EMPLOYEES' RIGHTS AND COMPANY LAW

HC Deb 17 June 1976 vol 913 cc885-944

10.1 p.m.

The Under-Secretary of State for Trade (Mr. Clinton Davis)

I beg to move, That this House takes note of Commission Documents Nos. R/2155/75, R/2863/75, R/2381/72, R/131/73, R/69/76, R/569/74, R/2128/72, R/2053/72, R/3128/75, R/1279/75, and R/160/76 relating to Employees' Rights and Company Law. I should like to begin by paying tribute to the Select Committee on European Secondary Legislation for its Eighth Report, which is before the House to assist us today. The Committee has considered a whole series of draft instruments concerning company law, and in analysing these complex and technical documents it has been assisted by a tremendous amount of work done in another place. It has presented the issues to us in a clear and intelligible form. There is considerable value in the expertise with which the reports have been presented in the field of negotiation which remains to be undertaken.

It would be convenient to the House if I were to introduce the documents fairly briefly and then respond at the end of the debate to specific points which may be raised. Work on all the documents before us, with the exception of the Commission's Green Paper and draft directive on the admission of securities to listing, was begun a considerable time before our accession to the Community. Consequently, they were prepared along lines which reflect the continental or Roman law concepts rather than the different principles which underlie the company law of the United Kingdom and Ireland.

Our negotiators in Brussels were at a considerable disadvantage in seeking to integrate into the philosophy the traditional principles of our own law, and inevitably the process of negotiation has been slow and difficult. I acknowledge the patience with which our point of view has been listened to and the readiness to recognise our case and make accommodations.

In negotiations on company law directives, we have been following four general precepts. The first is not to accept changes which would be detri- mental to our own companies and which would seriously undermine our own legislation. The second is to press for equivalence rather than uniformity in this process and to avoid becoming submerged in too much detail and entering into specific rules. The third is to preserve as much of the flexibility of our own system as we can. The fourth, and most important, is to arrive at a conclusion whereby the minimum requirements only are imposed so that we remain free to impose additional requirements in United Kingdom company law as may be found necessary.

Changes in our domestic company law are long overdue. These changes need to be fundamental. There has to be a radical change of emphasis. The traditional methods of reforming company law, such as those embodied in the 1973 Bill, are no longer adequate. For these reasons the Government have undertaken a wide-ranging review of company law, have set up the Bullock Committee on industrial democracy in the private sector and have engaged in a review of arrangements for supervision of the securities market. All these developments, coupled with the changes presaged by the documents we are now considering, make is abundantly clear that the next few years will provide us with the greatest period of radical reform of company law in the history of this country.

I now turn to the documents and will explain briefly the stage which they have reached. I shall say something about the main recommendation of the Select Committee's report. I begin with the draft second directive which deals with the co-ordination of safeguards in respect of the formation of public limited liability companies and the maintenance and alteration of their capital.

The Select Committee's report was necessarily based on a text which was considerably out of date. A considerable number of amendments have been made in the course of the three readings of the document in the Council's working group, and substantial progress has been made in the last two or three months during which time our negotiators in Brussels have had the benefit of the Select Committee's report. Notably, it has now been accepted by the Commission and the other members of the Com- munity that the directive should apply in the United Kingdom only to public companies. That was a matter that was causing a great deal of concern. Public companies have been selected because they are most closely analogous to companies in the other member States to which the directive will apply.

It will, however, be necessary to introduce legislation which will require all companies to make it clear in their titles whether they are public or private companies, and this will probably be done by some alteration to the titles of public companies. It is planned to bring a draft of this directive before the Committee of Permanent Representatives in Brussels in the very near future. Although final agreement has not been reached on some of the other points to which the Select Committee has drawn attention, I believe that there is good reason to say that our views on most of them will be recognised before the directive is finally adopted. This will require amendment of our company law to bring it into operation not less than two years after its adoption.

I turn to the draft third directive on company law concerning agreed mergers between public companies, and in conjunction with that I shall take the draft directive on the safeguarding of employees' rights in the mergers, takeovers and amalgamations, which is more commonly known as the "acquired rights" directive. Although it has been found convenient to deal with this matter in conjunction with the company law directives—in another place this was dealt with in the Twentieth Report of the Select Committee there—nevertheless this is not a company law directive and ordinarily it would fall to be dealt with by the Department of Employment. My hon. Friend the Under-Secretary of State for Employment is here to rescue me if it should be necessary.

No work has been done on the third company law directive since the first reading of the draft was completed in November 1973. It appears likely, however, that consideration of the text will be resumed in the near future, though I expect that some considerable time will elapse before the directive is ready for adoption. During the ensuing negotiations we shall, of course, pay careful attention to the points which have been singled out in the Select Committee's report.

The acquired rights directive is much further advanced and is expected to be adopted by the Council of Ministers later this month. A revised explanatory memorandum is before the House which states that amendments have now been made which deal with the two matters to which the Committee drew attention. Those are, first, that it is now agreed that the provision in Article 6 prohibiting dismissals on the occasion of a transfer except for "pressing business reasons" should be amended by deleting that phrase. It is likely that the directive will not necessitate any significant changes in current legislation affecting dismissals.

The second point on which the Select Committee commented was that the consultation provisions of Article 9 were not to apply to mergers covered by the third company law directive, which also contains provisions on consultation, but it has now been agreed by member States that the consultation required in the directive will apply to third directive mergers.

The fourth directive deals with the content of company accounts and the form in which they should be presented. I readily acknowledge the assistance which our negotiators have received from the accountancy profession, which has been most valuable. Progress on the directive has been reasonably good during the past 12 months. It is possible that it could be ready for adoption by the middle of 1977.

The Select Committee has drawn attention to four matters of importance concerning this document, and I shall refer to them in turn. First, the text has now been revised in a manner which, in our opinion, makes it clear that the principle that the accounts shall give a true and fair view of a company's affairs should be recognised as overriding other considerations. The concept of the true and fair view is essentially one which was born and practised in this country, and is unfamiliar on the Continent. I am sure that hon. Members who belong to the accountancy profession will recognise how important this change has been.

Secondly, the Committee refers to the need to draw a distinction between private and public companies, and we shall be pursuing this on the lines already agreed for the second directive. We shall seek to clarify the position of acceptance houses. The third point concerns the period for the writing off of goodwill. This is a difficult problem which requires considerable further study.

Finally, the Committee recommends that the accounts of groups of companies should be presented in consolidated form. This is desirable, and the Commission has recently published a draft directive on group accounts. However, difficult problems are presented, especially as regards the definition of groups of companies which should be required to present consolidated accounts. It follows, therefore, that it may be some considerable time before the directive is ready for adoption. In the meantime, and while the work continues, I think it may not be desirable to delay the fourth directive.

Another important issue concerning the fourth directive is the provision that is to be made for inflation accounting following the Sandilands Report. Agreement has been reached in Brussels that the directive must accommodate inflation accounting, and the precise way in which that should be treated in the directive is currently under discussion. I say in parenthesis that I was intrigued to read in page 5 of the Fourth Report from another place the interesting and unimpeachable assertion made in the evidence given by the Accepting Houses Committee that conservatism is not identical to prudence. It is true that that observation was made in an accounting context, but I sense that it has somewhat wider implications.

Although the directives that I have mentioned so far have been concerned primarily with technical matters, the fifth directive on the structure of companies deals with subjects of major industrial and political importance. The right hon. and learned Member for Hertfordshire, East (Sir D. Walker-Smith) is especially interested in the fifth directive and is playing a leading part in Europe in the move towards its final form. The directive contains provisions for the introduction of two-tier boards, providing for supervisory and management boards in companies with more than 500 employees, and the proposal that supervisory boards should include one-third of members appointed or approved by the workers or their representatives. It deals with the powers, duties and liabilities of persons appointed to the supervisory and managerial boards, the rights of shareholders' general meetings, the approval of accounts and the appointment and responsibilities of auditors.

The Commission recognises the fundamental importance of these issues, particularly in connection with industrial democracy. In order to encourage public debate on these important issues, it has published a Green Paper on employee participation and company structure. That document is before the House, and I shall refer to it more specifically later.

In the meantime, the draft fifth directive can be regarded as being in abeyance. No discussions are taking place on it at present. The Commission intends to revise it after the end of this year in the light of consultations which take place throughout the member countries on the Green Paper.

The Green Paper contains an extensive survey of the problems of company structure, the responsibilities of boards of directors and the question of two-tier boards and employee participation. We welcome that approach to this important subject. We particularly welcome the evidence of understanding of the need for flexibility in Community legislation in this area.

As the House knows, the Government have appointed a committee of inquiry, headed by Lord Bullock, to examine and advise upon these issues. It would be inappropriate for me to enter upon any discussion of the detailed proposals until the report of the Bullock Committee is before us. Suffice it to say that we regard the underlying philosophy of these concepts as fundamental to the creation of a new spirit in industry—a movement of ideas throughout the Community which, in my view and that of the Government, is irresistible.

Mr. Tim Renton (Mid-Sussex)

Does the hon. Gentleman anticipate that when the fifth directive is reconsidered the Commission will accept that its provisions should apply to public com- panies in this country rather than to all limited liability companies? Will the Commission accept the same kind of amendment as the hon. Gentleman has advised us has been accepted in relation to the second directive?

Mr. Davis

I cannot answer that question, because it will obviously be the subject of considerable debate. It will depend on the reflections of the member countries on the Green Paper. The hon. Gentleman is asking me to prophesy something which I do not think anybody is capable of prophesying at this time. I am sorry that I cannot be more helpful in answering that question.

The sixth directive aims to co-ordinate the information to be provided to the public in prospectuses issued by companies seeking Stock Exchange listing of their shares. The Stock Exchange has been assisting in the preparation of the draft. It is expected that consideration of the text in the Council of Ministers working group will begin later this year. In general, we are broadly satisfied with the progress that is being made, although the amount of detail asked for is still somewhat excessive having regard to the standards already set by the Stock exchange for listed companies in this country.

I should now like to refer briefly to the draft instrument, examination of which is not yet complete, which complements the sixth directive. Whereas the latter is concerned with information to be supplied to the investing public, this draft provides for minimum standards which securities must attain before being admitted to final Stock Exchange listing. It is seen only as a first stage in a wider harmonisation process. The Stock Exchange has been actively concerned in the preparation of the draft, and it is anticipated that consideration of the text in the Council of Ministers working group will begin in 1977.

The House will recall that the Sixth directive was debated in another place on 8th April. The debate demonstrated that there appeared to be no major difference between any of the parties in that House or, indeed, about the Government's approach to the negotiations that are being pursued.

I turn next to the European companies statute, which is a draft regulation. Unlike the directives that I have discussed so far, it would, if adopted, take direct effect as law in the United Kingdom. There would be no necessity for amendment of any United Kingdom legislation. It would simply take effect as the law of this country.

The proposed statute would make available a new legal form of a company—the European company—incorporated under Community law. Its use would be optional. That is to say, it would apply only to companies that decided that they wished to form a European company, either by a merger with a company in another member State or by combining with a company in another member State to create a joint holding or a subsidiary company.

Despite its optional status, the Government consider that this proposed statute represents a range of important issues and problems, which are set out in the explanatory memorandum. The Committee of Permanent Representatives in Brussels is now considering a number of political problems which will arise from the statute, not least its far too rigid—in my judgment—provisions for industrial democracy, which are about equivalent to the German system as it was, and it is considering what machinery should be set up to process the document. The Commission has urged the Council to adopt the statute by the end of this year, but in the view of the Government we need a very careful and prolonged examination of this draft statute before a decision can be taken by the Council of Ministers concerning its adoption.

