EEC COMPANY LAW PROPOSALS

HL Deb 08 April 1976 vol 369 cc1835-78

5.42 p.m.

Lord MAIS rose to move, That this House takes note of the Reports from the European Communities Committee on the following EEC Company Law proposals:

1. (a) Company Prospectuses (R/2053/72) [21st and 31st Reports, Session 1974–75];.
2. (b) Draft Second Directive—Formation of Companies (R/2381/72 and COM(70)232) [24th Report, Session 1974–75];
3. (c) Draft Fourth Directive—Accounts (R/569/74) [4th Report, Session 1975–76]; and
4. (d) Mergers and Takeovers (R/131/73, as amended by R/69/76, and 1836 R/2155/75) [20th Report, Session 1975–76].

The noble Lord said: My Lords, these reports cover, first, company prospectuses; secondly, the draft Second Directive on the formation of companies; thirdly, the draft Fourth Directive dealing with accounts; and, lastly, the Directive dealing with mergers. The fact that all these Directives come under the title of "company law" causes me some concern, because I should have preferred someone who is better qualified in law than I am to open this debate. Nevertheless, I am comforted by the thought that the noble and learned Lord, Lord Diplock, will be speaking later. Doubtless he will elucidate any of the more intricate legal implications; and, if I may be allowed to say so, I can think of nobody who is better qualified so to do.

I propose to confine my remarks to the practical aspects of these Directives and to draw your Lordships' attention in particular to the differeneces between the procedures contained in these draft Directives and those which are currently in general use in the United Kingdom. The Treaty of Rome called for the removal of obstacles to the free movement of goods, people and capital throughout the European Community. So far as the free movement of capital is concerned, this is dependent upon the lifting of exchange controls between Member States and the elimination of tax barriers and distortions. It is also very dependent upon there being some uniformity in the safeguards extended to those who participate in or are affected by the capital markets in each of the Member States.

The European Community has initiated the programme of company law harmonisation. The purpose of the programme is to achieve, or we hope it will achieve, equivalent, although not necessarily identical, systems of company law in each of the Member States. Thus, it seeks to ensure that there is, or will be, a uniform level of safeguards for creditors, debenture holders, shareholders, employees and directors. It is also intended that this level should be a minimum, thus permitting Member States, should they so desire, to build in greater safeguards within their own countries. In order to achieve the harmonisation of these minimum standards, it is necessary to obtain agreement on a number of Directives, probably 18 in all, over the next few years. Each of these Directives will deal with a particular aspect of company law, and once agreement has been reached on a Directive all Member States will be required to amend their national legislation in order to come into line.

So far, five Directives have been drafted. The first of these Directives relates to the prospectuses issued by companies applying for Stock Exchange listing; the second relates to the formation of public companies; the third deals with mergers between companies; and the fourth deals with the annual accounts of companies. It is these four Directives which form the subject of the reports prepared by the Committee on the European Communities which are before your Lordships' House today. The fifth Directive, which deals with worker participation and two-tier boards, will be the subject of a further report, and because of its importance I hope that perhaps it may also be the subject of a debate.

The Directives under consideration today would apply in Continental Member States to the Sociétés Anonymés, which is equivalent to our public companies. As it is drafted at the moment, however, the Directive would apply in the United Kingdom to both public and private companies. In our view, this would be discriminatory and would impose exces- sive and unnecessary burdens on half a million private companies. Part of the problem arises because we in the United Kingdom do not distinguish in the names of companies between whether they are private or public. I think we can take some comfort from the fact that the EEC Commission and the Department of Trade and Industry are aware of this problem, and it is hoped that a convenient method will be found to solve it, simply by requiring private companies to incorporate in their name either "Proprietary" or "PTY". I think it is reasonable to assume that the problem will be settled in that way. In that case, the Directive will then apply only to public companies here in exactly the same way as it applies only to public companies on the Continent.

It is important for us to remember that we in the United Kingdom are particularly affected by this problem, and that it is upon this country that the impact will be the greatest. The reason is that the United Kingdom and Ireland have 3,500 companies with publicly quoted equity, while the remaining seven States together have only 2,400 companies. Therefore, the practical importance of the proposals which are before us today cannot be stressed too highly. Perhaps we may hope that our voice on these matters will receive a sympathetic hearing in Brussels.

One of the major problems in the drafting of the company law Directives has been to reconcile the prescriptive and codified approach of the original six Member States with the more flexible and often non-statutory approach adopted by this country. The contrast between the British and the Continental system is that we in Britain rely to a considerable extent on the City institutions to regulate or to control, while the continental system relies a great deal on statutory regulations and rigid statutory control. I imagine there may be some of your Lordships who feel that there is merit in the continental system; I would hope that there are more of your Lordships who think that our system has been proved by time and that perhaps in the end it is a better system. After all, we have had an occasional hiccup or two but apart from that the system has worked well and for a very long time. It is speedy, it is efficient and it is not difficult to get a decision quickly.

Perhaps I may demonstrate the difference which I see in the three Directives of the reports before your Lordships today. To take the draft Directive on accounts, this lays down a detailed form for profit and loss accounts and balance sheets which must be used in presenting accounts. However, the British law lays down certain principles as to the information to be provided but leaves the form of the accounts entirely in the hands of the directors and their advisers in the form of their accountants. In particular, the original version of the Directive, that the valuation gives a true and fair which was drafted before the United Kingdom joined the Community, laid down a set of rules for the valuation of assets. In this country, the accountancy profession takes the view that the overriding consideration should always be view of the financial position of the company. I think it is reasonable to assume that the flexible, non-statutory approach has had an advantage in facilitating the development of accountancy practices. On the other hand, if the statutory approach is used it is felt that it would be difficult to modify the rules in the light of experience gained and in response to changed circumstances.

However, one must admit that it would be difficult to see our more flexible approach being accepted by or being suitable to those countries who have never used it. Therefore, it is obvious that the solution must lie in some compromise and it must give us some satisfaction to know that as a result of United Kingdom pressure from the Ministry, and particularly from the Institution of Chartered Accountants, the revised draft Directive in fact includes the phrase "true and fair" when referring to the valuation of companies' financial assets or position. It is a small point but at least it shows that our experience in this country is being listened to and is having some effect.

Turning to the draft Directive dealing with prospectuses, this Directive furnishes a long schedule of items of information that must be included in the prospectus and it is, by the way, required to be checked by an authority to be established for that purpose. I presume that, if we in this country operated under those rules, we should have to establish another fairly large administrative department to deal with it, which would involve some considerable expenditure, and I think would probably cause delays. At present in this country, the responsibility for a prospectus is placed firmly on the shoulders of the directors of the company, with the advice of their accountants. In addition, the Stock Exchange has rules with regard to the disclosure of information and checks the documents, but of course without accepting any responsibility for their accuracy. It might be that there would be those who would say that it is not a very watertight system. But again the fact remains that it has flexibility; it can operate with speed, and it has been proved over a long period of time.

Turning to the Third Directive on mergers, here again it raises the same question which bedevilled a number of the other Directives; namely, how to reconcile the statutory and prescriptive approach of the majority of the Member States with the non-statutory approach of the others. This particular issue arises in the case of the protection of shareholders in bids situations. The Mergers and Takeover Panel in the United Kingdom was set up comparatively recently to interpret and administer the City Code on takeovers and mergers. This set out the general principles and rules which persons involved in takeovers and mergers are required to observe. I think it can with fairness be said that although this panel has had a comparatively short life, it has carried out its terms of reference with efficiency and tact and it has already gained a considerable reputation with the commercial and financial institutions. Above all, it can act with speed.

The objective, of course, was to enforce a higher standard of conduct in this area than is required by the various statutory provisions. There are a number of distinct advantages in this type of self-regulation: for example, as I have said, the speed with which a decision may be given; the adaptability of the Code to changing circumstances and the way in which it can be improved and refined in the light of experience gained in its operation, and, above all, the assurance that the spirit as well as the letter of the Code is observed.

Nevertheless, we must also recognise that it has its disadvantages, for as things stand at the moment the panel is free to interpret its own rules as it goes along. There is no right of appeal to an external body; there are no legal sanctions available to the panel and yet it has the ability to impose severe sanctions on individuals and companies over whom at the moment it has no legal jurisdiction. In spite of the disadvantages under which they operate it says much for the manner in which the panel has carried out its work that so far they do not appear to have run into any serious difficulties.

