§ 2.51 p.m.
§ The Secretary of State for Trade and Industry (Lord Young of Graffham)
My Lords, I beg to move that this Bill be now read a second time.
The Companies Bill was introduced in your Lordships' House on 21st December. It is the first major and substantive companies Bill since 1981. The 1985 Companies Act was purely a consolidation measure, consolidating earlier Acts dating from 1948 to 1981 and also including elements of other legislation. Company law has also been affected by the Insolvency Act 1985 and the Financial Services Act 1986. I should like first to say a few words about the role of company law and the Government's policies for it. Then I shall turn to the various provisions of the Bill before your Lordships' House.
The limited liability company is strikingly popular. The year after the 1967 Companies Act, over 20,000 new companies were registered. The year after the 1976 Act, there were more than 63,000. And in 1987–88 there were over 124,000 companies added to the registers. The number of companies on the registers is now over 900,000 of which over 99 per cent. are private companies.
The limited liability company has proved a highly successful means of bringing together capital and enterprise. I am sure that these two words will figure prominently in our debates on this Bill. The capital comes from the shareholders and creditors of a company, the enterprise from its directors and employees. In the case of many small companies, and 7 a few larger ones, proprietors and workers are the same people, but the concept of limited liability serves to unlock both the capital and the enterprise needed to make a successful business.
At the same time we must guard against abuse of the privileges which are given to companies under the law. The law must provide safeguards to balance the interests of shareholders and creditors with those of the people within the company. Without the right safeguards, investors might become less willing to invest in British companies, and customers might be less happy to deal with them.
The objectives I have set out for DTI are reflected in our approach to company law. We aim to promote open, efficient, and properly informed markets. I wish to limit regulation to areas where it is in the public interest. In many areas, the parties concerned can be left free to erect safeguards or not as they see fit.
There is more than one reason why a companies Bill is needed now. Company law is not a work of art. It is a working mechanism which is put to mundane and practical uses. It has to be kept in proper working order and needs to be adapted to changes in the business environment.
One important change is the development of European Community company law. The first two parts of this Bill owe their origin to European company law directives which we have to give effect to in our own law. The harmonisation of company law can help the development of the single market, although I would give higher priority to other aspects. Company law harmonisation must not be based on too much regulation. It must allow for perfectly legitimate diversity of approach. The purpose of harmonisation must be to create a framework which will assist enterprise to develop across national boundaries. I believe that the first two parts of this Bill will implement the seventh and eighth directives in ways which bring benefits to United Kingdom enterprise.
Many provisions in the Bill implement measures foreshadowed in deregulation White Papers—the most recent of which is last November's Releasing Enterprise. All these provisions have been the subject of public consultation and we have been guided by the comments received from business and from financial and professional quarters.
The Bill also provides an opportunity to implement policy decisions in a number of areas related to company law. This category includes the provisions on mergers, on financial services and on financial markets. All these provisions are aimed at promoting open markets and keeping state intervention to a minimum.
There is no fundamental change of policy on mergers. We will continue to put the emphasis on competition. In the vast majority of cases, decisions on mergers should be left to shareholders. They are best able to judge what is best for companies. The important thing is for them to have adequate information on which to base decisions, and some provisions of the Bill are relevant to this. It is normally only when a merger threatens the interests 8 of customers by reducing competition that the law should intervene. The Bill improves the procedures of merger control rather than implements any change in policy. I shall describe the details shortly.
I shall now outline the main provisions in the Bill. I know that many noble Lords wish to speak in this debate, so I shall concentrate only on the main features. Much of the detailed text is complex and technical, and will doubtless receive close attention from your Lordships in Committee.
The first part of the Bill is concerned with company accounts. The principal purpose of amending this part of company law is to give effect to the Seventh European Community Company Law Directive on consolidated accounts. An earlier directive on individual company accounts is already reflected in UK law.
The seventh directive was approved in 1983. It aims to achieve greater uniformity of accounting treatment and disclosure within the Community. I believe that these directives are an appropriate basis for the accountability of companies to their shareholders. And, in practice, the main elements of the seventh directive already form part of the requirements imposed by accounting standards and practice within the United Kingdom. These new statutory requirements should not involve a major change for most companies.
Clauses 5 and 6 contain the basic requirement to prepare consolidated accounts, and introduce the detailed rules for the form and content of consolidated accounts and the information to be disclosed. The details in Schedule 2 include a requirement to give better information on the effect of acquisitions on the position of a group. This point is not specifically requested by the directive but has been the subject of much concern.
Clauses 12, 14 and 15 are deregulatory. Clause 12 contains a new exemption from the obligation to prepare consolidated accounts for the parents of most groups below a certain size.
Clause 14 will allow listed companies to provide shareholders—unless they wish to receive full accounts—with a summary of financial information instead. This will make the key information more accessible.
Clause 15 will reduce burdens on private companies. By unanimous agreement, the members can dispense with the requirement to lay accounts and reports before general meetings, though accounts will still have to be circulated to all shareholders. This derives from proposals made by the Institute of Directors to reduce the burden of Companies Act requirements on owner-managed companies. We shall be introducing amendments at a later stage to give effect to some of the other proposals of the Institute of Directors. We are also considering exempting small companies from some of the accounting disclosure requirements. Clause 18 gives powers which will enable such an exemption to be introduced by secondary legislation.
Clause 19 widens the definition of a subsidiary undertaking to include tests based on control and dominant influence instead of the existing test based on holding a majority of equity share capital. This 9 will bring many of the so-called "off balance sheet vehicles" back within consolidation. Such vehicles are often used to keep borrowings off the consolidated balance sheet in order to improve a company's apparent debt/equity ratio. That tends to undermine the value of consolidated accounts and we intend to curb the practice.
The second part of the Bill is designed to implement the Eighth Company Law Directive on the approval of company auditors. This directive lays down minimum requirements for the approval of auditors, in particular on their education and training. It obliges member states to ensure that company audits are carried out with integrity and that there are appropriate safeguards to protect auditors' independence. There is of course nothing new for us in any of that. The majority of those allowed to audit are the members of four chartered bodies of accountants. Those bodies have developed testing examination and training programmes. They have established professional rules and guidance on matters such as the integrity and independence of their members. In many instances, these professional requirements meet or exceed the minimum conditions in the directive.
The directive allows professional bodies to be designated as the authorities for approving auditors, which is what we intend to do. In the highly technical area of auditing, it is crucial that there is close involvement of practitioners in setting standards and supervising the profession. The Bill does not specify who the designated professional bodies should be. Instead it lays down criteria under which I can recognise professional bodies.
Schedule 8 sets out the criteria for bodies supervising the conduct of the audit. They must ensure that auditors hold an appropriate qualification, are fit and proper persons, and are subject to adequate rules on professional integrity, independence and technical standards. They must be able to monitor and enforce compliance with the rules; and they must be able to investigate effectively complaints against their members.
Schedule 9 deals with bodies issuing qualifications. The criteria are more precise than those which relate to supervisory bodies. They concern matters such as eligibility to embark on the qualifying course, the standard and content of examinations, and the length and nature of practical training. Both kinds of body will have to satisfy the competition test contained in Schedule 11 to the Bill. Their rules and practices must not be significantly anti-competitive or at least no more than is reasonably justifiable in the light of the purposes of the supervisory system.
The system that I have described so far gives me, as Secretary of State, the responsibility for ensuring that professional bodies meet the necessary requirements. However, Clause 44 and Schedule 10 would allow me to set up a statutory body and delegate to it many of my functions under Part II of the Bill. That is not my present intention. But if this approach were followed at some point in the future, it would still allow the close involvement of practitioners in the running of the profession.
10 I ought to mention one other matter affecting auditors which we propose to add to the Bill by amendment. The large accountancy firms have increasingly offered their audit clients a range of other services. I see no reason to deprive the clients of the benefits they gain from those services; but I think that we need to recognise the concern some people feel about possible conflicts of interest on the part of the auditors. I believe that the appropriate antidote is disclosure, and I therefore propose to take a power to require the fees paid to auditors, or their associates, for other services to be disclosed in company accounts, as audit fees are now. That will give shareholders a fuller basis on which to judge the relationship between the company and its auditors. I would not however intend to apply that provision to small companies.
Part III of the Bill implements the measures I announced in May last year following a review of investigation powers and procedures. The measures amend and extend provisions relating to investigations under the Insurance Companies Act 1982, the Companies Act 1985, the Insolvency Act 1986 and the Financial Services Act 1986. The purpose of those powers is to preserve fair and efficient markets, and following last year's review I concluded that the present range of powers generally worked well; but I also concluded that there was a need to enhance the scope and flexibility of those powers and to clarify some of the provisions. That will speed up investigations and make them more effective while safeguarding, so far as possible, the proper interests of those involved in an investigation.
The provisions will work in three main ways: by adjusting or extending the circumstances in which inspectors may be appointed and in which such appointments may be directed or terminated; by simplifying or enhancing powers to obtain and disclose information; and by enabling us to investigate on behalf of overseas regulators. If your Lordships wish, my noble friend who will be replying to this debate will be able to describe the changes in more detail.
I come now to Clauses 72 to 77 of the Bill, which contain a new investigation power. It enables the Secretary of State to assist overseas regulators in the company law, financial services, and insurance spheres by investigating on their behalf. I wish to dwell on this power for a few moments because it is entirely new. It also illustrates very clearly the way in which the world is moving in the sphere of regulatory co-operation.
Financial markets are becoming more sophisticated and more international. Increasingly, transactions straddle one or more national borders. To unravel a suspected breach of the law regulators frequently need to trace the ramifications of transactions in several countries. The system for enabling that to happen needs to evolve in the light of market developments and experience.
The first step in that evolutionary process has been to enable information to be passed, in confidence, between regulators. That already happens under formal agreements and through informal contacts which the UK has been keen to promote. Although 11 that system works well, it suffers from the fact that one cannot hand over information one does not have. The information can be requested and is often forthcoming on a voluntary basis, perhaps from innocent parties who are willing to help; but if my department receives a request for information which it does not have, then it cannot demand it unless there is some domestic reason to do so. But UK regulators will increasingly rely upon the co-operation of overseas regulators to help investigate breaches of UK laws and requirements, and they need to be in a position to reciprocate.
Clause 72 sets out the circumstances in which the power to investigate on behalf of overseas regulators may be used. Clause 73 and 74 contain the details, which are similar in scope to domestic investigation powers. The power is strong enough to ensure effective regulation while affording adequate safeguards to the innocent.
That proposal is an important step forward. Several overseas regulators are contemplating powers along those lines, and the SEC in Washington already has a power to investigate on behalf of its counterparts overseas. In return for the assistance we offer, we shall look for ever-improving levels of help from our counterparts.
Part IV of the Bill concerns the registration of company charges. The main aim is to reduce the burden on companies who register charges at Companies House. The present system is cumbersome and inflexible. We propose to reduce the amount of documentation that companies must supply to Companies House and to make it easier for companies to update information already on the register.
A second objective is to reduce the task of dealing with charges at Companies House, with a consequent reduction in costs. Staff currently employed on this work will be redeployed elsewhere to cope with the growing workload of the registrar.
Thirdly, we are taking the opportunity to make some essential changes to the system of registration of charges by overseas companies. Court decisions have revealed serious defects which must be put right.
Part V of the Bill contains a variety of further amendments to company law. I will mention only Clause 91, which implements the changes to the rules on the disclosure of interests in shares which I announced in December.
The clause will reduce the threshold at which an interest in shares will have to be disclosed from 5 per cent. to 3 per cent. and will shorten the deadline for disclosure from five days to two days. These steps will greatly improve market transparency. Shareholders will have more information upon which to base their decisions, especially when there is talk of a possible takeover. Some people have argued for stricter disclosure requirements and others for leaving things as they are. I think that the clause strikes the right balance between transparency and avoiding unnecessary burdens on shareholders. These changes will give us tougher national laws on disclosure than any other financial centre.
12 I should mention one other deregulatory measure that we intend to introduce by amendment at a later stage. This is the reform of the ultra vires doctrine which is obsolete in many ways but which can still set traps for the unwary. Our proposals are designed to remove these traps.
I spoke earlier about the Government's attitude to merger control. The two main provisions contained in Part VI of the Bill are designed to reinforce our aim of dealing effectively with threats to competition while otherwise impeding the operation of the market as little as possible.
The new procedure for voluntary prenotification of proposed mergers will offer a formal system with a prescribed timetable. A bidder who chooses to prenotify will have to provide certain prescribed information to the Office of Fair Trading and make the proposal public so that interested third parties can learn of it. But, having done so, he will know that unless he hears to the contrary within four weeks he can go ahead without any possibility of my referring the merger to the Monopolies and Mergers Commission. We hope that we will be able to deal with the vast majority of simple cases which raise no competition or other worries in this way.
For those cases which raise problems or which are more complex, there will be powers to seek further information and, if necessary, extend the period for deciding whether to make a reference to the MMC.
Even where mergers raise competition problems, these can sometimes be resolved quite easily by selling off part of the merged business. This is sometimes, perhaps misleadingly, known as plea bargaining, and it occasionally happens now when disposals are included in the proposed merger arrangements. But the present legislation is not well adapted to this. The powers to order disposals arise only after an adverse MMC report and the only sure remedy for a broken promise would be the rather cumbersome one of a reference to the MMC.
The new procedure in the Bill will allow me to accept binding undertakings to divest parts of the merged business as a way of dealing with the possible adverse effects of the merger specified by the Director General of Fair Trading. If these undertakings are then not carried out, I shall be able to enforce them without making a reference, either directly through the courts or by making a suitable order by statutory instrument.
Part VII of the Bill concerns the way in which insolvency law applies to financial markets. If one member of a market defaults, it is vital to prevent a domino effect which could bring down other members. Markets therefore have procedures designed to protect those other members.
These procedures are operated under complex rules, and insolvency law is also complex. If the defaulter is insolvent it will not always be clear how the rules and current insolvency laws interact. Part VII removes that uncertainty by providing that market contracts, and the settlement and default rules relating to them, are not to be invalidated under insolvency law. Insolvency office-holders are not to interfere with settlement or actions taken under default rules. Various specific provisions of 13 insolvency law are to be modified in their application to such matters.
The main markets concerned are investment exchanges and clearing houses recognised under the Financial Services Act 1986. They will be required to meet additional criteria relating to their default rules.
Prudential supervision of market members is designed to prevent defaults occurring. Such defaults are rare. Nevertheless, it is important that default procedures should be soundly based in law. Uncertainty is not in anyone's interest. Our objective is primarily to clarify the effect that most people believe the current law already to have.
Finally, I come to Clause 132, which amends the Financial Services Act 1986 by removing the right of a professional investor to sue under Section 62 if he suffers loss as a result of a breach of the rules made under that Act. Section 62 provides valuable safeguards for private investors but it has been suggested that this provision risked contributing to an excessively litigious atmosphere between professional investment businesses. Such an atmosphere would hinder healthy competition and growth. The definition of "professional investor" is to be included in secondary legislation so that it can be adjusted if necessary in the light of experience and of any changes in the relevant rules.
I have spoken at some length about the individual provisions of the Bill. They will have a major impact on the framework within which enterprise operates. I make no apology for returning to the point that company law is not an end in itself. Its justification lies in the way that it works. That is why it is necessary from time to time to adapt it to reflect the new thinking and to respond to changes in the environment.
The present Bill is not a radical overhaul of the legislation which applies to companies. That would be a formidable task. Our more limited objective is carrying through a set of proposals which we judge to have the highest priority. Many of the provisions are detailed, many are technically complex but many are also designed to lead to a simpler and less burdensome framework for companies themselves.
Most of the proposals have been worked out in consultation with businesses and with practitioners in the accounting and company law fields. We are grateful for the advice we have received. 1 am sure we shall receive further advice and help as the Bill moves into Committee. We want the drafting to embody the policy intentions exactly and without any undesirable side effects. We are already aware of a number of places where government amendments will be needed to achieve the best possible text. We do not claim a monopoly of wisdom in this area and I shall be happy to consider suggestions from noble Lords and outside experts concerning the best way of implementing our proposals.
I have no doubt, however, that the proposals themselves will command your Lordships' general support, and I commend the Bill to the House. I beg to move.
Moved, That the Bill be now read a second time.—(Lord Young of Graffham.)
§ 3.19 p.m.
§ Lord Williams of Elvel
My Lords, the House will be grateful to the noble Lord the Secretary of State for introducing the Bill and taking us through its very detailed provisions. It is, as he said, a very complex Bill, as those of your Lordships who have had the opportunity to read through it during the recess will be aware.
The Bill proposes important amendments to the Companies Act 1985, the Fair Trading Act 1973, the Financial Services Act 1986, the Insolvency Act 1986, and the Policy Holders Protection Act 1975. Not satisfied with that, the Bill proposes some equally substantial amendments to a number of other pieces of legislation, such as the Insurance Companies Act 1982 and the Company Directors Disqualification Act 1986. All that will make for a good deal of complication and consequential difficulty when we debate the Bill in Committee.
Perhaps worse than all that, there is no coherent theme running through the Bill. It appears as just a jumble of measures thrown randomly together, and bearing very little relation one to another. It is a kind of glorified legislative Lancashire hotpot. There is a reason for all that. And that reason is somewhat disturbing. I shall comment further in a minute. Before doing so I should make clear our general view.
The Bill is to us rather disappointing. It is not objectionable, but it is disappointing. Whatever our views about its various provisions—I shall come to those later—we do not believe that the measure constitutes the major review of company law that we should have liked to see in the run-up to the single market in Europe. In other words, to be blunt, the Bill ducks a number of issues that we regard as being crucial to any serious review of company legislation for the 1990s.
I said that I thought I could understand why the Bill is in Lancashire hotpot form. It is almost certainly due to the way that such legislation is put together. The Government start with a problem. As the Secretary of State announced, two directives exist which must be acted upon, and in due time. In the case of the present Bill, we are already out of time on the seventh Company Law Directive. We understand that a Bill to meet our obligations within the timescale specified in the directive had to be introduced this Session. We shall be discussing the question of the commencement implications of the Bill when we debate Clause 139 in Committee.
Given the imperative of the necessity to legislate, is it really necessary to tag a lot of unrelated bits and pieces on to what should be a quite simple and clean piece of legislation? That is what the Government have done. This process has for me, I am afraid, a kind of:, dreary familiarity. I recognise the pattern from other Bills that have emanated from the DTI, and with which I have had to deal from these Benches. The procedure is this: the Government start off with a directive, a convention or other international agreement. They then have a cast-iron case in the Cabinet Legislative Committee for a slot—I am using air traffic control language—to accommodate a DTI Bill in the Session.
15 Having achieved that important objective, they then look around for other things that they can put into their Bill. Obviously all kinds of bits and pieces present themselves. The result, more or less inevitably, is the kind of Bill that your Lordships are being invited to consider this afternoon.
There are three clear disadvantages to this process. All three are in evidence today. First, the appropriate timing of changes in domestic company law, or law that can reasonably be considered to run alongside company law, and therefore suitable for a companies Bill, may not fit with the timing inherent in the directive. For example, the part of the Bill which the Secretary of State described on the registration of charges has appeared, so far as I am aware, before the result of the study being conducted by Professor Diamond into exactly this problem. That is manifestly absurd.
Secondly, the department may not have fully formulated its proposals on a number of issues which are of current concern. But, of course, it cannot afford to let the opportunity slip for including those issues in a Bill when it may be quite a long time before another Bill can be introduced. That leads generally to large shoals of government amendments—a process with which your Lordships are now, I am afraid, very familiar. Even today, on Second Reading, the Secretary of State has announced some amendments.
Even worse, a number of clauses have been inserted into the Bill which allow the Government to change the resulting Act by statutory instrument, if they find that they do not like it. Examples of this phenomenon occur in Clauses 18, 24, 108, 122 and 125. Any Government which give themselves powers to change primary legislation by statutory instrument must be treated with the maximum of suspicion.
Another problem arises where the department may know that it wants something but is not entirely clear exactly what it is or how it can be formulated into legislation. Nothing is put in the Bill when it is originally published but an announcement is made that certain parts of the legislation are not yet available and will at some unspecified time be made available in the form of government amendments. As the Secretary of State said, that is the case in respect of the ultra vires provisions which will come later. The Bill to which your Lordships are today being invited to give a Second Reading is therefore incomplete. It will be completed when the Government have got their act together.
I hope 1 reflect the general view of the House when I say that this situation is, to put it at its mildest, far from satisfactory. The Government should make up their mind what it is they want and then put forward the legislation designed to achieve their objective. It is fair enough that the original Bill should be amended as the result of parliamentary debate. But the Government should not waste our time by asking us to debate what are only tentative suggestions. Nor should they be allowed to make it all up as they go along. My own view, for what it is worth, is that we should today be debating on Second Reading Parts I 16 and II of the Bill. There is a directive, and we have an obligation to write it into our law.
The remaining matters which fall within the Bill should be subsumed in a second piece of legislation, or more if necessary. If that upsets the Cabinet's legislative programme, all I can say is that it should produce less legislation. If that were to be the case and we were only dealing with Parts I and II, we would be assured of a relatively easy passage. But we have to put the directives into UK company law. There are only three matters of principle on which the Opposition need to be convinced—that was before the Secretary of State made his announcement today that consultancy fees would be introduced as a separate amendment to the Bill—and I shall give them seriatim.