I am somewhat sceptical about it and about its value. We are not convinced of the need for the creation of the European company at present. We have the strongest reserve about the "European company" which would operate in the United Kingdom and yet not be subject to United Kingdom company law, and we take the view that European Community company law should follow and build upon the directives rather than precede them.

Necessarily, I have had to paraphrase comments about the directives and about the other issues on which I have spoken, because it is difficult to foresee what will be the issues raised by hon. Members in so wide-ranging a debate on such technical and complex issues as these. However, in conclusion, I want to say that I shall do my best to respond to any specific points that are made by hon. Members.

We very much welcome the opportunity for debating these matters. I think that it is the first time we have been able to have a comprehensive debate. Notwithstanding the lateness of the hour, I think that it will have value. It will, of course, have value to those who are negotiating on behalf of Britain to secure the best deal that we can and the best form of European company law. It follows also from this that the House will recognise that the report of the Select Committee has been considered by the Government with great care and will also be of continuing value to us in the discussions that will necessarily take place over a very long period.

Mr. Deputy Speaker (Sir Myer Galpern)

The Question is as printed on the Order Paper—notwithstanding the lateness of the hour.

10.25 p.m.

Mr. Esmond Bulmer (Kidderminster)

The Government have invited us to take note of eight Community documents which cover a great deal of ground. I propose to deal with the employment aspects of the Green Paper and my hon. Friend the Member for Mid-Sussex (Mr. Renton) hopes to have the opportunity to deal with company law.

The importance of the Green Paper, both of itself and in the context of the Bullock Committee, cannot be overstated. We welcome the constructive contribution made to the debate by the Green Paper issued by the Commission, and we join with the Government in welcoming its emphasis on flexibility and concerning the need for time to allow member States with different backgrounds in industrial relations to come closer together.

The Commission in its document spells out the case for harmonisation, the need for common standards as a prerequisite for progress towards a genuine Community, the economic benefits that flow from the removal of national barriers to the development of trade and the merg- ing of companies, the social advantages that stem from greater mobility of labour and equivalent safeguards and responsibilities for those at work, and the reduction of imbalance between regions.

We would not dissent from any of those matters nor from the Commission's judgment that the Community's foundation must be completed, otherwise it may well collapse. Commissioner Gundelach, in a recent speech, drew attention to the relative decline of Western Europe in relation to some other countries following the dramatic increase in the price of oil and the effect on national resources on which prosperity depends. The Commissioner said that if we are to prosper we must invent, manufacture and trade more effectively than our competitors. To do this we must harness the full creative abilities of our citizens. We all agree that we have a long way to go to achieve this.

As a first step, the Green Paper rightly draws attention to the democratic imperative—the need to recognise that those who will be substantially affected by decisions made by political and social institutions must be involved in the making of those decisions. If we are not to be progressively discomfited by the speed of change and by its sometimes unforeseen nature, and if we are to carry through the fundamental reorganisation that is necessary in much of our industrial life, we can do this only with the active support and understanding of those affected.

We have a great deal to change. The approach of scientific management which sought to take all decision-making out of the job is now clearly counterproductive. As Len Neal put it, "We have run out of morons". Indeed, our school leavers are better informed than ever before. How many jobs insult the intelligence? How many jobs are dead end? We have to meet the higher aspirations of those at work, and we have a task no less formidable than to reestablish the emotional security of work forfeited during the Industrial Revolution.

We must do all we can to encourage management by consent. "Theirs not to reason why" was an attitude as disastrous to Lord Cardigan and the Light Brigade in the past as it would certainly be to any management in the future. It is foolish to think that way. The willingness to trust is an essential prerequisite to success. This, more than any formal structure, will build confidence and reduce confrontation.

We have to bring about a substantial shift in employment from activities which consume wealth to those which create it. We have to streamline those industries which clearly are overmanned and we must reduce unemployment. We cannot hope to do this without the help and understanding of the trade union movement. Whether this can best be enlisted by the development of collective bargaining or by presence at the board table has yet to be worked out.

The Green Paper, while acknowledging the role of collective bargaining and the need to extend it across national frontiers, comes down firmly on the side of board-level representation and the fostering of understanding through co-operation rather than conflict.

The trade union movement is divided over employee directors. To some extent, perhaps, that division reflects the difference in attitude between union leaders whose members work in the areas of the economy which are successful and those who, if they were to accept the responsibility, would have all the difficult decisions to take.

Overmanning is a problem in many industries—steel, printing, railways and the motor industry. It is not reasonable to expect trade unions to co-operate and even to shoulder a major responsibility in the streamlining of these industries without a major contribution from the Government to retraining and the development of social plans which remove hardship and foster hope. Nevertheless, at the macro-economic level of the TUC it is obviously in the interests of all our labour force that it should be deployed to produce the maximum wealth. A recent survey of those working in the nationalised industries showed that 57 per cent. thought that they could do more work without too much effort. This was twice the figure for small business and was some indication of the contribution that might be unleashed if motivation could be improved.

The Green Paper rightly points out that company law must reflect the real world. The Under-Secretary of State has said that British company law is outdated and derives from the nineteenth century and that the board of directors is charged with the management of the company in the interest of the shareholders. Our Bill to reform company law which was lost as a result of the February 1974 General Election made it clear that we thought the time had come to formalise the obligation of directors to take into account the interests of the employees, although that is indeed taken into account by the vast majority of boards.

Mr. Clinton Davis

Is it not the fact that no mandatory requirement was set out in the 1973 Bill to that effect?

Mr. Bulmer

The word was "entitled".

I think we might now wish to go further. In fact, I believe that we need to go further and perhaps require the chairman of an organisation to show how the employee's interest is taken into account, and to provide for companies with over 2,000 employees to enter into participation agreements as outlined by the CBI and for codes of practice, relevant to the great diversity of British industry, both public and private, to be established by a body on the lines of the Advisory, Conciliation and Arbitration Service in order to point the way.

The Green Paper rightly stresses the need for time to effect changes that are agreed to be desirable. All the companies which have been most successful in developing participation up to board level, such as the Bristol Channel Ship-repairers, understand clearly that this is a long process even in small companies. To move from little or no participation to the standards of the best that are set today can take up to 10 years.

The Commission is unrepentant in its claims for the supervisory board. The arguments which it puts forward are powerful: that long-term policy can more easily be put before consideration of the short term, that decision-making and decision-taking are less likely to be confused, and that management is more effectively supervised. The CBI has set out well the contrary arguments. I noticed, however, that Unilever, in its submission to the Bullock Committee and from long experience of supervisory boards, gives them a substantial measure of support.

Unilever and other major companies are at one, however, in supporting the Commission concerning board representation on the basis of two-thirds shareholders and one-third employees. Unilever, in its rejection of the TUC's submission for parity, said: We totally reject this proposal which would mean that the United Kingdom, from a base generally less developed than any of the Continental countries discussed, would in one jump reach a state which none of those countries has deemed necessary even after long experience. Employee relations is not a field for taking leaps in the dark. Furthermore, Supervisory Boards with 50 per cent. representation would create the risk that shareholders, through their representatives, would no longer be able to exercise the ultimate control which should derive from their ownership of the Company. It is still a fundamental characteristic of a free society that property rights should be respected and protected. Every British company would, I believe, echo those sentiments. If the Government were to seek to legislate on the basis of the TUC's proposals, this would attract a reaction from management and shareholders that would mirror the hostility of unions to the Industrial Relations Act. The effect on the pound and on investment would be disastrous.

A more general and gradual approach is what we would all welcome. The Biedenkopf Commission found that the more effective was the participation on the supervisory board, the more smoothly the workers' council functioned. Commissioner Gundelach has rightly emphasised the need for supporting structure, and in the present evolution of British industrial relations, it might well be more sensible to legislate for employee councils rather than board representation. It is from membership of such councils that employee directors will most naturally evolve.

There are a number of points in the Green Paper which we would specifically wish to recommend to the Bullock Committee and in which we hope that the Government will join us—for example, that worker directors should be employees of the company, that board level representation can function most efficiently on the stem of proven structure, that employee directors should be truly representative of employees and that all employees should be involved in their election, and that employee directors should be responsible to the enterprise as a whole.

I believe with Commissioner Gundelach that no union can claim that the existence of formal democratic guarantees is harmful to it. Further, it is no service to the trade union movement to seek to deprive employees who are not members of trade unions of fundamental rights. There are millions of them. The Green Paper makes it clear that there can be no question of enforcing participation on those who do not wish it but that those who do wish for it must be provided with a proper back-up and secretarial facilities and time to study relevant documents.

The Commission also makes two further points which I think are important—the need to ensure that minority views can be represented, and the contribution which financial participation can make both to motivation and, I would add, to the independence of the enterprise.

I believe that it would be immensely helpful in this country if companies which have outgrown the impetus of the original founding families were able to involve employees in the ownership of the enterprise. There are, of course, the familiar risks which attach to the arguments concerning "all the eggs in one basket", but if companies are to thrive and to remain independent it is in the nature of a mixed economy that some risks should be taken. Too many companies which might have made a valuable contribution in their own right have been sold to larger enterprises when the synergy was high and the price attractive, with disastrous consequences both for employees and for the locality in which they work.

The Bullock Committee has been handicapped from the start by its terms of reference. I hope that it will study the Green Paper for the valuable points that it makes and the pointer that it provides to the way in which participation will be developed within the Community. There is a great need for a non-partisan approach and for a recognition by all concerned that development should be by consent and that there is no middle road between a market economy and a bureaucratic, centralised State. For those who wish to preserve a market economy and freedom of choice, a growing measure of participation by employees is an important key.

We very much recommend to the House many of the points in the Green Paper.

10.38 p.m.

Mr. Ivor Clemitson (Luton, East)

It is a pleasure to follow the hon. Member for Kidderminster (Mr. Bulmer) and to see him, with his considerable knowledge and experience of industry and industrial relations, speaking from the Dispatch Box.

I wish to follow the hon. Member in considering the document "Employee Participation and Company Structures in the European Communities". I found it something of a curate's egg. There is much in it with which I can agree. It talks, for example, about the need to come to terms with the increasing recognition being given to the democratic imperative that those who will be substantially affected by decisions made by social and political institutions must be involved in the making of those decisions. It has taken us a long time to realise that the democratic principle cannot stop short at the narrowest of political limits. Now, unfortunately, it is in danger of becoming a cliche. Nevertheless, we should welcome the fact that the penny is at last beginning to drop.

I cannot dissent from the proposition in the document's conclusion that no attempt should be made to impose a rigid framework for industrial democracy in the EEC. The conclusion states: The main task is to construct a framework which provides for the objectives to be reached in a way which leaves discretion to member States as to the precise models which they may adopt. That is correct. There must be flexibility not only between member States but in any legislation passed in this country which should be enabling legislation.

So far, so good. We recognise the democratic imperative and that it would be wrong to impose a rigid strait-jacket. When, however, one begins to dig beneath the surface of the document and to disentangle some of the basic attitudes and philosophies on which it is based, some nagging doubts arise. For example, the document gets off on the wrong foot by its sympathy for the poor companies which it describes as being imprisoned within their national system. Tears do not immediately spring to my eyes, because when I survey my own constituency, for example, I see that there are a number of "prisoners" which have successfully escaped. A major company in my constituency is owned and controlled by a foreign-based multinational company. The picture of an imprisoned company needing release is wide of the mark in that case.