The draft Directive makes no reference to many of the share dealings or dealing aspects of the merger which it has been found necessary to cover in the City Code. I think the explanation undoubtedly lies in the vastly greater number of bids that take place in this country, particularly contested bids, when compared with Europe. Therefore, in the view of the Committee it is important that the harmonisation achieved by the Directive should be a harmonisation of minimum standards, thus leaving the United Kingdom and other countries, if they so wish, free to continue to conduct shareholder protection in merger situations, largely by self-regulation and in the light of experience and, if necessary, to introduce legislation should they feel this is necessary.

In fact, I think it is fair to say that, so far as all the Directives are concerned, it should be made clear that they are the minimal requirements, thus leaving the countries free to impose greater safeguards wherever they feel it necessary. If this is not done there is a danger that they may well be regarded as maximum requirements. The safeguards currently extended to shareholders in this country may probably go well beyond the EEC proposals in almost every respect. However, it will be in the safeguarding of employees that the United Kingdom will probably be obliged to improve matters. This is as it should be, although I confess that in the mergers Directive the protection of employees appears at the moment to be taken to almost impossible limits. For example, it states that the bidding company, the bidder—call it what you like—should foresee the consequences of a merger on the employees for at least two years ahead.

A number of us have had something to do with mergers and takeovers, and much as one agrees that employees must be protected I think it would be difficult for a company to know exactly what the impact would be until the merger was virtually a fait accompli; that they have been able to put their top management in and they have been able to investigate in considerable depth before they could say what reorganisation was necessary and what effect that might have on employees. That does not mean that I do not feel that we shall have to go a great deal further than we have at the moment to try to meet this point in some way.

I said at the beginning that only five company law Directives have been produced and another 12 or so have yet to see the light of day. One of the drawbacks of what I would call the step-by-step approach to company law harmonisation is that the effectiveness of several of the early Directives is conditional upon the appearance of some of the later ones. For example, the Directives on prospectuses, mergers and accounts, the reports of which your Lordships have before you today, are all of limited value without the appearance of the Directive that will deal with consolidation of accounts. Contrary to the practice in this country, accounts of public companies on the Continent are not obliged to incorporate the full figures for profits and losses or assets and liabilities of their subsidiary companies. It is, therefore, possible for a parent company in its accounts either to overstate or understate the true financial position of its subsidiaries and therefore of the group as a whole.

It is perhaps unfortunate that one of your Lordships is absent from this House today, abroad. Had he been here, he would have been able to quote a case from personal experience and given a great deal more detail than I can of his own difficulties due to a Continental company not showing the position of one of its subsidiaries, which proved to be somewhat disastrous when they managed to get down to the facts. I suppose one should not say this, but I would suggest that, until consolidation of accounts is required by law in all countries, prospective shareholders in companies or interested bidders in companies in Europe should perhaps look at the accounts and the prospectus with caution and reservation. One appreciates that the Commission cannot tackle everything at once, and they have really done quite a monumental job as it is. But nevertheless it does seem that priority should be given to the preparation of a draft Directive dealing with the consolidation of accounts.

Another consequence of the piecemeal approach is the fact that the form taken by some of the earlier Directives will also have influence on the contents of later Directives. This occurs in particular with the mergers draft Directive. The one we have before us today deals with a type of merger relatively uncommon in this country; namely, where the assets and liabilities of the company acquired are transferred to the company taking over, and it is done by means of an issue of shares rather than cash. Once the deal is completed the acquired company is wound up and disappears. Mergers taking a different form, which will affect us more closely, will be dealt with in a subsequent Directive under the heading of takeovers. The present mergers Directive, as I have said, is of little direct importance here. However, it would be wrong to ignore it, because the general approach adopted in this report on mergers may well be carried forward to the takeovers Directive, and, as I have said, this will have considerable effect on this country.

This brings me to my final point; namely, that every effort should be made to ensure that the professional bodies, commerce and industry generally, particularly trade associations and institutions of all kinds, should familiarise themselves with the proposals that are coming out of Brussels, particularly on company law harmonisation and they should use the numerous channels available to them to express their views and reactions to those proposals. The timescale appears to be long for the Directives, but the drafts become more and more difficult to amend in any radical form once the machinery has been set in motion.

It may appear that I have overstated the difficulties and the differences which exist. I do not do that in any way because I am hostile to the Directives—very far from it. I have done it in order to emphasise how necessary it is that these Directives before us today, and any other Directives that may come before us in the future, should lay down the minimum requirements, thus leaving member countries freedom to adjust to their own particular needs. If we do not do this, I think it will be very hard to reach agreement.

I have spoken overlong. I wish only to express my appreciation and that of the Committee to those Government Departments, the professions, financial institutions and industry who have given of their time, given us information, appeared before us in our Committees. They have been of enormous assistance, and without their help I doubt whether these Reports would have been before your Lordships today; but without such help I doubt very much whether they would have been as detailed or as factual as I hope they are. I should like once again to express my personal appreciation to the special advisers to these Committees and to the Parliamentary secretariat. I doubt very much whether your Lordships' House as a whole realise the enormous amount of extra work that is thrown on the secretariat and the staff here as a result of having to deal with these Reports and Directives. That, my Lords, completes all I have to say. May I end by begging to move that this House takes note of the Reports from the European Communities Committee on the EEC company law proposals referring to company prospectuses, formation of companies, accounts and mergers.

Moved, That this House takes note of the Reports from the European Communities Committee on the following EEC Company Law proposals:

1. (a) Company Prospectuses (R/2053/72) [21st and 31st Reports, Session 1974–75];
2. (b) Draft Second Directive—Formation of Companies (R/2381/72 and COM(70)232) [24th Report, Session 1974–75];
3. (c) Draft Fourth Directive—Accounts (R/569/74) [4th Report, Session 1975–76]; and
4. (d) Mergers and Takeovers (R/131/73, as amended by R/69/76, and R/2155/75) [20th Report, Session 1975–76].—(Lord Mais.)

6.6 p.m.

Lord LYELL

My Lords, I think the House owes an enormous debt to the noble Lord, Lord Mais, who has so very ably opened our debate this afternoon. First, as he said himself, he is a member—and I go further and say a very hardworking member—of one of your Lordships' EEC Sub-Committees which do so much to scrutinise Community law; and, secondly, because he has raised this extremely important topic of company law in your Lordships' House this afternoon. Indeed the noble Lord, Lord Winterbottom and myself, are deeply involved in attempting to update our own company law here in the United Kingdom. I am sure the House will await with great interest the contributions by all the distinguished speakers this afternoon, and, on a personal note, I look forward with eagerness to hearing the noble and learned Lord, Lord Diplock, for, in our deliberations, it is he who guides those of us who sit on the Law Sub-Committee.

My Lords, we are discussing four reports this afternoon, and all of them are of a very technical and complicated nature. I think it would be for the convenience of the House that I should comment briefly on some of the more obviously contentious points that seem to me to arise, and then perhaps the noble Lord who is to reply for the Government could let us hear his opinion. The first draft Directive we are discussing is that on prospectuses. The noble Lord, Lord Mais, has already covered that in considerable detail, but I should like to add one or two comments of my own.

It seems that this Directive presents no terrors to those of us in the United Kingdom who are concerned with obtaining quotes of a company's shares on the Stock Exchange. We can all agree that its purpose is threefold. First, it seeks to enforce minimum standards for the quantity and quality of the information that has to be offered to potential investors. So far as quantity is concerned, there are some major anomalies. Can there be any valid reason, and do we have to be convinced of it, for requiring much greater disclosure of expenditure proposed on, say, research and development, or pension schemes, or staff salaries, than we require in the United Kingdom? And, conversely, the information required in the draft Directive does not cover various points on material contracts, on directors' service contracts, pension schemes, and directors' interests and the like, that we insist on in the United Kingdom.

Secondly, this particular Directive states that one of its objects is to facilitate capital movements within the Community. But regardless of the politically emotive content of such a comment, it seems that the original Members of the Community have been permitted to take some pretty draconian measures at times of economic difficulty themselves. Also our own company legislation is, to say the least, in the transitional stage, so it may be inconvenient for us to fulfil all the commitments of this Directive at once. Thirdly, this Directive requires an agency responsible in each Member State of the Community to enforce the rules for prospectuses and for seeing that the various companies' securities can be quoted on the Stock Exchange in an orderly manner. The report raises the query as to what is the responsibility of the agency, and in this country I believe that the agency is logically, and should continue to be, the Stock Exchange.