The first relates to exemptions for small and medium-sized companies. It has always seemed to me that the privilege—and it is a privilege—of limited liability should be accompanied by the obligation to present to shareholders and creditors, but, above all, creditors, as much information as is reasonable, and that there should be no exception to that rule. I am not of course referring to the so-called river companies set up by the Conservative Party to gather in donations to the party. No doubt when the noble Lord, Lord Beaverbrook, comes to speak he will refer to that point. I am talking about the general principle of companies with limited liability. I believe that we need to be convinced that the Government are right.
Secondly, it is surely time to get rid of the notion that banks need special treatment in the disclosure of transfers to inner reserve. I have never quite seen the point of allowing banks—this goes back to the 1948 Act—to avoid the obligation to show a true and fair view in their accounts and I cannot see it now.
Our third and last point of principle as regards the supervision of the auditing profession is that we would opt for what is known as the "General Medical Council formula" whereby the Secretary of State should delegate his powers to a statutory body. At the moment that is an option. We would like that option to be exercised. Had the Bill stopped there, your Lordships' task would have been reasonably straightforward. But of course it goes on, and the rest of the Bill is a bit of a curate's egg, with perhaps evidence of a mild salmonella infection.
Part III deals with investigations. On the whole we welcome the powers which Part III provides and we understand fully the Government's reason for bringing them forward. However, I should sound a note of caution. The mere fact of an investigation being announced, or leaked, can severely damage the reputation of individuals involved, particularly where, as in one recent case, a prominent individual is named. If reports are not to be published it seems only right that the Government should make sure that there is no residual damage of that kind if the investigation does not reveal any malpractice. I think that that is a point of natural justice.
Part IV is very technical. It does not raise for us great points of principle. I should say only that it is odd that Professor Diamond's review of securities over property other than land is not available to us before Part IV is to be discussed.
17 It is Part V, which as the noble Lord the Secretary of State said deals with other amendments to the 1985 Companies Act, which is to my mind disappointingly short. That is a part of the Bill which we shall try to expand. We believe that the time has come to address in statute the matter of non-executive directors; of audit committees and of compensation committees composed of non-executive directors; and to set the remuneration of executive directors and senior executives. We shall be raising those matters at Committee stage.
My noble friend Lord Peston will say more about competition policy when he winds up from these Benches so I shall confine myself to two fairly brief points. First, we welcome the intent of the prenotification arrangements, which we have argued for in the past. However, we believe that they should be mandatory rather than voluntary. There is a clear difference of opinion between us and the Government on that issue.
Secondly, we should like to see the criteria of Section 84 of the Fair Trading Act, which govern the Monopolies and Mergers Commission decisions on any reference, both expanded to take account of the new European dimension and made applicable to the Director General of Fair Trading's recommendations to the Secretary of State and to the Secretary of State's decision to make a merger reference. At the moment both in law and in practice we have two different standards. That cannot make sense.
In relation to insolvency, again we recognise the Secretary of State's argument that there is a problem in financial markets. But we have doubts, which we shall be airing in Committee, about the wisdom of overriding a general law of insolvency for one particular category of business. That is something about which we shall wish to be convinced when we come to the Committee stage.
More importantly for the financial markets—and this point relates to Part VIII of the Bill—we shall wish to explore whether your Lordships would welcome a more far-reaching revision of the Financial Services Act. For instance, I am by no means persuaded that the draft new SIB conduct of business rules avoid the bureaucratic pitfalls of their predecessors. Perhaps what is required is to give to the SIB the ability to lay down general principles which do not necessarily have the force of law. That facility is not available to it under the Act, not least because of the difficulties associated with Section 62 of the Act, which is to be amended in the Bill.
It may be that those problems are too difficult to resolve by opposition amendments, so I put to the Government the possibility that they might look further at the matter and see what they can do. In exploring that point we shall also be exploring whether it is not now time for the Takeover Panel to be brought within the ambit of the Act.The shadow of the thirteenth company law directive, designed to harmonise takeover procedures throughout the Community, is anyway beginning to fall across our domestic arrangements in that area.
All that I have said makes for a very meaty Committee stage. Meaty it will be. If in addition we 18 are to have the usual or more than the usual quota of government amendments, we are in for a long stint. I can say for the Opposition that we shall get through the business as expeditiously as possible because we do not wish to hold up the Bill. But if the Government produce a Bill with a Long Title as ambitious as this one they must expect some substantial amendments in Committee. They will get them; because above all—and this is the main point which I wish to make—it is what the Bill leaves out rather than what it puts in that is the real bone of contention between us and the Government.
We believe that this should have been the time for a major reconstruction of the Financial Services Act to make the regulatory system for the protection of investors stronger at the top but more flexible underneath so that markets can operate properly but investors are properly protected. That is a point which I argued to your Lordships at boring length when the Bill was before the House in the summer of 1986.
This should also have been the moment to set the course for competition policy that would remove the confusion of aims that still exists in spite of the glossy brochures which have come from the DTI and in spite of the recent intervention of the Secretary of State for the Environment and, in addition, that would result in a clear definition of the spheres of action of the domestic and European competition authorities.
Thirdly, but perhaps most importantly because here we look into the future, this should have been the opportunity to set the legislative framework for what in our view will be the next phase in the development of the governance of companies. That is the proper involvement of employees as partners in the management of and in the destiny of the companies in which they gain their livelihoods and whose livelihoods they gain. I make that last point with great emphasis, not only because of its importance but because I believe we are beginning to see the glimmering of a change of view in the matter.
It may be that informed opinion is starting to move and is being stimulated to move by our closer association with our European partners and our understanding that our partners in the Community mean business when they talk about "Social Europe". We understand that the Prime Minister disapproves of it and that the Government have set their faces against it, but if that is to be the next major political change in the organisation of company structure it has to be with Europe and it should be a social Europe. Capitalism in one country will disappear in the course of time. The next move will be towards a greater involvement of employees in the decisions which affect their working lives. That shift will be wholly to our liking.
There is no doubt that that development will involve some major changes in company legislation. Those changes could run along the lines of the European Company Statute against which the Government have set their faces. The changes could combine some of the ideas which have been generated domestically in co-operative ventures or in the United States in employee stock option plans. All such changes, however they manifest themselves 19 when we come to adopt them as practical realities, will require substantive modifications to company law. I can only say that it is a matter for great opposition disappointment that the Government have not grasped this opportunity to take the lead in what will most certainly be a major development, and perhaps the major development, in the microeconomic structure of the 1990s.
The Bill could have put Britain in the forefront of progress. It has not done so. That is where its failure is most glaring and most regrettable.
§ 3.39 p.m.
§ Lord Lloyd of Kilgerran
My Lords, I could not but feel a certain amount of sympathy with the Secretary of State as he presented to your Lordships this very inadequate Bill, which has been received with the poignant and pungent Lancastrian allusions of the noble Lord, Lord Williams. I felt some sympathy when I recalled the shower of problems on proposed mergers and takeovers between companies in different countries with which he has recently been deluged. However, those twinges of sympathy for the Secretary of State were diluted when I recalled my deep disappointment at the failure of this Government to take the opportunity of rescuing industry and their advisers on company law from the many unnecessary complications of much company legislation that has been produced in the past 150 years without adequate regard to the international developments in technology that have occurred in industry.
As the noble Lord, Lord Williams, has pointed out, the delegation to the Secretary of State of so many powers in the Bill seems to indicate a desire on the part of the Government to remove large portions of company legislation from the scrutiny of Parliament. This desire, as it appears, to legislate more and more by statutory instrument certainly raises suspicion. Parliamentary control is greatly diminished under this Bill. It may be that the Secretary of State will be able to indicate briefly the reason for that remarkable development, having regard in particular to his statement to your Lordships this afternoon that state intervention should be at a minimum.
I do not propose to speak at any length on Parts I, II and III of this Bill. Many of the points will be raised by my noble friend Lord Ezra later in the debate and many noble Lords who are more skilled in the arts of accountancy and City financial matters than I am will be dealing with these matters. However, in passing I should like to emphasise, as the noble Lord, Lord Williams, has done, that Section 12 and Schedule 5 concerning exemptions from accounting provisions for small and medium-sized companies seem extremely disappointing. Prima facie, they seem to add to the problems of small companies rather than reduce them. However, I understand that the Government have already decided to take another look at the regulations for these companies, so I shall reserve further comments until the Committee stage.
20 I note also that the noble Lord, Lord Mottistone, will be speaking later this afternoon. I am sure that he will make further use of the excellent parliamentary brief that I have received from Judith Vincent of the CBI legal department. I am grateful to the Secretary of State for shortening my speech still more by his reference to the further consideration that he proposes to give to the recommendations of the Institute of Directors, of which I am a member and a member of the management committee of its Welsh branch. If I may say so, I am also indebted to my friend Mr. Philip Goldenberg for the assistance given to me on many of the following matters at very short notice during the Recess.
Part IV is a substantial and useful rewrite of technical provisions relating to the registration of charges. I should like to mention just two sections. I should be grateful if at some time the Secretary of State could clarify the significance and intended scope of the substituted Section 397(5) to the Companies Act 1985 in Section 80 of this Bill at the top of page 75. I have had considerable difficulty in understanding what it means.
Clause 81 continues to place the obligation to register the charge on the company giving the charge rather than the beneficiary of the security under the charge. In practice this seems to be a rather strange procedure, as it is unusual for a lender to rely on the borrower registering the charges.
Part V deals with a miscellany of amendments to the law. I shall briefly mention four points. So far as concerns Clause 92 relating to the annual and consolidation accounts, the explanatory and financial memorandum to this Bill states that the main purpose of the Bill is:to implement the European Community Seventh Company Law Directive on consolidated accounts of … 1983".As the Government will be aware, there was an earlier directive—No. 660 of 1978—which, inter alia, was directed toward reducing the administrative burdens on small and medium-sized companies. I regret that I have not been able to check whether this Bill has had regard to that earlier directive, but perhaps the Secretary of State could arrange at some time to give an indication of what has happened to it.
As for Clause 91, which deals with the disclosure of interests in shares, it is my view that to allow these provisions to be altered by secondary legislation is quite unacceptable.
Having regard to the Single European Act, it seems desirable to reconsider how far the definition of a company in Section 735 of the 1985 Act needs to be amplified so as to give it a Community dimension. Serious problems have arisen about the position of United Kingdom companies, in particular those offering bank facilities, which desire to do business with banking organisations in countries outside the Community. This matter was discussed at length at the Heads of Government meeting in Rhodes last December and I believe that some decision was taken. I say that with some trepidation because in a distant corner of this House I see the noble Lord, Lord Cockfield, who has returned to our deliberations. I personally would very much like to welcome him back again. At Rhodes the view was expressed that 21 the Commission wished to consider the Community as a partner in world trade rather than a fortress against it and that a definition of, as it were, an EC company operating outside the Community would be desirable.
A similar problem has arisen, for example, in the motor industry where United Kingdom companies have voluntary trade restraint agreements with Japanese companies; as it has in recent proposals on procurement in the water sector. It seems to me to be worth giving further consideration to removing anomalies arising in the international general trading activities of United Kingdom companies with companies outside the European Community.
Part VI, which deals with mergers, is of course the most sensitive part of the Bill from the standpoint of United Kingdom industry. Some proposals are an improvement, in particular the prior clearance procedure and the formal enactment of the provision (which has hitherto operated informally with the Office of Fair Trading) that a partial divestiture can be imposed as a condition of the approval of a merger.
There is also a useful provision prohibiting the acquisition of shares following the announcement of a reference. That follows a well publicised recent case. However, as the noble Lord, Lord Williams, has emphasised, there is a total lack of clarity as to the Government's policy in this area. Nobody involved in this field is certain of what is the Government's policy.
I should like to draw attention at this stage to four general matters relating to mergers and competition law which should be the subject of further consideration. The Government must decide, particularly in the run-up to the single European market, whether they are looking primarily at the European or the domestic market when making their decisions and recommendations. Also the regional dimension must not be overlooked. Indeed, Brussels seems to have a greater appreciation of the problems of the regions and of the need for a clear regional policy than do the Government.
At a mechanical level, we need an integrated set of rules so that a takeover bid, and in particular one involving companies in more than one member state, does not become merely a haphazard obstacle race between the regulation of competition on the one hand and the regulation of takeovers on the other.
Lastly in this context, the recent Irish Distillers case pointed up that the United Kingdom Takeover Panel did not have an adequate Irish dimension, even though there is a unified Stock Exchange, including London and Dublin, and that, more fundamentally, it would be better if this kind of matter were put on a statutory basis.
It would have helped UK industry and its advisers to include in this part of the Bill a reference to some of the policy matters and recent decisions of the Commission and also some of the accepted general findings of the European Court.
I should perhaps at this stage declare a personal interest. Since about 1960 I have been professionally involved with problems arising with companies and 22 organisations with research and development activities under the Rome Treaty in the fields of competition law and merger policy, in particular those involving Articles 85 and 86. The charm of being involved professionally in that area is that of course one can never be proved wrong for a period of about 25 years!
The Minister has from time to time publicly explained the Government's merger and competition law policies. The European Community Law Bulletin recently issued by the solicitors, McKenna and Company, has reminded me of the Minister's address to the Stock Exchange Conference for Industry on 27th October 1988. Perhaps I may refer to what he said then. The noble Lord, Lord Young, explained the Government's merger. He suggested that the starting point was—surprise, surprise— that the market should be allowed to get on with it. He said that interference should occur only when a bid would not be in the best interests of the economy. He stressed that his responsibilities are for the UK, not Europe nor the wider world, but it is clear that as the internal market becomes a reality the DTI will increasingly take into account competition and potential competition at the European level. That is one of the main themes of my address in relation to this part: that even on defence matters—certainly on financial matters and merger and competition law matters—the European dimension should be far more the concern of the Government.
The bulletin continues:Lord Young's new exposition of the Government's policy, which continues to be that references are primarily made on competition grounds, has not made it any easier to predict when references will be made".But perhaps the noble Lord will be bringing his public announcements of government policies in this field more up to date when he addresses that vast concourse of expectant United Kingdom directors of companies at the Institute of Directors' conference at the Albert Hall on 28th February.
Whatever will happen then, I am strongly of the opinion that the Government will be acting helpfully to directors of UK companies to try to unravel the increasing jungle of company law by introducing some broader principles relating to company activities in the context of European Community practice. At least some of the well-known matters that have been decided by the Commission, and decided by the courts, should be adumbrated in this Bill, perhaps in a schedule.
I had hoped that the noble Baroness, Lady Elles, would be speaking this afternoon. If I may say so, she has achieved international repute while chairing the European Community Legal Affairs Committee as a Member of the European Parliament. I had the privilege of hearing her speak when I was the guest and she was one of the principal speakers of the colloquium last year in Brussels on merger control in the EC. That was a most useful colloquium convened by seven law firms from seven different countries with offices in Brussels. The United Kingdom law firm concerned was Allen and Overy, whose partner, Michael Reynolds, was a principal speaker. The colloquium was chaired by an old friend, the Honourable Sir Gordon Slynn, Queen's Counsel, 23 then an Advocate General of the European Court of Justice but now the recently appointed judge in that court. Its proceedings have of course been published under the title Merger Control in the EEC and no doubt the Secretary of State and his advisers have seen the contents of it.
Briefly, some of the points I propose to raise at Committee stage will be the following. An amendment of Section 2 of the Fair Trading Act 1973 to cover competition in a Community context is highly desirable. It would have been helpful to include in the Bill the block exemptions from competition rules of the Community granted on 30th November last year to certain classes of franchising and knowhow agreements. Broad references to joint ventures relating to research and development, in particular those leading to technical and economic progress of benefit to the customers, should be indicated.
Perhaps I may say that on joint venture agreements I am somewhat surprised that the Government have not yet taken the opportunity to assist companies' legal advisers by reference to the scope and capacity of joint ventures referred to in The Times of 14th January last week at page 19. It stated:The Prime Minister's conversion to cross-border industrial ventures within the European Economic Communityhas now arrived.
Another matter which is worth consideration at the Committee stage is whether a section should be included in the Bill to remind companies of some of the broad undertakings to which the United Kingdom Monopolies and Mergers Commission expects companies to adhere.
I do not propose in dealing with Part VII to say any more than this. I should like to ask the Secretary of State whether he could arrange to let me know in due course whether the following directives of the Community have been accepted by the Government and, if so, whether their provisions have been included in this Bill. I do not expect to have an answer this afternoon. However, there is a directive on employee rights as secured creditors on insolvency which was adopted in 1980 and implemented in 1983. The second directive on employee rights on transfer of undertakings was adopted in 1977 and apparently implemented in 1979. I apologise that in the short time available for consultation I have been unable to check these matters. I understand that the Government may advise that this Bill is not a vehicle for introducing directives of that order.
Perhaps I may conclude by echoing the suggestion as to government policy to be found in this week's Economist. In concluding its first leading article, the Economist states that in this time when there are so many proposed reshufflings of industries,The Government needs to do just two things: make sure that competition is preserved at a European level, and resist the temptation to see national ownership of arms-makers as vital to security and to industrial strength".I hope to raise similar matters in relation to competition law merger on the fair trading Acts later at the Committee stage. I agree with the noble Lord, 24 Lord Williams of Elvel, that there are many matters to be considered in further detail at Committee stage.
§ 4 p.m.
§ Lord Benson
My Lords, in speaking to the Second Reading, I hope that I reflect fairly the views of the Institute of Chartered Accountants of England and Wales as I am a member. In so far as the Bill affects the profession, we generally support the broad sweep of it. But there is a mass of complexity in it and many of the clauses will require some amendment to make them work satisfactorily. Those will be better dealt with in Committee rather than mentioning them this afternoon.
I have but three points to raise. The first is that in the past 20 years we have had no fewer than six company Bills of one kind or another. There is an ever-present threat of more legislation. The danger is that boards of directors and professional firms of accountants are becoming drowned in detail which is self-defeating. Once the Bill is out of the way, I hope that the Government will be able to introduce some measure of restraint so that we have a little peace for some years thereafter.
The second point is really a corollary of the first. We are troubled by the weight and complexity of the regulatory regime which in future will affect auditors. This will be extremely costly, and that cost will eventually have to be passed on to industry and it will affect particularly the smaller firms. As a result of the Bill a great many rules and regulations will have to be drafted. I hope that the Government will bear in mind the painful experiences of the Financial Services Act and avoid the enormous weight and complexity of the bureaucracy which that involved and which this Bill may also involve unless great care is exercised.
There is one omission from the Bill which I feel justified in raising at this point: that is that self-regulatory organisations and the Securities and Investments Board are now essential parts of our administration. Under the Financial Services Act they were granted immunity from actions for damages or claims by litigious people in the exercise of their supervisory role imposed by the Government. The reasons they were given that indemnity were clearly expressed in another place on 11th June 1986 by Mr. Michael Howard.
Under Clause 27 of this Bill, the professional bodies will have to apply to become self-regulatory organisations. They will have to supervise company audit work, which is the mainstream of the professional accountant's business. To that extent the professional bodies will be on all fours with the present regulatory authorities and the SIB. It is only right that they should receive the same measure of indemnity. At present there is no such indemnity under the Bill and I hope that the Government will introduce an appropriate clause at Committee stage.
For the removal of doubt, this is not at all an indemnity against bad auditing, inefficient or incompetent professional work. It is only a request that professional bodies should be put on the same basis as the existing self-regulatory organisations so that they are protected in carrying out the 25 supervisory role imposed on them by the Government. That is not a small matter of procedure. The claims that can and no doubt will be made in a litigious society against the regulatory authorities are likely to be substantial and could run into hundreds of millions of pounds. It will not be possible to find the right quality of people to take on the supervisory role if they are exposed to such risks without some protection. I hope that the Government will smile upon the point that I have made.
§ 4.4 p.m.
§ Lord Taylor of Gryfe
My Lords, I should like to follow the noble Lord, Lord Benson, who has just resumed his seat, and say that I have been asked by the Institute of Chartered Accountants of Scotland to say that it fully endorses his comments in relation to the protection of the recognised supervisory bodies of auditors. I hope it will he taken on board, at least on this occasion, that both institutes are speaking with the same mind.
I should also like to follow the noble Lord, Lord Lloyd of Kilgerran, in quoting the interesting speech made by the Secretary of State at the Stock Exchange in October last year. He said:Any mergers policy must provide industry and commerce with a clear and predictable framework within which to conduct the merger and takeover activity that is an important part of the operation of the market. Our policy, far from being the thing of shreds and patches its detractors would claim, does show a remarkable degree of consistency.I am not sure that the City would endorse that comment. The City very much welcomed the speech of the noble Lord, Lord Young of Graffham, on that occasion. I realise the complexity of some of the decisions that he has to make with references to the Monopolies and Mergers Commission. Nevertheless, the Bill does nothing further to clarify and achieve a degree of consistency in these matters.
However, there are several items which are very welcome in the Bill. One is the obvious desire of the noble Lord's department to expedite the proceedings of the Monopolies and Mergers Commission. On several recent references the Minister has laid down that there should be a reporting period within three months or six months where there are difficult and complex issues to be considered. That relieves some of the continued uncertainty which was a feature of references to the Monopolies and Mergers Commission in the past which held up very important decisions in which shareholders' interests were very much involved. I should like to compliment the Minister on injecting within the Bill some degree of urgency in getting some of these decisions made. The only complication I see is that in all these major merger decisions now, the EC has entered the field with a formidable organisation making its assessment of the effect on competition of proposed mergers and takeovers. I suspect that that might frustrate the desire of the Minister to achieve rapid decisions. I hope that that is not so and that he will be able to lean on his former colleague at the EC to ensure some consistency in decisions at least concerning the time scale.