I should have been happier had the document posed the question of how the great centres of power, the suprenational companies, can be made accountable and democratized—to use modern jargon—instead of dealing with participation in terms of the poor imprisoned company. The supranational companies present a most difficult problem and are a grave challenge to industrial democracy. I do not wish to develop that argument at length, but I am increasingly convinced that the problems cannot be solved in the context of individual nation States and that countervailing power—to use a Galbraithian phrase—must be built up across frontiers by different States and trade unions coming together.

The key passage of underlying philosophy is that on page 51 which says: In so far as economic and social policies come to regard the company as an enterprise in which labour and capital combine in their own and society's interests, then the laws relating to companies will sooner or later have to reflect this change of underlying philosophy". The picture there is one of two groups of people coming together, one of which supplies the labour and the other of which supplies the capital. If that is true, there can be no argument against a fifty-fifty representation on boards. If the two sides are equally important, they must be equally represented.

The document says earlier, in referring to the experience of systems with minority employee representation on the boards: There is no fundamental shift in the ultimate balance of power as regards decision making". We must be fair and recognise that to talk of capital and labour as having equal rights is an enormous step forward. It is patently nonsensical that the control of companies, certainly in terms of the law, should still be entirely in the hands of the suppliers of capital only. I am talking about the legal, technical position, not of what may be the position in practice. I find it impossible to see how that legal position can be defended in the twentieth century.

The view that there are these two distinct groups, the suppliers of labour and the suppliers of capital, who come together is a very simplistic view of the nature particularly of capital in modern society. Clearly a large proportion of capital in a large modern enterprise is that which is produced by the people who work within the company and is reinvested in the company. Much of the capital from outside the company comes from such things as insurance funds and pension funds, which are contributed by millions of people, most of them working people who generally have no say in the running of those funds and how the money is invested.

A much more radical analysis than the one contained in the document is needed. This kind of capital and ownership cannot be adequately dealt with by share participation schemes. The document deals very briefly with this aspect, saying: with a very few exceptions, none of the existing systems in practice give employees any real influence over the decision making of the enterprises in which they work". However, I am not arguing that until we get the ownership question right we should have nothing to do with industrial democracy. That would be a very negative approach. I argue, on the contrary, that the more we move towards industrial democracy, the more will the whole question of the patterns of ownership be raised and the more we shall develop new patterns. I believe that the questions will inevitably flow from the development of forms of industrial democracy.

The same kind of rather superficial thinking comes up again when the question of supervisory boards is considered. It is true that the document asks for a clear distinction between what it calls the function of management on the one hand, and the supervision or control of management on the other", but the real nature of the difference between the two functions is missed in the document. The real distinction is between the making of policy and its execution. I know that in practice it is not easy to distinguish between the two, but I believe that in a conceptual sense we must distinguish between them. What we have in much of industry is an almost total blurring of those two functions. That has not been for the health of industry.

The task of the board—or the supervisory board if we are to use this dualist jargon—should be to make policy. The function of management is basically to carry out the policy as determined. The document talks of supervisory management. Very well, that is fair enough. But supervisory management is essentially a subsidiary function. It is a follow-on function from the making of policy. We must get this distinction clear in our minds.

I must confess that at one time I was sceptical of the idea of workers in the board room, but I have now come round to the idea—provided, of course, that it is on a fifty-fifty basis—because democracy clearly must imply participation in the making of policy at the highest level. I believe increasingly that we cannot achieve that by any other means. The document is basically right on this. One hears the argument that, if one develops and expands collective bargaining that way, one can influence policy and so on at the highest level but in practice collective bargaining has been around for a long time and we are still waiting for the really significant influences on policy at the highest level to come about.

I have become convinced that the sort of proposals put forward by the TUC would bring about that influence over policy-making at the highest level and would, as the document rightly says, provide a fillip to industrial democracy at all levels. Clearly we are talking about the development of industrial democracy not only at the top but at every level in the organisation.

The document shies away rather from the idea of imposing a works council structure except in the case of the Euro-companies, which I do not wish to talk about. It is right not to attempt to impose such a policy. My own observations lead me to the conclusion that such bodies are either talking-shops about trivialities or become challenges to the official trade union organisation, which does nobody any good. At the best, that sort of organisation is a useful stage in the development of industrial democracy or good industrial relations. I do not believe it can bear the weight that some people wish to put upon it.

If we are talking about industrial democracy in the real sense, we are talking not merely about consulting people, however seriously the management may take consultation. We are talking about influencing, determining and changing policy—that is a different order of things altogether—whether it is achieved by representation at board-room level, by collective bargaining or whatever else it might be.

I may have appeared to be unduly critical of the document, but it is important that we should attempt to look at its underlying philosophies on which the proposals are made. In this respect I found the document somewhat lacking in depth. However, I welcome the general commitment to advance in industrial democracy and what I take to be the general approach of not imposing blueprints and of allowing the maximum flexibility.

10.54 p.m.

Sir Derek Walker-Smith (Hertfordshire, East)

Like the hon. Member for Luton, East (Mr. Clemitson), to whose very interesting speech I have listened with close attention, I shall confine my observations almost entirely to the fifth directive. That is not because the other directives referred to and the ancillary documents are not of considerable interest and importance—of course they are. Some of them are of considerable technical complexity as well. But there is no doubt, and this is common ground, that the fifth directive has a far greater content of general political and sociological significance than any of the others. Therefore, it is perhaps right in what is inevitably a relatively short debate, and having regard to the diversity of subject matter, that we concentrate on that subject.

By way of preface, I thank the Under-Secretary for his very kind reference to my own interest and participation in the formulation of this important directive. The fifth directive, with which we are here concerned, was formulated as long ago as September 1972—that is to say, before the entrance of the United Kingdom into the Community.

That explains—if I may say so by way of parenthesis—why my hon. Friend the Member for Mid-Sussex (Mr. Renton) does not find a clear answer to his question as to which British companies are covered. If he looks at the original text of the directive, he will find in Article 1 thereof that the companies to which the directive applies are listed seriatim under the countries—in France, la société anonyme; in Italy, la società per azioni; in the Netherlands, de naamloze vennootschap, and so on. There is not, however, any reference to the limited liability company in this country, because the United Kingdom was not being catered for in the directive.

As "public company" is not a term of art in British company law, certain complications will arise, and to these I drew attention in the early days, three years ago. So far, however, that particular matter has not come to be decided.

In its original form—and as it originally came before the Legal Affairs Committee of the European Parliament, in the early days of my membership of that Committee—the fifth directive was peremptory. Under Article 2, the two-tier board system, as we call it, was mandatory—that is to say, there has to be a management board and a supervisory board. Under Article 3 of that directive, the supervisory board was responsible for the appointment of the management board. Article 4 of the directive specified the composition and appointment of the supervisory board. In effect, two alternative methods were specified, which for convenience I shall call the German and the Dutch methods. The German method involves the appointment of two-thirds of the supervisory board by the shareholders and one-third by the workers or their representatives. The Dutch method involves membership of the supervisory board by co-option, with a right of objection on the part of the workers.

Article 12 of the original fifth directive specified the spheres in which the supervisory board would have the power not only of consultation, to which the hon. Gentleman has just referred, but of co-decision—that is to say, it specified the matters in which the decision of the management board would depend upon authorisation by the supervisory board.

Under Article 64 of the directive, member States would be obliged within 18 months of the promulgation of the directive to amend their company law to bring it into line with the directive and to institute a two-tier system with appropriate employee participation. Such a requirement might have been reasonable in countries already operating a two-tier system and familiar with the concept, but it was hardly realistic in respect of a new member State such as the United Kingdom which had joined after the formulation of the directive and was inexperienced in the two-tier system.

Matters did not proceed very fast, partly because, at the same time, the European company statute was under consideration and the Commission was anxious—and the European Parliament acquiesced—that priority should be given to the evolution of the European company statute. That statute was debated in the European Parliament in plenary session, after lengthy discussion in the Legal Affairs Committee, in July 1974. Many amendments were made, most of which were adopted by the Commission, which recently referred it back to the Parliament. Now it is recommended by the Commission to the Council with those amendments incorporated.

In spite of that impeccable background, I must echo the doubts and scepticism of the Under-Secretary of State as to the extent to which the European company statute will come into operation. As will be recalled by my hon. Friend the Member for Saffron Walden (Sir P. Kirk) and my hon. Friend the Member for Kensington (Sir B. Rhys Williams)—who have made such a distinguished contribution to these matters both in the House and in the European Parliament—I found it necessary in the course of our proceedings both in the Legal Affairs Committee and in the plenary session of Parliament to issue a warning that, although a great deal of labour had gone to the evolution of the European company statute, it might not be taken up to the extent that its originators would wish because its final form was not wholly practicable.

I do not want to make more than a passing reference to the European company statute because we are primarily dealing with the fifth directive, to which the Legal Affairs Committee returned after the passage of the European company statute. We returned to it against the background of knowledge of the difficulties that would face certain member States in adopting that directive as it stood, and we resumed our consideration with the keenest perception of the issues involved, as many of them were common to the European company and had been exhaustively debated in that context in the committee and Parliament.

There is this important difference between the two. The European company is voluntary. No one need form a company unless he wants to. But the fifth directive when it comes into operation will be part of the compulsory processes of harmonisation—or approximation, as it is technically called—of law. It will be compulsory on its adoption in its final form, whatever that might be, for the member States. Therefore, it is a matter of vital importance to the business and industry of this country and the large section of our population engaged in business and industry.

When we resumed our consideration of this matter, we were fortunate in having a Commissioner dealing with these matters, also from a new member State, a man of great wisdom, practical judgment and receptivity of mind, Mr. Gundelach. After his dialogue with us in the Legal Affairs Committee, he informed us that he was withdrawing or deferring his directive and proposing to issue a Green Paper—using that phrase in the English tongue. That is the genesis of the Green Paper which we are discussing today, and which is also currently under discussion in the Legal Affairs Committee of the European Parliament. That means that the final form of the Commission's fifth directive as it will go forward for consideration by the Council of Ministers will be settled only in the light of thorough and detailed consultation with the European Parliament and the Legal Affairs Committee. This is a pre-legislative function of the greatest practical value. It involves the association of Parliament in the vital formative stages of law-making. It is a procedure we have not succeeded in incorporating into our parliamentary process in Britain, in spite of generations of parliamentary experience. I referred to this in my speech in the procedure debate on 2nd February this year, and if any hon. Member is an unsatiable glutton for punishment he can refer to it at column 1087 of the Official Report of that day.

We have already had some parliamentary discussions of the Green Paper in the Legal Affairs Committee with Commissioner Gundelach, and we are about to resume them. Indeed, I was in conversation with Commissioner Gundelach on this subject yesterday in Strasbourg. I left that city before six o'clock this morning in order to take part in today's debates on Community matters, so that if my clarity of exposition leaves anything to be desired I hope I shall be forgiven. That very friendly and constructive conversation with Commissioner Gundelach took place within moments of the vote of censure by our group on the Commission of which he is a distinguished member. It is not only in this Parliament that we observe the traditions of personal friendship in spite of occasional political differences.

Next week, all being well—and who can tell these days in these matters?—we in the Legal Affairs Committee will have our first detailed discussions on the Green Paper with, and in the presence of, Commissioner Gundelach and his officials. We shall seek to answer a series of questions which he is addressing to us. These questions include such matters as the prescription of a transitional period, for which no provision was made in the original directive, and the question of alternative structures which will be permitted during that period.