So far as the public are concerned, what exactly are the responsibilities and the duties towards them? Already the Stock Exchange Quotations Department takes immense trouble to check that companies wishing to have their shares quoted in London or elsewhere disclose all the relevant details that might have a bearing on the judgment of investors, or indeed the public. I am going to be chauvinistic and I will declare that the United Kingdom system provides more than sufficient information to investors which is relevant, and my one fear of this Directive is that it will impose unrealistic and possibly inflexible rules which will not suit each company. This Directive may force us towards rules of disclosure which the Stock Exchange has found to be totally unnecessary, and indeed irrelevant. Nobody knows more of the experience of the Stock Exchange in these matters than the noble Lord, Lord Mais, and I am sure that he would agree with me when I ask whether or not this is another case of EEC legislation failing to allow sufficient flexibility, while imposing what we see as irrelevant conditions and rules. Such measures require not merely discussion but also a great deal of persuasion from our representatives in Brussels and here in the Department.

This Directive also concerns itself with the quality of the information required by the Stock Exchange, and the responsible bodies who are to implement the contents. The eternal problem of the harmonisation both of accounts and of the listing requirements, which are continually revised and amended by the Stock Exchange, should not prevent us from seeking to encourage the addition of such measures as will allow us to continue to exercise flexibility while, at the same time, maintaining the maximum protection of prospective investors and creditors.

It was approximately three years ago that I had the honour to speak in your Lordships' House on a debate concerned with the professions in the EEC. I remember that during that debate we found that one of the main barriers to better joint agreement on the validity of different qualifications (at least in my own profession of chartered accountancy) was this question of harmonisation, not merely of company law but of accounting terms and standards. I believe, and I hope that the House will agree with me, that this Directive seeks to cover almost all the conceivable situations which we shall find when a company seeks a listing on the Stock Exchange, yet it is clear that the code of law, or practice, cannot possibly cover most of the situations without necessarily becoming impossibly restrictive, particularly in a rapidly changing commercial world such as we have in the EEC today.

For example, one problem that is apparent from the Directive as at present drafted is, who has the individual and the collective responsibility for the prospectus? In the United Kingdom the directors have the joint responsibility; but there are valid fears that the national authority, when it is to be set up in this country—and let us hope it continues to be the Stock Exchange—could be liable should anything in that prospectus be deemed later on to be misleading to investors or the public. Another problem in this Directive is one of undue delay in the flotation of the company's shares where needless and unnecessary checking could be required.

The Second Directive that the noble Lord, Lord Mais, has dealt with this afternoon is concerned with the formation of individual companies and, I believe, with the maintenance of their capital. Nevertheless, here in the United Kingdom such protection of both investors and creditors is laid down and enforced in three ways: first, in the Companies' Acts, which the noble Lord, Lord Winterbottom, and I are seeking in this House at least to update and modernise; secondly, by the Stock Exchange and its various requirements; and ultimately these requirements are enforced by the courts. The House, and particularly the noble Lord, Lord Winterbottom, will be aware that company legislation in the United Kingdom is in a great state of flux. We are currently considering non-controversial changes to our existing legislation. But we await with keennes the report of the noble Lord, Lord Bullock, later this year, or possibly early next year. Once we have digested what he has to say, then there must be a general consolidation of company law—but, of course, we have to frame our own domestic legislation to take account of Directives such as those we are discussing this afternoon.

I, and many others of your Lordships, wonder whether the systems proposed in the Directives take sufficient account of the wide and helpful discretionary powers available to our courts, and of course to the Departments of Trade and Industry. Can the noble Lord who is to reply give some indication that his Department are indeed pressing for flexibility when new codes of company law are being discussed? Many of us here fear that there is a desire for caution and over-rigid restrictions in the EEC when framing company law for European application, and we do not wish to see our own system subjected to needless change. For example, there is the possibility that EEC nationals could form companies within the United Kingdom and yet, as we understand it, be free of some of the restrictions which are applicable to United Kingdom nationals. Any such cases would require clarification from the European Court of Justice, but it seems to me that it could be another example of seeing standards prevalent here which could be at the same time by-passed because of a Directive which sets out minimum standards in the EEC yet fails to allow one of the Member States of the EEC to apply its own standards with a reasonable amount of flexibility.

Then, my Lords, this Directive continues to deal with the vexed and, I believe, most relevant question of public and private companies. The noble Lord, Lord Mais, has had a great deal to say on that, and I will add a few brief comments. During our debate on the Companies Bill the noble Lord, Lord Winterbottom, and I discussed this point, but still I believe it is vitally important for over half a million private companies in the United Kingdom to be allowed total, or at least partial, exemption from the more restrictive aspects of this Directive. There are more than adequate measures already enshrined in our existing company legislation to protect investors and creditors from outright and blatant fraud.

One item which gives rise to far too much suspicion in the EEC concerns the widely accepted United Kingdom practice of paying an interim dividend to shareholders at some convenient date during the company's financial year. It seems that in order to be allowed to carry on this admirable practice all United Kingdom companies could be required to undergo a separate interim audit merely to ascertain that there are sufficient liquid funds to permit the payment of an interim dividend. Is this really necessary? I can hardly think so, particularly if the Government' could adopt the recommendation in the Jenkins Report that no dividend could be paid until revenue losses had been made good. I think that this would avoid terrible expense, not to mention the frustration for shareholders in having to wait for a very large dividend once a year.

The Directive also contains one or two needlessly fiddling details which concern the increase of capital, and the requirement when there is an increase of capital for cash, that shares must first be offered to the shareholders. This last point is already enshrined in Stock Exchange requirements, so on this subject there should be no difficulty in seeing that the Directive should apply in the United Kingdom. There is one major problem—and possibly the noble and learned Lord, Lord Diplock, may be able to help us when he speaks—and it concerns direct applicability of various Directives and some articles in the Directives as they apply to us. I do not propose to say more at this stage because I want to keep my remarks as brief as possible and because there are a few detailed points I want to raise.

The Fourth Directive on company law and accounts is to me the most fascinating and challenging Directive that we ire discussing today because, once again, we have to consider our own company legislation and, indeed, the 1976 Bill. This Directive seeks to improve standards of disclosure among company accounts; there are, however, major differences in definitions and accounting terms. We in the United Kingdom are concerned with definitions, for example, of a true and fair view. There are also different descriptions of share capital; here in the United Kingdom we refer to issued and paid up shares, whereas in the EEC it seems that "authorised" capital can, in some Member States of the EEC, refer to any or all of those categories of share capital.

Accounts in the EEC, because of the prescriptive and often rather cautious legal systems in the various Member States, tend to be more conservative than in the United Kingdom. The standards of disclosure in the EEC are, for the same reasons, a little way behind ours. What we seek is to be allowed to continue to insist on our forms of accounts while permitting the Directive to lay down permissible minimum standards. The Working Parties of the various accountancy bodies have done a remarkable job in seeing that accounting standards can be unified all over the Community, and we owe them our gratitude.

A major omission from this Directive is that there is no mention of consolidated accounts; it is generally considered that no adequate and reasonable view can be taken of a group financial position or group accounts without such consolidation. Also, there is only a hazy outline of the duties of what we call an auditor. I believe that these problems can be overcome, but I hope that the United Kingdom standards of disclosure through company accounts will not be reduced, nor will United Kingdom companies be forced to produce accounts which serve no useful purpose.

Inflation, both here and in the EEC, has caused immense difficulties in setting out useful information to shareholders and, indeed, to the public. Completely unrealistic values can be attached to various assets and often the depreciation of these assets becomes meaningless. Happily, however, the Sandilands Report has arrived and we shall soon have some reasonable form of inflation accounting agreed in the United Kingdom. However such a new form of producing information will have to meet the requirements of this and, indeed, other Directives. Once again, declaring my interest, at this late stage, as a member of the Institute of Chartered Accountants of Scotland, I know that the accountants' profession is continually working to see that the formation of our accounts in the United Kingdom provides adequate and reasonable information to those who, for various reasons, need it, but in addition the profession is continually involved in Working Parties to amend and up-date EEC accounting and, I hope, this Directive.

A final point on this Directive concerns where the accounts of half-million companies should be published. Is there any point in publishing all this information in some huge national gazette? Surely this would be far too cumbersome and unnecessary, not to mention expensive, particularly in view of the work which is going on so that companies' accounts and other records can be examined more efficiently and speedily by the public. In my view, this Directive more than any other shows the need to ask for and to obtain our continuing high standards of disclosure among companies. We cannot and must not allow these standards to be reduced or even minimised. Rather, we should encourage our fellow Members of the EEC to raise their standards, by degree, to a European minimum.