In Part VI there are provisions for mergers and acquisitions. I do not propose to speak on any other 26 aspect of the Bill because I am not competent so to do. I find Clause 97 in Part VI completely acceptable, which is the provision for proposed mergers within six months. Clause 98 enables the Secretary of State to accept undertakings to divest part of the merged business. I thought that that was already a feature of existing practice. I can recall that the Guinness acquisition was only cleared by the Monopolies and Mergers Commission when the company agreed to dispose of certain brands of whisky.
§ Lord Young of Graffham
My Lords, I hope that the noble Lord will forgive me for reminding your Lordships' House that these provisions were the subject of a Blue Paper, as we called it, on competition policy which we issued some time ago. The present law is that it is possible for the Monoplies and Mergers Commission to make these undertakings, but it is not possible for the Office of Fair Trading. Our proposed provisions in the present Bill are to give effect to those provisions which we brought out about a year ago, and none other: to give powers to the Director General of the Office of Fair Trading and to myself as Secretary of State at the time to make undertakings to prevent matters going to the MMC.
§ Lord Taylor of Gryfe
My Lords, I am pleased to have that clarification. Clause 99 is sensible and agreeable. Clause 100:prohibits parties to a merger situation from acquiring, during the period following a merger reference".I presume that that closes the door on acquisition of Scottish and Newcastle shares by Elders following the decision that there should be a mergers reference.
Clause 102 makes interesting reading. The clausemakes it an offence to provide false or misleading information to the Secretary of State, the Director or the Commission in connection with their statutory functions".I wonder how that will operate. Noble Lords may recall that in the famous Guinness takeover both contending parties gave certain undertakings in the prospectus and in the submissions to the Monopolies and Mergers Commission that the headquarters of the company would be in Scotland. I wonder whether the Secretary of State has in mind that kind of false or misleading information submitted when acquisitions are made and undertakings are given in order to make the bids more attractive. Will such a case be covered under the clause?
Clause 103 sensibly makes reference to the charging of fees in connection with references. I believe that that will not cause undue hardship to any of the contending parties in a contested takeover, especially when one considers the fees paid to merchant banks, public relations officers, lawyers and others in order to support the bid. I am worried about the amount of money which is spent on lobbying, public relations and advertising by contending parties in the field of mergers and acquisitions. Their representations are made with their powerful public relations machine on Ministers. We do not lobby judges when they must make important decisions in law. I should like to place the Minister above the battle and free him from the political pressures which exist during a large 27 contested merger. It is a bad system. Recently a large company involved in this situation confessed to me that last year it gave £100,000 to the Conservative Party. This is an unhealthy situation. I do not in any way suggest that this influences the Minister. He should always be above the battle of contending bidders. I am sure that he would welcome freedom from the political pressures involved in major acquisitions. I speak with knowledge of the power of the Tartan Army which regularly descends from Edinburgh whenever a Scottish company is involved.
There is only one area in which I disagree with the noble Lord, Lord Williams of Elvel: it is in giving statutory power to the takeover panel. The issue was debated at length during the passage of the Financial Services Bill. I believe that the experience gained following that Bill has enhanced the status of the takeover panel without giving it the necessary statutory backing. It is on that issue that I disagree with the noble Lord, Lord Williams of Elvel.
While digesting the Bill during the Recess, I received representations from the Scottish legal fraternity which is almost as formidable as the Scottish chartered accountants. It seeks clarification on several matters. The first concerns insolvency in relation to the settlement and clearing systems on financial markets, including the Stock Exchange. While we accept the general objective of preserving the integrity of the financial markets, it is difficult on this highly technical matter to know whether the protection provided for these markets—involving as it does a quite substantial distortion of the pari passu system of distribution which is a central feature of insolvency law—has not gone too far at the expense of the ordinary creditors in the event of a default or consequent failure of a market participant. I should like the Minister to consider the question of balance and the protection of the ordinary creditor in relation to a default.
I turn to the strengthening of the range of powers available to inspectors in investigations under the Companies Act and the breach of confidence which may arise with the banks. I know that during investigations one does not wish to be frustrated by the secrecy provisions of the banks when one feels that there is just cause for such an investigation. However, I wonder whether the recommendations of the Jack Committee, which is at present considering the matter, are being anticipated. It may be advisable to take their advice into account.
I should like the Minister and his advisers to consider the implications of the Bill in relation to the floating charges in Scotland. Perhaps we can return to those technical matters at a later stage of the Bill.
§ 4.17 p.m.
§ Lord Jenkin of Roding
My Lords, I recognised the description given by the noble Lord, Lord Williams, of how a Bill of this size comes to be before us. I sat through many Cabinet meetings on Queen's Speeches, and he described the situation correctly. One finds a slot for a Bill and hangs everything else on to it. However, I disagree with the noble Lord because I do not believe that the Bill is any the worse 28 for that. Much needs to be done and my noble friend has succeeded in putting a great deal into the Bill. I have a suspicion that many noble Lords will have a happy time during Committee.
I wish to make only three brief points. First, I welcome the merger changes contained in the legislation, and I welcome the philosophy behind them. A short time ago there was a feeling that more radical change was necessary. They were changes such as altering the burden of proof and putting it on those who wish to merge companies and making people prove the advantages which they were asserting would arise. I am delighted that my noble friend has resisted those changes and that we have before us a number of sensible modifications to the law. I welcome them.
Some years ago one may have felt apprehensive that the general tide of merger and acquisition was having the undesirable effect of reducing the level of competition in a number of areas. In his opening speech my noble friend made reference to the fact that one has seen a ferment of new business activity arising in a number of ways. There has been an enormous growth in the venture capital movement. He gave the House the figures for the growth in new companies. There has been a growing tide in management buy-outs which have led to many desirable hivings off and demerging of companies. The result has been that, while there certainly has been the creation of larger groups which will compete effectively on a multinational scale, as there must be of necessity particularly as we approach the unified Market, one has also seen what used to be called "the invaders". They are the new companies which come in from the bottom and challenge methods, products and processes, so keeping alive the pressures of competition.
In these circumstances it would be undesirable to lose the flexibility that the present law gives on the control of mergers. Flexibility is essential if one is to serve the needs of a dynamic and rapidly changing economy. I find it difficult to agree with those who complain that the present system lacks certainty. The only way to achieve certainty would be to deprive my noble friend of the flexibility which he must have. With the noble Lord, Lord Taylor, I welcomed very much what my noble friend said to the conference in the City in October. I welcomed the message in the Blue Paper published last March. I welcome these provisions in the Bill.
Clause 97 speeds up the process of clearing mergers with the pre-notification procedure. That is sensible. Clause 98 will allow the Secretary of State to accept divestment undertakings. Had it been in force earlier that could well have avoided some of the major Monopolies and Mergers Commission inquiries, such as those into the mergers of British Telecom with Mitel and British Airways with British Caledonian. Both mergers could probably have been dealt with by sensible undertakings being given in advance.
There is another desirable effect. These clauses will shift the balance away from the commission and on to the Office of Fair Trading and so accelerate the process of desirable mergers and avoid the cost of full-blown inquiries.
29 I welcome also the power to charge fees. I was somewhat surprised to receive among my papers today a blast from the CBI, which takes the view that this ought to be part of the costs of regular policing and met by the state. I disagree. It is absolutely right that those who initiate these questionable mergers which will involve investigation—I say "questionable" merely in the sense that they raise the question as to whether they should be allowed—should be charged such fees. I have a great deal of sympathy with the point made by the noble Lord, Lord Taylor, when he said that, when one considers the amount paid now to the merchant banks and public relations consultants, modest fees paid for the costs of policing seem reasonable.
I also welcome the provision in Clause 99 to allow private individuals and private concerns to initiate proceedings for enforcing undertakings, rather than leaving that to the public authorities. Therefore, this all adds up to a series of sensible, pragmatic adjustments to help the competitive process in the United Kingdom and to shift some of the costs of policing mergers on to those who initiate them.
As regards company law, there is a mass of detail and no doubt we shall be able to debate that in Committee. I ought to declare my interest as chairman of a number of companies, including a major mutual life assurance company. I have only one question for my noble friend to answer. It refers to one further possible change which is not in the Bill but about which there appears to have been some inspired press comment in the past few days. The press reports that the Government are looking at so-called rights of pre-emption which are embodied in Sections 89 to 96 of the Companies Act 1985. I am sure that the House is well aware that the right of pre-emption enables existing shareholders of a company to decide whether the issue of shares for cash at a particular price may reasonably be offered to third parties. Shares issued to existing holders on a pro rata basis reserve their share of the equity and do not dilute their shareholding. However, an issue for less than full value to third parties must result in a transfer of some part of the rights of existing shareholders to those third parties.
There has been a suggestion that there are some within Government who see this right of pre-emption as restricting the growth of new shareholding and therefore going against the aim of wider share ownership. However, I question that. I have seen no evidence to suggest that where shares are to be offered at a full market price the company has been unable, if it wishes, to widen its share register by inviting subscription from third parties. The pre-emption rights currently conferred by the Act were introduced to satisfy the requirements of the European Second Company Law Directive. I was therefore mildly disturbed to read the suggestion that it might be amended. Accordingly, I ask the Government, perhaps through my noble friend's reply, to state their policy on this point.
Finally, I echo what the noble Lord, Lord Benson, said about the Financial Services Act. I want to make a few general remarks about the dangers of overregulation. I speak primarily from the point of view of the life assurance companies. It is now clear to 30 many in the life assurance business that the Financial Services Act is having many consequences which were far removed from those in anyone's minds, least of all the Government's, when the Bill went through Parliament. The intention of the Act was, of course, admirable. It was to give consumers a better deal, partly by imposing firmer regulation on brokers and agents, partly by requiring better disclosure of commissions, and partly by obliging a broker or agent to decide whether to be a tied representative or an independent intermediary and to make clear to his client which he is. This is the so-called polarity principle.
However, I have to tell the House that there has been no discernible effect so far other than to have led to a major reduction in the number of independent intermediaries, large numbers of whom have felt that the burdens imposed by the Act and by the regulatory bodies have made it impossible for them to continue as independent intermediaries. I see that my noble friend Lord Elton is speaking later in the debate and he may have something to say about that as he is the distinguished chairman of FIMBRA, which is the financial intermediaries' regulatory body.
There has been a considerable growth in the number of tied agents, who, of course, offer the products of only one company. There has been a substantial increase in the costs of all companies in complying with the legislation and there has been a significant diversion of effort away from market and product development and increased efficiency into such matters as rewriting product promotion material in order to comply with the new laws and rejigging elaborate computer programmes. In my own company, we estimate that at least six months' work by the entire data processing team was necessary simply to comply with the Financial Services Act and the regulations that stem from it.
The end result has been increased costs which can only be passed on to the consumer. It is emerging already in higher commissions being paid to independent intermediaries and tied agents and, in consequence, lower returns to policy holders. It has also been suggested that in the longer term it may lead to a substantial reduction in competition between life assurance companies as the smaller companies find themselves unable to survive in the new regime.
None of that was intended, but it is happening. In the life assurance industry the words "deregulation" and "lesser control" and some of the words used by my noble friend in his opening speech—"keeping Government intervention to a minimum", "a simpler and less burdensome framework for companies", "avoiding undesirable side-effects"—ring pretty hollow for those who are seeking to run our country's biggest savings institutions—the life assurance companies.
I conclude, therefore, by offering my noble friend a word of advice. There was once a king of Sparta who, fearful of forgetting a perceived danger, instructed one of his attendants to stand at his shoulder and periodically murmur into his ears, "Sire, remember the Athenians". Actually, it was not enough because, as we know, Sparta was defeated in 31 the war, but it at least was an effort. As my noble friend faces in the subsequent stages of this Bill demands for still tighter controls or more regulation, I hope he will have at his shoulder an assistant private secretary in his department who will at regular intervals say to him, "Sire, remember the Financial Services Act." It may not have quite the Thucydidean ring of the earlier warning, but I hope it will be a good deal more effective.
§ 4.30 p.m.
§ Lord Murray of Epping Forest
My Lords, I first—I hope provisionally—express my regrets to the House and to the noble Lord, Lord Strathclyde, if I am not in my place when he comes to reply. Regrettably I have a long-standing engagement to speak in Essex this evening and, although I hope to be here, I apologise in advance if I am not able to be present.
I regret perhaps even more fundamentally the fact that neither in the introduction by the Secretary of State nor in the Bill itself can I find, as my noble friend Lord Williams of Elvel said earlier on, any reference to the rights of employees in companies. This to me glaring gap in the Bill, and indeed in accompanying legislation generally, derives from the curious assumption that a company is composed wholly and exclusively of shareholders—those who have invested their money or who, more usually, have acquired certain financial assets in the company. They are typically people who either do not know where the company is or what products or services it offers to the community: people to whom, as my noble friend Lord Williams reminded us this afternoon, have been given the quite astonishing advantage of limited liability. That is an advantage by comparison with which any immunities hitherto valued by trade unions pale into total insignificance.
The noble Lord, Lord Jenkin, has very aptly reminded us of the advice that we were given earlier this afternoon. I echo what he said in praying that the Secretary of State will at all times in thinking of companies remember the employees. British company law, in contrast with the company law of many other countries, accords no right whatever to the general run of employees in decision-making, and equally it imposes no obligations on them. The noble Lord, Lord Young, reminded us of that this afternoon when he said:decisions on mergers should he left to shareholders".As I said, they are the people who invest their money and we are told that they are the only ones who are competent to make decisions about the future of these enterprises. It was partly to seek to repair this defect that work people themselves originally combined into trade unions which would give them the ability to express a view about the activities and the actions of their companies.
More recently, as my noble friend Lord Williams has reminded us, unions have been taking a close interest in newer methods of conducting the affairs of companies—indeed, in industrial democracy—stimulated by developments in companies and in company law in other countries, notably in Germany, where mitbestimmung is a central pillar of 32 company law. Similar rights are widely recognised elsewhere in Europe and are recognised too, as we have been reminded this afternoon, in initiatives taken by the European Commission. But I note with regret that while the Bill seeks to give effect to Directives 7 and 8, there is no reflection whatever as yet of those European initiatives.
The view that work people are just assets to be bought and sold is seen most clearly in their treatment when companies are subject to hostile takeovers. In the last couple of years one-tenth of the assets in UK quoted companies have changed hands as a result of mergers or, more usually, contested and hostile takeovers covering something like ½ million employees.
I am by no means opposed to mergers, and perhaps we should do more to encourage them or to encourage valuable ones which have some industrial logic as opposed to short-term financial gains to shareholders and directors. There may well be a strong case for restructuring the European electronics and electrical engineering industries. But bids and counter bids, plots and counter plots, predatory and piratical raids and forays are manifestly not the way to go about it. It would take me much too far from the Bill and would take far too long to pursue that course, but I hope we can find an occasion to examine the future of these great industries, notably those which are now the subject of such contested bids, in the near future.
My concern is to comment on the failure of this Bill to deal with the rights of employees in takeover situations. The failure stems from the Government's view that the only interests which count in takeovers, with one qualification relating to the public interest in competition, are the financial interests of the shareholders themselves, even though the results are to be seen in closures, in sackings and in changes in the conditions of employees. It seems to employees affected by current moves in GEC, Plessey etc. that the banks will contribute the credit in order to enable a takeover to take place and the Government will contribute a permissive takeover policy, but that many workers—perhaps tens of thousands—will contribute their jobs. So employees are treated as part of the assets or as part of the liabilities to be bought or sold as part of the package. That this cannot be right has been acknowledged even by the Government themselves.
I am glad to say that there is a glimmer of light at least in the form of the Transfer of Undertakings Relations 1981 which apply the principle of automatic transfer of contracts of employment, collective agreements and trade union recognition during transfers of commercial undertakings and which place a duty on employers during transfers to consult and inform representatives of recognised trade unions. The regulations further provide that employers must give information on legal, economic and social implications for employees early enough before transfer to enable this consultation to take place.
The regulations are capable of improvement, but they apply only to transfers or mergers where the legal employer changes. They do not apply to 33 takeovers where control passes from one company to another by the acquisition of shares but where the legal employer remains the same. In the United Kingdom the overwhelming number of transfers fall under the second heading and are not covered by the regulations.
If those arrangements are right in the case of agreed mergers—and the Government have told us that they are right by putting the regulations on the statute book—why should they be wrong in the case of a hostile takeover? Why should the employees there have no rights to information, no rights to consultation and no protection for their existing contracts of employment?
Within the Bill and embodied in company law generally we should have the three principles which were set out in the takeovers and mergers employment protection legislation which my noble friend Lady Turner sought to introduce in 1987: the right to information, the right to consultation and the safeguarding of acquired rights and expectations, including rights and expectations from pension funds which have so often been the aim of attempts at acquisition. This is an issue which is now being considered by the Occupational Pensions Board, from which I hope we shall hear in the near future.
As a minimum we need the principles established in the 1981 regulations extended with improvements to contest the takeovers. I repeat that to argue for that is not to oppose mergers or even to oppose takeovers. As we have been told quite rightly, many changes will be needed in Britain and in Europe generally if we are to compete effectively in Europe and if Europe is to compete effectively in the world.
As my noble friend Lord Williams of Elvel has reminded us, we should recognise, as do our colleagues in Europe, that the ability of industry to compete is not weakened but strengthened by the involvement of work people and their unions in decisions which affect the activities of their companies. We should ensure that effect is given to that recognition within the law relating to companies.
In conclusion, I hope that we shall not be told that some good employers already inform and consult. A small minority do, particularly when they want help in resisting a takeover. I hope that we shall not be told that all we need is a voluntary code of conduct. As with the transfer of undertakings regulations themselves, employers should be left in no doubt where their obligations and indeed their enlightened self-interest lie in the form of a statutory requirement.
§ 4.43 p.m.
§ Lord Milne
My Lords, I too welcome the Bill as a great contribution to the long task of harmonisation of company law in Europe. It also serves to improve and streamline many existing procedures.
The burning question and the one at issue today is in the area of takeovers and mergers. Here I appreciate the remarks made by the noble Lord, Lord Murray. It appears that employees are not considered in the matter of takeovers, but in fact in the Companies Act they have their protection. This is something which directors have to consider when they are taking decisions.
34 The entrance of the European Commissioner into this area is also a new factor in a highly confused situation. That especially affects the whole definition of competition. My practical experience is about two years out of date so I shall not comment in detail. It is sufficient to say that any measures assisting clarification, as in Part VI of the Bill, are helpful. Further, the reduction in the period of notification of a holding from five to two days, and in the amount from 5 per cent. to 3 per cent., will be welcomed. However, there is no reduction in the striking point of 30 per cent. for a takover, which I think was expected.
It has been said that it is exceedingly difficult to do justice to the Bill in a Second Reading Speech. Many of the amendments and alterations, although important to the beneficiaries, are not of interest generally. Many will need attention in Committee. However, I am bound to say as a professional accountant that 1 support the noble Lord, Lord Benson, in his plea for immunity for those bodies required to supervise auditors. This was raised in the Financial Services Act in 1986 and I know it will be raised again in Committee. In that the statute always lags behind practice, confirmation thereof is of little interest, however important, such is the termination of the principle of ultra vires. However, the Bill has been commendably prompt over the subject of off balance sheet finance.
In addition, I must mention three other matters which are not in the Bill. The first is that of non-executive directors; the second, of two-tier boards; and the third, audit committees. All these are problems of larger groups.
It seems to me that non-executive directors and two-tier boards are aspects of the same question. A supervisory board is by definition non-executive, so it somewhat solves the question. It is a Continential concept, and as such no doubt Brussels will wish to impose it upon us against British reluctance. Our solution here is the management committee of the board and non-executive directors. However, all this is conjecture. Whatever the facts may be, it is important that agreement one way or the other should soon be reached as in the meantime there is no reference to non-executive directors, which is a weakness in the Bill.
Finally, on the question of audit committees, none of us who spoke against the Bill of the late Sir Brandon Rhys Williams was against that principle. The point was that they should not be compulsory and should not have been given the powers in that Bill. I feel that if quoted companies were obliged to make some statement of policy at the annual general meeting, that would be an acceptable improvement.
I hope that the House will excuse me if for private reasons I do not stay until the end of the debate. I shall of course read the debate in the Official Report. I support the Bill.
§ 4.48 p.m.
§ Lord Carr of Hadley
My Lords, there are many aspects of this Bill about which I am tempted to speak, not least perhaps the question of employees' 35 rights. This was a subject about which I spoke in my maiden speech in another place as long ago as April 1950. I happened to make the speech in this Chamber which was the home of another place temporarily at the time. The subject having been mentioned, I am greatly tempted also to speak on it. I shall however find another occasion.
I wish to speak about mergers and takeovers, mainly from one particular angle. I should first make sure that your Lordships are aware of my connection with the largest institutional investor in this country, the Prudential, of which I had the honour to be chairman for five years from 1980 to 1985 and of which I am still a non-executive director for another two or three months. But all that I say reflects only my personal view.
