Helen Shilling sets out the provisions of rules that impose restrictions on political donations and the impact on private and public companies

The insertion of part XA Companies Act 1985 (Control of Political Donations) by the Political Parties, Elections and Referendums Act 2000 has caused problems for corporate and commercial lawyers and their clients (see [2004] Gazette, 12 February, 6).

The uncertainties that arise from the drafting of part XA have been demonstrated by the fact that some listed companies have considered it necessary to pass so called 'protective' resolutions, purporting to authorise political donations and European Union political expenditure at their annual general meetings.

They have done this despite having express policies of not making political donations.

The provisions apply to both private and public companies, and although the issue is less likely to be significant in relation to private companies, they cannot be ignored by companies or their advisers.

The prohibition

Section 347(C) of the Companies Act 1985 prohibits companies from making any donation to any registered party or other EU political organisation or incurring any EU political expenditure unless authorised by an approval resolution passed at a general meeting before the donation is made or the expenditure incurred.

Financial thresholds apply to this prohibition.

An EU political organisation includes a registered political party and an organisation that carries on or is proposing to carry on activities that are capable of being reasonably regarded as intended to affect political support for any registered party.

Although it is a question of fact in each case, most trade unions will probably qualify as EU political organisations.

For example, campaigning for an improvement in employment rights could reasonably be regarded as intended to affect public support for registered parties that supported or opposed the improvement.

Even if that were not the main intention of the trade union, the fact that the activities could be reasonably regarded as intended in part to affect public support for a registered party would be enough to bring the trade union within this provision.

Most charities should fall outside the definition, although it is unlikely that a charity could never be an EU political organisation.

Donations

The definition of 'donation' includes gifts of money, sponsorship, money spent on paying expenses incurred directly or indirectly, money lent 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 organisation (including the services of any person).

The value of a donation is normally the market value of the property in question.

Also, where money or property is transferred to an organisation under an arrangement that involves the organisation providing property, services or facilities or other consideration - the value of which is less than the market value of the money or property transferred to it - the transfer counts as a donation.

Here the value of the donation is the difference between the money or market value of the property in question and the total value of the consideration provided by the organisation.

One problematic area has been in the making of donations to individuals because anything given or transferred to any officer, member, trustee or agent of an EU organisation 'in his capacity as such and not for his own use or benefit' is to be regarded as given to the organisation.

Typical issues are:

- The status of a donation made because the donee is a member of an EU political organisation but intended for his personal consumption, for example, a case of wine, or tickets to a cultural or sporting event;

- Whether allowing individuals to take time off work for trade union activities or to hold public office can fall within the legislation.

In the first case, a key issue is whether the gift is for the individual's own use or benefit.

A distinction can be drawn between donations to members to use on party business (which would fall within the legislation) and donations to members to use on their own business which would not.

In the second case, the time off is capable of amounting to a donation to the extent where there is a statutory requirement for an employer to provide time off.

Contravention

Where a company makes a donation or incurs expenditure in breach of the prohibition, every person who was a director at the relevant time is liable to pay to the company the amount of the donation or expenditure and interest and damages for loss or damage sustained by the company as a result.

Liability of directors is joint and several.

A defence is available where (among other things) the unauthorised amount, together with interest, has been repaid to the company and that repayment approved in general meeting.

Where a company is a wholly-owned subsidiary of a holding company, no resolution of the subsidiary to make donations or incur expenditure is required, but a subsidiary approval resolution made before the relevant time and passed by the holding company is.

Where the subsidiary is not a wholly-owned subsidiary of the holding company, both a resolution of that subsidiary and a subsidiary approval resolution are required.

However, problems arise where a subsidiary has more than one holding company.

For example, C is a wholly-owned direct subsidiary of B which is, in turn, the wholly-owned direct subsidiary of A.

No resolution of C is required, but subsidiary approval resolutions of both B and A are required, with that of B serving no useful purpose.

Equally, where C is the non-wholly-owned direct subsidiary of B, which is the wholly-owned direct subsidiary of A, subsidiary approval resolutions of both B and A are needed as well as C's approval resolution.

Again, the resolution of B serves no useful purpose.

A subsidiary approval resolution may not relate to donations or expenditure by more than one subsidiary, so holding companies must pass separate subsidiary approval resolutions for each subsidiary.

However, where required, there is nothing to prevent a holding company from passing a single composite approval resolution for donations or expenditure both by itself and a single subsidiary.

Where the holding company fails to pass the requisite subsidiary approval resolution, every person who was a director of the holding company at the relevant time is jointly and severally liable to pay to the holding company the amount of the donation or expenditure made by the subsidiary plus interest and damages in respect of loss or damage.

This liability to the holding company is separate from, and in addition to, the liability of the directors or former directors of the subsidiary to the subsidiary so, in principle, discharge of the liability of one would not discharge the liability to the other, although qualifications to this apply.

- The Law Society, with the help of its company law committee, has instructed David Mabb QC of Erskine Chambers to consider some of the most difficult points.

Counsel's opinion is available to view in full text format on the Law Society's Web site (www.lawsociety.org.uk under company law).

It considers the background to the implementation of part XA and then examines various aspects of the legislation in detail.

Helen Shilling is a member of the Law Society's company law committee