The last Directive which we are discussing this afternoon concerns mergers and takeovers and, in view of what the noble Lord, Lord Mais, has said, and in view of his great experience, I do not propose to say much about this Directive. I would, however, draw attention to the tremendous work that has been done by the Takeover Panel. We owe the Panel our gratitude for the work which they are carrying out with such skill and a great deal of tact and speed. We look forward to hearing from the noble Lord, Lord Douglass of Cleveland, on the question of employees' rights and safeguards, and I am sure that the noble Lord will have much to say about that.

My Lords, this debate is very important because it draws the attention of your Lordships' House to the continuing scrutiny of EEC legislation which is being carried on by various Members of your Lordships' House upstairs in Sub-Committees. We are here considering measures which have, and will continue to have, an effect on our commercial life in the United Kingdom. I believe that we owe it to our partners in the EEC to align our controls with the demands of EEC legislation, while continuing to insist on our own continuing high standards. This debate is also important because it takes place while the Companies Bill is continuing its passage through your Lordships' House. For both reasons, the noble Lord, Lord Mais, deserves our heartfelt thanks.

6.26 p.m.

Lord DIPLOCK

My Lords, the noble Lord, Lord Mais, and the noble Lord, Lord Lyell, have already dealt with the most prominent points on the practical application and effect of these four Directives. I want to stick briefly to some of the legal aspects of the problem. These Directives, the four of them, cover much of the field of company law and they are to be supplemented by other Directives, three of which require special mention the one on consolidated accounts; the Directive not yet in draft—at any rate, we have not seen it—on share takeovers, it being remembered that the merger Directive is on asset takeovers; and, thirdly, the Directive on the management and structure of limited liability companies. These Directives are not, as one sometimes suspects some directives are, harmonisation of law for harmonisation sake. They are required in order to achieve one of the main objectives of the Treaty of Paris; the creation of a single capital market in the Community, and to fulfil the special requirement of co-ordinating to the necessary extent the safeguards which, for the protection of the interests of Members and others, are required by Member States of companies or firms with a view to making such safeguards equivalent throughout the Community.

These Directives deal with a field in which the commercial and legal experience of the United Kingdom could have made a very great contribution at the drafting stage, a contribution for the betterment of the Community as a whole. But unfortunately all the Directives originated before this country and the Republic of Ireland acceded to the Community and they were drafted with Continental law and Continental condition in mind. It was a grave misfortune that they were not able to benefit from United Kingdom experience in this field and, in the result, when we did accede, minor modifications were inserted in the existing drafts with, I fear, inadequate knowledge in some cases of both English law and English conditions. This has placed upon the Working Parties of the Commission a burden which, had we acceded earlier, would and should, have been assumed by the Commission. In the result the Working Parties of the Council have had to deal not only with questions of principle but with detailed matters of drafting, which normally should have been dealt with before that stage.

It is for that reason that the Committee has hoped that it would be helpful if it made unusually detailed Reports. I should like here to pay a tribute to Sir Charles Sopwith, Sir Hilary Scott, and Mr. Woolley, who have a great responsibility for what we have been able to put down in our Reports. These are designed, because of the exceptional circumstances, to give what help we can to the British representatives on the Working Party; and not only to them, but to all the Members of the Working Party and the Commission, to draw attention to matters to which their attention would have been drawn had the original drafting taken place after accession, instead of before it.

One other misfortune, or perhaps it was inevitable, quite apart from the time of accession, is that these are interlocking Directives, but because the subjects are so vast the Commission no doubt thought them indigestible by the Council in a single meal. But to pass one of them without the others, until the terms of the others have been decided, would be like passing Part I or Part III of the Companies Act without knowing what was to be in Part IV. I venture to urge that when it comes to deciding when these Directives are to come into force, they should come into force simultaneously and none should be brought into operation until the terms of all the relevant ones are known.

My Lords, there are three aspects of general principle to which I should like to advert briefly. The first, which has already been referred to by the noble Lord, Lord Lyell, is the possibility of direct applicability of some of the provisions of the Directive. That is discussed in the Report upon the Second Directive, and it is obviously highly desirable that company law should be contained in a single code, and not scattered, in part, among Directives and, in part, in Acts of Parliament. I am inclined to think that the extension of the doctrine of direct applicability by the Court of Justice may now have reached its bounds, but it would, I venture to say, be prudent to state in the Preamble, in the recitals to the Directives, that they were not intended to be directly applicable but were intended to be brought into force by national legislation and regulation.

The second point is this. If I were to criticise these Directives, I should say that they are strong on detail but, in some respects, perhaps short on principle. I accept that rigidity and going into detail is the Continental mode. But this results, or may result, in too little constraint upon some companies in certain circumstances, and too much restraint upon others. I suggest that in the Directives we should state quite clearly that the safeguards there set out in detail are minima. I should say state "expressly", because one must remember that with these Directives being made under a provision requiring equivalent safeguards throughout the Community, it might be said, if we did not state expressly that they were minima, that to have variations within Member States—greater safeguards in one than in another—would destroy the equivalence of the measures. We must not sacrifice the substance of protection for the shadow of uniformity, and this we should make clear expressly in the Directives themselves.

Finally, my Lords, I mention again what has been mentioned by both noble Lords who have already spoken and what runs like a refrain through all four of the Reports; namely, that the rigid application of these detailed norms laid down may, in some cases, in the particular circumstances of some companies, reduce the safeguard to investors and to employees, and even positively deceive. That can be in no one's interests. So there is a real necessity for some machinery capable of speedy action to grant exceptions in particular cases, to modify detailed requirements where it is necessary in order to give a true and fair account of the situation of the company. Only in this way can these Directives ensure that the protection both for the investors and workmen is not less than it is today in this country.

At present under our system the functions of making exceptions and modifying detailed requirements are divided between the Departments of Trade and Industry, the Stock Exchange and the Takeover Panel. This system works. The sanctions available are in part legal, but mainly economic, and I suggest that a system of that kind is probably not acceptable to the Continental Member States. Some more institutionalised equivalent would, I feel, be the solution for which we should aim. I make my final suggestion as a personal suggestion, not speaking on behalf of the Committee or of the Legal Sub-Committee. In the Directive relating to prospectuses there was provision that a national authority, public or private, should be required to vet prospectuses to see that the requirements were fulfilled. There was, and still is, provision also for what is called a "contact group" to keep under observation how matters were working out and to recommend changes if they were needed as circumstances changed. Neither of those bodies reappeared with any functions in the subsequent Directives. I do not know why. It is rather odd. It may be because of the piecemeal way in which the Directives were produced.

What I would suggest for consideration is that we should set up a national authority with a combined membership representing roughly the same people who are now serving on the relevant Committees in the Department of Trade and Industry, the Stock Exchange and the Takeover Panel. We would confer upon such a body, which would be more institutionalised than the three bodies which at present between them exercise this kind of function, a power to grant exceptions, to modify requirements in particular cases where that was necessary—and to modify them up or down—to add to the requirements if that were necessary in particular circumstances or to exempt from certain requirements if that were necessary in particular circumstances.

Such a body would, I believe, have to be given legal sanctions to make it palatable to other Member States. If it be said that what that would be doing would be creating an English SEC, I suggest that, as long as it is an English SEC working upon the lines which a body of that composition can be relied to work, it will be none the worse for that. It would give us an opportunity of getting into the Directives a flexibility which is necessary for the best functioning of a single capital market and it should be acceptable to our fellow Member States, accustomed as they are to the civil and not the common law.

6.44 p.m.

Lord DOUGLASS of CLEVELAND

My Lords, in dealing with the Fifth Directive, it is my intention to deal with worker-participation, which comes into this section of the Directive. My noble friend Lord Mais said that in this country we were apt to rely upon City institutions whereas on the Continent they rely upon statutory legislation, and that this was where we should come into conflict with our Continental friends both in the trade union movement and among industrialists. The noble Lord went on to say that we look at their accounts with some scepticism as a consequence because—and the noble Lord did not say this, but it was the implication of his words—they were continually trying to find ways round the law.

Lord MAIS

My Lords, if I may clarify what I said, I said with regard to the European situation that there was no reflection on the companies themselves but that the problem arose from the fact that they were allowed to disregard the results of a subsidiary company. In other words, if they had a subsidiary company which had had bad losses, they were not compelled to show those in detail or to explain them in the consolidated accounts of the company. That is the difficulty, and if it were put right there would be no difference between Continental companies and ourselves. They are allowed to disregard bad or, indeed, good results from a subsidiary company if they so wish.