I welcome in principle the proposals in Part VI and those in Clause 91, the first clause of Part V, to give greater transparency regarding the ownership of shares. I believe strongly that these are moves in the right direction—in sympathy with the kinds of things I am going to speak about. But I do not believe that they will prove sufficient on their own.
Therefore, my purpose in intervening is to express my hope that the proposals do not represent the sum total of the Government's thinking on this subject. As will be seen, I am particularly concerned about the political—using the word in its broadest sense—repercussions of some aspects of the way in which merger and takeover practice works at the moment. I believe that the Government would be wrong to ignore the widespread feelings that the present practice in mergers and takeovers has undesirable side-effects which, if possible, should he minimised. It may be not possible to abolish them but they should he minimised. There is no doubt that some of the goings-on associated with takeover operations are highly distasteful to large numbers of people in this country. To many people, even to many of those who make capital gains out of these operations, they represent what to them is an ugly feature of the market economy.
This feeling is at its most acute when we are plunged into the sordid depths of an operation such as the Guinness-Distillers affair. But in my experience the public distaste is not confined to the few extreme cases. It is also felt, though obviously less acutely, about many, but not all, of the less dramatically intense takeover battles which nonetheless cause painful anxiety and threat of potential damage to many people whether they be employees of the company concerned, its customers or the members of a community in which the company under attack is a major source of local prosperity. Yet such battles seem to have no obvious or properly explained industrial purpose or general economic advantage put forward to justify them. However, out of them great financial gains are made, usually by a relatively small number of people.
We now see, at least across the Atlantic, if not yet in Britain—and, I hope, never in Britain—highly leveraged operations financed by vast borrowings which are nothing but highly sophisticated financial engineering without any avowed or credible 36 industrial strategy to justify them. Some of these operations, but not all of them, seem to many people in this country to be nothing better than industrial jerry-building. That should stop. It will not be easy without killing the goose that lays the golden egg. I believe however that the Government must show an awareness of the feelings I have described. I believe that this political and public distaste can be of real significance if it is ignored and allowed to fester.
I emphasise this because one of the Government's major aims has been to make our economy a more enterprising one. Much progress has been made in this area over the past few years for which I believe that the Government deserve great credit. Much courage has been required and noticeable results have been produced in many sectors, not least, although not only, in the small companies' sector. This progress needs to be continued and sustained and made permanent. In a universal suffrage democracy this will require public support and understanding.
We need to create in this country an enterprise culture that permeates society and with which people as a whole feel they can identify. Great damage can be done by a few, but nonetheless prominent, ugly features of a market economy if these appear to be ignored or dismissed as of no great importance. An enterprise society can come to be seen, or at least can successfully be so caricatured as simply a get-richquick society for the few and having little concern for the interests and the feelings of the many. For that to happen would be a great tragedy.
In the past century the practice of doctrinaire economic laissez-faire led in the end to a fatal political reaction towards centralised control by the state; to private control through organisations like cartels; and, most sadly of all, to a general but deep and widespread denigration of enterprising commercial activity as an activity acceptable and praiseworthy in society. As a consequence of that political reaction, the country has paid a heavy penalty throughout this century. We are only just emerging from the damage which was caused. We must take great care not to let this vicious cycle of reaction repeat itself.
For this reason I believe most strongly that the Government, as well as being bold and strong in pursuing an enterprise policy, must also be intensely politically sensitive and skilful in dealing with some of its undesirable and I believe, at least partially avoidable side-effects. To ignore them or to say that they are relatively unimportant can be increasingly damaging to the public support which an enterprise culture needs if it is to become the permanent culture of this country.
We have to realise that these distasteful side-effects do not occur only in the social and political sphere of which I have been speaking. They appear also within the economic and industrial sector. It is now very clear that many of the great mergers of the past 20 years, whether voluntary or unwilling, have not produced the industrial benefits which were predicted for them. Moreover, it cannot be denied that living in the climate of a high takeover market forces many companies and also their shareholders to take an 37 undesirably short-term approach to their affairs. For directors and managers to be constantly looking over their shoulders at the share price from day to day is not conducive to efficient and enterprising direction and management.
It is a dangerous fallacy to equate enterprise too closely with short term results. Surely enterprise is about taking risks. Many of the most important risks can only have a long-term pay-off. They will not be taken, or they tend not to be taken, by people who feel that their security depends above all on short-term performance. So there is a debit side in the economic sector to this high degree of takeover activity. Also one cannot disregard the fact that when a company is "put in play", as the jargon goes, it is an immense distraction for directors and senior managers from the job of actually running the company in an enterprising and efficient manner.
I wish to make clear that nothing I have been saying is intended to advocate that we should make mergers and takeovers extremely difficult or well-nigh impossible. If we were to do that we could well produce evils of rigidity, slothfulness and complacency of a different kind but perhaps even greater than those I have been speaking about. What I am advocating is a careful consideration of whether we can change not the basic principles upon which the Government's policy is based but the detailed practice.
Despite what has been said by my noble friend Lord Jenkin of Roding, I do have some desire to see the burden of proof and justification moved somewhat more towards those who are making the bids and away from those wishing to defend themselves against them. I do not ask for this to be done dramatically—only to some extent. In passing, I fully agree with my noble friend about the difficulties of running large and small insurance companies under the new security protection regulations. On this one other issue, however, I differ from him, although I hope not too greatly.
I also want to make these changes in order to provide shareholders with a better opportunity to come to considered decisions. In spite of the question of the rights of employees, I agree with my noble friend the Secretary of State that it is shareholders above all who have to make these decisions. I want to put forward for consideration three questions which I cannot develop in detail and which are certainly not in any way comprehensive.
First, we ought to consider lowering the trigger point at which an acquirer of a company's shares has to make a bid for the whole company. It used to be a 40 per cent. holding. It is now 30 per cent. I suggest that it should be reduced to 25 per cent. To go down further, as I might have hoped, would, I realise, raise other complications. This would force an acquirer of a company's shares to declare his intentions at an earlier stage in the operation. It might be helpful to shareholders and all the others involved in considering what decision finally to take.
Secondly, a bidder should be required at the point when he makes a full bid for a company to publish, if he has not already done so, a statement of the commercial strategy which motivates his action and 38 broadly—one cannot ask for more than broadly—a description of how he sees that strategy being implemented. Here one brings in the effect on employees, customers, localities and so on. This is something of which all shareholders should be made aware from the earliest stage. It often comes out as the battle proceeds but it should always be available at the starting point.
Thirdly—and in the end probably most important of all—I should like to see every possible effort being made to bring about a more positive and constructive relationship between a company and its shareholders on a regular basis and not just at a time of crisis. This would perhaps do more than anything else to encourage shareholders—particularly and most importantly the institutional shareholders—to take a longer term view of their investment, which is what we need above all.
A takeover is usually not the only or the best remedy for putting new life into an ailing company. Responsibility for a company's success or failure lies fairly and squarely on its board whose prime duty is to ensure that the company has efficient management and to monitor its performance. Behind the board lie the shareholders whose most important right and duty is to appoint the directors. It would often be better for the shareholders and everybody else if the shareholders, far from looking for an early profitable opportunity to sell their shares, were to be active in using their ownership function, were to be more insistent upon requiring a satisfactory performance from the board they have appointed and were to be prepared to bring about changes in board membership when it appeared in order to achieve that performance.
In order to make this company/shareholder relationship as effective as it could be—this point has been touched on by at least one other noble Lord—two conditions are especially important. First, every board should include a strong cadre of well qualified and fully independent non-executive directors, making not less than a third of the total board membership and perhaps even more. Secondly, the roles of chairman and chief executive should be firmly separated and not he held by the same person. If necessary, although with regret, I would be prepared to see legislation used to bring about these changes. Progress has been made in these ways, including the use of non-executive director committees to which reference has been made. However, more could be done.
In these ways we can begin to detect means of making our market economy work freely but more responsibly and more accountably. I urge the Government to give the most careful consideration, particularly to the ownership function. It has always been a bee in my bonnet that an active ownership function is vital to the proper working of the capitalist system. If that is allowed to die the capitalist system too will die or at least will decay into a state of affairs which is unacceptable.
§ 5.4 p.m.
§ Lord Dean of Beswick
My Lords, I should like to apologise for not being in my place for the opening speeches. I have been engaged in meetings with a 39 group of people who are interested in a Bill which received its First Reading today. Along with other noble Lords, I have received a number of briefs from professional associations, including the Chartered Institute of Public Finance and Accountancy, the Chartered Association of Certified Accountants and the Institute of Chartered Secretaries and Administrators. Those organisations list the aspects of company law that will affect them. However, I should like to deal with points that are not in the Bill. The noble Lord, Lord Carr of Hadley, referred to some of them in his opening remarks.
The relationship between business and society is like a pyramid. It has a narrow top and widens towards the base. The view in the press of business and company takeovers is that only those at the top of the pyramid are affected and only they have anything to lose by takeovers. However, the ordinary man and woman in the street do not look too kindly on a succession of takovers which very often have a goldfish bowl mentality. The smallest goldfish will be eaten by the next biggest one and that in turn will be devoured by the next biggest one. It is not well received when company A takes over company B and then company C is formed which takes over company A.
Such takeovers are not universally welcomed and accepted. Most people believe that they are nothing more than high-stake gambling with the ultimate goal of seeing who can make the fastest buck and when. No consideration is given to the damage that can be done to the social fabric and to the people at the bottom of the pyramid. I have seen some of the devastation that is caused by these takeovers. No one asks the views of people who have invested their lives in a company which is eventually swallowed up.
In 1960 I left the company for which I had worked since 1937. It went out of existence because its product was killed by cheap oil flooding in. I got a job at the biggest factory in the Greater Manchester area. Some 20,000 or so people worked at that factory. There was a succession of takeovers. It was impressed on the workforce, which had a very good industrial record, that the takeovers were necessary if the company was to survive. However, the company that survived very quickly became another company. No views were sought from organised labour at the factory or from their national trade union officials. I refer to the two because sometimes there is a difference. Very often someone at shop floor level takes a different view from that of his national trade union leaders. It does not follow that one will agree with the other. No input is allowed from responsible trade unionists at factory level or national level when these things happen.
I am not too sure that I would quickly swallow the banner and want to protect a chairman of a giant company who now finds himself under threat. Some of those people who are now starting to worry about what might happen to them would do well to look backwards to see what they have done to thousands of people who had a view but who were not allowed to express it.
40 I recall that during my days as a senior member of Manchester City Council a very distinguished and highly-paid official in Manchester town hall said to me, "I don't know what's going on where you work, but the misery which is being handed out through this reorganisation by the takeover by a national agent is causing absolute chaos in the area of Cheshire where I live". I am not talking about Manchester now, though the factory was in Manchester; I am talking about high-tier management at the time when a factory was divided into, say, four or five divisions. I am talking about a superintendent on a substantial salary, perhaps in his forties, with a mortgage still to pay and children at probably the most vital part of their educational process, who was suddenly sent for and told that his services were no longer required or to go on the sick list for three months and who was then never requested to go back.
It may not be germane to this Bill, but I think that there was a lot of truth in the remarks which the noble Lord, Lord Carr, started to make about some of the things at which we ought to be looking. It goes without saying—this may seem an oddity—that the more you went down the pyramid in that factory to the shop floor worker in overalls the more it added a greater degree of protection and then the men would talk. That was because there was actually more trade union clout at the bottom end because of the organisation in the factory. Therefore when the redundancies and the shedding of labour took place, unfortunate though it was, it was done on an agreed basis.
I can still recall that only a few years ago the place from which I take my name—namely, Dean of Beswick—was a tremendous hive of industry. It was not a highly-paid area, but it was an industrious area producing a variety of commodities including engineering goods, chemicals and rubber goods. In fact, you name it and it was produced in the area.
There was a factory in that area in the ward which I represented on the city council that manufactured wire. Three to four thousand people worked at that factory. In the early '30s—just to digress for a moment—it was the victim of a very bitter and prolonged strike because of the introduction of an American time system called the Bedauex system. However, after the war all that was washed away and it became a very good company to work for. The workforce were happy and they produced the goods. But what happened? The company was eventually taken over by an asset stripper who quite ruthlessly closed the factory. I think that the individuals concerned eventually became the subject of police proceedings in one of our former colonies in respect of some business deals.
It is no good saying that such things cannot happen again. There is far too much day-by-day reporting in the press of undesirable happenings which are taking place in the commercial and industrial business sector of the community today. There may be some provisions in this Bill which, as I say, try to deal with such situations. I referred a few moments ago to the devastation of certain people losing their jobs. It is also a fact that most of these reorganisations—taking the most common ones which are featured in the 41 headlines day by day—are in areas of high unemployment.
When I came down last week for my first visit to London since the recess to collect my mail, one of the first letters I opened was from the chairman of a works committee from the Isle of Wight. He is chairman in a Plessey factory there. I do not know whether there is just one factory there or a group of them, but he is the chairman of the Plessey works committee. He was objecting to being taken over by someone who is already under threat of takeover by another company which will now be rescued by some knight in shining armour from America.
If your Lordships tell me that such a situation creates a marvellous image of stability—which we ought to be talking about—I must say that I believe that to be complete nonsense. Most people in the country, whatever their political persuasions. do not like this because there are too many futures at stake. For example, how do you manage when you work at a place that suddenly, almost overnight, is wiped out of existence and you have a heavy mortgage around your neck in an area where unemployment, without factories, is so high that you will not be able to sell your house? It means that you will never be able to get out of the area in your life. You are trapped there because you have no possibility, unless a miracle occurs, of being able to deal with the situation.
I hope that during the passage of the Bill the Government will give some thought to some of the remarks which I have made today. I am not talking about extreme trade union practice which in the past exacerbated situations which would have been well left alone. In the main I am talking about stable areas that have a very good record and certainly never had the benefit of the so-called high pay that some people so readily seem to fall back upon as an excuse for our losing so many jobs.
Last Wednesday morning I found a new phenomenon when I took the bus to go into Stockport to catch the train to London. I met an old colleague with whom I used to work in Trafford Park. I said to him, "What are you doing? I thought you had been retired". He said, "I have come back. They are now taking on people of over 65". This is an engineering company in Stockport. I said, "Why do you say that, Eric?" He said, "Because we have lost a generation of skilled men. Though the training schemes are admirable and necessary, they are not producing lads who can go into the factory and start producing the goods immediately". He then rather laughingly said to me, "If you were not fixed up where you are, Joe, I could see you back on a boring mill'. I said to him, "I do not think that that is too much of a possibility". However, that is the situation in which we find ourselves at present.
In my last two or three minutes I must put forward a rather parochial plea. Recently there was a study by Cambridge Econometrics and Northern Ireland Economic Research on regional economic prospects for the United Kingdom. I have been in two parts of the country as a public representative. Indeed, for quite a while I was a Member of Parliament for a constituency in Leeds, as many noble Lords will know.
42 However, quite recently I moved back to the area which was more my own breeding ground; namely, Greater Manchester. What saddened and disappointed me was what the report said regarding that part of the country—the North-West—which used to be almost the workhouse of the world and the future it predicted to the turn of the century. All this is at a time when the Government keep telling us that things are improving.
With the leave of your Lordships, perhaps I may quote from the report. It said:The outlook for the North West is almost wholly depressing. It is forecast to fare the worse of any UK region suffering the biggest fall in employment, output growth barely half that of the national average and a growing exodus of the population.By the end of the century the region is projected to have lost 222,000 jobs—representing a fall in its share of national employment from 10.1 to 8.8 per cent.The textile, clothing and footwear industries will be virtually decimated; 50,000 jobs, representing a fifth of the workforce, will disappear in engineering alone. The region will not even have the solace of increased employment in the service sector where 51,000 jobs in the public and private sector will go".That is the scenario painted by people who have no political axe to grind. The report gives more glowing and optimistic reports about most other parts of the United Kingdom. Some of the companies to which I have referred, without naming them, involved in takeover bids are heavily involved in that area. All that I am asking is that the Government turn their attention to the carnage that may be caused once again in those areas if the matters are not handled delicately and humanely.
The report even says that money has been pumped into areas such as Liverpool. It refers to Sheffield as being on the upswing, but in retail trade only. Since when have we survived as a nation of shopkeepers? Our history is built on manufacturing industry. Sadly, wherever there has been a company merger at any level in the manufacturing sector it has not resulted in increased jobs. There have always been cuts. The people who have had to take the can are not the big boys in the boardroom. We know the handshakes that they receive. They can live on them even if they never work again. It is the people at the bottom who have to pay the price.
I am not alone in believing that the Government should study that situation. Engineering, in which I worked as a skilled man, has lost more jobs in the past decade than almost the rest of manufacturing industry put together. That is one of the reasons that we are now suffering a balance of payments deficit. We do not even have the capacity to manufacture the goods we need to keep our industries going.
I am grateful to have had the chance to digress from the Bill a little and to bring these matters to the attention of your Lordships' House in the hope that someone may listen to what I have said.
§ 5.23 p.m.
§ Viscount Chandos
My Lords, the noble Lord, Lord Young of Graffham, introduced with great clarity what his honourable friend in another place has called a necessarily miscellaneous Bill. In seeking to implement the seventh and eighth European Community company law directives and tidy—even 43 tighten—up a variety of other areas in corporate and commercial life, as the noble Lord, Lord Williams, said, the Bill contains a hotch-potch of measures such that it is unusually difficult to find a basis for a Second Reading speech.
Your Lordships' House has been accustomed to dealing with the passage of Bills from the Government which originate from great deeds and principles—right or wrong—such as rolling back the frontiers of government, returning unions to their members and so on. I join the noble Lord, Lord Williams, in asking: where is the great theme to this Bill? The Prime Minister would not wish the implementation of Community directives to suggest that the future dominance and supremacy of Brussels over company law is the theme.
Is the Bill then no more than a reminder, like a photograph album of holiday snaps, of happy days spent by veterans of your Lordships' House on the Companies Act 1985, the Financial Services Act 1986 and the Banking Act 1987, and the necessary amendment of those otherwise flawless pieces of legislation? Yes, the Secretary of State has already said that it is precisely that—the compilation of various measures and amendments in the field of company law and related areas which are part of a natural evolutionary process which should not be politically contentious or controversial. As I shall show your Lordships, I have no objection to, and indeed welcome, many of the proposed changes, but that cannot obscure the sense of dissatisfaction which like other noble Lords, feel when surveying the 200 pages of the Bill presented before your Lordships for Second Reading today.
It is not what is in the Bill, as other noble Lords have said, that should predominantly give your Lordships concern; rather it is what is not in the Bill. It is the Bill, as Sherlock Holmes might have said, which does not bark, let alone bite, which, if enacted in this form, might well be renamed the missed opportunities Act 1989. I shall come to those omissions in a minute, but first I propose to comment on some of the principal measures that are included.
Before doing so, I should perhaps remind your Lordships that outside the House I am the director of a bank and certain of its subsidiaries to which of course the Companies Act applies, as do particularly the Financial Services Act and the Banking Act. Just as importantly, its central business is the provision of advice to other companies, especially in the areas of merger and acquisitions to which the Fair Trading Act 1973 is the most relevant legislation.
If my professional colleagues turn out not to agree wholeheartedly with everything I say, which I must confess has sometimes been the case in the past, I may take comfort in the fact that, whether right or wrong, it means that I may not be guilty of pursuing my professional interests.
The first part of the Bill covering the provision for company accounts is generally to be welcomed not only for the specific measures being proposed but for the principle of establishing common standards and approaches throughout the European Community. 44 Even if chauvinistically we may take some pride in general levels of disclosure and reporting by companies in this country compared to those in some of our partner countries in the Community, we should not ignore the room for improvement in our own case or the advantages of European harmonisation, so long as the principle of the highest common denominator is pursued.
The most important specific proposals in that area are perhaps in the definition of subsidiaries and the accounting for acquisitions, in both cases intended to eliminate the obfuscation and other abuses that have been developed by companies making acquisitions, often of disproportionate size relative to their resources. I shall come later to the wider area of takeovers, and leveraged takeovers in particular.
I am sure that none of your Lordships believes that the true level of borrowing undertaken by a company to acquire another should be in any way obscured, let alone concealed, in the acquiring company's accounts. The cult of the golden-fingered master of the takeover has been surprisingly unaffected by the monotonous regularity with which such figures have fallen from grace, so it is all the more desirable that the disclosure required should be enhanced. It is of course not possible to legislate for financial journalists, share tipsters and research analysts to make use of the clearer information provided for them; but it may nonetheless assist some of them, as well as the general public, to form a rather more realistic and less euphoric view of companies whose growth is achieved predominantly by the acquisition of other companies, with the assistance of over-hyped paper and overambitious and under-disclosed borrowings.
In view of that move to fuller disclosure in relation to what is often a major event in a company's business, there may seem to be some inconsistency in the provision contained in Clause 14 whereby arrangements can be made to allow shareholders to receive summary financial information rather than the full report and accounts of a listed company. Your Lordships may appreciate the cost to companies, especially those which have established unusually large lists of individual shareholders, whether through the process of privatisation or otherwise, in providing annual reports for millions of shareholders. Although the cost difference between supplying full accounts and summary financial statements may be relatively small, when spread over hundreds of thousands or even millions of recipients it is understandable why companies might seek to explore that alternative.
Many shareholders too may believe that they would rather receive less information than more. But we should be careful that this does not reflect a view of stock market investment—encouraged, as it has been, by some of the intemperate privatisation campaigns by the Government—that there are few risks, if any, and no responsibilities in share ownership.