Four such alternatives are set out at page 74 of the Green Paper. First, there is the two-tier system with employee representation on the supervisory board. Second, there is the two-tier system with a transitional arrangement for employee participation. Third, there is the one-tier system with employee representation on that single board. Fourth, there is the one board system with a transitional arrangement for employee participation—that is to say, not actually on the board.

There are the four methods set out. We shall consider them and, very important, we shall consider the position at the end of the transitional period and what the directive is to prescribe for them. That includes the basic question whether the directive should make the two-tier system with employee participation compulsory at the end of the transitional period or whether, even at the end of the transitional period, the option should be given in the light of the experience of that period to adopt the alternative method of introducing some appropriate form of employee participation short of a full two-tier system with the supervisory board.

The other sort of questions that we shall be discussing with Commissioner Gundelach will include the method of the allocation of the workers' representatives that can be prescribed in such a directive—how far they should be local, to what extent they should be the organised representatives of the trade unions, and the like. Also, I should think that the Commissioner would wish to consult us in regard to the relationship of employee participation to the important question of collective bargaining. All these things go to the heart of the matter. It means, therefore, that the Commission will formulate its substantive directive in replacement of the original 1972 directive only after full consultation with the Parliament and its Legal Affairs Committee, at the same time en rapport with individual Ministers in the various member States. The Ministers in the member States will also have the benefit of the views of their own national Parliaments.

When the time arrives for the Council of Ministers to take its decision, there will be for its help and guidance a whole confluence of parliamentary opinion flowing in from various sources by divers channels and fertilising and enriching the whole democratic process. What will be the outcome? Equally important, what should it be? I shall not suggest answers to the various questions to which I have been referring and on which discussion will begin in the Legal Affairs Committee on Tuesday. It would perhaps be inappropriate for me to do so as it is my duty as the chairman of that committee to preside over the discussions, although, on the continental model. I am a participating chairman and, therefore, I am not shut out from expressing my views in the matter.

I can restate my general views and approach on these questions. In principle, as I have said before in this House and elsewhere, I believe in the two-tier board system and employee participation. I have held this view for several years and would hold it irrespective of the Community implications. I should take the same view if there were not a fifth directive and the harmonisation of company law. I should hold it on its intrinsic merits. I believe in the two-tier method of achieving two desirable and perhaps essential objectives, of the first of which we have properly heard much this evening—namely, employee participation. Curiously enough, we have not heard much about the second set of objectives—namely, a proper place, a proper role and proper protection of the shareholders of the company.

Shareholders play only a mute and inglorious role in twentieth-century capitalism. Although nominally elected by the shareholders, directors in many companies are thought by some to be something in the nature of a self-perpetuating oligarchy, and shareholders have little or no actual say. A supervisory board on the German model with watchdogs, perhaps experienced bankers and the like holding the proxies of individual shareholders and breathing down the necks of the management board would be much more powerful protection for shareholders than anything presently existing in this country.

I have held that view for a number of years, and who can say that some episodes in our company history in the past few years have not justified and reinforced it? On the other hand, I believe that a proper degree of employee participation is the natural order of events and the beneficent and probably essential ingredient in a dynamic and successful system. In the long run, I believe that it can best be achieved by suitable participation in the two-tier board system.

I am also aware of the virtues of collective bargaining and the part it has to play. Indeed. I was brought up hereditarily in an atmosphere of collective bargaining. As a result, I was privileged as a young Member of this House to enjoy the friendship of such great trade union figures of the past as Ernest Bevin and George Hicks. I need no instruction on the merits, qualities and contribution of collective bargaining. However, I think we must recognise that collective bargaining of itself is not enough. There is always the danger that the concept of the two sides of industry, a phrase that find unattractive, is becoming negative. We must get away from the idea of polarisation that is implicit in that phrase. We must get away from not only the implications of dichotomy implicit in that phrase but possible division and even collision and conflict.

Employee participation would give to workers at once a greater responsibility for the industry in which they work and a greater incentive to achieve success for it. I believe that it is no accident that in Germany, where it is practised, the growth rate is so much higher and the inflation rate so much lower than in this country. We need a new spirit of unity in industry, which can be achieved in that way, so that all will be associated with the success of the industry in which they serve.

In conclusion, I would add this cautionary word. The principle is clear and is easy to state, but its achievement in practice may be difficult.

In particular, I stress two points. First, it is vital to get the right balance between the functions and powers of the management board and the supervisory board. We spent many hours discussing this matter on the European Company Statute. In some matters the supervisory board should have the right to co-decision as given, for example, in Article 12 of the original fifth directive. In effect, that is a right of veto. In other matters, however, it is appropriate that a supervisory board should have only a right of consultation. It is necessary to achieve a meaningful role for employees and shareholders through the supervisory board without prejudicing, and still less frustrating, the efficient executive conduct of industry.

My second observation is that worker participation must mean what it says. That is not worker control. Employee participation on a two-tier board is not and should not be the introduction of syndicalism by the side door. It is not intended to be that. Employee participation should reflect local democracy and not be a mere extension of the powers of trade union organisation, which are in all conscience, sufficiently powerful at the present time.

Our goal is clear. When we can hope to achieve it in totality is less clear. For that reason we should be prepared to be flexible, practical and long-sighted. In that spirit, I shall hope to continue my discussions with the Commission next week, and that spirit I commend to the House.

11.23 p.m.

Mr. John Lee (Birmingham, Handsworth)

The whole House should be grateful to the right hon. and learned Member for Hertfordshire, East (Sir D. Walker-Smith) for giving us a long and detailed account of the negotiations that have been taking place. I think that it was of value to all of us, whatever views we may take on the matter.

It is a pity that, once again, a whole series of quite different matters have been gathered together and bundled into the same debate—matters of a technical character relating to accounts, prospectuses and so on, all of which merit attention but few of which will get the attention they deserve because of the late hour at which we normally conduct these deliberations. If we were to give these matters the attention they merit, they would tend to shut out what the right hon. and learned Gentleman has rightly chosen as the theme which will remain the theme for the rest of the debate.

This debate, to make a slightly controversial comment and perhaps to introduce a somewhat discordant note, is based on the premise of the continuation of the mixed economy. That is a premise that I reject and do not regard as being more than a transitory situation. Nevertheless the fact remains that, whatever the political fortunes of this country, the public company in one form or another—indeed, the private company—will be with us for some time to come. Therefore, it is only right to think in terms of company law revision.

My complaint about this matter is that we find ourselves discussing it as a kind of spin-off of European legislation. However, I take the point made by the right hon. and learned Member for Hertfordshire, East that the most painstaking and scrupulously attentive activity is going on in Europe to see that as many people as possible are involved in the discussions and that the atmosphere in which the revision, particularly of the fifth directive, is going on is as democratic as possible. But I do not like the way in which this may tend to pre-empt our own root-and-branch consideration of company law, as I hope it will be.

I hope that the Under-Secretary of State will be able to tell us that, if not in this Session, at least in the coming Session there will be scope for a comprehensive review of company law. I have heard rumours, via the grapevine, that there will be a Companies Bill of a comprehensive kind in the next Session. Bearing in mind that we shall be clearing the decks for action for devolution and that almost everything else of importance will be swept aside, I hope that there will be scope next Session for a review of company law dealing with far wider matters than are under discussion in this debate.

Returning to the theme of employee participation, I echo the remarks of my hon. Friend the Member for Luton, East (Mr. Clemitson). At the end of the day we are considering to what extent we make the government of a company vested in those who work in it to a large extent. I am not casting doubt on the good will of the people concerned, but nevertheless, all the discussion about whether it is to be a one-tier or two-tier board system and about the exact proportion of participation short of 50 per cent, participation represents a kind of fancy franchise or hybrid constitution-making and is done for the purpose of avoiding the reality of control by those who participate.

It reminds me so much of the hybrid constitutions of the emergent colonies, where elaborate franchises are evolved and special measures are introduced into the legislatures to cushion the countries against the effects of democracy. In every case the constitution is swept aside and is replaced by full participation by those elected. I know that the analogy must not be pushed too far, but it is the same kind of situation.

The recommendations contained in the document which suggest the replacement of one-third employees and two-thirds shareholders by the one-third, one-third, one-third concept reminds one also of Dick Crossman's crack-brained attempt to revamp the House of Lords. That provided for the balance to be held by some indeterminate grey area held by the kind of people the Leader of the House would call political eunuchs.

At the end of the day the House will have to recognise that, whatever the European Commission may want when it has finished its deliberations and whatever the European Parliament may want, Labour Members will not be content with anything which gives less than a determining influence on the policy of a company by this participation.

The argument goes a little beyond that. I accept that not all criticisms of trade unions are unreasonable and that not all trade unions, any more than anyone else, are always wise in the way they conduct their affairs. If, however, it were to be thought that we were going to use this system in order to side-track, bypass or outsmart the trade union movement, it would do no good. It would cause great resentment and in the end would be counter-productive.

I therefore find it difficult to understand why the hon. Member for Kidderminster (Mr. Bulmer) should make a sour comment and try to draw an analogy with the Industrial Relations Act. One failing of that Act was that it introduced a spurious air of democracy in trying to produce a balance in trade unions. One recalls when the railway unions were forced to hold a ballot under that Act and the Government were confident in the expectation that the vote would go a particular way, to the discomfiture of the trade union leaders. In the end, the opposite happened and it was the Government, not the trade union leaders, who were discomfited.

I hope we shall hear a little more about some other directives. The Minister scarcely referred to the question of the protection of the rights of employees in the matter of transfer. I do not know whether I understood my hon. Friend the Under-Secretary correctly, but looking at Commission Document R/2155/75 it seemed to me as though the Government were resiling a little from what seemed to be a useful, if rather minor, improvement that had been suggested. I hope that that is not so. My hon. Friend will have an opportunity to comment on that when he winds up the debate.

Mr. Clinton Davis

I am in a position to respond to the point that my hon. Friend makes, but I should like him, albeit at this late hour, to develop, just briefly, the point from which he says we are resiling.

Mr. Lee

Perhaps I misunderstood my hon. Friend, but I thought that that was so. Perhaps I have misread my own notes on the matter. If he tells me I am wrong about it, I shall accept what he says.

Will my hon. Friend say a little more about the technical question of the writing off of goodwill? He made no definite comment on that point, but I see that there is provision in the document for the recommendation of a five-year period with regard to that. What is the Government's view? My hon. Friend seemed to express no particular view as to whether that was likely to be adopted.

Again, although my hon. Friend appeared to welcome the reference to the group of companies producing consolidated accounts, I am not entirely clear whether the Government think that that is a practical situation. The impression I got from my hon. Friend—I hope that in this instance I have not misunderstood him—was that the Government had doubts about this matter on grounds of practicability. I hope that that is not so, because it would be a useful minor improvement.

Perhaps my hon. Friend will also comment on the proposed changes in company meetings where there would be two-thirds majorities, as has been recommended by some of the drafts, in place of the situations in English company law where a simple majority at present would suffice. I think that all hon. Members would welcome any greater degree of participation and greater safeguard of that kind. There is a reference to mergers also. We should be glad to hear from my hon. Friend on those matters.

Finally, I echo the view that the European company seems to be a non-starter. I see no benefits from it. It seems that it is merely a device to remove the control of a number of companies outside the supervision of the Department of Trade. I hope that the Government will discourage this proposal. If I understood my hon. Friend aright on this matter—that this proposal has a direct impact on British law—may we know whether it is to be incorporated in any Statutory Instrument here or is to take the form of any amendment to our domestic law?