Lord DOUGLASS of CLEVELAND

My Lords, the noble Lord, Lord Lyell, went on to suggest that I should have something to say about employees' rights and safeguards. I believe that the greatest safeguard employees can have is a strong trade union and that nothing can take its place. Therefore, I am not anxious for the holocaust of legislation to give us protection. Let us have a look at the participation which we have had for many years now. We discuss money with the employers. Whenever plant is planned, we discuss what manning there will be. I was challenged on this in my very early years when employers refused to allow me to negotiate the number of men on a given machine. It was not very difficult for us to deal with that. We did not allow the machine to start until we had agreed on the money. We could carry that to excess with the power which we have and if we do so we shall destroy the industry and the union.

I have had 62 years as a member of my union and half a century of negotiation. We have the power and very rarely do we use it indiscriminately or harmfully to industry. We negotiate shift and weekend work. We have productivity bargaining—or at least we had, but we now have legislation which limits productivity bargaining and we all want to get away from it even though it is very necessary at the present time. We negotiate safety which, again, is restrictive practice so far as the management are concerned, because we insist on work being done in a certain manner. We discuss rationalisation when the management want to put in new plant. We discuss redundancy arising from that. If there is to be a merger, we discuss the merger and we do so even more anxiously if it is to be a takeover. We discuss investment because, if money is to be invested—for example, the British Steel Corporation has invested in tremendous plant—and whole communities are to be thrown out of work, there will have to be negotiation. Sometimes it ends unsatisfactorily. Sometimes we might like to have legislation to prevent firms from acting unilaterally, as some do in these matters. I believe that we come to a very much more satisfactory conclusion through consultation than we should through legislation. The social consequences of all that is done are a matter for negotiation inside the trade union movement. I have deliberately put in these items to show that participation is taking place, and taking place on a very active basis in this country at the present time. What we are discussing now is how far we shall proceed with worker participation and how it can be achieved.

My Lords, there has obviously got to be legislation on company law; and, as I listened to all the speakers, I heard them all advocating a policy of restraint, legislation to restrain. That seems to me to indicate that directors must be a rather difficult set of people, if they are to have all these laws to keep them in line. I was a member of the Monopolies Commission, and I saw all the evils which could arise from monopoly and from selfish action so far as companies are concerned. I accept that there is a need for legislation; but, even there, the noble Lord, Lord Mais, said that it is much better to have accepted rules, Stock Exchange rules, than it is to have legislation which, in the end, is not so effective with any particular section of society as accepted codes of conduct. When we come to deal with trade unions, we want the reverse, I think. We do not want constraints; we want to involve them in some action that is going to give them an incentive to see the higher productivity which is going to bring the higher wages and dividends inside the industry—and it is to that end that I would speak this afternoon.

When we deal with this matter by legislation and put the Bills through this House, the inevitable tendency is to polarise industrial action. We in this House are polarised, as they are in another place. The arguments from this side are opposed by arguments from the other side, and vice versa. I do not complain; this is how democratic politics run. But it is not how an industry should be run; and that polarisation, through legislation, tends to transfer itself back into the industrial field, which is bad for industry.

So I say that politics polarise; and, if I can say so without offence, politicians very often paralyse. It is for that reason that I am wanting something that is acceptable and voluntary inside industry so far as workers' participation is concerned. I am content to rely on the strength of most of the unions in this country. Some are in very difficult circumstances; they are in industries where organisation is very difficult, where the turnover of labour is so frequent that you cannot get the organisation. Some forms of legislation have got to come in there—they are inevitable. But let that be at the tail end, and following on agreement which is arrived at within industry.

So far as the Opposition is concerned, I have heard them talk about the unacceptable face of capitalism. My Lords, capitalism today is not what it was when I started my trade union membership 62 years ago. By legislation, by trade union pressures, by commercial activities, capitalism today is a vastly different animal from what it was yesterday. It might be said—and I would have used this argument if I had been a Member of the Opposition—that capital is one of the few sections of our commercial organisation which contains within it incentives. Too often when you get planning, and intensive planning, incentives tend to be wiped out. If you want an example of that, you need to go to Russia to see what the ultimate is so far as planning is concerned. It is absolute lack of incentive. They have to go to America to buy the food to keep them alive. The trade unions there have all the legislation in the world, but no freedom; they are tools of government. So when you come to the ultimate of legislation, that is it. It is supposed, of course, that if you get the power that they have, the dictatorship of the proletariat, then you have got enough power to plan and compel people to do what ought to be done for the good of the nation. Yet they cannot feed themselves.

Then you go to China and see what is happening there. We visualise China as a new concept of communism. Only this week we have had the revolutions inside China. What does it mean? It means that the young people of the world are not going to accept dictatorship, wherever it comes from. So the end of good commercialism and good industrial practice does not rest with planning in an authoritarian or autocratic way. Nor am I sure that it is going to depend too much on legislative planning, but, rather, more on planning that is agreed between employer and employee. I can remember something that happened many years ago, when I was with a firm which was making steel. We contested the employers' new method of operating the open-hearth furnaces on which we worked. They would take no notice because they believed that they knew it all. Fifty years ago I produced a costing of that particular method of steel-making practice, which was finally sent up to the directors, who accepted the arguments that we put forward. The workers can bring forward the constructive ideas given the opportunity—and they can demand the opportunity.

We then come to what is the hub of contention at the present time, and that is the proposal for co-determination, where you have two bodies—a policymaking body at the top elected by a works council who appoint a managerial body underneath. I have great difficulty in understanding the attraction of this to so many people. I have been discussing this with Lord Feather, who was secretary of the TUC and who was sent out to Germany in order to get the trade unions re-established after the war. He did it very successfully; he made a good job of it. But it was when he established the unions that they established co-determination. Why did they establish co-determination? It was not for productivity; it was not for better understanding; it was to keep the Nazis at bay. In those days coal and steel employers were arrogant autocratics. I know; I went over and met them on a number of occasions. We would never have stood for the arrogance of those people inside this country.

Co-determination was set up because in Holland in the 1870s shareholders felt that this method of operation would give them some control over their company. That is how it originated. In Germany, it was continued, reincarnated, re-set-up, for the purpose of controlling Nazis, not for the purpose of production. It worked because the workers believed that they had that protection from them—from the Nazis, from the autocrats who were inclined to treat them as the Nazis had treated them all along. It was workers' protection from that; it was not an endeavour to get something which would work properly. Why did it work? It worked because the whole of industry inside Germany was at such a depressed point as a consequence of the destruction in the war that they knew that if they were going to get back to security, and security without inflation, there had to be a working together as there had never been before; a productivity which would equal anything in the world—and they were given the best machines in the world with which to do it.

If people did not succeed in those circumstances, I do not know in what circumstances they would succeed. People think that because that happened it is going to be continually successful. I like to keep abreast of events. There is a great deal of unrest among the young workers inside Germany today about co-determination. There is a demand for it in a number of industries, with a fifty-fifty representation. But there is a good deal of unrest there, and I think it will emerge before very long, when we will see that it is not the cure-all.

Coming back to our own country, I was on a works council many years ago now, and that works council was instituted for the purpose of rescuing works which were bankrupt. We could not have conducted that council unless we had had some confidential information, because the management was making a request of us. Shareholders' information can be got without trouble. All you have to do is to buy a couple of shares, and you have it. There is no point in constructing machinery to get the information that is given to shareholders. It is too easily available. But people are demanding more than that now. They are demanding some of the information that directors get. But there will be no power given by such information without it being accompanied by the responsibility which inevitably accompanies power of that character.

Company law has been set up in this country to prevent directors with inside information from using that information against the shareholders or from using it for their own benefit. Company law has done this in order to protect the shareholders of companies. It is visualised by some of our people that they are going to get information that directors have. If they do, they will have to observe the same secrecy which direc- tors have to observe; or the industry would be destroyed if they were not prosecuted by law. They would have to be prosecuted. It is an inescapable consequence of knowledge of that character that you must obey the law in respect of it and not use it for your own individual advantage. This will cover the trade unions just as it will the directors of any firm. If anybody has any doubts about that, they should get down to it and see where they get to at the end of the day.

I know of at least two firms in this country which believe in voluntary cooperation. They have set up works councils, and they have some young shop stewards sitting along with top management on the councils. They have described to the young men the problems of the industry and they have said to them: "We want to go a little further. We want to give you some of the information that our directors have. The condition is that you keep it secret, as the directors will have to keep it secret." These young men—and although I know of two I think there are more than two companies doing this—have accepted this situation. The consequence is that they have now got information which is not only secret but is not understandable to them because they have not been trained to understand it.