We shall no doubt discuss this point in greater detail during the Committee stage of the Bill. I add only that my unease is increased by the proposal that the details by which the arrangements are made to 45 allow for summary financial statements to be provided as an alternative to full accounts be left, as in so many instances in the Bill, to ministerial regulation by statutory instrument. I believe that there is a strong case for this important matter to be defined in detail in Parliament, whether as part of this Bill or another, rather than left to ministerial regulation.
I join the noble Lord, Lord Williams, in also viewing with caution the proposed exemptions for certain private companies from publishing accounts, given that creditors, unlike shareholders, would have no rights or powers in this regard. I also support the noble Lord's call for the end of the special treatment afforded to banks, even if not universally exploited. having had the opportunity of arguing just that in my maiden speech seven years ago.
The accounting profession has for some time promised to address the problems of off balance sheet finance and acquisition accounting, to which I referred earlier, but it has made no progress in actually implementing its promises. As a result of this failure, the Government have included the measures in the Bill. I believe that that is something which should be borne in mind when considering the second major section of the Bill, which covers the eligibility to conduct statutory audits and the training and supervision of auditors as part of the implementation of the Community's eighth directive.
The auditing community has expressed concern that the Bill proposes a degree of over-regulation which, in the words of one commentator,threatens to do to auditors what the Financial Services Act has done for investment businesses".Once more, your Lordships' House will, I suspect, resound to the arguments of self-regulation as against statutory regulation. Although the Bill only gives the power to the Secretary of State to set up a statutory body to oversee the auditing profession, and the noble Lord has today confirmed that he has no present intention of exercising that power, that has still been enough to set accounting nerves jangling.
It may be more pertinent to ask the Secretary of State not whether it is appropriate for him and his successors to be given the power to supervise statutorily the accounting profession, but whether this should not be implemented immediately as part of the Bill. The original proposal for a statutory supervisory body was raised and then dropped two years ago and it is difficult to see—particularly with an eye on some of the continuing errors and omissions by the accounting profession since that time—what justification there is for further prevarication.
Comparisons with the Financial Services Act may or may not be valid. But even if they are, I see no cause for the accounting profession to be concerned so long as the Government have learnt the lesson of the Financial Services Act. The complexity and cumbersome nature of that Act do not derive from its statutory basis. It is exactly the opposite. Its unwieldiness and the burden felt by the banking and investment communities (themselves exaggerated) are because of the awkward combination of the self-regulation and statutory supervision enshrined in the 46 Act, with a statutory umbrella needing to be designed to cover a variety of pre-existing, as well as newly formulated, self-regulatory practices. A more overtly statutory system of regulation would have been cleaner, simpler and no more burdensome or threatening—possibly less so—than the system which was instituted by the Financial Services Act. If that lesson has been learnt, the auditing profession should not fear a statutory body to oversee it, and the public is entitled to get one.
As I have referred to the Financial Services Act, this may be an appropriate moment to mention Clause 132 of the Bill, which seeks to amend Section 62 of the Financial Services Act and restrict the right to sue an investment firm for losses suffered as a result of a breach in the rules of a self-regulatory organisation to private investors only as defined by regulations made by the Secretary of State. Though widely and strenuously campaigned for by banks and investment firms, this proposed change is, in my view, dubious logic and owes more to an irrational prejudice against a supposedly litigious-prone business environment, echoed by the noble Lord the Secretary of State himself, than any real burden on investment firms. The Committee stage of the Bill will give the opportunity for your Lordships to explore and establish whether there is a valid distinction between the position of private investors and of professionals and as to whether their rights should therefore be differentiated.
Another major section of the Bill covers investigations under not only the Companies Act but the Insurance Companies Act, the Insolvency Act and the Financial Services Act as well. In general, the increased powers, greater clarity and enhanced flexibility for the Secretary of State are positive steps, though there remains some doubt as to how much the measures can substantially speed up investigations or add teeth to the DTI and its inspectors, once wrongdoing (particularly when short of clear criminal activity) is exposed. There are still too many individuals whose previous activities have justified the strong censure of DTI inspectors, continuing through clever manipulation of areas such as accounting practice to lower the business environment of the country. While Bills such as these can close one by one the most obvious and flagrant areas of abuse, it is the powers of investigation that are critical to controlling the most sophisticated breaches of corporate stewardship.
It is obviously important that our regulators co-operate with those of other countries in conducting investigations into companies or investment businesses whose activities, as the noble Lord the Secretary of State said, are more than ever worldwide. The parallel legislation in the United States has now been passed. It is therefore of great importance and urgency that we should follow suit in the UK. It is inevitable that reciprocity should be one of the tests to be considered by the Secretary of State in determining whether he is satisfied that a request for assistance from a foreign regulatory body is valid. Such a reciprocity test however should clearly be used not in a petty way, allowing fraud and other abuses to go uninvestigated and unpunished because of a geographical accident, but rather as the greatest 47 power available to bring common standards of investigation and supervision to all the countries with which we and our companies do business.
Although only a small part of the Bill relates to "Mergers and Related Matters"—just eight out of the 140 clauses—I am sure that few of your Lordships will disagree that this is by far the most important issue in the corporate world today. The brevity of the Bill's attention to the area is an accurate reflection of the Government's studied inaction and apparent unconcern over the exaggerated and often unproductive takeover boom. It has been inaction laced with inconsistency and muddle, as the principles of competition as the paramount consideration in merger policy have been occasionally and unpredictably overridden, whether overtly or covertly.
While welcoming the relatively minor amendments to the Fair Trading Act, therefore, along with most of your Lordships today, I can only deplore that the Government have not taken the opportunity to establish a merger policy that would really set the correct environment for British business in the 1990s. That, even more than the omissions listed by the noble Lord, Lord Williams, is the greatest cause for regret. For merger policy need not be synonymous with competition policy, even if the Government have chosen to try to make it such, except of course when it suits them not to do so. I would not argue that competition should not be the cornerstone of merger policy, albeit competition now needs to be judged not only on a UK and a regional basis but, as other noble Lords have said, on a European basis too. European competition considerations should not, however, override national ones, but should he part of a tripartite group of tests which have roughly equal weight.
Once the competitive aspects of a merger have been assessed, however, there is no reason not to consider also a wider range of factors under the broader heading of national and regional interests such as security, environmental effect, the effect on employees and employment generally, safety, foreign reciprocity, financial stability, specific developments in a company's industry, and so on.
If the markets were really an infallible method for determining a company's ideal ownership, why have the Government consistently included the provision to themselves of a golden share in many privatised companies? The noble Lord, Lord Strathclyde, may say in winding up that that measure has been taken to protect companies in their transition from public to private ownership. Are there not times in the life cycle of other companies when, for quite different reasons, some protective stability is equally vital and justifiable?
I do not believe that it is necessary to place the burden of proof on acquiring companies to demonstrate there are positive benefits from a merger. The noble Lord, Lord Jenkin, has already dismissed that as unworkable and counterproductive to initiative and enterprise. However, I believe that the merger policy that would best serve this country would clearly and unambiguously state the non- 48 competition criteria which could and would be considered in examining proposed mergers.
The resulting policy need not be chauvinistic or nationalistic; indeed, it could well prove to be less so than the rather variable implementation of existing policy. But it would establish a more stable and less short-term environment for the development of British business and commerce. Companies themselves still need to do much more to achieve that stable environment themselves, in the strategies they pursue and the relationships with shareholders, and indeed the shareholdings themselves, which they develop.
The institutions, financial analysts and commentators, as the noble Lord, Lord Carr, has said, also need generally to take a longer-term view, whatever the shallow or complacent conclusions of the CBI group which examined the problem of short-termism recently. But the public at large, with its uncanny nose for where nonsenses are being perpetrated, as well as some of the Government's closest and most loyal supporters, have made it quite clear that radical reform of merger policy is urgently needed. Sadly, with this Bill the Government appear to be failing them and the country.
§ 5.43 p.m.
§ Lord Stevens of Ludgate
My Lords, I should like to extend a general welcome to the Companies Bill. I was pleased to receive it just before the Christmas holidays, so that I could devote more time than usual to it. While admirable in many respects and necessary in order to co-ordinate our standards to those of the EC, particularly with regard to accounting matters, there are three main areas to which I feel your Lordships may wish to give further thought. Most of those areas have already been mentioned in this debate. Here I must declare an interest as a director and deputy chairman of Britannia Arrow, which is a major fund management company. My noble friend Lord Rippon is chairman of that company.
The first area is the Financial Services Act. I know that your Lordships' House undertook a considerable amount of work on the Bill and made some 500 amendments. However, the Act arose out of the collapse of Norton Warburg and Professor Gower's report on the protection of the small investor. What we have, perhaps unwittingly, is an Act which discourages fund managers from looking after the small investor. It has financially penalised those who do so, in particular unit trust managers. It will decimate the ranks of independent financial advisers, and while the original concept was correct it is growing like an octopus out of control and sucking within its tentacles the creativeness and vitality of the financial services community.
The Securities and Investments Board's budget for 1989 to 1990 is some £13 million and its wages bill alone is nearly £7 million. The total costs since it started to March 1990 are estimated at £35 million. In addition to this, the bodies underneath the SIB have huge budgets of their own and impose their own regulations on the financial community.
The SIB rule book alone consists of some 900 pages and the rule books of the other authorities 49 consist of a total pagination of 1500. The SIB sets the standards for the operations and for the rule books of its associated bodies, but the detailed rules require full-time compliance officers and lawyers to supervise and implement them. I believe that a worthwhile debate could be held on whether the separate bodies under the SIB should be abolished and whether the SIB should supervise the industry, perhaps on a divisional basis. At the present time the SIB rule book is being partially duplicated by the associated bodies, who in turn have their rules approved by the SIB. Why cannot there be one regulatory body?
This should also result in substantial cost savings. I appreciate that the profitability of companies and the high salaries of some of those who work in the City do not attract much sympathy, but it surely cannot be our intention to stifle such a major contributor to the nation's financial well-being and to our invisible exports. If the severe decline in profitability of fund management and related organisations continues, there will be less and less desire to look after the investments of private individuals. In addition to this, the huge changes made by the Act on the operations of the unit trust industry will further concentrate this business in the hands of a few.
People are the basic assets in the businesses that we are talking about, and these assets walk out of the door every night. If our regulations continue at the present level, I have no doubt that there will be an increasing tendency to set up operations abroad which will effectively circumvent large parts of the Financial Services Act.
In the case of unit trusts, the barriers within Europe cease on 1st October this year. It is quite clear that this country has a much higher degree of regulation than the rest of Europe. Luxembourg, for example, offers a very favourable tax environment, and it will be possible to market Luxembourg funds in the UK by March this year. Its valuation and pricing rules for unit trusts are considerably simpler and less hostile to company profitability than those imposed by the SIB. Should unit trust companies decide to move their operations to Continental Europe, they will still be able to operate within the UK, subject of course to the rules of the SIB and its affiliated bodies, but only those rules which affect the way in which they market their units.
My second point concerns the disclosure of shareholdings under the Companies Act 1985; namely, the proposed reduction of the percentage from 5 to 3 per cent. While it is an admirable concept for a company to know who its shareholders are, any diligent company secretary, subject to the speed at which shareholdings are built up, will have made inquiries as to who the potential owners are when the names first appear on the register.
A practical problem in this respect, however, is that for very good commercial reasons shareholders may wish to use a nominee name. Do we assume that the 3 per cent. disclosure is designed to enable investors to be better informed about movements in their companies' shareholders, or has it arisen because of CBI pressure for earlier disclosure of potential bidders? I assume it is the latter. In my 50 opinion it makes little difference whether a company has a 3 per cent., a 5 per cent. or a 7 per cent. shareholding. What effective action can a company or its shareholders take when somebody is determined to build up a large shareholding? Furthermore, it seems to me to miss the point of 1992.
Many European companies have bearer shares where the beneficial owners are unknown, or as in Holland, the voting rights to shares may be held effectively to the order of companies' management and the other shareholders have shares to which no voting rights attach; or, as in Germany, companies may have registered shares but will only agree to the voting rights on those shares being transferred if they approve of the new shareholder. Unless we standardise the nature of our equity capital and its voting rights with that of Europe, or vice versa, no amount of moving percentages will achieve very much. We have a situation in which it is very much easier for predators to buy shares in UK companies and to vote them than it is in most of the rest of the EC. Changing 5 per cent. to 3 per cent. misses the basic point, though it will give companies and their shareholders earlier notification of either stake-building or genuine investment demand.
Lastly—and here I speak somewhat cautiously because I think that I saw my noble friend Lord Alexander walking in behind me (I did not; I beg your pardon)—the Bill contains no reference to the Takeover Panel. While the original concept of the Takeover Panel as a voluntary regulatory body was admirable and it has performed a very useful task, I cannot help feeling that its days of non-statutory existence should be numbered. The Continent has no similar body; nor indeed does the United States. Its rules are extremely complex and change at regular intervals. Practice has shown that executive or full-time staff's rulings on code matters are seldom overruled by a full Takeover Panel hearing. There is virtually no statutory right of appeal.
The thirteenth company law directive of the EC, which is about to be published, is, I understand, a great deal simpler and sets minimum standards which are below those of our own takeover code. The days of the old boy club in the City, if it ever really existed, should have ended with the termination of fixed commissions. Overseas companies, particularly American, have felt less inhibited by the code than UK companies and would, I believe, welcome a statutory system with an effective right of appeal.
We need to examine the Bill in relation not only to existing UK practice but also the practice of our competitors. We need to standardise our arrangements and ensure level playing fields with the rest of the EC in the immediate future. Otherwise UK companies will be kicking up the slope and be severely disadvantaged in acquiring European businesses. They will be far more vulnerable to being bid for by other companies in the EC outside the UK than the latter are to being bid for by UK companies.
I fear that in the three areas that I have mentioned we are nibbling at the edges rather than getting to the core of the problem.
§ 5.54 p.m.
§ Lord Graham of Edmonton
My Lords, perhaps I may begin by apologising to the House for not having been present at the beginning of the debate. However, I know that the noble Lord, Lord Strathclyde, will share my pleasure when I say that I intend to be present at the very end to hear his pearls of wisdom.
I should like to refer to some of the remarks that I have heard, not least those of my noble friends Lord Murray of Epping and Lord Dean of Beswick, and the noble Viscount, Lord Chandos. They all introduced a point which I believe needs to he taken into account when considering what may be seen as a prosaic Bill dealing with legal frameworks, namely the human dimension.
I am delighted to see the noble Lord, Lord Mottistone, in his place because as I came into the House this afternoon I met a group of people who work for Plessey on the Isle of Wight. I do not know whether he is privy to their presence in the building. I know however that he takes a great interest in all matters relating to the Isle of Wight and that he is very diligent in such matters. Those Plessey employees impressed me by their concern to arouse the interest not only of your Lordships' House but also of others over what happens when the dust settles, not only in a place like the Isle of Wight but in many similar situations. They brought home to me their virtual helplessness when a major takeover or merger takes place.
Part VI of the Bill relates to mergers and related matters. The Bill states:This Part amends the provisions of the Fair Trading Act 1973 dealing with mergers and certain provisions in the related fields of monopolies and uncompetitive practices".Reference has already been made to that Act. Section 84(1) of the Act states that:the Commission…shall have regard to the desirability…of maintaining and promoting the balanced distribution of industry and employment in the United Kingdom".I appreciate that that is not the main thrust of the Bill, but I wonder to what extent the Government, in their contacts with the Monopolies and Mergers Commission and the Office of Fair Trading on takeovers involving billions and billions of pounds, have taken the human dimension into account. It is right and proper that there should be a legal framework. Noble Lords have spoken quite fairly about protecting the interests of a great many groups of people, not least shareholders large and small. They are entitled to protection. However, I believe that in a debate of this kind relating to mergers and takeovers of that size we need to recognise that ordinary men and women are affected, as the noble Lord, Lord Dean, so graphically illustrated from his own experience.
Those contacts which I made in the central Lobby about three hours ago left me with a piece of paper. It refers to a workforce on the Isle of Wight of approximately 1,350. The paper mentions skill categories, and the skills of those people are very impressive indeed. Any worker in any job is entitled to be fearful about the consequences of a takeover. In this particular instance I am sure that the noble Lord, Lord Mottistone, will be able to put some flesh on the 52 bones of the problems. I am glad to see that he smiles and nods his head. He probably came well equipped to do so.
I simply use that case as an illustration to demonstrate that in the south of England there are pockets of unemployment and pockets of difficulties, contrary to the general belief that in this part of the world the situation is better. Those colleagues I met outside told me that weekly earnings on the island are the lowest in the UK apart from Cornwall and Shropshire. The closure of Plessey, if that were to come about would push the average even lower.
I am glad to have the opportunity to ask the Minister to take on board the fact that such issues need to be borne in mind when considering the grand design of a handful of people in a boardroom in the City, in Chicago, in Zurich, or wherever it might be. They are big decisions and very important, but little people in a small place like the Isle of Wight and in many other communities througout this country are deeply affected, crucially affected, perhaps fatally affected, by those decisions.
The Minister shakes his head. I was alluding to the death of a community as a result of the closure of a large concern. We know exactly what that means.
I should like to take the opportunity of drawing the Minister's attention to some other aspects of the Bill. I do not expect answers to my points tonight necessarily, but I should be grateful for some correspondence at another time.
Schedule 12 has the effect of making auditors to a diverse body of non-companies, some public and some private, subject to the same rules as proposed in Part II of the Bill for company auditors. These proposals, with which the Secretary of State dealt in some detail, effectively confer powers on the four professional bodies for chartered accountants to regulate the company auditing profession. Is it necessary or desirable that this power should extend to so many other bodies?
Of course those bodies must continue to employ chartered accountants as auditors, as they do now. But are there any reasons for linkage with companies and ultimate control by the Secretary of State for the DTI? Some of these bodies are currently obliged to employ auditors who are approved by the Treasury, for example auditors who are currently authorised under the Friendly and Industrial and Provident Societies Act 1968. At present this system works satisfactorily. Most of the auditors appointed by members of friendly and industrial and provident societies are also either currently employed as company auditors or qualified to be so employed.
Why then is there the query? In the case of industrial and provident societies the audit service for many years was provided by qualified auditors who were on the Treasury list but employed as part of an internal audit service by the Co-operative Wholesale Society for retail co-operatives. At this point I declare an interest with regard to co-operatives and friendly societies.
The system was ended by agreement following a merger of professional bodies. If retail I&P societies ever wanted to revert to the former system—in effect, an audit union—would the provisions now in the Bill 53 preclude such a development? Perhaps, on mature consideration of this matter, the Secretary of State will write to me and let me have his views.
I have mentioned the I&P societies and the friendly societies. I wonder whether the Minister is able to comment on the future legal framework for friendly and industrial and provident societies. In the past 10 years major aspects of our financial institutions have been made ready for the 1990s and perhaps for the year 2000 onwards. I refer to the banks, insurance companies, building societies and other financial institutions. Perhaps the Minister can tell the House whether in the Treasury or elsewere any thought has been given to the future legal framework for the friendly and industrial and provident societies' movement. I am not pressing him but it seems to me logical that if the Government are looking at all the matters in point—and the organisations that I have mentioned are smaller both in size and impact than many others -then the I&P and friendly societies might be considered with a view to bringing them up to date.
The final point that I wish to make concerns Part II of the Bill. Clause 28 defines the circumstances in which a person may be regarded as holding an appropriate qualification; Clause 29 defines qualifying bodies, their members, rules and guidance; and Schedule 9 lays down how a qualifying body may apply for recognition of a qualification that it offers.
The Association of International Accountants, which was incorporated in 1932, is an accountancy body which examines internationally. Its examinations were recognised by the Department of Trade and Industry in 1982 as being in all respects of no less a standard than the examinations of the chartered auditing bodies. A letter issued to that body on 1st March 1982 confirmed that. The association is well known to the Department of Trade and Industry as from 1975 to 1982 it accepted ministerial criteria in response to its application for listing under what was then Section 161 of the Companies Act 1948. That was repealed by Section 389 of the Companies Act 1985 which was of similar content. The purpose was to obtain for a member eligibility to be appointed a company auditor. According to the then Secretary of State, the noble Lord, Lord Cockfield, the body met the criteria but for a statistical reason approval for listing was withheld by him.
The association has 1,600 qualified members and 5,000 students. While not numerically large when compared with the membership of the chartered auditing bodies, its ethics, standards and conduct are similar to those bodies. All those factors were covered by the ministerial criteria. I make particular mention of it because government policy, well pronounced by the noble Lord, Lord Young, is to encourage growth and competition by smaller enterprises.
The Companies Bill that we are now discussing proposes changes in the regulation of' auditors to comply with the European Community eighth company directive. That is welcomed by the Association of International Accountants as being in both the public interest and that of the profession. The Bill will enable those bodies whose examinations cover the theoretical training for a company auditor 54 to apply to the Secretary of State either to be recognised as a supervisory body—the proposal is that such a body or bodies will regulate all statutory auditors—or to have its professional qualification recognised and for the body to be described as a "recognised qualifying body". It is for the latter category that the association will be making an application to the Secretary of State.
I ask the noble Lord, Lord Young, whether he will make a point of looking at this matter of the association's application and take the opportunity, when the Bill is enacted, to accord recognition to the association's qualification which, had the proposals now before the House been part of the previous Companies Bill, would no doubt have been granted.