I hope that my hon. Friend will refer to the directive on the European company. I hope that it is a non-starter. It is wholly undesirable and only tends to increase the suspicions that many of us have had. One of the many objections to the Common Market that many of us have had is that it tends to make life easier for the multinational conglomerate and the control of such institutions that much more difficult.

11.34 p.m.

Mr. John Davies (Knutsford)

I shall be very brief. I am tempted to follow up some of the earlier remarks but I shall not do so.

The assembly of documents with which we are faced presented the Select Committee with something of a dilemma. That dilemma is mirrored in the problem that the House faces.

There is an extraordinary complication of different issues, and it is natural that the fifth directive and the consultative document should monopolise the interest and discussion in this debate—apart from some rather ill-judged remarks by the hon. Member for Birmingham, Hands-worth (Mr. Lee), who obviously has not studied these matters with the care and attention which they merit.

The dilemma with which one is faced is that the system that exists to review Community matters in the House does not lend itself to instruments such as those which are now before the House. They are instruments which respond better to the more normal methods of legislation in this House—particularly examination in Committee involving detailed point-by-point and line-by-line examination. One cannot conduct an exercise of that kind on occasions such as this. Therefore, these instruments lack the degree of analysis which they should properly have because they cover a wide variety of matters.

I wish to draw attention to what was said by the Lord President of the Council earlier today about a rethinking of methods of dealing with Community legislation. Certainly we require a different approach to the matters which are before us tonight. It is true that the Select Committee will very much need to review this debate and to consider whether the undertakings given some time ago by the Government in relation to proceedings of this kind are met by the kind of debate we are having tonight.

It may be that the fifth directive and the Green Paper can be said to have been given a certain airing in this debate and can be regarded as having been considered. But it would be ridiculous to imagine that we have taken note of such matters as mergers between public companies, the presentation of accounts and matters of that kind. Surely we must regard those matters as not having been dealt with, and the Select Committee will seek to give whatever help it can to the House in advising it how best to proceed on any other occasion.

Finally, I wish to deplore the somewhat general douche of cold water poured on the European company statute. I think that that statute could serve a useful purpose. It is unlikely simply to be dropped. It does not seem to me that that is likely to happen. It is possible that it will be accompanied by some positive advantage flowing from incorporation under the statute which at the moment is not evident.

Mr. Gundelach, to whom much warm reference has been made, regarded this as being the pace-setter of European company law and a means by which one could project the pace of European company law in a single statement which would serve as an objective for the more complex arrangements which would ensue. I personally hope that the Minister does not regard the European company statute as something to be discarded. No doubt it has difficulties ahead of it, but it would be a pity to regard it as something to be avoided at any price.

That sums up what I have to say. We shall have to think carefully again about how the House can cope with these problems.

11.38 p.m.

Mr. Peter Viggers (Gosport)

My right hon. Friend the Member for Knutsford (Mr. Davies) referred to the volume of detail involved in these documents. I have checked the situation and find that I have read a depth of 2.6 inches of foolscap paper in relation to this debate —or, to put it in European terms, a depth of paper of 6.6 centimetres.

Company law reform in the United Kingdom tends to go in 20-year cycles. We had the 1929 Companies Act and the 1948 Companies Act, revised by the 1967 Act, and that was intended to be followed by other Acts. The Conservative Bill of 1973 failed to reach the statute book, and I think there is now general agreement that revision of company law is due. When the revision takes place it should be on a basis agreed by all parties since the law of companies is not something which lends itself readily to political tinkering. I suggest that we should all press for a non-controversial modest reforming Bill.

The reforming measures we now need in this country could be classified in two broad groups. There are first, the technical reforms to rectify specific abuses and to eliminate areas in the law which have become obsolete. In this category there ought to be some revision of the laws of disclosure as spelt out in Sections 27 to 33 of the 1967 Companies Act. There should also be some tightening of the law on insider trading. I say that specifically not because I feel that insider trading is a great abuse, but it is an area to which public and Press attention has been drawn, and it is proper that an area which has been the subject of Press criticism should be seen to be rectified.

The second area of necessary reform is more important and reflects a changed attitude to company activity. This was expressed clearly in the White Paper on company law reform published by the last Conservative Government in July 1973. Part of it states: The Government are specifically recognising, in the context of company law, the generally accepted fact that ownership involves responsibilities as well as rights. This requires company directors on behalf of the shareholders, to discharge their social responsibilities as well as to protect their legitimate interests. The boards of companies and their managements thus have a manifest obligation towards all those with whom they have dealings—and not more than the employees of the company. We ought to be discussing the responsibility of companies in the broadest sense —their responsibilities to the public, to consumers, to employees and to their pensioners.

In dealing with the Commission document we need to bear one important point in mind. It has been dealt with before, but I am not satisfied with the reference made to it. The Community regards a limited company in the United Kingdom as the institution which it seeks to control by its directives. This includes, in British terms, the listed company, the unlisted company, the public company and the private company. The private company is in many cases a small concern dealing with the family affairs of perhaps a small shopkeeper or a small business man.

In Britain the laws of partnership are so harsh that a partner can be at a considerable disadvantage in that he can find himself responsible to the extent of the whole of his fortune for some mistake or misdeed of one of his partners. Therefore, the small private company is becoming the normal way through which small business is carried on in this country. It is quite inappropriate for small companies to be controlled by Commission directives.

In Britain, most industrial and commercial activity is carried on through companies even down to the very smallest operation. That is not the case of the Continent. In Germany, the normal form of a small company is the Gesellschaft mit beschränkter Haftung—GmbH—and in France it is the société á responsibilité limitée—SARL. This continental conception is a form of business organisation which is a legal person in form and an partnership in essence, so that economically it is a hybrid between a company and a partnership. There is a clear difference between the GmbH and the Aktiengesellschaft—AG—which is the German form of a public company. The Commission documents are based on the concept of the Aktiengesellschaft, and the suggestions made in the Commission documents are appropriate for major industrial organisations. They are clearly inappropriate for small private companies. It is of overwhelming importance that small British private companies should be exempted from the rules, controls and structure which are appropriate to larger companies.

It is clearly important for us in this country soon to bring forward a change of our company legislation so that large and medium-sized companies, those which are prepared to accept certain disclosure and other requirements, should be called limited companies and should have the word "limited" as the last word of their title but that the small family business and company should now be given a completely different complexion and name. It might, for instance, be suitable to use the word "private" in the title to distinguish it from the limited company.

Although this has been recognised—the Under—Secretary referred to it time goes by and it does not happen. If we are not careful, the Commission will continue to regard limited companies as those which are to be controlled by directives. We cannot simply sit on this: we must deal with it. We need this legislation soon.

Having made that preliminary point about small companies, the rest of my speech will be about larger companies. I have no strong comments on Document R/2155/75, which deals with employees' rights in the event of a merger, takeover or amalgamation. Certainly the document appears to raise no great difficulties for the United Kingdom, but I agree with the view in the Minister's supplementary explanatory memorandum that this point could be covered in the third directive and does not merit its own paper.

The Green Paper on employee participation and company structure is a fascinating document. It takes the view that the best way of proceeding in this field is with common guidelines—that is, laying down suggested methods of approach without firm rules. This is a reflection of the Commission's decision to proceed gradually towards harmonisation of company laws. This is the flexible and gradual approach which, I understand, is known to those in the European Parliament as the "salami approach", the slice-by-slice approach, rather than one traumatic revision of everyone's business law system.

I am not inspired or impressed by the Department's explanatory memorandum dated 5th January 1976, which explains that an independent committee of inquiry was announced in August 1975, that its membership was announced in December and that apparently it will be in a position to make final recommendations within 12 months of December 1975. Time goes on. Does the Under-Secretary feel satisfied that progress is being made and that legislation will be brought forward?

In our approach to employee participation, we must search for methods which will be grasped enthusiastically by all employees. Page 161 of the Commission's Green Paper states: Company law in the United Kingdom makes virtually no provision concerning a company's employees. For too long attitudes on the subject of employee participation have been bitter and inflexible. Those demanding industrial democracy have made demands which are quite unrealistic and unworkable, and as a result employers have tended to take the line of greatest resistance.

When employers read the kind of speech that was made by the hon. Member for Birmingham, Handsworth (Mr. Lee) their reaction is to wonder whether to emigrate or to reach for their cheque books to make another donation to Aims of Industry. The last thing they will do is make a concession to their employees.

For too long the actors in this debate have portrayed each other as stereotypes. One example of the way in which the debate has evolved is the policy suggested by the TUC General Council that companies employing more than 200 employees should have a two-tier structure, with one-half of the members of the supervisory board being appointed through trade union machinery. This is not realistic. It is a formula for deadlock, and the sooner the TUC recognises that the better.

We should try to work not through imposed legal requirements but through a code of practice which companies should be encouraged to adopt. I strongly support the thoughtful and constructive suggestion put forward by my right hon. Friend the Member for Lowestoft (Mr. Prior) on Tuesday of last week that there should be minimum legal requirements which would be spelt out and that there should then be a code which would lay down ideas beyond those minimum standards.

For too long the shrill demands of the far Left and the inflexibility of the far Right have masked the fundamental fact which should be in the front of our minds—the overwhelming desire of nearly all decent, hard-working, moderate people for a feeling of belonging, a knowledge that their views are taken into consideration and their interests safeguarded. That is clearly spelt out in the Green Paper in a phrase that rings out. It refers to the increasing recognition of the democratic imperative and says that those who will be substantially affected by decisions made by social and political institutions must be involved in the making of those decisions. The decisions of employers have an effect on the way of life of employees, their work satisfaction, their sense of dignity and their autonomy as human beings.

I hope that we can benefit from discussion in the European arena. After all, the mixed economies of many European countries are controlled by Socialists—and they are none the worse for that because they are forward looking and ongoing. They are not reactionary and negative. We need a new spirit, and those involved in this debate may find that new spirit in Europe.

In the second directive on the formation of companies, private companies must be exempt. The best way to do that would be for the United Kingdom to legislate to distinguish between public and private companies. Subject to that comment, the directive should not cause any difficulty. The third directive on domestic mergers is broadly acceptable for public companies, but it is preposterous that it should apply to private companies.

The fourth directive on company accounting is meaningless in the context of private companies. I am struck by the strength and excellence of the London financial market and the way it operates. Two important points have been neglected in the directive. There should be rules for group consolidation and group structure, which are more import- ant in the United Kingdom than in any European country. For any accountancy provisions to lay down rules in the European context without taking into account the importance of the group structure in the United Kingdom makes the rules less meaningful.

Mr. John Davies

When he introduced the debate, the Under-Secretary mentioned that there is now a seventh directive, which is not among the papers we are considering today, dealing with the consolidation of group accounts. To try to discuss many of these matters without regard to that new supplementary directive, which has a bearing on accountancy problems on a group basis, is to deny the purpose of the discussion.

Mr. Viggers

I am grateful to my right hon. Friend the Member for Knutsford, who has a wide knowledge based on much work and his membership of the Scrutiny Committee. I am not aware of the contents of the seventh directive, but the Under-Secretary said that there was a need to take account of it and that it would be included elsewhere. If that is so, it would be unfortunate.

My second point involves the United Kingdom principle that accounts should give a "true and fair view". That principle does not appear in the directive, and its inclusion should be urged. There are two ways of dealing with company accounts.