This brings me to the point that management is a very professional occupation, with sophisticated machinery, both technical and administrative, which has arisen as a consequence of technical improvements and administrative legislation. Sometimes you need to be a lawyer to understand just what is happening. The trouble is that lawyers do not know what to do with it when they understand what happens. It is an advantage to have these shop stewards learning how to understand. They have asked management, "How can we get to understand this? These are closed doors to us." The management have appointed teachers to teach them; and they are learning.

That brings me to the next point. If our trade unionists are going to move as they are moving, and as they have got to move, into the realms of responsibility and of management, they will require a lot of training. I should think that an advanced company would do what one such company is thinking of doing. They are thinking of employing some of their retired directors to take classes of these young fellows, to tell them of the problems they have had in their experience inside industry. They are letting them ask questions and giving them an understanding which will enable them to take responsibility. No legislation can do just that. My Lords, I do not care how it is done. It is the problem. I am not sure that my noble friend Lord Winterbottom will agree with all that I am saying. I am not saying this with the authority of my Party. I am saying it because I think it from my own experience and I want to get the thing down in Hansard so that there may be some criticism and thought going on about this question.

So far as co-determination is concerned, if we are to adopt legislation that was put through in Germany 30 years ago, then I think it is showing a stultification of thought so far as we are concerned. When I was in industry—I was in the research department of the steel industry and I was in the Department of Scientific and Industrial Research covering all industry—I was looking on the drawing board at something which was to operate 20 years hence. If we are to look at what was on the drawing board 20 years ago and adopt it now, it shows a stultification of thought which is not in the British character. There is more innovation inside the British character than that. There is an ability inside British industry to make it pay. It has been obscured by subsidies and legislation up to this point; it has been obscured by economic jargon up to this point. But now, as the Budget has shown, we are at the point where we can neither adapt economic methods nor borrow any more money. We must rely on ourselves to get productivity in this country. The only way to get that productivity is not by operating as we do as politicians but as we should as industrialists. By that, I mean that we are not going to sit down in industry and oppose each other for the sake of opposition as we do in Parliament; we must sit down together to bake the cake that we are to share. I am sure that inside industry today there is enough thought to do this.

We have come to the issue of what has to be done. Can it be left to com- panies to get together with the unions or unions with the companies? Or do we have some pressure? When we dealt with the Industrial Relations Act, the Code of Practice became very prominent. We have adopted a code of practice in many instances and possibly with the back-up of legislation in the background. If we in this country can evolve a code of practice for co-operation between trade unionists and employers—and by employers perhaps I mean management, but let me say between trade unionists and management—then the interests of the shareholders will be well looked after, the interests of the trade unionists will be well looked after and the interests of the Chancellor of the Exchequer will be well looked after.

It will take some years to evolve. It will take years to bring to fruition. But there is no other method I know that will bring the fruits that we want inside this country. I would therefore ask that everybody—trade unionists, employers, and Government—consider first how we get trade unionists and management together as they are doing in some of these firms; how we give satisfaction to those who want legislation because they are afraid that without legislation nothing will be achieved. I think that the economic committee of the TUC and the CBI or perhaps the National Economic Development Council could draft a code of practice that should be followed by all. I do not think it will need backing by legislation, because the example will be sufficient to prove its worth. But, if legislation is necessary, then put it somewhere in the background to give satisfaction to those who have doubts about voluntary co-operation.

There it is, my Lords. Let us get away from the old idea of fighting each other! Let us do what the Chancellor of the Exchequer has done and say to the unions: "Here is something for you, if you will give me something. It will be to our joint advantage." If we can get that spirit running throughout industry then the future of this country is not only assured but it will not be said that we have to depend upon a policy evolved 30 years ago by a nation because the trade unionists were scared of the autocrats inside that nation.

7.10 p.m.

Viscount AMORY

My Lords, the subject on which the noble Lord, Lord Douglass of Cleveland, has been speaking, worker participation, is of immense importance. I am sure we shall all look forward to a very special and full debate on this subject before long. I am no lawyer, and I know very little about the Companies Acts. I want to make one or two remarks stemming from my membership of Sub-Committee A. Several of these points have been already dealt with with great skill by the noble Lord, Lord Mais, and my noble friend Lord Lyell, who is a chartered accountant and speaks with great authority on these matters. I shall refer to them only sufficiently to illustrate the truth of the old adage that great minds are apt to reach identical conclusions. I do not think that will take me very long. On the other hand, I have no intention of referring to the points made so cogently by the noble and learned Lord, Lord Diplock, for a reason which will appeal to your Lordships: that I would be incompetent to do so. Nevertheless, I am sure I shall be on safe ground by saying that I concur in full with the noble and learned Lord.

In general, as the noble Lord, Lord Mais, said, we must realise that there is a difference in the attitude of our colleagues on the Continent and ourselves on some of these matters. We are taking the pragmatic attitude, dealing with situations and problems as they have arisen in the most practical way, and we must recognise that the other Members of the EEC are accustomed to a more prescriptive approach. I think we must accept that while our system suits us well, it is not likely, as the noble Lord, Lord Mais, said, to be entirely practicable or acceptable to the nine nations trying to lay down common rules. Nevertheless, I hope the EEC Commission will look very carefully at the methods which have worked and are working well in this country. Fortunately, many of the provisions lay down minimum standards of action, leaving those countries who prefer more exacting but workable standards to maintain them if they so desire. That sounds a wise approach.

Having said that, the first drafts of some of these Directives seem to suffer from an attempt to lay down too rigid and too detailed rules. Two examples, in passing, are the provisions for advertising mergers and the number of expert valuations required. There are many other instances one could quote. Most Continental countries, I suppose, have less experience of mergers—or, at any rate opposed ones—than we have, and if some of the detailed provisions proposed were literally enforced the time and expense involved might often prove prohibitive, especially to the smaller companies. In some instances the EEC proposals seem to put more emphasis on the quantity than the quality of information.

If one surveys the whole field of the detailed rules envisaged by the EEC Commission, I think one would feel at times rather daunted by the nightmare of a massive bureaucracy resolved to harmonise everybody and everything. It would be a pity if the verb "to harmonise" lost some of its dulcet tone and became terrifying in its significance. One's hope is, however, that good sense and good judgment about what is practical may dictate the limits of these Directives which are going to have the force of law. Clearly, there must be a corpus of strict company law applying to company law. Though I doubt how far it is applicable to company law, I believe personally that our complicated modern society may increasingly make use of codes of practice supported by public opinion in lieu of an ever-increasing multiplicity of law in immense detail which no citizen can hope to comprehend. Codes of practice in the cases we are considering now have strict limits.

De minimis non curat lex seems to be a principle getting a little out of date. As Mr. Bernard Levin said a few days ago, as a result of Parliamentary enactments, today the law "curats" with an increasing devotion about the most miniscule of trifles. The section in the Report on the Safeguarding of Employees' Rights in the case of mergers may seem at first sight rather brief. But it deals with an important aspect of mergers. Too often in mergers the interests of employees seem only to be considered at a late stage; sometimes, indeed, too late. Your Committee, my Lords, has said in its report that employees' rights should be safeguarded in some way, whichever legal form of merger is used. We might perhaps have added that this whole question of safeguarding employees' rights requires and fully justifies the most careful consideration at every stage.

Regarding the evidence we received about United Kingdom attitudes, there is one point I should like to make. While some of the evidence we had from expert bodies displayed a really impressive appreciation and knowledge of the proposals and state of play in the EEC, I think I would be right in saying that we did not receive a great deal of evidence that businessmen or their representative bodies were yet interesting themselves very much in these matters. If that is true, it would seem a pity, because while most of the proposed Directives are not likely to come into force overnight, many of the things they will cover are extremely important. Remembering that most of the rules will eventually become binding on companies in the United Kingdom, it seems prudent that businessmen and representatives who are to be concerned keep in early and close touch with what is being planned during the formative stage.

There is one other matter that I should like to touch on. These Reports from the Select Committee are, of course, primarily for the information of this House. But one would like to think that they would also serve wider purposes, by furnishing criticisms and suggestions which will be of use to our Ministers and officials in their EEC negotiations. The noble Lord, Lord Mais, touched on that point.

This question was raised the other day, in a debate on EEC environmental matters, by the noble Lord, Lord Avebury. He asked what happens as a result of our debates. Are our Reports and discussions of use to our delegation in Brussels? He also suggested some kind of reporting back procedure on the recommendations in these Reports, so that we in this House can judge what action has been taken and whether our recommendations have proved effective and useful. The noble Lord, Lord O'Hagan, in the same debate asked whether the six-monthly Report the Government are to make might afford such an opportunity. A recommendation made last Session, I think, in the Second Special Report dealt with this matter and is relevant. There was a welcome indication in an Explanatory Memorandum from the Secretary of State for Trade that the recommendations of the House of Lords Select Committee were to be pressed in the Council Working Party. That is good news. May I ask the noble Lord, Lord Winterbottom, whether he will tell us more about this, and how he thinks these objectives we have in mind, about knowing what subsequently happens to the subjects we have discussed in our Reports, might best be met.