§ 6.7 p.m.
§ Lord Mottistone
My Lords, I should like to thank the noble Lord, Lord Graham of Edmonton, for giving me a run-in to the problems that we have in the Isle of Wight over possible mergers. I shall not say very much about it because it is not the matter of the Bill. However, it is a fact, as he said, that it would be a disaster for the Isle of Wight if anything adverse should happen to the Plessey factory in Cowes, not only from the point of view of unemployment and the workforce in the island as a whole but also as regards the balance of the community, because Plessey's in the Isle of Wight plays an important part in giving us a balance of intellectual stamina and expert qualifications which are not reflected in other companies. It is very important, although it is something that I do not want to press just now.
However, my noble friend Lord Carr said in passing that mergers do not produce the improvements that are expected. From my experience many years ago as director of personnel and training for a large public company which had been involved in mergers, that was absolutely obvious. It was obvious to me then and is so now that when people work out whether a merger will be good or not they do not take any account of the effect on the workforce or the management—I stress the management—of the companies concerned. I have always felt that that ought to be done.
I have always been told, and certainly it has been my experience when experimenting with how one might do it, that it is an intractable problem to assess the qualities of a workforce in a new environment. It is a problem because each company has a different ethos and different ways of approaching matters. It is a very difficult problem and one which I do not think is suitable for legislation. However, I believe that it is one for successful company management and successful mergers. It is a problem that ought to he tackled. However, I do not think that I can go further than that now.
I say finally in relation to the Isle of Wight and the representation that we have around us from Plessey that the management of Plessey is also very concerned about this and keen to tackle it; it is not only the workforce. But I much applaud the workforce for taking the steps that it has to make sure that no one is in doubt about the problems that may arise.
55 I turn now to the Bill. I too must apologise for not having been present at the beginning of the debate and for coming in in the middle of the opening speech of my noble friend the Secretary of State. In contributing to the debates on this Bill I shall be advised by the CBI. As an adviser to that confederation and as a director of small companies I have to declare an interest to your Lordships.
The Bill is in general welcomed, although there are many specific points on which I am hoping that the Government will agree to amendments. It would be tedious to spell out at this stage all the clauses which I am advised require amendment. I propose therefore to pick out some of the more important examples. For instance, many of the provisions in Schedule 2 on merger and acquisition accounting would be more appropriately dealt with in accounting standards. On another accounting matter, the CBI has advised me that the provisions in Clause 19 are more widely framed than is necessary and will have an undesirable side effect.
Turning now to Part III, the Bill does little more than tinker with the matters requiring amendment under the Financial Services Act. What my noble friend Lord Jenkin of Roding had to say rather endorsed that. We believe therefore that there is a need for substantial further amendments to that part.
With regard to Part IV, the CBI welcomes the amendment to the process of registration of company charges. There are, however, matters of detail in that part which require further amendment or clarification.
In Part V, the CBI welcomes the attempt in Clause 91, to which the Secretary of State referred, to increase transparency in the market place. However, it questions whether the Government are right to allow the provisions on disclosure of interest in shares to be altered by secondary legislation. Disclosure can impose an administrative burden and in the interests of legal certainty it is better that the provisions should be included on the face of the Bill. There are also other amendments under consideration for other clauses in Part V.
On Part VI, the CBI welcomes the implementation of some of the procedural improvements proposed in the Blue Book on mergers policy. As my noble friend Lord Jenkin said, it has some criticisms of this part of the Bill and in particular—if I follow its advice—I shall be seeking to have Clause 103 removed from the Bill. The concept of charging fees for merger control is suggested as being totally unacceptable in principle. The Government make the rules for monopoly and merger control so they should bear the cost. I appreciate that the noble Lord, Lord Taylor of Gryfe, and my noble friend Lord Jenkin do not agree with that. We therefore may have some interesting debates on any amendments in that area.
Finally, the CBI considers that there is a need for the Trusteee Investment Act 1961 to be brought up to date and that Section 310 of the 1985 Companies Act should be reviewed. It suggests that relevant amendments to give effect to those proposals could with benefit be included in this Bill and will be 56 proposing suitable amendments for me to agree to and perhaps put down.
Broadly speaking, this is a non-controversial and useful Bill, but by its nature it will require particularly close scrutiny by your Lordships. It will probably lead to a great many amendments because it covers such a wide area and so many interests may be involved. However, I hope that the Government will view with the greatest possible sympathy any amendments which are inspired by people with practical experience in running companies.
§ 6.15 p.m.
§ Lord Elton
My Lords, I should like to start by thanking the Secretary of State for a remarkably compressed and efficient exposition of an extremely long and complex Bill. I do not envy the task of my noble friend Lord Strathclyde of picking up all the pieces that were left. No doubt we shall be asked to give him some indulgence on the length of his speech. I shall therefore try to be very brief.
I shall concentrate on only one aspect of this Bill. That is the use that can be made of it as a vehicle for amendments to the Financial Services Act—an aspect touched upon by my noble friend Lord Jenkin of Roding. Noble Lords will recall that he expanded on the demerits of that Act. As chairman of a self-regulatory organisation recognised under it, I sympathise with a great deal that he said. I regret that I was unable to be present for the speech by my noble friend Lord Stevens of Ludgate—who I see has returned the compliment by being absent for mine. That must be the termination of a very brief exchange.
However, the Act has its successes and has produced new and much needed levels of protection for investors. Such need was made clear by investors' very unfortunate experience in the months immediately preceding implementation. Some 2,000 applications to trade as independent financial advisers made to my own association either failed or were withdrawn. That must also represent the removal of some form of risk to investors who might have been their clients since they were presumably practitioners not up to the job as independents.
There have been other improvements but these have all been bought, as my noble friend said, at a price. He described this price in terms of the burden that it has placed on a large institution. Seventy-five per cent. of my members are very small institutions indeed. Many of them are one-man institutions. They are all independent intermediaries, responsible themselves for compliance with the provisions of the Act as transmitted to them through SIB's rule book and subsequently our own. They are finding the rules complex and burdensome, in proportion, as does my noble friend. The results are both increased direct costs and increased opportunity costs which must diminish the good effects of the Act. If it can be remedied, the Act and consumer protection will be strengthened.
Much is already being done to simplify the requirements, and I welcome that. But there is a strict limit on what can be done because of the way in which the Act requires the application of its 57 provisions through SIB and the SROs' rule books. The SROs exist only by virtue of recognition under the Act by SIB. That recognition is, by reason of the Act, dependent on the rule books of the SROs reflecting pretty closely the relevant provisions in SIB's rule books providing—I think this is the term—equivalence. Each SRO has to provide for its own sector what is called equivalence to SIB's provisions for that sector in its own rule book; and SIB's own rule book has to reflect the statute very closely and carefully.
The language and arrangements of statutes are very workmanlike tools for courts and lawyers but they are not always very apt for the market-place and small, overworked businessmen. It would be a great help if the Government could uncouple this direct drive so that, as opportunity serves, we can produce rules for our members which enforce the principles of the Act without following its detail. SIB has itself embarked on expressing those principles, and on a consultation on them. This we welcome. Once they are agreed, we would be happier with a new requirement to replace the old one: a requirement to conform to those principles rather than the existing requirement to equate to the detail.
While an immediate wholesale redrafting of rule books would cause much further work and confusion to our members, I believe that we could use the opportunity not just to benefit practitioners but to improve the service to their clients.
§ Lord Williams of Elvel
My Lords, I am sorry to interrupt, but am I right in thinking—I am sure that the noble Lord can answer from his experience—that the SIB has no powers under that Act to make general statements of principles that everything in its rule book has statutory authority?
§ Lord Elton
My Lords, I should not wish to use language which was tested by the courts on this matter, but broadly the noble Lord is right. As I understand it, there is a question as to the extent which SIB can pronounce a principle and then say whether an SRO has adhered to that principle. I believe that that difficulty is implicit in the drafting of the Financial Services Act. I hope that the Government will see fit to find words to replace that passage which would relieve them of that difficulty.
As we are discussing a Bill. I shall not pursue that much further except to say that one should not regard that as an absolute panacea not only because the redrafting, relearning and reimplementing of a complex rule book is itself very burdensome both to those who draft it and to those who have to abide by it, but also because the more general a statement placed in the superior regulation is, the more room there is for width of interpretation by the inferior body and therefore for litigation as to whether the principle has been observed. We are not here for that purpose. I am here simply to plead for that opportunity which I know will be welcomed by my members and I feel empowered to do so because I believe it would also benefit their clients who are the object of all the provisions of the Financial Services Act.
58 My noble friend Lord Jenkin of Roding said something else before saying that he was looking forward to hearing me speak, which leads me to suppose that I ought to reply to it. He said that very large numbers of independent financial advisers were leaving the independent sector. It is true that enormous efforts are being made by insurance offices, life offices and insurance companies to, if I may use the word, seduce practitioners from the independent sector to the extent that they are sending out glossy brochures on compliance, one of which I received this morning, saying on compliance things like:Undoubtedly, it placed onerous burdens on you…Does this distract you from your main purpose—looking after your customers?".On record keeping, it states:You've always kept records. No business interested in customer service and growth would not. Now, however, your records must conform to a strictly prescribed format and be kept for up to seven years. What consequences does this have for your business? And what of the other administrative issues—code of conduct, selling practices. advertising, accounting, stationery? The list is endless. How can you concentrate on what you do best?".I am not here to answer that. I regret that the circumstances should be exploited in this way, but the consequences are not exactly what my noble friend may have suggested. if my experience is anything to go by. When we were preparing for the implementation of the Financial Service Act, we expected a membership of, at the most, 7,500 member firms. We now have a membership of 9,030 member firms. It is true that we lose a dozen or so a month, but we have 50 applications a month from new members. That does not sound to me exactly like a stampede.
It is true that the independent financial advisers have been going and are going through a very difficult period indeed. The market has been desperately bad for them because of events of which your Lordships are all too well aware, and they have had the burdens to deal with which my noble friend has not exaggerated and the costs that arise therefrom. However, I believe that when the commission arrangements that at present exist are removed and that will be sooner, not later—taken together with other developments in the regulatory regime, the environment that he is waiting for will exist and he will be able to exploit it efficiently in both cost and business terms, provided that my noble friend sees fit to make the changes which I ask him to make, which will reduce the burden of regulation where it bites and make it more effective, not less, for the protection of the investor.
§ 6.25 p.m.
§ Baroness Ewart-Biggs
My Lords, I want to make only a very short intervention in the debate and say a few words about consumer related matters in the Billl. It is clear that the Bill does not in the main hear directly on the consumer but there are certain areas which affect his interests. I should like to make the following comments. I am sure that some comments have been made before, but I should like to marshal them and show how the consumer and the small investor are affected by the Bill.
First, there are measures which may be of great benefit to members of the public, and they must be 59 welcomed. For example, there are measures designed to curb abuses in financial reporting contained in Part I. If these succeed in making the information contained in company accounts more readily comprehensible to the small investor, that would be worthwhile.
Secondly, under Clause 91 there is a move towards greater transparency in share ownership through lowering the threshold by which the purchaser of shares in a company has to disclose his stake. That would be good for the small investor and is a step in the right direction. As the Minister said in opening the debate, some people may feel that the Bill has not gone far enough, and I believe that this is the case among consumer groups. Those are some of the changes which would undoubtedly help in strengthening the position of small investors and which are welcomed by consumer groups.
In a Bill of this size and complexity there inevitably are areas in which the rights of individual consumers are not quite clear. I should like to seek explanations and some assurance from the Minister on the precise meaning and effect of some of these proposals.
First, Clauses 98 and 99 cover legal enforcement on merger undertaking. The proposal under Clause 98 enables the Secretary of State to accept undertakings to divest part of a merged business as an alternative to making a merger reference, provided that the undertakings given are such as to prevent or remedy effects adverse to public interest from a proposed merger. In Clause 99 such undertakings arc declared to be enforceable at law by any person under the terms of the Fair Trading Act. A question that arises from this clause is, who do the Government envisage taking this action in practice? Will it be the Secretary of State, companies or individuals? For example, if a merger between two large airlines is approved on condition that they divest themselves of certain routes and those undertakings seem not to be fulfilled, who would bring the company into court? Would it be a smaller airline, which may be in a precarious financial position, or an individual traveller without the resources to sustain a protracted legal action?
Will the Minister not agree that as these undertakings under Clause 98 are to be made in the public interest, some form of aid should be made available to members of the public wishing to enforce them? That could be done perhaps through a group or class action. Alternatively, is there not a case for an independent body to monitor the carrying out of such undertakings? I should be most grateful if the Minister will comment on that.
On another related point, given that the Government are taking steps in the Bill to ensure that the taxpayer does not have to pay for investigations into mergers, they might perhaps now consider further amendment to the Fair Trading Act to ensure that the public do not foot the bill for action taken under the misleading advertising directive. It is of some concern that the Office of Fair Trading will have to expend an enormous amount of resources investigating the current advertising dispute between the two giant consortia of Sky Television and British 60 Satellite Broadcasting. Would it not be much cheaper for the taxpayer and quicker for all concerned if the Government allowed such cases to be taken directly to court by the complainant rather than insisting that they are referred to the OFT, which would then be able to concentrate on complaints made by the individual consumer for whom help would be more necessary?
My second point about this part of the Bill concerns the need for the reversal of ownership proof in merger cases. The current obligations on the vetting authority to prove disadvantage to the public appears to be totally unrealistic, particularly because there is no mechanism for the continued examination of the after-effects of a merger. In cases where a full Monopolies amd Mergers Commission investigation is carried out, the requirement to prove that the proposals would be against the public interest must mean that lack of information will frequently weigh the decision in favour of non-interference from a body which to a large extent is dependent on receiving information from the organisation being vetted.
Support for the reversal of the onus of proof comes from no less a person than Sir Gordon Borrie, Director General of the Office of Fair Trading. He suggested that the Government should consider changing the burden of proof as a means of ensuring that public interest does not suffer from an excessively short-term view in relation to merger policy. There is little doubt that there will be a great deal of support from consumer groups and trade unions for that view.
Clause 132 has been mentioned by several noble Lords. It deals with the right to sue an SRO. A further point of concern arises because the clause amends Section 62 of the Financial Services Act in order to restrict the right to sue an investment firm for losses suffered as a result of a breach in the rules of a self-regulating organisation to the private investor. While at first glance it appears that the amendment preserves the right of the private investor to sue, on further examination it becomes clear that the amendment states that the meaning of the expression "private investor" shall be defined by regulations made by the Secretary of State. It therefore appears that a private investor will not be able to sue under this section until regulations have been proposed by the Secretary of State. Can the Minister say when such regulations are likely to be produced and whether the House will discuss them beforehand?
That point is symptomatic of a wider problem concerning companies legislation. Such legislation should ensure fair redress for loss by the consumer when he or she has had the market artificially rigged against them, when information has been denied them or when negligent or dishonest practices have taken place. There has been a distressing number of such cases in recent times and compensation for loss has not been swift in being brought about, if indeed it has been awarded at all. In building up an edifice of regulation we should not neglect its indispensable corollary, which is that there should be an effective means of enforcement and redress for the individual.
61 I have touched on a few points which appear to affect the consumer directly. I hope that the Minister will take note of them and be able to respond.
§ 6.34 p.m.
§ Lord Beaverbrook
My Lords, by listing the number of Acts which the Bill seeks to amend, the noble Lord, Lord Williams of Elvel, reminds us that it is a broad Bill. However, I am not sure that it visits as many corners of economic life as we have in this debate.
From what has been said by previous speakers, it is quite clear that all sides of your Lordships' House welcome certain parts of the Bill. The harmonisation provisions, the updating of consolidation requirements and accountancy standards are necessary measures. Any sensible attempt to reduce red tape, and therefore cost, in industry is to be welcomed. Such benefits to industry are diminished by other new forms of regulation, much of it sadly necessary, particularly so in the financial services sector. I suspect that the overall burden of red tape that we, the legislature, impose upon business has never been reduced in net terms. Therefore I hope that the provisions in the Bill to reduce the burden will not be watered down during its passage through your Lordships' House and another place. The point was made by the noble Lord, Lord Benson, and it is extremely important.
I am always pleased when important, and in this case technical and complicated, Bills start their parliamentary progress in this House. Our debate today has served to highlight the parts of the Bill which will be controversial. The noble Lord, Lord Williams of Elvel, based his opposition to the Bill on what is left out. He stated that there is no theme, that the Bill is not the general view that he had expected and hoped for and that ultra vires provisions are omitted at this stage. He summed up by saying that the Bill represents no progress. I believe that on balance the Bill has been well received today. The noble Lord commented on the so-called "river companies" and, to use his phrase, perhaps it is he who is swimming against the current and not the Government.
Perhaps it is fortuitous that the Government's merger policy is to play a part in our discussions at a time of increased merger and acquisition activity, not only in this country but also on the world stage. Indeed, I welcome the Government's proposals of pre-notification and divestment. I suspect that the former will be relevant only for agreed mergers because, as it is improbable that sufficient evidence will be made available by the management of a target company in a hostile bid, rule No. 1 for escaping a predator is to play for time. It must be remembered that the proposal in the Bill to reduce the threshold of disclosure from 5 per cent. to 3 per cent. and to reduce the time element will also assist the target company management in its defence strategy by giving earlier warning of a stake being accumulated in the company.
I join the welcome given to the Government's proposals on divestiture. However, I believe that in a contested bid where a predator makes a legally 62 binding undertaking to divest, it gives on balance an advantage to the target management. The value of a part of a merged business in a forced sale is surely less, and no doubt the case for the defence against a contested bid would make full use of that fact. Thus I do not believe that in the Bill we are setting a charter for more successful mergers. We are moving in the direction advocated by my noble friend Lord Carr.
To those noble Lords who believe that big and bigger business is generally bad for competition and therefore bad for the consumer, I say that the Government's proposals to streamline merger procedures in no way open the door to a further concentration of economic influence. Every merger case is different; they have their particular features. I believe that the Secretary of State has carried out the Government's clearly stated policy consistently and fairly.
On occasions noble Lords opposite have attempted to broaden the issues in a particular takeover beyond the matter of competition. They would like to see many other considerations introduced to act as constraints on the operation of a free market. But the success of our economy today demonstrates that a free and open market will ultimately decide what is best far more efficiently than will committees of bureaucrats.
Competition must remain the dominant cornerstone of government intervention. In particular, this country's position as the largest foreign investor in the United States should not be jeopardised by old-fashioned, insular attitudes to inward investment here. A fully open mergers policy appears to stimulate target companies into increased economic activity. Even the predator, as we have seen recently, is galvanised in order to repel "pacman"-type tactics by defending companies.
A bid or merger in the first instance is often triggered by the perception of a jewel in the crown of the target company. This jewel, in the form of' a particularly prosperous diversion or even a pile of uninvested cash, can put even highly successful, active and progressive companies at risk of takeover. After the jewel is extracted, the rest of the business is broken up and sold off. That is not necessarily bad but in a free market managements should be free to plan ahead to avoid such occurrences.
I believe that is about time that artificial restrictions on the available options were removed: restrictions such as tax disadvantages and restrictions on hiving off divisions by way of bonus shares to the existing shareholders, so making two separate freestanding companies out of one, albeit with identical shareholders. It may also be desirable further to reduce the restrictions on companies buying in their own shares and to remove tax penalties on passing out unused and surplus capital to shareholders. Such moves can enhance shareholder value, so enabling good management successfully to head off opportunistic takeover approaches. Those are suggestions that my noble friend the Secretary of State might wish to bring to the attention of his right honourable friend the Chancellor of the Exchequer before the next Budget.
Turning hack to the Bill itself, it was always known that certain provisions of the Financial Services Act 63 would need amendment in the light of experience. Subject to some clarification at Committee stage, I believe that removing the professional investor from the protection of Section 62 of the Financial Services Act and the clarification in the Bill on the set-off in bankruptcy provisions contained in Clause 134 are sensible changes.
I also welcome the strengthening and widening of the investigative powers of the Department of Trade and Industry. As financial markets and trade generally become more international, it is important that the DTI is sufficiently equipped to liaise with its opposite numbers in other countries in order to provide and enforce regulations.
The Bill is indeed a compendium of legislation, but it is necessary legislation, and I believe that it is none the worse for that.
§ 6.43 p.m.
§ Lord Ezra
My Lords, I am pleased to be speaking after the noble Lord, Lord Beaverbrook, in his new place. I hope that we shall hear him intervene in debates on many occasions in the future in that new capacity.
At this stage in the debate it is clear to me that there is much in the Bill that is desirable and can be supported; but there are some aspects of it that could be improved by amendment. Indeed, there are a number of omissions which could also be dealt with at a later stage. I am among those who regret, as did the noble Lord, Lord Williams of Elvel, my noble friend Lord Lloyd of Kilgerran and the noble Viscount, Lord Chandos, that the opportunity has not been taken in the Bill to pursue a more concerted theme. If ever a theme was to hand in relation to new company legislation, it is to hand today.
The noble Lord, Lord Young, has distinguished himself by the vigour with which he has sought to promote the preparation among enterprises in Britain for the single market. It seems logical, therefore that a coherent legal framework for companies within that market should have been attempted in the legislation now before us. Unfortunately, that opportunity has not been taken, so my first question to the Minister is this. Are we to expect something later that will deal with this? We ought to know. This seems to be a gap in the preparations for the single market.