Mr. Clinton Davis

The hon. Gentleman is speaking to documents which were unamended and were before the Committee of the House which considered them in that form. The position has now been changed, and reflects exactly the point the hon. Gentleman is making.

Mr. Viggers

I am grateful to the Minister. I noticed that some of the papers to which I referred were dated 1973. I was not sure whether they included the latest amendments.

The subjective approach, reflected by the "true and fair view", which throws the onus of responsibility on the auditors, is clearly the better way. The alternative is to take an objective view and lay down standards of everything to be included. This happens in the United States, where a prospectus document is so thick that only a company lawyer can understand it. It is bound with red binding and is universally known among company lawyers as a red herring.

The fifth directive is the draft proposal for the rules to be regarded as mandatory for all companies. We read in it about those strange institutions the management organ and the supervisory organ, which, together with the general meeting of shareholders, comprise the three principal management arms. Any view on these proposals must be subjective. No one can say that he knows the answer. One can only form one's own view. Having been chairman of a public company and having attended a large number of general meetings, not to mention board meetings, I have come slowly to the view that the two-tier board structure is good.

The concept of a supervisory board exercising supervisory functions over the management board should work quite well, and it works quite well in the countries in which it is implemented. I particularly like the concept of the supervisory board appointing the directors of the management board, because anyone who has attended a general meeting will know that the shareholders, or the nominees or proxies who are used to appoint the directors, act from a position not of knowledge but of ignorance. Often the shareholders who are voting for directors do not even know who they are voting for or against, unless the chairman of the company has the wit to ask the directors to identify themselves by standing. A supervisory board, which should have the opportunity to know something of the individuals concerned, is a good concept and one worthy of support.

The sixth directive, on prospectuses, again poses no problem in the United Kingdom, whose Stock Exchange is way in advance of any other European institution. I pay tribute to the quotations department of the Stock Exchange, which is responsible for the implementation of its regulations. The staff are a model of constructive efficiency. Their ability to deal with complex situations quickly, as they arise, has helped to maintain London as the leading capital market in Europe.

The draft regulation for a European company statute takes us outside the known world and introduces the concept of the Societas Europaea. There is a need for such an organisation as companies cannot conveniently operate across national boundaries, and it is eminently sensible and logical that there should be a pattern of European company which is readily understood throughout Europe but which is required to comply with the national laws within which it operates.

I listened with interest to the hon. Member for Luton, East (Mr. Clemitson), who criticised the permission which appeared to be given by the creation of the European company to the spread of multinational companies. I think he felt that no multinational needed help and that such companies were strong enough already, rather like an octopus which can twine itself round anything it finds tasty. Having been on the other side of the fence and acted as company lawyer to a large multinational company, I have found that it is difficult to reconcile the different demands of different countries. I feel that the provisions for union representation which would allow European representation would offset any disadvantages the hon. Gentleman may fear in the creation of European companies. I would therefore modestly support the proposal.

Mr. Clemitson

Am I wrong in thinking that the Commission's proposals are in fact talking in terms of one-third representation on the board? The Green Paper acknowledges that this does not give employee representatives any controlling influence over policy-making or any great influence at all.

Mr. Viggers

The hon. Gentleman and I would not agree on the basis of what we are trying to achieve in terms of representation. I believe that one-third representation on the supervisory board would give employee representatives—and I hope that they are employee representatives rather than trade union representatives—a very important say in the affairs of the company and an ability to bring their views to the interest of management, the cognisance of employees generally and the world outside in an important way. As far as I understand it, the hon. Gentleman will not get the strangehold he requires. He will get one-third representation, which is adequate, I think, in present circumstances. That, however, is a philosophical argument which we might continue tomorrow or elsewhere rather than now.

Knowing the ability of the Under-Secretary to charm the birds off the trees, I felt he was hiding the spring of joy in his soul when introducing the debate. He did not pay tribute to the opportunity that this debate and the directives give us to move forward in employee participation. After all, we are all in this together and it does not help to strike an inflexible attitude.

Britain has the strongest trade unions in the world. I wish Len Murray well and a speedy recovery to full health, but I noticed a remarkable remark attributed to him in the Press that in future Ministers would have to recognise that they could not always see the General Secretary of the TUC. Is it not incredible that with such powerful unions we are the laggards in Europe when it comes to employee participation? Is this perhaps because our attitudes have been so inflexible and perhaps that the unions have preferred to follow the path of free collective bargaining without genuinely wishing to involve themselves in company management?

As a business man I criticise this Socialist Government for failing to deal with the genuine needs of employees. At the present rate of progress, it will need a Conservative Government to bring participation to the factory and the shop floor.

12.3 a.m.

Sir Brandon Rhys Williams (Kensington)

The Under-Secretary covered a great deal of ground with his usual capacity in opening the debate and I do not think he could seriously have expected that we would respond in detail to all the points he touched upon, although my hon. Friend also covered a great deal in his speech. But I am sure that in studying this debate the Department will find many useful indications of the trend of thinking among hon. Members concerned about company law reform.

The motion set down by the Government points particularly to the rights of employees and company law. The fifth directive and the Green Paper are bound to attract the most attention, not only in this House but among the public outside. Before leaving Strasbourg today, I had the responsibility of speaking on behalf of the European Conservative Group on the resolutions proposed by the Economic and Monetary Affairs Committee in preparation for the tripartite conference that takes place next week. I thought it appropriate to draw attention to the need to create a greater sense of unity in industrial enterprise and to prepare public opinion for Government action in the industrial field.

On the Continent they tend to use the phrase "the social partners", when in this country we still use the objectionable phrase "the two sides of industry". This concept of partnership is surely something far more civilised than the idea of class struggle and conflict which is, unfortunately, incorporated in the Marxist approach to the joint stock company of all too many people in this country.

The debate has been fruitful, and reflects the fact that among the students of company law there is a growing consensus in this country about many of the things which have to be done. No doubt the Bullock Report, when we receive it in due course, will reflect opinions drawn from all sides, and will, I hope, be able to make specific recommendations, which will command very wide support.

But the general direction of movement in company law reform must already be obvious to the Government. I have been disappointed by the indications we have seen lately that the Bullock Report was likely to be delayed, that consideration of its findings might not be possible for 12 months, and that a General Election would probably have to come and go before we actually saw any legislation arising from the report.

Mr. Clinton Davis

Was the hon. Gentleman not in the House today to hear the Prime Minister respond to that very suggestion, when he said that legislation would be introduced in the next Session of Parliament?

Sir B. Rhys Williams

I must apologise. As I was endeavouring to fulfil the duties in Strasbourg, for which I was nominated by this House, I was not able to hear the Prime Minister. I shall be delighted if what he says proves true.

As to the general direction of movement in company law reform, it is surely important to differentiate between two very clear aspects. One is the question of human relations at the work place. The formulae adopted for consultation and reconciliation in the case of disputes, and all the procedures that go into good human relations in joint stock companies, are very important.

On the Continent, and particularly in Western Germany, they have been brought to a high degree of civilisation. Willy Brandt's 1972 Act—there used to be a copy of it in English in the Library—sets out in very fine detail the way in which human relations disputes are to be tackled. If only a quarter of German companies have been able to follow the directions exactly as set out in the Act, they must have much to teach us.

We need also to consider that other aspect of company law reform which concerns company structure. It is only in quite recent years that the phrase "the two-tier board" has passed into general use in this country, and we are completely unfamiliar with the practice that has evolved in Germany over the past 100 years, of separating the supervisory element in the board from the executive. As this is a new concept, we have allowed ourselves to relate it to what in Germany is a highly topical debate, namely, the extent of worker participation in the supervisory board. But there are other aspects of the supervisory board which are of great interest, in addition to the way in which the workers can make their voices heard there.

I have tried humbly—I hope with a modest degree of success—to draw attention in the House over a period of years to the need to give greater power to the supervisory forces in the joint stock company. The whole question of the management audit, and the way in which the senior executives are to be guided and appointed—and dismissed, for that matter—or, if necessary, corrected when they make mistakes, is receiving study, although it seems to me to be quite outside the scope of the Bullock Report. If we learn something from the Bullock Report on that subject it can only be incidental and arising out of the Bullock Committee's study of the way in which employees could take part in the supervisory board. Surely the time has come for us to hear from the Government specifically on the social responsibilities of the company. Again, this goes far beyond the question of employees' rights. And I should like to hear how the Government's thinking is evolving on the rights and future role of shareholders, particularly institutional shareholders, who are in a separate class from private shareholders. The latter are undergoing a slow process of euthanasia and are finding it increasingly difficult to exercise any control over joint stock company management. I should like a constructive debate to be started by the Government on their view of the future role of shareholders in relation to the other stakeholders. I personally would like the word "stakeholders" to be used more freely and defined more clearly. I think that it ought to include the pensioners and the main contractors of the company as well, of course, as the employees.

I recognise that we cannot do everything at once. If it is true that the Government have committed themselves to introduce legislation next year, I suppose that they are adopting the "big bang" theory, that we can do something dramatic in company law reform. I doubt whether we have in this country enough people who sufficiently understand the etiquette of the two-tier board to make them work if they are introduced in too much of a hurry. I join those who express approval of the idea of the two-tier board, and I am sure that it has to come; but we must not do it badly. We must make a start.

Commissioner Gundelach, in his admirable Green Paper, recommends a transitional period. In this transitional period there should be preparatory and permissive legislation. At present we find that, even if they want to, British companies may be prevented by our existing obsolete company law from making experiments which might prove fruitful and which might help to throw light on the way in which company law could evolve in the future.

As an example, I might mention that as long ago as 1969 I drafted a Private Member's Bill on the transferability of pension rights, in which I persuaded the sponsor to include the suggestion that representatives of the employees should be included on the board of management of the pension fund. This is one of many ways in which employees could be encouraged to take part in the management of companies without having to have two-tier boards created for them before they can make a beginning.

As another example, Clause 53 in the Conservative Bill of 1973 was a decided step forward. The Under-Secretary of State often draws attention to the fact that it was only permissive, but in 1973 that was probably as far as we were able to go, and it is possibly as far as we are able to go now. Why should we not make a start with that? Why should we not draw attention to the responsibilities of the board for the employees, or at any rate give them the option of putting the employees' interests alongside those of the shareholders?

I hope that in Committee on the Companies (No. 2) Bill we shall have the opportunity of considering the idea of setting up an audit committee as a subcommittee of the board. That practice was introduced 10 years ago in Ontario, and it is now increasingly common pracstice in North America. It is admittedly only a device for making an easier relationship between the board of directors and the auditors, but in effect an audit sub-committee is a nascent supervisory board. If we make a beginning by setting up formal contacts between the board and the auditors—who in British company law are effectively the supervisors appointed by the shareholders over the heads of the directors—and call for reports on the way the company is being managed; and if thereby we make a start on organising the work of the auditors through a sub-committee of the board we shall have started out towards the creation of the two-tier board and we can take our time before making the next move.

The Government could also perform a useful service by making the provision of management accounts a matter of course. In too many companies, even if we had a supervisory board it still would not have the data in front of it on which it could rely to judge the per- formance of the management. In all too many companies the preparation of estimates and collation of information is too out of date or amateurish to give a clear view of what goes on. If we had a supervisory board it could not perform a really responsible function. But the Government can make a start in the way I am suggesting, even while they are waiting for the Bullock Report.