These Directives will eventually call for some very important alterations in our laws. May I repeat once again how important it is that those at home who appear to be concerned—the industrialists, businessmen and trade unionists—should apply themselves as soon as possible to considering these questions which are likely to arise, so that their varied views may be understood and represented by our delegations during the formative stage in Brussels. The Directives which will ensue will be very important indeed. Finally, I should like to associate myself with what the noble Lord, Lord Mais, said about the gratitude which our Sub-Committee feel towards our secretariat and advisors. The other members of the Sub-Committee would like me also to add, "and to our chairman, too".

7.21 p.m.

Lord WINTERBOTTOM

My Lords, the House has very properly thanked the noble Lord, Lord Mais, for his valuable act in recommending these draft Directives to the House in such a clear and illuminating way. I think that a much wider circle—all those individuals who in due course will be affected by these Directives—also have cause for gratitude. This is a matter which perhaps is only just coming before the public, and in particular those sections of the public who will be directly affected. For this reason, I should like to support the point made by the noble Viscount, Lord Amory, that public attention should be directed towards the work done by your Lordships' House, towards this debate and to the various problems and prospects that the Directives are opening up.

Speaking on behalf of the Government, I should like also to express gratitude to the Select Committee and their Sub-Committees, who carry out such a great deal of detailed work, in the preparation of the report which is now before your Lordships' House. This has entailed the taking of evidence from numerous interests, a study of lengthy and complex documents, discussions both in this country and in Brussels and the sifting of a vast amount of technical information so that it may be put into a form in which it is accessible to laymen and experts alike. I am sure that I speak for the House as a whole when I congratulate the Committee on its notable achievement. At this point I should also like to commend to your Lordships what was said by the noble Lord, Lord Lyell, when he stressed how the work we are doing in the House this week shows how closely inter-related are becoming the legislative work we have to do for the United Kingdom and that which is coming to this country from the EEC. This is something which, if I may say so, has interested me very much during our joint work this week.

The programme of work on company law harmonisation is part of the industrial policy programme which was approved by the Council of Ministers in December 1972, aimed at the eventual establishment of a single European industrial base. The company law programme is designed to contribute to these wider policy objectives, and obviously the proposal before us today represents only the first step along what will be a long road. There is a lot of work to be done before these objectives can be realised.

The Government's attitude to the programme is naturally influenced by the difference in the circumstances and conditions which apply in the United Kingdom. As has been said, we have more companies than the rest of the EEC put together, and traditionally rely on a liberal approach to company law. Our system is based on a principle of disclosure, and we tend to react ad hoc to proven abuses. Of course, the relative sophistication of our Stock Exchange, banks and professions plays an important part in making the system work in practice. It is important that the benefits of this existing structure are not lost in the maze of detailed discussion leading up to harmonisation.

As my right honourable friend the Secretary of State for Trade made clear in his evidence to the Scrutiny Committee, our aim in negotiations is to ensure that we do not accept changes which would be detrimental to our legislation; that we accept as few as possible of those which serve no useful purpose; that we maintain the aim of equivalence and not uniformity together with much of the flexibility of our own system; and that the Directives should impose the minimum requirements only, leaving us free to impose more stringent requirements, if need be, in the United Kingdom law. I hope that what I have said on this point will satisfy the noble and learned Lord, Lord Diplock, to a certain degree. I have noted his view and shall bring it to the notice of my right honourable friend that all Directives relating to company law should come into effect together rather than piecemeal. If I have understood the noble and learned Lord aright, he would like to see, following this particular step, the consolidation of all company law. I believe I have understood the noble and learned Lord correctly on that point.

In general, progress is slow and the total timetable for any instrument from its conception to adoption and implementation is nearer ten years than five. This is mainly due to the inherent complexity of the field and the very detailed level of harmonisation at which the Community was aiming before we joined. Furthermore, the difference between the more flexible and liberal company law and practice in the United Kingdom, derived from a mixture of Statute and common law, while those of the Continental countries have tended to be based largely on civil law, has thus raised different problems which of necessity extended the discussions even further.

Your Lordships may be interested to hear the present state of play on the four Directives we are discussing this evening. The draft Directive on Company Prospectuses, which is sometimes referred to as the draft Sixth Directive, has now been published in revised form by the Commission. No firm timetable is yet available, but it is understood that consideration of it in a Council Working Party may begin in the next few months. The draft Second Directive has now virtually completed its Third Reading in a Council Working Group and, although there are still some major problems to be resolved, it is planned to bring the draft before the Committee of Permanent Representatives in the next few months. It is clear, therefore, that work on the Second Directive is near completion and we may assume it will be ready for adoption by the Council of Ministers during 1976. The draft Fourth Directive is currently having a Second Reading in a Council Working Group, and recent progress has been reasonably rapid. It is therefore possible that it could come before the Council of Ministers in 1977.

In the case of the Report on Mergers and Takeovers, I would remind the House that we are dealing with two separate Directives, R/131/73 being the draft Third Directive on international mergers; and this has not progressed since a First Reading of the draft was completed in November 1973. Future progress will depend on the speed with which the Second and Fourth Directives can move through the Council, but it seems unlikely that work on these will resume before 1977. R/2155/75, which is the draft Directive on the safeguarding of employees' rights in mergers, takeovers and amalgamations, and which is more commonly known as the "Acquired Rights Directive", is having a Second Reading in the Council's Social Questions Working Group and could well be ready for adoption by the end of June this year. I should mention that this draft Directive is the responsibility of the Secretary of State for Employment, whereas the others with which we are dealing today are, of course, the responsibility of the Secretary of State for Trade.

It will be seen that these proposals do not involve reforms of company law immediately facing us. In two cases, the drafts may well come before the Council of Ministers for adoption in the current year; in two other cases, possibly in 1977; and in another two cases, at some later date. In each case, there could be up to two years more before their implementation in domestic legislation. It is nevertheless important that they should be scrutinised at an early stage by the House and another place, and that there should be ample opportunity for debate.

I should now like to turn to the main recommendations of the reports from the Committee, so that the facts are on the record in an easily available form. The draft Directive on Company Prospectuses, which is covered by the Twenty-first and Thirty-first Reports of the Select Committee, was published in 1972 and has not been discussed in any Council or Commission Working Party since the United Kingdom's accession to the EEC. The Commission has now redrafted the draft Directive in the light of comments from the European Assembly and the Economic and Social Committee and it is anticipated that a Council Working Party will be convened in the next few months to consider the revised proposals.

The draft Directive is intended to coordinate between Member States the information to be disclosed to the public by companies applying for a Stock Exchange quotation for their shares. The information which the measure seeks to secure about the company covers its general character, activities, financial situation, management, prospects et cetera; details must also be given of the securities for which quotation is being sought and of the persons or bodies responsible for the prospectuses. Member States are, however, free to require more information than that laid down in the Directive. The extent to which adoption of the Directive would require amendment of British law is uncertain, although it is possible that some revision of the Prevention of Fraud (Investments) Act 1958 might be called for. The principles of the draft Directive are generally followed by the Stock Exchange and are not thought likely to give rise to any significant policy problems for us. However, the Government concur in the amendments to the draft Directive suggested in the Thirty-first Report of the House's Select Committee on the European Communities. In particular, it attaches importance to ensuring that the directors rather than national authorities are made solely responsible for ensuring the accuracy of all statements in the prospectus. It also attaches importance to ensuring that the financial information in the prospectus should be attested by a qualified expert.

May I say that I noted that the noble and learned Lord, Lord Diplock, remarked that at one point in the discussions a national authority appeared and then subsequently disappeared. I will bring to the attention of my right honourable friend the Secretary of State that it is his view that a national authority should be set up in this country for quick moification procedures, and that it should to a degree be institutionalised and given some legal sanctions to aid it in its funtioning. The noble and learned Lord mentioned that he would like to see an English Stock Exchange Commission, and he thought that our European colleagues, being rather more institutionally minded, would welcome such an organisation.