The way in which this Bill is built up, as surmised by the noble Lord, Lord Williams, and confirmed from his great experience in government by the noble Lord, Lord Jenkin, appears to be that because there was a need to implement the Seventh and Eighth Directives the opportunity was taken to introduce a number of other matters which had to be legislated for and for which somehow a place had to be found. As I said, the result is a number of desirable propositions but a coherence and an opportunity missed.
A large number of important points were raised in the debate. No doubt we shall return to most of them in Committee. I should like to single out three points for special comment. I suggest that more should be done in Part I than has already been done—it is a 64 considerable amount—to relieve the burden imposed on small companies. There is a vast number of small companies in this country: some 90 per cent. of registered companies have a turnover of less than £2 million, which falls within the definition of a small company in Clause 12. The reduction in the burden for which I am asking is that they should no longer be required to have their accounts audited in a formal manner. As the noble Lord, Lord Benson, said, the cost of auditing, which arises from this legislation will increase. It will become a heavy financial burden as well as take up much time for small companies. Of course they will need to keep their management accounts and to keep accounts that will satisfy the tax inspectors and their creditors, but I believe that they could be relieved of that obligation with benefit.
The intention of Part II, which deals with the regime for the regulation of auditors, is wholly desirable, but there are problems to which several noble Lords referred. In particular, there is the risk that we could get into a situation similar to that created by the Financial Services Act. The noble Lord, Lord Jenkin of Roding, suggested that the noble Lord, Lord Young, should in future be followed by someone to remind him of what had happened with that Act so that he should not forget it in respect of future legislation. Therefore, we must make sure that the supervisory system does not contain the blemishes of that Act.
There is concern in the accountancy profession (I do not form part of it as I am not an accountant but I respect the profession). I am satisfied that it has made a good point as put forward by the noble Lords, Lord Benson and Lord Milne, that if accountancy professional bodies are to be given a supervisory role of the sort proposed in Part II, they should be relieved of the legal responsibilities in the same way as the SIB and the SROs in regard to the exercise of their proper functions. This is an important issue and it is a matter to which I hope we shall come back in Committee.
The noble Lord, Lord Stevens of Ludgate, referred, as did other noble Lords, to the excessive supervisory and bureaucratic system that is contained within the Financial Services Act. I think it is a serious thing to consider that, as the impediments to the free movement of capital are removed within the Community, we could end up looking like the most regulated financial centre in the Community. We must not extend that overregulation to our other services. There is a real prospect, as the noble Lord, Lord Stevens, quite rightly said, that a number of financial institutions, could quite happily set themselves up in, let us say, Luxembourg where the regulations for free movement of unit trusts will come into operation on 1st March, and operate from there and therefore escape from much of the regulation within this country. That does not seem to me to be a very sensible arrangement. Whether we can use this Bill as a vehicle for further amendment of the Financial Services Act, as was proposed by the noble Lord, Lord Elton, I do not know, but certainly that needs to be done at some stage.
There is finally the question of the mergers. 1 think we possibly all found ourselves in some 65 disappointment at the mergers section of the Bill, because the whole question of mergers is now playing such a large part in the economic activity of the developed world, particularly within the European Community and between the Community and the United States. This is one area where one would have thought there ought to be a fundamental review. As the noble Viscount, Lord Chandos, said, this would have presented the opportunity of stating quite clearly what are the bases on which these propositions will be considered.
I can see no harm, if one accepted that competition will be the main factor, in nevertheless indicating as an example some of the other factors which have to he taken into account. I see no reason why this should be left entirely open, and an indication to that effect in this or some other piece of legislation would be highly desirable. As these mergers get larger and larger, so more and more people are involved the—noble Lord, Lord Mottistone, referred to the people in the Isle of Wight who will be affected by whatever happens to Plessey—and so this human element needs to be more considered. This is a point to which the noble Lord, Lord Graham of Edmonton, referred.
The other aspect of the mergers part which caused me some concern is that, although I went through it fairly carefully, the words, "Europe", "European" or "Commission" were not mentioned at all. If we had abstracted ourselves from the world as it is and thought that we were just an island state acting within our own frontiers, this would have been an admirable bit of legislation. But in fact we are preparing ourselves for the biggest change in our economic affairs in human memory. The question arises: how are we to link our merger legislation with that of the Community?
The noble Lord, Lord Young, in the address that he delivered on 27th October, to which reference has already been made, referred to this. He said that he thought that as far as the Community was concerned the existing regime of Articles 85 and 86 was quite adequate. He went on to say:It is well known that the UK has reserved its position on the principle of the regulation"—that is, the merger regulation—while continuing to participate constructively in council working group discussions".I should like to ask your Lordships whether you believe that Articles 85 and 86 of the Treaty of Rome, which were devised for some quite other purpose—namely, the question of competition—are suitable for dealing with the developing merger situation. For one thing the articles are meant to be applied after the event so that, strictly speaking, mergers could go ahead as agreed by the national governments and then the Commission could come along and say, "No, sorry, you can't do that. You will have to undo it".
What is happening in practice is that the prudent enterprises, which realise that there is a European context in the merger proposals that they have in mind, are going to the Commission first and asking their views, exactly as is proposed in this Bill so far as UK merger legislation is concerned. If that is what 66 people are doing, why are the Government reluctant to have a corresponding merger regulation within the Community? Why should we be objecting to having a similar procedure to the procedure which we are enacting in our own country? Surely it would be far better for firms contemplating intra-European mergers to know precisely what the procedure is, riot only in their own country but in a Community context, and to have this clearly laid down and agreed by the various member governments. In fact, as I understand it, in Spain at the moment they are passing through their Parliament merger legislation which is entirely modelled on what the Commission would like to do within the Community.
So far as I can see from what has been reported in the press, the merger proposals in a European context would not differ all that much from what we have been debating this afternoon in a UK context, so it is important for us to ask the noble Lord the Minister when he replies what we are doing about that. Are we going to leave that as a lacuna? Are we going to leave the Commission to have to work post facto with Articles 85 and 86, with all the problems that that could create, or are we going to try to get this sorted out as quickly as possible so that we can effectively prepare for the advent of the single market and, in this very important question of mergers, know where we stand?
§ 6.57 p.m.
§ Lord Peston
My Lords, my noble friend Lord Williams of Elvel referred to the Bill as a hotpot. It is certainly a very diversified piece of legislation—what we might call a conglomerate merger of DTI interests. It is also, speaking for myself, a very complex Bill, large parts of which I have to tell noble Lords I do not understand at all. I have read the DTI's companion introduction and I am bound to say that there are large parts that I still do not understand. Therefore I hope noble Lords will bear with me if I take slightly longer in making this speech than I normally would, but also will bear with me subsequently in Committee where one puts down amendments with the sole purpose of discovering what the Bill means, because we will certainly have to do that.
I also echo some other remarks of my noble friend Lord Williams in saying that I too, am not one of those who likes to see primary legislation introduced in a way which then can be substantially and significantly amended by statutory instrument. We have been doing that a great deal; I noticed it in the Education Reform Act. It is a matter which taken too far—I go no further than that—verges on the deplorable. So one must at least indicate one's concern on that matter.
On the Bill itself, noble Lords have rightly said that it contains much that is to be welcomed. We support that. It is entirely right that we legislate for the relevant directives. Indeed, the only concern is how late we sometimes leave these matters. But we must do that.
In particular, on matters to do with accounting we must follow what in most cases is the perfectly good sense of the directives. Other than on matters of clarification one will find much to support here. But 67 the main criterion on accounting must surely be the full and meaningful disclosure of information. I must strongly underline what my noble friend Lady Ewart-Biggs said about how that disclosure of information is of importance to the small investor in particular. The small investor is not the only person who is concerned about full disclosure, but certainly we must bear in mind that particular interest.
On the question of auditors, again one broadly supports the lines that the Government are taking in considering the supervisory bodies and qualifying bodies. With respect to specific amendments, one will be interested to know what or who the Government have in mind in regard to the supervisory bodies. Because of my interests in the publice sector field I shall certainly press the Secretary of State for his view on whether the Chartered Institute of Public Finance and Accountancy (CIPFA) would be regarded as a relevant supervisory body, particularly given the enterprising nature of much of what is happening in the public sector with which the CIPFA is very much involved.
The Bill refers—The Secretary of State commented on it—to the fact that those supervisory bodies are of their nature bodies which introduce restrictive practices. That is what a supervisory body is meant to do. I hope very much that the Secretary of State or someone else will look askance at those restrictive practices so that they are at the absolute minimum necessary to pursue the supervisory and qualifying function.
The remarks made by the noble Lords, Lord Benson and Lord Milne, supported by the noble Lord, Lord Ezra, on the question of immunity for the supervisory bodies are well taken. I am sure all of us will return to that in Committee.
More generally, on the question of the powers of the Secretary of State, I support my noble friend Lord Williams—obviously I support my noble friend—on the advantages of setting up a statutory body to take over the Secretary of State's powers of adopting the GMC solution. We did not really get into the detail of why the Secretary of State thought that he ought to take reserve powers here which he might want to use, but we shall have an opportunity in Committee to explore that further, by putting down the appropriate amendment, so that we can say why we think it would be advantageous for the Secretary of State to devolve those powers from the beginning, and he might tell us why he would like to learn and perhaps do it a little later. That is certainly a subject worth pursuing.
On the question of investigations, that brings out very clearly our European and world commitments that we really must do what we can to work with and help foreign regulators. There is little that is likely to emerge there that will provide difficulties for us.
The other aspect of investigations which my noble friend Lord Williams raised and which I should like to take further is the question of investigations which are set up where it is not proposed to publish reports. There are two aspects of this, and in due course I should welcome some clarification. There are investigations where it is announced beforehand that 68 the report will not be published and there are investigations where subsequently it is announced that the report will not be published. My noble friend Lord Williams raised the point that merely suggesting an investigation can be damaging to particular interests and individuals. I totally agree with him. On the other hand, given that there is an investigation my own view, because I tend to favour publishing almost everything that can be published, is that there should be a presumption in favour of such things being made public except in extreme cases.
A similar point on publication and transparency refers to the disclosure of interest in shares. I think that is something one will support. The noble Lord, Lord Stevens, raised the point that you may say you wish to do that but there are many ways round it. I can only say that although I do not wish to go along the lines of what was referred to as over-regulation by the noble Lord, Lord Ezra, I certainly believe that we ought to go to almost any lengths to disclose the true owners of shares. It ought to be made as difficult as possible to disguise the true ownership of shares and of companies from that point of view.
Since I wish to talk about mergers at slightly greater length. perhaps before that I may go to the question of financial markets. It is surely the case that the dominant criterion in considering anything that happens in financial markets, anything to do with regulation, must be the protection of the investor, or the saver as I prefer to call the relevant man or woman. This must be the criterion that matters. I regard the institutions themselves as secondary to the interests of the investors, the savers. They exist for the sake of the investors and savers and it is not the case, as they sometimes seem to suggest, that the investors and savers exist for the sake of the institutions. It is those whose funds are involved who are the people who need protection, and the best way to achieve protection is by full disclosure.
When we come to Committee I shall be very critical of those parts of the Bill that seem to regard the protection of market-makers as on a par with, if not more important than, the protection of investors and savers. I read in the press recently that at least one of the regulatory bodies will try to reduce disclosure requirements in order to protect market-makers. I regard that as wholly deplorable. If market-makers cannot operate with full disclosure of price and quantities, they ought not to be in the business of market-making. I would go further with respect to financial institutions generally.
On the reform of the Financial Services Act, various noble Lords have referred to the unintended consequences of the Act. I was not in your Lordships' House at the time, but I am well aware of your Lordships' debates on these matters. The consequences may have been unintended but they were certainly predicted. The bureaucracy was certainly predicted, not least by my noble friend Lord Williams.
We do not want to overlegislate, but I and my noble friends would be sympathetic to the view that we might look at aspects of the Financial Services Act to see if we cannot at least modify it to some extent along the lines that my noble friend Lord Williams 69 suggested and on similar lines to those which the noble Lord, Lord Elton, suggested. It seems to me that good regulation involves setting down explicit rational principles which one then puts into practice. I do not regard rule books running to 900 or 1,000 or more pages as rational regulation. Since the rule books become completely uninterpretable, let alone unenforceable, I do not regard them as a way of protecting investors and savers in financial institutions. I hope we can make some progress in that area.
I also take the view that when we are looking at financial services there is really no longer a case for the special protection of the banks. Whether there was a case I do not know, but I think that if the banks wish to buy the rhetoric of the enterprise economy they have to behave in an enterprising way and survive in the market-place as others do without special protection.
That takes me to the question of monopolies and mergers. We know that people are inconsistent in their attitudes to mergers. They are inconsistent in their attitudes to monopoly and to competition. Essentially the view they take is: "The merger where I am the predator is good; the merger where I am the prey is bad". That is the fundamental way in which people approach this matter: "Of course competition is uniformly good, but we all believe in resale price maintenance in books". I could go on along those lines.
I have to tell your Lordships that I actually believe competition is a good thing and that on the whole I am not happy with almost any of the cases that are put forward to justify merger activity. As an academic who has worked in this field I can construct the intellectual case for mergers but I never believe in it. I believe that competition is the way to move forward, raise efficiency and protect the consumer. I criticise the Bill in that I believe the Government's competition policy is in disarray because it is being conducted in an ad hoc fashion. It is a pity that the Monopolies and Mergers Commission has not been strengthened in this Bill. It could have been strengthened in a way that would have assisted the Government with a short-term body responsive to specific problems as they emerge and a body to consider problems of a long-term nature. That is what is required. It is a pity that it has not happened.
Having emphasised my concern with competition as a central matter, I do not deny that other criteria are put forward to do with the national interest, industrial and regional policy. I take those as examples. The Government claim that they do not have such policies. They stick to their usual cliché of leaving everything to the market. In practice the Government have discovered that they have to have an industrial and regional policy. They have to react to crises as they occur. The GEC problem as we have it now is such an example. In order to cope with that the Government have to say that they believe it falls within the remit of the Monopolies and Mergers Commission and so give the problem to the MMC as the body to deal with it. It would be better if we had either a different kind of MMC in the first place or a different body altogether which would get the 70 Government off the hook and give them some independent advice.
Having said that, I believe that we can either reform or to some extent extend the MMC. Noble Lords will not be surprised to know, given the remarks that I have made as regards competition, that I am one of those who would change the burden of proof very substantially. I listened with enormous interest to the speech made by the noble Lord. Lord Carr. I hesitate to say that because I hope that the Government were also listening with enormous interest to what he said and that they will respond accordingly. I do not wish to undermine the constructive side of his speech by saying how much I agreed with so much of it. Therefore, I add that I disagreed with the noble Lord's view that he would not go a long way along the path of reversing the burden of proof. I do not have his precise words but he said that he would not advocate that we should make mergers and takeovers extremely difficult if' not impossible. I believe that this country would be richer and more efficient today if, during quite a number of past years, mergers had been made difficult to the point of impossibility.
All the empirical evidence is as well known to the economists working at the DTI as it is known to me. That evidence shows that on the whole mergers do not raise efficiency or productivity. They are not beneficial. On the whole they benefit people in the City and that is about it. The noble Lord, Lord Beaverbrook, said many things with which I agree. He said all mergers are different. They are. But the one thing they have in common is that they should not take place or rather that we should look at them askance. I should like to see the burden of proof, not taken to the extreme position I personally would advocate—like most economists I take seriously the empirical work of the failure of mergers, and I therefore become an extremist—but without going to extremes, I believe that the Government should consider at least changing some aspects or the burden of proof.
I agree very much with my noble friend Lady Ewart-Biggs. We should devote more effort to studying the after-effects of mergers. This is not simply a characteristic of policy as regards mergers. It happens to be a characteristic also of policy generally in our country. We are very good at analysing problems beforehand; but we spend nowhere near as much time looking at the matter expost facto to see if everything happened along the lines that it was supposed to happen and whether anything can be learned from the experience. I believe that mergers should be monitored. Following the suggestion that has been put forward, I believe that those who wish to merge might state the benefits that are supposed to flow from the merger. One might look occasionally at some sample matters to see if any of the benefits really did occur.
§ Lord Taylor of Gryfe
My Lords, does the noble Lord not agree that that is an extremely difficult thing to do because one has to assume what would have happened if the merger had not taken place.
§ Lord Peston
My Lords, I am well aware of that, but I say to the noble Lord that that is true of any 71 study of any event that ever occurs in the world. Unless one says that one can never look at anything of an empirical nature one obviously has to have some kind of' a working hypothesis as regards what might have happened. Then one has to compare that with what did take place.
To be slightly more balanced, I am not suggesting that where one discovers that a merger has failed one should always jump to the conclusion that it failed because it was a merger. One would look at the problem in a balanced way. We are discussing a matter that noble Lords have pointed out is contemporary and a major event. These problems have continued for a great many years. The least we can do is examine what the alleged benefits are and see if we have them. Economists have done this in a limited way. The economists of the DTI have done it. These are well known matters. On the whole the evidence is negative but I should like to see such examination followed to an even greater extent.
I wish to make a few remarks as regards interested parties. Many noble Lords have referred to the employed labour force as being an interested party. I was glad to hear such remarks not merely from noble Lords on this side of your Lordships' House but also from other noble Lords. I believe that we should take more seriously the interests of the workers involved. I do not go to the extreme of saying that that is the only interest. I am not naive on these matters. It is some little while since the party on this side of your Lordships' House was in power. However, when we were I did not discover that trade unionists were totally against mergers and as forthright for competition as I am.
My noble friend, Lord Murray, was not anti-merger. The real point is not that the employed labour force is pro or anti-merger but that the employed labour force in firms has an interest that should be taken into account and made explicit. My noble friend Lady Ewart Biggs brings out a point that I totally support; namely, that consumers are also interested parties. It is a great pity that we have not yet found a way of legislating so that consumers and consumer bodies have a statutory right at least of comment.
In conclusion I echo the words of my noble friend Lord Williams that this Bill is important. We shall scrutinise it carefully and completely in Committee. Our duty is to improve it. We shall try to iron out the errors it contains as we see them. And we shall try to add to the Bill. We can do none of this without the help and sympathetic response of Her Majesty's Government. I was heartened by the Secretary of State saying that he had an open mind on matters connected with the Bill. I do not expect him to have an open mind as regards my views on merger policy, but there are other matters as well. The Secretary of State says that he has an open mind. Certainly, we on our side also have open minds. Therefore it is to be hoped that your Lordships together can convert the Lancashire hotpot into something—I do not wish to offend too many people—of a more haute cuisine nature, sending to the other place a well thought-out form of this Bill for its consideration.
§ 7.19 p.m.
§ Lord Strathclyde
My Lords, this has been a most interesting and useful debate as well as being very far ranging. We have covered a good deal of ground on a whole spectrum of subjects. As my noble friend outlined at the beginning of the debate, the Bill represents a set of carefully prepared and detailed proposals and it is not a radical overhaul of the Companies Act or of other legislation. It is nonetheless a sizeable Bill and introduces some significant reforms.
At this moment perhaps I may crave the House's indulgence. I shall not he able to answer all noble Lords' questions but will try to cover as many as possible. I shall of course read Hansard diligently tomorrow. I am sure that the questions which I cannot answer today will be raised in Committee. I join my noble friend Lord Beaverbrook in welcoming the introduction of the Bill. Noble Lords' expertise in this area is highly regarded. As your Lordships are aware, I am my noble friend's mere replacement. 1 enjoyed listening to him and I look forward to his contributions in Committee.
I was pleased to hear the noble Lord, Lord Williams of Elvel, say that the Bill was not objectionable. He prefaced his remarks by saying that he was disappointed. From him I feel that this was praise indeed. We shall try to convince him in Committee that he will no longer be disappointed and we hope that by the time of Third Reading he will wax lyrical on the virtues of the Bill.
§ Lord Strathclyde
It is easy to criticise but he must make up his mind whether he wants more subjects or fewer subjects in the Bill. The noble Lord, Lord Peston, repeated the comment about the Lancashire hotpot. In this case I feel that he wants to make more of an Irish stew where no one quite knows what goes in.
The noble Lord, Lord Williams, asked why we were introducing changes on the registration of company charges before we see Professor Diamond's report. Professor Diamond was asked to make specific recommendations on improvements to the system of registration of company charges. These recommendations form a separate part of his report which he delivered early. He believes that there is a case for making improvements now to the registration of company charges in advance of any action on his proposals on the general law of security over property other than land.
§ Lord Williams of Elvel
My Lords, the noble Lord has been kind enough to send to me copies of the two directives in question which I could not get from the Printed Paper Office and copies of other documents which I could not get from the Printed Paper Office. Indeed I am trying to get the Thirteenth Company Law Directive in draft. I have failed to get a copy of Professor Diamond's recommendations. Therefore I may be speaking out of order when I say that I have not seen them. Certainly the House is not aware of them. Will he kindly ensure that I get them?
§ Lord Strathclyde
My Lords, the noble Lord is quite right. He will not have had an opportunity to see them. We intend to publish Professor Diamond's full report in time for it to be available before discussion of Part IV of the Bill in Committee. I hope that that will put his mind at rest at least for the time being.