Finally, as far as the European company statute is concerned, I do not think many British companies will leap into this new formula, but it may be a way of gaining experience of the German system that would be valuable in our period of transition to a system more akin to that of our continental neighbours. Some continentally-based companies might adopt this formula and put it into practice here. Under the tutelage of people who are familiar with continental practice, alternative methods could grow up in this country through one or two major companies operating the continental system. That would be fruitful, and I cannot see what harm it would do.

The European company statute is only a voluntary system, and even though it may be premature for British companies, I do not see any reason for resisting it. A great deal of work has gone into it, and when resources and people are organised on the continental pattern for the creation of wealth we only have to look at West Germany to see that the results can be extremely fruitful.

12.17 a.m.

Mr. Tim Renton (Mid-Sussex)

We may have considered a mixed bag of documents tonight, but we have been fortunate to have speeches from two members of the European Parliament—my right hon. and learned Friend the Member for Hertfordshire, East (Sir D. Walker-Smith), and my hon. Friend the Member for Kensington (Sir B. Rhys Williams), both of whom have spoken from a deep knowledge of the subject. We were also lucky to have a contribution from the Chairman of the Scrutiny Committee on European Secondary Legislation, my right hon. Friend the Member for Knutsford (Mr. Davies). I agree with his comments on the need for time to scrutinise these documents line by line.

In opening this debate, my hon. Friend the Member for Kidderminster (Mr. Bulmer) said he would confine his remarks to the employee participation side of the documents, and I shall speak to the company law reform documents.

The Under-Secretary showed his beguiling pessimism about the future of company law reform in the years ahead. On 19th May he said: For all these reasons I see the next few years as being the greatest period of radical reform in company law in the history of this country."—[Official Report, 19th May 1976;Vol. 911, c. 1639.] As my hon. Friend the Member for Gosport (Mr. Viggers) pointed out, company law reform tends to be the Cinderella of Government policies. The Government find more popular and more pressing things to do, and Cinderella seems to get to the ball only once every five years.

It would be helpful if the Under-Secretary gave us information about the programme that he envisages for company law reform outside the Bullock recommendations in the next year or two. Does he envisage that when the Bullock Committee reports there will be a White Paper for the House to consider before any legislation is brought forward?

In his opening remarks the Under-Secretary referred to four general precepts on company law reform. I reply by saying that there are five principles that apply in this field. First, company law reform should not add to the administrative burdens on companies, especially the smaller companies. Where possible, we should try to simplify rather than complicate. Second, let us not have change for change's sake, or uniformity for its sake. Where there is need for a common form, let us standardise up to the best available practice.

Third, let company law encourage the maximum disclosure and the maximum passing of information, but only to the extent that this is consistent with the successful growth of the company. Fourth, let us recognise and, where necessary, deal with this by appropriate changes in company law, so that employees, shareholders, customers and creditors all have a common interest in the growth and success of the company. But let us not so burden the company with new legislation in favour of one group that the continuing success of the company as a thriving entity is impaired. If that happens, none of the groups affected will benefit and they will all suffer.

Fifth, all company law should actively encourage those companies which provide continuing employment and create wealth for the benefit of the Community. The essence of reform should be to carry forward the brilliant Victorian concept of the limited liability company, so that a new incentive exists for the creation of wealth for the Community's good.

I fail to see how these basic principles are promoted to any great extent by the mammoth documents that we have been examining. There must be evolution and change in company law, as all hon. Members recognise, but to impose standardisation for its own sake in an area that goes to the heart of every limited liability company in the country, excluding Northern Ireland, and where our customs are, as the Under-Secretary said, notably different from those of our Continental neighbours, could have a purely negative effect. It could cause more paper work and administrative change when companies need to be encouraged to get on with their basic business of manufacturing and investing.

Taking an overall view of the documents, it is rather pointless to get at company law reform via these directives. If we have to harmonise, there are many other laws that need to be changed in order to achieve uniformity in the movement and treatment of capital throughout the EEC. But I think that the Commission takes the view that it must harmonise piecemeal and in detail in order to achieve anything, and it is against that background that we have to consider these documents as part of a very detailed move towards the overall objective.

The documents on company law reform will involve mammoth change for companies in this country. My hon. Friend the Member for Gosport pointed out correctly that the fifth directive will affect every limited liability company in the land. The discretion that exists throughout the Continent, by which the Société anonyme, the Aktiengesellschaft, the Gesellschaft mit beschränkter Haftung and the société à responsabilité limitée are exempted, does not exist here. Every company here is basically incorporated in the same form of law. It will be helpful if the Minister amplifies his earlier remarks and tells us whether he sees the exclusion for private limited liability companies that now applies in the second directive being extended to all the other directives we are considering. As my hon. Friend the Member for Gosport said, this is an important matter for private companies in this country.

There is a follow-on from that. We should all like to know whether the exclusion will mean that in due course private limited liability companies in this country will have the same more limited amounts of disclosure required from them as that which is now required by SARL and GmbH in France and West Germany, respectively.

It is natural that our discussion has concentrated on the fifth directive. It is by far and away the most well known of these documents. I believe that it is possible to advance a counter-argument to the point of view that we have heard from both sides of the Chamber in favour of two-tier boards. There are a number of business men in Germany, for example, who would say that two-tier boards are not a bad thing in terms of cosmetics, that one-third employee participation does not impede the growth of a company and that the supervisory board is a useful place in which to place the statesman who has retired from the management board, where his advice and experience can still be available to the company, but they would go on to say that the supervisory board puts a brake on the flexibility and speed of action of the management company. German management is caused great worry when it comes to consider 50 per cent. employee representation. I realise that at that point it is taking up an entrenched view.

Against that background, we must have deep discussion and give consideration to the question whether the two-tier board is the ideal structure for the United Kingdom, totally apart from the employee participation issue to which my hon. Friend the Member for Kidderminster referred.

We do not have two-tier boards at present, and it would mean something of a board-room and administrative revolution to achieve them here. The pattern of share ownership in this country is very different from and far wider than that in West Germany. It suited the German financial institutions that hold the major part of the equity in industrial companies to have a supervisory board on which they could place their representatives, but I believe it is questionable whether unit trust, investment trust and pension fund shareholders, let alone private shareholders, would take any more active an interest in their investments through a supervisory board than they do through the unitary board, or whether supervisory boards will reflect any better the wishes of a diverse share ownership than does the present unitary system.

Two-tier boards will lead to further administrative apparatus, at a time when we are anxious to cut down expense in that respect. At times it is impractical to think that executive decisions at management board level can be divorced from the long-range debate and planning at supervisory board level. There is a risk that decisions could fall between two stools. I believe that, at most, we can have only a very gradual and voluntary evolution towards a two-tier board system in the United Kingdom.

There are other ways of proceeding, for example, through wider disclosure and, as my hon. Friend the Member for Kensington mentioned, by placing specific responsibilities on non-executive directors. There are other ways of ensuring that the interests of shareholders and employees are not over-dominated by those in management.

As the second directive, Document R/2381/72, is at present drafted, it would prevent an interim dividend without the auditing of accounts up to the point at which the interim dividend is declared. That would be a tiresome procedure. We should, therefore, resist it. It defeats the point that interim dividends are only an instalment towards the total dividend payment of a company. I hope that the Minister will reassure us that that matter will be fought.

On document R/569/74, the fourth directive on the presentation and content of annual accounts and management reports, the question of goodwill being written off over five years comes up. A number of hon. Members have referred to this matter. It seems to me that this reflects a doctrinaire attitude against goodwill. It will particularly affect service companies. Such businesses are bought on a price earnings multiple rather than on an asset basis. For example, in an insurance broking business the intangible assets are the individuals who make the profits. There is no need to write off goodwill as long as those individuals remain in the employment of the company. I hope that that point will be thoroughly debated with the Commission.

Turning to the sixth directive, British law addresses itself to the company at the time that it is proposing to issue shares. It requires information to be made available from the company whenever it issues shares. On the other hand, this directive points itself to the company that is seeking a public quotation, although there may have been non-public trading in that company's shares for a long time previously. I believe that that is the wrong priority.

The sixth directive does not provide for any form of attestation by public accountants at the time that the shares are issued. It is extremely important that attestation by public accountants should be covered. I hope that on both those matters the Under-Secretary will be able to give us some reassurance.

I have listened with interest to the various comments for and against the European statute envisaged in document R/1279/75. That European statute is a potentially important development. Multinational companies could use European companies as vehicles into which they would hive off all their European operations. These would then have a uniform legal base throughout the Community. The hon. Member for Binning-ham, Handsworth (Mr. Lee) saw it as a shelter behind which multinationals could hide. I think that it might turn-into the opposite. It might help the Europeanisation of multinational companies. I ask the Minister to enlarge on that point in reply to the debate.

Lastly, I believe the most recent document of all—R/160/76—to be fairly inoffensive. It errs only in one respect. The directive requires proof of profitability. If proof of profitability at the time that the prospectus is issued were to stay, British Leyland, for example, when it was reconstructed last year, would not have been able to come back to the market because it could not have shown either past or future proof of profitability. That would have been a great disadvantage to British Leyland at that time. I hope that this point will be taken up very strongly in Brussels.

We should take pride in the fact that, in this whole area of prospectuses and the listing of shares, we have the strongest Stock Exchange in Europe. Together with Ireland, we have 3,500 public quoted companies compared with 2,400 public quoted companies in the whole of the remainder of the EEC. Therefore, I hope that the United Kingdom will take the leading position in the redrafting of document R/160.

In summary, many of the proposals in these documentts seem to be drawn together on a somewhat random basis. They are so theoretical that those involved daily in practical business have not yet given much time to their deep consideration. We should therefore follow the example of the banking directive. The first draft of that was examined by the British Bankers Association. They disliked it, and found so many clauses totally unacceptable that, with other countries, through the Federation Bancaire they persuaded the Commission that the first draft was not "on". A second draft is now available and is being considered.

My right hon. Friend the Member for Knutsford was right when he said that we required a detailed degree of analysis of these documents—an analysis more detailed than we have been able to have in this debate.

That is the line that should be taken. In taking note tonight, we are not approving the documents. We are pleased to have had the opportunity of debate but we believe that more examination is required in due course, and that the House must have more time to debate the documents further.

12.36 a.m.

Mr. Clinton Davis

Necessarily, this debate has been incapable of pursuing a coherent theme We could foresee that when this substantial number of directives was presented to the House in this way. The right hon. Member for Knutsford (Mr. John Davies) is right in saying that we must look carefully at how we scrutinise this type of proposal. I do not know that I would wish to add anything to what the right hon. Gentleman said in that respect. I am glad that he will reconsider the position.

I shall try to deal with the observations of hon. Members in the order in which they made their contributions.

The hon. Member for Kidderminster (Mr. Bulmer) spoke of his belief in a form of industrial democracy. It is easy to adumbrate principles about that, but I was not quite sure whether the hon. Member was passionate about the detail that would have to arise in order to implement the principles to which he was adverting. I was very interested to note that he commented on the inadequacy of Section 53 of the 1973 Act, and went much further than did his hon. Friend the Member for Mid-Sussex (Mr. Renton) when we debated these matters on Second Reading of the Companies (No. 2) Bill on 19th May.

The hon. Member went on to discuss a matter that he will recognise, I am sure, I cannot join him in debating. It would be wrong for me in any sense to prejudge the outcome of the Bullock Committee Report. We have made a commitment about the need to introduce legislation here. It was reinforced only this afternoon by the Prime Minister. That is something to which I referred in an intervention in the speech of the hon. Member for Kensington (Sir B. Rhys Williams).