Turning now to a Community proposal which faces us more immediately, the draft Second Directive, I should first point out to the House that the Report your Lordships have before you is based on the published text of the Directive which has already been very substantially revised following detailed negotiations in three readings by the Council Working Group. Indeed, in the last two months there have been rapid and substantial changes, and of course our negotiators in Brussels have had the benefit of the Committee's Report to assist them. I am glad to say that it has been possible to achieve progress on many of the Committee's recommendations. This is something which I know will please the noble Viscount, Lord Amory. The machine is being fed with the Committee's recommendations, which are having substantial effects.

First, we have sought to ensure that the Directive prescribes minimum requirements so that national law can provide greater safeguards for shareholders, creditors and the general public where this seems desirable or is already United Kingdom practice. There has been a ready acceptance among our partners of this principle. We have also examined the problem of the direct applicability of the Directive, on which the Select Committee expressed some concern, and we have put forward detailed proposals in Brussels. These are still under discussion but, again, I think I may say that there is no great difference of opinion among Member States on this point. One of the most important of the recommendations of the Select Committee was that the draft Second Directive should not apply to private companies in the United Kingdom, and here again I am glad to say that there appears now to be an acceptance of this in the Community. It will probably, as noble Lords will agree, be necessary, however, to introduce legislation which will require companies to make it clear in their titles whether they are public or private, probably by some alteration to the titles of public companies.

A further important problem on which the Select Committee has made a recom- mendation concerns the system of paying interim dividends. This practice which is almost universal in the United Kingdom is viewed with much suspicion by many of our Continental neighbours who, by and large, do not have it. They consider that there should be fairly stringent restrictions on the amounts that could be paid out, but we share the view of the Select Committee that interim dividends are an important part of the investment system in this country and must he maintained. The Government have accumulated a great deal of evidence and opinion from the professions and from representative bodies and individual companies, and have concluded that fundamental changes in our interim dividend system would lead to hardship to shareholders and would he disadvantageous to our companies. This point remains to be settled in Brussels, but we shall not be prepared to agree to the adoption of this Directive so long as it contains provisions which would make the payment of interim dividends virtually impossible.

I should like now to say something about the Report of the Select Committee on the draft Fourth Directive on the form and content of company accounts. This draft Directive deals with accounting technicalities which are not easy for the layman to grasp. The noble Lord, Lord Lyell, having lost his amateur status will probably understand better than we do. I should like to congratulate the Select Committee on producing an extremely good Report which, while dealing extensively with these technicalities, is nevertheless readable by those who are not versed in them. Negotiations on this Directive continue, and once again some advance has already been made over the position reflected in the Report. In particular, the importance of the true and fair view, which the noble Lord, Lord Mais, stressed, in the presentation of company accounts, has been accepted by the other Member States, and indeed we are hopeful that the final text will make it clear that its importance is overriding.

The formats for the balance sheet and profit and loss account as laid down in the Directive will be a new feature for the accountancy profession in the United Kingdom. The process of harmonisation makes it inevitable that there should be required some uniformity in the presentation of accounts, and while this may mean losing some of the flexibility of the present system I think the formats, as they are now envisaged in Brussels, will be broadly acceptable to the accountancy profession. A problem remains, however, over inflation accounting following the Sandilands Report. Agreement has been reached in Brussels that the Directive must accommodate inflation accounting, but the precise way in which it should be incorporated into the Directive is still under discussion.

The Select Committee recommends that the Fourth Directive should not come into effect before the draft Directive on consolidated accounts and that it should contain those parts of the draft Fifth Directive dealing with the adoption and audit of accounts. The Government agree that both of these recommendations would be desirable. Unfortunately, it is a feature of the approach being adopted in the Community whereby different aspects of company law are treated slice by slice, as it were, that the timetable for the various draft Directives cannot be brought into line without holding up parts of the work. We intend to maintain our position on both these points, but it could be some time before the consolidated accounts Directive and the draft Fifth Directive are ready for adoption and it may not be desirable to delay the Fourth Directive while this work goes on.

The Select Committee have made a number of detailed recommendations concerning this draft Directive (relating among other things to the writing-off of good will, the basis on which profit is calculated, et cetera). I would not wish to delay the House by dealing with each in turn. I shall simply say that the Government are grateful for these recommendations and will have them very much in mind in further negotiations in Brussels. In particular, we shall he pressing on our colleagues in Europe the importance of setting up channels for the regular reviews and possible amendment of the Directive to accord with changes in accountancy practice. I think this will please the noble Lord, Lord Lyell, because he was stressing flexibility. Accountancy is a subject which does not stand still, and it is important that the legislation in Mem- ber States should not act as a deterrent to its further development and improvement.

May I now turn to the Twentieth Report concerning the draft Directive on Safeguarding Employee Rights (R/2155/75). The noble Lord, Lord Douglass of Cleveland, spoke on this draft Directive. He mentioned his reservations on the subject of co-determination on various aspects of company law based upon legal Directives, and issued a warning arising from his long experience of negotiation. I hope that the noble Lord will forgive me if I do not touch deeply on the points he has made. I am dealing with a different Directive. The Directive which interests the noble Lord is the draft Fifth Directive which is not the subject of our debate today. However, it is in front of our Select Committee which has not yet reported upon it, and doubtless the Committee will take note of what the noble Lord has said. It may be that the noble Lord will think that it is worth while to give his views directly to the Select Committee.

Lord DOUGLASS of CLEVELAND

My Lords, I raised this question on the draft Fifth Directive because I knew that the noble Lord intended to refer to it. Therefore, I took advantage of being in order as a consequence.

Lord WINTERBOTTOM

My Lords, I am sure that the noble Lord is sufficiently concerned with the situation to give his views, which are cogent, to the Select Committee.

If I may turn to the more limited field of the Acquired Rights Directive, its aim is to safeguard employees when a merger which leads to a change in their employer takes place. This type of merger is relatively rare in this country. In the more common British situation, where the identity of the employer does not change although there has been a change of control of the firm, most of these safeguards are unnecessary. Only the provisions in the Directive regarding pensions, dismissal and consultation will apply in these circumstances. Perhaps I may venture to draw the attention of the House to the supplementary memorandum on the Directive which was circulated by the Joint Parliamentary Secretary at the Department of Employment, Mr. Fraser, earlier this week. This memorandum was produced in order to bring Members of both Houses up to date with the progress of discussions on this Directive.

I should like to comment briefly on the main points made by the Select Committee in its report. First, on the article dealing with pensions, the Government agree with the Committee's view that the article has gone too far in seeking to guarantee that there can be no diminution in pension rights because of a transfer. Discussions on this point in Brussels have led to agreement that this article should be redrafted in such a way as to meet the Government's concern. Our attitude to the article of the Directive relating to dismissal is mixed. The majority of Article 6 is acceptable, but we foresee great problems in attempting to define the phrase "pressing business reasons" in legislation, and take the view that because there is already strict regulation by law of dismissals in this country, and because it might detract from existing protections against dismissal, the first paragraph of this article should be changed substantially.

The night is moving on and I think that I have been speaking for far too long, although I hope that what we in this House have said tonight will be of interest beyond our four walls. In conclusion, I should like to say how much I appreciate the opportunity for this debate to take place. The subject matter is one of great importance to this country; it will affect our national law in the future—as we know it is affecting it now—and will entail a considerable amount of legislation. But before this becomes necessary, I am sure that your Lordships' House will agree with me that it is essential to ensure that the Directives are framed in such a way as to maintain the United Kingdom objectives that I mentioned at the beginning of this speech.

I trust that I have been able to reassure your Lordships that the various recommendations made by the Select Committee in the reports before this House have been taken into account with some care by the Government. Indeed, many have already been, or are in the process of being, satisfactorily negotiated. There is still a lot of work to be done and much discussion has yet to take place both here and in Brussels. The Government welcome this debate and the reports of the Select Committee, and I commend to your Lordships' House the first-class work that they have done in the course of their scrutiny.

7.44 p.m.

Lord MAIS

My Lords, looking around your Lordships' House, I am reminded of the fact that it is Thursday and that time is going on apace. Therefore I will confine my closing remarks to thanking all those noble Lords who have taken part in the debate today and, again, all those who have made it possible by their contributions at the Select Committee meetings. In particular may I thank the noble Lord, Lord Winter-bottom, for his very detailed reply which has been most helpful to us. Much remains to be done. I think we would all agree that we found our representatives in Brussels most receptive. Although many years may have to go by before we reach finality, I am confident that in the end we shall have a solution which leaves each country with reasonable flexibility and yet bound by a common law throughout Europe. Once again may I thank all noble Lords for their contributions and wish them a safe journey home.

House adjourned at fifteen minutes before eight o'clock.