trade union activities also constitutes a donation.

Donations or gifts made to individuals but used by them for political purposes (for example, a gift of wine used for a networking party) fall within the legislation, as they are deemed to be for the party not the individual.

If companies make donations in breach of the rules, every director at the relevant time is liable to reimburse the company for the amount, plus any damages for loss arising to the company as a result.

The committee sought the advice because the issue is causing concern to lawyers and expense to companies in obtaining legal advice in framing resolutions.

Vanessa Knapp, a partner at City giant Freshfields Bruckhaus Deringer and chairwoman of the company law committee, said many companies had erred on the side of caution.

She added: 'This advice gives companies and lawyers a thorough explanation...

the committee knew that companies were very concerned and were taking different approaches.'

LINKS: www.lawsociety.org.uk

Jeremy Fleming