I want to say something about the Bullock Committee in refutation of a point made by the hon. Gentleman. He said that it was handicapped by its terms of reference. I do not accept that. I do not believe that a man of the capacity of Lord Bullock and men of the capacity of those serving on that committee would willingly have served and have accepted appointment if they thought that the terms of reference would cripple the findings ultimately made by them. I have no doubt that their work will make a major contribution to the study of industrial democracy in this country and to the legislation that we shall be introducing in the next Session.

Mr. Mike Thomas (Newcastle-upon-Tyne, East)

I hope that my hon. Friend will forgive me for interrupting him, but at this late hour a number of us have forborne from making speeches. It is not only trade unions and shareholders who have an interest in these matters. One hon. Gentleman opposite mentioned the customer, in passing, and there is a large consumer interest. Will my hon. Friend tell us what part the Department of Prices and Consumer Protection will play in the process, as well as that of his own Department and that of the Department of Employment?

Mr. Davis

My right hon. Friend was very fully consulted about these matters. She will be fully consulted about the legislation as it begins to take shape. It is not without interest that Mr. John Methven, who was the Director General of Fair Trading, is a member of the Bullock Committee, although he is no longer serving the nation in his former capacity.

Mr. Bulmer

Is it the Government's intention to introduce a White Paper following the report of the Bullock Committee, before they legislate?

Mr. Davis

We shall have to discuss that matter when we have the report. We shall have to determine whether to have a White Paper or a Green Paper, or whether to proceed directly to a Bill. These are matters on which the options have to remain open. The hon. Gentleman will recognise that it would be quite foolish for me, certainly without consultation with my right hon. Friend the Secretary of State for Trade, and others, to offer any prognosis about that at this stage. However, we have indicated that we wish to allow the maximum possible consultation on these matters. There must be full discussion because the principles that will be adumbrated in the legislation will be absolutely critical, and critical not only from the point of view of the legislation but in building a new spirit in industry, which is a point that has been made by hon. Members on both sides of the House.

I turn to the interesting comments of my hon. Friend the Member for Luton, East (Mr. Clemitson). He expressed his anxieties about the control that can be exercised against multinational companies, and asked how one makes them accountable. One has to answer that question with two others. Where does power reside? How is it exercised? I do not hide the fact that this will be one of the most difficult questions that we shall have to try to resolve. In a way, however, my hon. Friend put his finger on perhaps a more positive way of approaching this matter, namely, the increasing power of the trade union movement, in an international sense. That, I believe, can be the only salutary and effective sanction against abuse by companies of that character.

On the other hand, it would be quite wrong to brand all multinationals as villains of the piece. That is not so. There have been villainous activities on the part of some—I do not deny that—but we ought to be very careful about generalising in such a situation.

Mr. Clemitson

I was not arguing that multinational companies necessarily acted villainously—to use my hon. Friend's phrase. I was trying to imply that by their nature they are nondemocratic organisations. In this debate, presumably, we are talking about the extension of democracy within industry. The particularly difficult question is how to extend democracy in the context of the supra-national company.

Mr. Davis

Unsatisfactory though I have no doubt my hon. Friend will consider this response, I must say that the multinational company will become increasingly subject to the domestic laws of the countries within which it operates. Therefore, the element of democracy that will be infused into the multinational company must depend upon the legislation that prevails in any given country in which it operates.

However, having said that, there is the caveatthat I have already entered—that it depends largely upon where effective power resides. I do not think that I can add anything useful to the points I have already made in response to the interesting comments of my hon. Friend.

The right hon. and learned Member for Hertfordshire, East (Sir D. Walker-Smith) explained why he could not remain in the Chamber to hear the end of the debate. I do not blame him in the least for that. He is probably very wise. He reflected very interestingly on the development of the fifth directive, born as it was in pre-accession days. He spoke of the multifarious problems that we shall have to resolve.

Let me summarise my feelings—and, I hope, the Government's feelings—about the fifth directive and industrial democracy generally. Because of the lateness of the hour, I speak only in headline terms. We hope to be able to try to encourage a greater emotional attachment to industry on the part not only of workers but of management. That is the crux of the issue. People are too detached from the industry in which they work at present, and in a sense that point was made by the hon. Member for Kidderminster. I am convinced that we must work out our own design. We cannot simply ape the experience of others in seeking to plant this new seed of industrial democracy here. That is not to say that we should throw aside a study of those experiences, but we have our own traditions in working out things, and I am sure that is right. We should work out our own future opportunities.

Thirdly—and here I accept one of the points made by the hon. Member for Kensington—the mere fact that we have set up a committee to deal with the problem of industrial democracy is no reason to deter existing experiments or, in the interim, to fail to develop new experiments in this area. We have made that plain, and my hon. Friend the Secretary of State for the Environment, in his former office at the Department of Trade, made that clear in announcing the appointment of the Bullock Committee.

I turn to the comments made by my hon. Friend the Member for Birmingham, Handsworth (Mr. Lee), who made a characteristically robust and controversial contribution. He asked about document R/2155/75 and said that the Government were resiling. Then I, as a solicitor, placed in a position in which particulars did not seem to be forthcoming, requested further and better particulars, but my hon. Friend—I am sure uncharacteristically, so far as his normal life at the Bar is concerned—failed to give me any. I am not able to go to a master in chambers, but the fact is that I can see no evidence that we have resiled from anything. Perhaps my hon. Friend was referring to the prohibition of dismissals on occasions of transfer, except for "pressing business reasons." I dealt with that matter in my speech. It was a fairly long speech, and was probably rather boring, and I can understand my hon. Friend's missing that point. But this was a phrase that the Government and the Select Committee found unacceptable. I made that point absolutely clear.

Mr. Lee

I accept that.

Mr. Davis

I am glad about that. My hon. Friend then made a point about writing off goodwill, which was echoed by the hon. Member for Mid-Sussex. We have opposed the writing off of goodwill within five years as being unduly rigid. It should depend on the circumstances of the assets concerned, and we are still negotiating on that point.

My hon. Friend then mentioned consolidated accounts. Our doubt on this score is not about the practicability of the proposals; it is about timing. It will obviously take time to work out the answer. My hon. Friend went on to refer to the question of the majority for the increase in capital. We take the view that control of the company by 50 per cent. of the shareholding should carry with it the ability to increase capital. Therefore, this is a matter in respect of which we shall have to negotiate.

As for the European company, and its effect on the United Kingdom law, no Statutory Instrument would arise here. It is a draft Regulation and, if adopted, it would apply directly. That is what I said at the beginning of the debate.

The hon. Member for Gosport (Mr. Viggers) spoke about certain matters such as insider dealing and disclosure. I do not think that I can usefully add very much more to what I said on 19th May in the discussion on the Companies (No. 2) Bill, when I referred to the Government's proposals for future legislation—a point made by the hon. Gentleman. I am surprised that he made that point because I spoke about the Government's proposals for future legislation on that occasion and it extended over several columns of Hansard starting at 1635 and going on to 1639. The hon. Gentleman was there, and he should have read it. Perhaps he misheard me.

Mr. Tim Renton

I was indeed there. What I want to know is whether, in view of the obviously increasing legislative burden in the next Session, the Minister still believes that the Government, in addition to a Bill implementing the Bullock Report proposals, will bring forward a Bill dealing with the statutory disclosure provisions and the whole range of securities provisions which he touched on on 19th May.

Mr. Davis

No. I do not think that we can commit ourselves to legislation dealing with securities. I did not give that impression at all during the debate on the Companies (No. 2) Bill. What I was saying—and I have said it tonight—is that our immediate requirement will be for a Bill dealing with industrial democracy. That will be next Session. That is our undertaking.

At the moment we are engaged in discussions with professional and other organisations on securities that will cover insider dealing, warehousing, and matters of that kind. We are also dealing with the securities market, and we have sent out a consultative document. We are considering replies to that. We do not believe that we shall be able to legislate on this matter next Session. The programme after that must encompass picking up other matters of the more traditional aspects of company law that, inevitably we shall have to deal with.

We have set up the Bullock Committee to look into a situation that will necessarily involve huge changes in the whole concept and direction taken by companies. That must be our first priority.

The hon. Member for Gosport went on to speak about public and private companies. I thought I had made the situation clear as far as the directive was concerned. They are not included in it. But whether they are to be included in others must depend on the nature of the directive. The fourth directive must apply to private companies, as well as public companies, because there are some very large private companies. Each directive will therefore have to be negotiated on its merits.

As part of our wider reform of company law, we are considering the possibility of a new form of incorporation for the smallest companies, but there are a number of problems to in that regard.

Mr. Viggers

Does the Minister accept that it is urgent to have a separate form for small private companies? Unless something is brought forward they will be swept under the general definition of limited companies that the directives of the Commission now incorporate. It is urgent that something should be done.

Mr. Davis

I do not accept the consequence recited by the hon. Member. It will be a matter, to a great extent, of negotiation. We are fully aware of the position. As I have said, one has to negotiate on each directive on its merits. I do not believe that this terrible fate lies before all private companies.

The hon. Member commented on the desirability of the true and fair view of accounts. I have dealt with that. I think that in my intervention I corrected the impression that the hon. Member had formed—I do not blame him for it; it is very difficult with all this documentation—from reading the out-dated documents which do not deal with the position.

I have nothing to add to my original comments about the concept of the European company. I have the most serious reservations about it. I think that it is too rigid, that on the industrial democracy aspect it imitates the German system without regard to traditional developments elsewhere.

Incidentally, I do not believe that we are the laggards in Europe in this respect. There are other countries that have not formulated proposals for industrial democracy. Some of the experiments that we have carried out in this country are unique in their own way and have made a major contribution. The hon. Member is altogether too pessimistic.

I have to be a little controversial, even at this late hour, but only for a moment. The hon. Member said that we need a Conservative Government to infuse a new spirit into industrial relations. Foolishness of that kind at 1 o'clock in the morning is understandable, but unfortunately it goes on after that hour. It is an incredible claim. The Conservatives are the architects of the Industrial Relations Act and the three-day working week—a situation in which a country Came to a dead stop in January and February 1974.

In contrast, we repealed that Act. We have introduced the Employment Protection Act and the Health and Safety at Work Etc. Act. We have a social contract and for the first time a 17:1 endorsement of our incomes policy by the TUC. Under this Government the number of days lost through strikes has been the lowest since 1968. We have set up a committee to study industrial democracy. Yet the Conservatives say that they have the answers to these problems. That is a lot of rubbish. They printed more money than anyone else ever did, and they did a great deal to ruin the economy.

Now I come finally, and briefly—my right hon. Friend the Patronage Secretary has made his presence felt—to the speech of the hon. Member for Mid-Sussex. He skated over all the directives, and I do not know that I can usefully deal with the points he made. I believe that I have covered many of them already.

One of the four principles that I stressed at the beginning of the debate was the need to avoid too much detail and too many specific Regulations. That is the Government's ambition, among others, in dealing with negotiations in this area.

If I have not dealt with all the points that the hon. Member made, I believe that any further attempt to do so would only upset my hon. Friends. They are absolutely with me on that.

This has been an interesting debate. I am not satisfied that the way in which we deal with these matters is right, and I hope that the House will have another look at the procedure involved.

Question put and agreed to.

Resolved, That this House takes note of Commission Documents Nos. R/2155/75, R/2863/75, R/2381/72, R/131/73, R/69/76, R/569/74, R/2128/72, R/2053/72, R/3128/75, R/1279/75, and R/160/76 relating to Employee's Rights and Company Law.