Britain’s biggest investors have written to the Government to demand changes to the new Companies Act, which they say prevents them from taking action over unsatisfactory behaviour by businesses.

In a letter yesterday to Stephen Timms, the Minister for Competitiveness, the Association of British Insurers (ABI) complained that it had “suddenly become exceptionally difficult for institutional investors to attend, speak and vote at company meetings”.

The ABI’s members own 20 per cent of the FTSE 100.

Peter Montagnon, the association’s director of investment affairs, said that the Act had caused a rift between fund managers and the custodians who looked after the funds’ shares.

City lawyers cannot agree on the meaning of two sections of the Act, leaving shareholders paralysed, he said.

A fund manager said: “It’s a very technical issue, but it’s of considerable concern. The wording is an accident, but it needs to be sorted out.”

The 2006 Act aimed to simplify rules and regulations for businesses. Most of the provisions within the Act came into effect on October 1 and the Government said that the new laws would save companies up to £250 million each year.

But the ABI said that the wording of section 323 of the Act prevented fund managers from casting opposing votes on the same issue at annual and extraordinary general meetings.

Investors usually vote by proxy 48 hours before a vote at the meeting. But if there has been a particularly contentious issue — executive pay, for example, then discussions with the company can continue right up to the meeting.

In these cases, the fund appoints a representative to attend and cast the votes as directed by the customers of the fund.

Sometimes, this nominated person must represent more than one of the investors’ customers.

For example, individual pension schemes that invest in the fund may have differing views on the same issue, forcing the representative to vote for and against on a single issue.

As a result of the confusion over the new laws, custodians — the giant banks that take care of shares on behalf of fund managers and other owners — have started to refuse to allow appointed representatives to use the voting rights attached to the shares.

Meanwhile, some companies are changing their own articles of association to prevent representatives from making opposing votes at their AGMs and EGMs.

Mr Montagnon said: “We need to defend an important right of institutions, but we can only do so at risk of unhealthy friction between companies and shareholders, which will increase sharply as next year’s reporting round gets under way.”

Although some lawyers argue that section 152 of the Act overrides the requirements of section 323, other lawyers disagree. Only an amendment to the law will clarify the issue, Mr Montagnon said.

A spokesman for the Department for Business, Enterprise and Regulatory Reform, formerly the Department of Trade and Industry, said: “We’re aware of these [problems] and we are already discussing them with key shareholders and considering the issues further.”

The spokesman said that the department began holding meetings last week to iron out wrinkles in the Act.

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