The noble Lord also asked about exceptions for small and medium-sized groups from requirements to prepare consolidated accounts. This arises under Clause 12. The Government wish wherever it is sensible to do so to remove burdens on small and medium-sized companies. In the cases covered by the clause we believe that the costs of preparing such accounts outweigh any benefits derived from them. Therefore we shall go ahead on that basis. As for non-executive directors, the Government have indicated that they welcome the involvement of non-executive directors on audit committees and remuneration committees but regard this as a matter for companies themselves to decide. It is not a suitable subject for compulsion in the Bill.
The noble Lord, Lord Williams, my noble friend Lord Stevens of Ludgate, as well as other noble Lords, asked about the Takeover Panel. The question of whether the takeover rules should be legally binding was considered in the review of the operations of the Takeover Panel carried out in early 1987. The review was carried out by the DTI, the Treasury, the Bank of England, the SIB, the Stock Exchange and the Takeover Panel itself. It concluded that there were significant advantages in the existing system of consensual rules which would be lost if replaced by a statutory system. I note that the noble Lord, Lord Taylor of Gryfe, recognised the strength of this view.
At present the panel has considerable flexibility in applying its rules to ensure that conduct is in line with the principles of the Takeover Code. To a large extent it is the final arbiter in cases it considers. This is vital in an area of fast-changing market practice. Such flexibility would not be available under legally binding rules where rulings of the regulatory body would be subject to appeals to the courts. Moreover a statutory system, by increasing access to the courts, would result in an increase in litigation used for purely tactical and delaying purposes during takeovers. This would be to the detriment of the takeover market in the United Kingdom. For these reasons the Government believe that it is in the interests of takeover regulation and of the whole economy that the system under the panel should continue and that the European directive should be framed so as to allow it to. The panel continues to show that it is an effective regulatory body.
The noble Lord, Lord Benson, and the noble Lord, Lord Milne, who mentioned that he would not be here for the end of the debate, and the noble Viscount, Lord Chandos, expressed fears that the supervisory system for auditors will represent a heavy burden on the profession and its clients. I say at once that we are determined to avoid the dangers of overregulation. I do not think there will be any dispute that auditors should be subject to a satisfactory supervisory system. The Eighth Directive obliges us to place certain requirements upon auditors. The 74 profession has a long history of regulating itself, so regulation in this area is nothing new. It is the profession's own bodies which will have the responsibility under the Bill for drawing up many of the detailed rules. We expect them to seek to minimise the burden they place on their members. Certainly we intend to work closely with the professional bodies to ensure that that aim is achieved.
The noble Lords, Lord Benson, Lord Taylor of Gryfe and Lord Ezra, asked whether the Bill will provide a recognised body with immunity from action for damages. Such a provision is not in the Bill at present. The professional bodies have asked that an immunity provision be added. We are considering their request. Noble Lords will appreciate that this matter requires the most careful consideration.
My noble friend Lord Mottistone asked a variety of questions and made some detailed points on the provisions on accounting for mergers. I welcome his support for many aspects of the Bill. We note that he has been advised of detailed points and we shall no doubt return to these more closely in Committee. On his particular point that provisions on merger and acquisition accounting would be best left to accounting standards, the proposals in the Bill are for the most part needed to give proper effect to the Seventh Directive. We keep in close touch with the Accounting Standards Committee. It is not the Government's intention to step into territory best covered by the ASC. We feel however that the additional disclosure required by the Bill is an essential basis for accounting to shareholders and is a proper concern of company law.
I also note that the Association of International Accountants will be making an application to be recognised as a qualifying body. This point was raised by the noble Lord, Lord Graham of Edmonton. I confirm that all applications will be carefully considered on their merits. It would be quite improper to prejudge the outcome until we have seen the application. The fact that the association made an application to be recognised under Section 389 of the 1985 Act and that it has had communications with departments in relation to the application do not affect the issue under the new system one way or the other.
The noble Lord also asked whether the right to audit certain bodies referred to in Schedule 12 should be tied to the right to audit companies. This is required by the Eighth Directive. This point can be looked at more closely in Committee and scope will exist to make alterations if a strong case is made for them.
My noble friend Lord Jenkin of Roding, in an interesting speech, asked whether this Bill would abolish pre-emption rights in the light of a certain amount of press speculation. The Community's Second Company Law Directive establishes the principle of pre-emption rights. The option of completely abolishing pre-emption rights does not therefore exist. There is only one difference of substance between the directive and the 1985 Companies Act on that point. The directive permits member states to allow companies, through their articles or by special resolution, to authorise the waiver of pre-emption rights indefinitely.
75 Under Section 80 of the Companies Act such authority expires after five years. Therefore there is room for maneouvre only on the duration of the waiver to be allowed. The Bill contains no amendments to the current Companies Act provisions. I cannot therefore undertake that the Government would never change or abolish the five-year limit, but I note the views expressed by the noble Lord.
The noble Lord, Lord Peston, asked about new powers under Section 432 in Clause 50. The new power which provides for investigations by inspectors not leading to a published report is intended to speed up the investigation process in those cases where the underlying purpose of the investigation is to decide whether there are grounds for specific prosecution or regulatory action. It is not intended for those cases in which the public interest requires a published report. I think that that provision also covers the point made by the noble Lord, Lord Williams of Elvel.
§ Lord Peston
My Lords, perhaps the noble Lord will forgive me if I intervene for a moment because I find myself a little lost here. The point which was being made was, I suppose, the point of guilt by association; namely, that the mere fact that one's name is mentioned would cause people to remark, "There's no smoke without fire".
One was hoping, not necessarily at this stage but perhaps in due course, for some reassurance on the matter. Even I believe that the overwhelming majority of businessmen are honest, but the situation might occasionally need to be looked at so as to reassure them that they are not in that danger. As I say, I do not expect an answer from the noble Lord now, but I wanted to make clear the point which we on this side of the House were raising.
§ Lord Strathclyde
My Lords, I understand what the noble Lord says and I hope to be able to deal with the matter later on.
My noble friend Lord Carr of Hadley and the noble Lord, Lord Milne, asked about the changes to the Takeover Code, especially the reduction of the 30 per cent. mandatory offer threshold. That threshold is part of the non-statutory city code; it is not company law. Therefore changing it is a matter for the panel on takovers and mergers, which has recently set up a working group chaired by my noble friend Lord Rockley. The group will be looking at a number of posisble changes to the city code which have recently been suggested.
My noble friend Lord Carr went on to suggest that the Takeover Panel should have stringent requirements for information to be disclosed in takeover documents. I am not convinced that it is necessary to add a new requirement for a statement of commercial strategy, although this is perhaps a point which will be considered in detail by the panel's working group.
Further, I take note of my noble friend's points on the better relationship between company and shareholder so as to achieve a longer term view. 76 However, he has not shown why in a properly informed market the balance between long and short-term prospects are not fully reflected in the price of shares and shareholders then properly left to make their own decisions. I did not expect noble Lords on the Front Bench opposite to agree with that, but there we are.
I am glad to see that the noble Viscount, Lord Chandos, welcomes and supports the proposals in Part I of the Bill on mergers and acquisition accounting and on the definition of a subsidiary. I am sorry that he criticises the proposals that content on summarised accounts should be stipulated in secondary legislation. I point out that the content of all company accounts can be varied by secondary legislation under the existing Companies Act. The noble Viscount also wanted the general auditing council option to be adopted immediately. That was not the option preferred by respondents to public consultation exercises and is not desired by the profession.
Perhaps I may now turn to the debate which has focused our minds this afternoon on the subject of mergers. It may have been slightly out of proportion to its place in the Bill but nevertheless it is an extremely important subject. Many noble Lords have suggested that the criteria against which mergers are considered for reference to the MMC need to be clarified. Noble Lords have also asked for complete reviews. They have asked for consistency and for predictability. Those are words which were mentioned time and time again during the course of today's debate.
The present provisions are very widely drawn, allowing any matter which bears upon the public interest to be taken into account. The concern relates to the way those powers are used rather than the powers themselves. We have made it clear—
§ Lord Dean of Beswick
My Lords, I am most grateful to the Minister for giving way. He mentioned that the public interest would be taken into account. I and other Members of the House spoke earlier today specifically about the workforces involved. Perhaps I may ask him whether those people are included in that "public interest" or are they once again to be completely denied any input into their own future?
§ Lord Strathclyde
My Lords, many matters are taken into account in the definition of "public interest". However, perhaps I may continue with my speech. Obviously takeovers and mergers are important subjects and I may be able to answer the noble Lord later on.
We have made it clear that we see competition as the main factor to be considered in reference decisions. It is loss of competition that poses the most obvious threat to the public interest. But we fully recognise that there are, exceptionally, other public interest concerns which justify a reference. The fact is that very few mergers are referred and we therefore aim for consistency. The need to deal with each case on its merits precludes absolute predictability. That can only be done, as has already been pointed out, by a loss of economic activity.
77 The noble Lord, Lord Peston, said that the United Kingdom would be a better place without takeovers or mergers. However, perhaps I may ask him what would have happened to ICI. Would it now he a whole lot of—say 500—small backstreet companies working together or perhaps independently?
The noble Lord also asked about European Community evidence that mergers do not raise efficiency. That was looked at closely in the review of merger policy, the results of which were published in the DTI's March policy paper and which also led to the procedural changes contained in the Bill. It concluded that it is for investors to take account of the evidence available to them in deciding on the merits of the mergers. We support that conclusion.
The noble Lords, Lord Williams of Elvel, Lord Lloyd of Kilgerran and Lord Ezra, mentioned in particular the European dimension. I think that there is some confusion resulting from the fact that our mergers policy looks at the effect on competition in the United Kingdom. Obviously it can only look at the effects of mergers in the UK. But in assessing those effects full account is taken of the impact on imports and the geographical nature of the market for the goods or services concerned, which can be local, national, European or international.
Inevitably any merger involving a company which is based in more than one country will be of concern to regulators in those countries. Indeed, that has always been true. The approach of 1992 does not in itself change the way in which such mergers are considered except to the extent that it increases their number.
It is true that we have also seen an increasing interest on the part of the European Commission. The noble Lord, Lord Taylor of Gryfe, and other noble Lords will be interested to know that the interrelationship between the European Community regime and domestic merger regulation, including on timetables, is one of the matters about which we are concerned in the discussions on the Commission's draft merger control regulation.
§ Lord Strathclyde
My Lords, the noble Lord preempts me. I was about to come to that point. The United Kingdom Government's position on the draft Community merger control regulation is well known. We have reserved our position while continuing to participate constructively in discussions. It is draft Community legislation and so is separate from the Bill which deals solely with national controls. Your Lordships will have the opportunity to consider its implications on the United Kingdom in the usual way.
§ Lord Jenkin of Roding
My Lords, there was originally a deadline of the end of 1988 for agreement to the Community directive. Is there a new deadline? What is its relationship to the Bill's passage through the House?
§ Lord Strathclyde
My Lords, I understand that there is now no deadline on the directives as a number 78 of countries do not like what has been put forward. We shall have to see how progress improves in the next few months.
In looking at current cases under existing powers under Articles 85 and 86 of the Treaty of Rome, the European Commission will no doubt bear in mind the need for as rapid a decision as possible to remove uncertainty on that point.
The noble Lord, Lord Lloyd of Kilgerran, also raised other points relating to the operation of Articles 85 and 86 of the treaty and block exemptions under Article 85. We shall no doubt return to those points, but I must say that they seem to be going rather wide of the matters now covered under Part VI of the Bill, and to be more relevant to future legislation on restrictive trade practices, on which we published a Green Paper last year.
A number of noble Lords have criticised our comments that decisions on mergers are best left to shareholders, and that that means we have no concern for employees. This may answer the question asked by the noble Lord, Lord Dean of Beswick, but it is untrue that we are not concerned about employees. We believe that the interests of employees overall are best safeguarded by leaving the decisions to those who own assets and to the market. It is when assets are used most efficiently—this has been shown time and time again—that employees are best off. Mergers have a vital part to play in the process of resource allocation. That may sometimes involve restructuring and a loss of jobs in the short term. The Government are aware of that fact. They do not like to see it happen but they feel that it is important.
§ Lord Dean of Beswick
My Lords, I am once again grateful to the Minister for allowing me to intervene. He is standing the facts on their head. He talks about matters balancing out and being put right in the long term. I spoke about a factory where 20,000 people worked. They are now down to about 6,000. That has been going on for 20 years. Is that short term? Does he think that the 15,000 people who have been made redundant think that it is short term and that they have been well looked after by the shareholders?
§ Lord Strathclyde
My Lords, we are talking about mergers and takeovers and not a long-term decline in certain industries due to technological changes. The Government never like to see people made redundant or lose their jobs. But when in the past 10 years unemployment has risen from 1 million to about 3 million and is now coming back down to under 2 million, I feel that the point I made about the loss of jobs in the short term is relevant. It is a sad but necessary fact of commercial life.
Many commercial decisions, not just mergers, have such effects. Impeding economically justifiable takeovers because of their short-term effects could reduce the overall level of economic activity and leave everyone worse off ultimately. The record of nationalisation and government inspired restructuring shows that politicians and bureaucrats are far less likely to get that sort of decision right than those with a financial stake in the success of their company.
79 The noble Lord, Lord Murray of Epping Forest, also said that he would not be here at the end of the debate. He referred to the absence of employee rights. There is of course a whole branch of United Kingdom law which regulates employment but which is not company law. It is no part of government policy that companies should ignore the interest of their employees; but to compel, for instance, worker participation is to subscribe to the philosophy of the corporatist state which has in the past been tried and got us nowhere.
The noble Lord, Lord Williams, also asked about worker participation. The Government actively support the principle of employee involvement in company affairs, but we strongly believe that arrangements for involvement should in all cases be negotiated on a voluntary basis. The noble Lord, Lord Williams, also welcomed our proposals for the prenotification of mergers. However, he suggested that they should be mandatory. As was made clear in our policy paper published in March, we believe that that would impose unnecessary burdens on companies. To be sure of catching those who might qualify for reference to the MMC, the criteria would have to be framed in a way which would catch many mergers of no interest to the authorities. That would also place on the authorities a burden which would considerably outweigh any advantage from having an early warning of such cases.
The voluntary system that we propose will enable those companies which wish to obtain advance clearance to do so. The noble Lord, Lord Taylor of Gryfe, asked whether the promises given by Guinness to move its headquarters to Scotland would be covered by the proposed new offence of giving false or misleading information. The offence will cover any information given to the competition authorities. It would, however, be invidious to comment on its possible application to earlier cases. Merely breaking a promise or undertaking is no indication that the information given was false at the time.
Noble Lords have raised a number of other points on merger provisions. I know that we shall have a long debate on this point in Committee, and it would take up far too much of your Lordships' time to go into further detail now. We have taken careful note of what noble Lords have said and will no doubt have an opportunity to come back to it. It would also be wrong for me to comment on matters taken into account in particular cases now being considered by the MMC. However, I have explained why the Bill does not contain far-reaching changes to merger policy. The reasons why we are generally happy with the existing powers were set out in the March Blue Paper.
The noble Lord, Lord Williams, asked whether it was wise to override the general law of insolvency for one category of business. I am glad that he recognised the need for Part VII of the Bill. I hope that it will be possible to reassure him when we come to look at that part in detail that we have sought to limit interference with the operation of insolvency to the minimum consistent with ensuring that the market's default procedures can operate with certainty. The default 80 procedures themselves build on the general principle of set-off.
The noble Lord was wrong to say, in dealing with the SIB power to lay down principles which do not have the force of law, that the SIB could not do that. Both the SIB and the SROs must have rules governing the behaviour of the business they authorise. The SIB must be satisfied that the SRO's rules afford protection to investors at least equivalent to that afforded by SIB's own rules. But that does not require the rules to be identical or to have identical effect. It is open to SIB to set out the principle it intends its rules to achieve and to judge an SRO's rules against those principles. The noble Lord's reference—
§ Lord Elton
My Lords, will the noble Lord elaborate that slightly? Do I understand from what he says that he has made a statement of principle which means that it is not necessary to achieve an amendment of the Financial Services Act 1986 in order to arrive at a more flexible regulatory system such as I described, which the whole industry would welcome?
§ Lord Strathclyde
Yes, my Lords, I am making a point of principle to the noble Lord, Lord Elton. Perhaps I may just finish what I—
§ Lord Williams of Elvel
My Lords, I wonder whether the noble Lord would like to consider very carefully what he is saying. This is a very important point. As I understand it, the SIB's legal advice is that it is not in a position to accomplish what the noble Lord, Lord Elton, and I would like. That is the situation. I understand that it requires amendment to the primary legislation. If the noble Lord is saying that the SIB lawyers are wrong and that we are wrong, perhaps we could hear it in a very considered manner.
§ Lord Strathclyde
My Lords, yes. Perhaps I may get to that point in the next few minutes, when I shall make my position clear. The noble Lord's reference to Section 62 of the Act is something of a red herring in this matter, since principles so expressed would be guidance not rules under the Act and Section 62 does not relate to guidance.
My noble friend Lord Elton, raised a different but related point and I think this is perhaps where the confusion lies. I appreciate the concern which my noble friend has expressed about the relationship between the various sets of rules made under the Financial Services Act. It is no part of the Government's wish that the relationship should be any more complex than necessary or that there should be unnecessary overlap. The Act already provides considerable flexibility for SIB and the SROs to align their rules where this will help to avoid confusion or to waive them where it will help to avoid overlap. Nevertheless, I do not wish to rule out amendments to the Act to ease such simplification if this should prove necessary. I hope that that clears up the momentary confusion in the last few minutes.
My noble friend Lord Stevens of Ludgate is of course correct to state that European companies will be able to sell their unit trusts here from October this year, and in the case of Luxembourg from March, 81 subject only to the rules which govern marketing here. At the same time UK unit trust companies will be able to sell their products throughout the community, again subject only to local marketing rules. This will give the industry a substantial opportunity, which I am sure it will seize. Of course, for the reasons given, we do not wish standards in the Community to diverge substantially and will be working to achieve this. My noble friend mentioned tax advantages. However, I put to him that there are a large number of factors which might affect the commercial decision to move and by no means all of them point in the direction which he suggested.
The noble Lord, Lord Taylor, referred to the need to take account of the interests of general creditors in the financial market provisions. We have sought to strike a balance between market creditors, including investors, and other creditors. Only those assets within the market system will be subject to special treatments. The assets will be set off against liabilities in a similar way to the general law of set-off and market creditors will not be given priority for their net claims over other creditors.
My noble friends Lord Jenkin of Roding and Lord Stevens of Ludgate asked about administrative and cost burdens imposed by the Financial Services Act. Nobody has ever pretended that improved investment protection could be achieved without an extra cost. Equally it is of interest to investors and the industry alike that those extra costs should be kept to a minimum. The Financial Services Act contains two important provisions designed to achieve this. The first is the competition regime which works against anti-competitive effects which cannot be justified for investment protection. But more important is the fact that the system is practitioner based. This reflects the Government's view that practitioner based bodies are best placed to frame their requirements in such a way as to reduce burdens to the minimum possible. I am sure that all the bodies concerned have this issue very clearly in their minds.
The noble Lord, Lord Lloyd of Kilgerran, asked whether there were directives on employee rights on secured creditors and whether the transfer of undertakings was taken into account in preparing Part VII. The noble Lord mentioned these two directives. I have to tell him that I shall be pleased to look into this point and to write to the noble Lord later on this week. I think he wishes to intervene.
§ Lord Lloyd of Kilgerran
My Lords, I am grateful to the noble Lord for his remarks. Perhaps I may follow them up and echo what the noble Lord, Lord Williams of Elvel, said earlier on. Is it possible for us in the next few days to receive copies of the directives which are not available in the Printed Paper Office? Is it possible for the Minister's department to let us have copies of the directives?
§ Lord Strathclyde
My Lords, we try to get all directives to all noble Lords who are interested as soon as possible. I think that Article 13 in particular is being sought but I understand that this has not been published and is therefore not available. As soon as it and other directives are available they will be passed on to noble Lords.
82 The noble Baroness, Lady Ewart-Biggs, asked who would enforce the undertakings under Clause 98. We envisage that they will be enforced in most cases by the Secretary of State or the Director General of Fair Trading. It will also be possible for third parties to bring private actions. This will be in addition to the powers which exist at present to make orders where undertakings are broken. However we do not see it as replacing the role of the authorities in enforcement.
The noble Baroness went on to ask about the definition of private investors. The clause will not commence until the regulations have been made and the regulations will only be made after proper consultation has taken place.
The noble Lord, Lord Ezra, asked why the statutory audits for small companies were not being abolished. The original decision to retain the statutory audit was announced for small companies in May 1986. Even so, the Government reviewed that decision last year, in particular to look at possible alternative types of reports by accountants to replace the audit. We continue to believe that the involvement of the independent professional accountant such as the audit requirement entails will improve the reliability of the accounts and provide a protection against fraud. None of the possible alternatives offers sufficient advantages over the audit to justify the removal of the present statutory requirement.
The noble Lord also asked about the framework of company law and whether we expected something later. Was there not a gap in preparations for the single market? We do not accept that further changes to company law arc needed for the single market. As my noble friend the Secretary of State said in introducing this Bill, to conduct a root and branch review of company law would be a colossal task. We would need to be fully convinced that the benefits would justify the costs. All I can say at present is that we see no need for a further Bill in the immediate future.
Among other matters raised by the noble Lord, Lord Dean of Beswick, who is at the Bar, were the North West and the poor forecast for the area. Since 1980 the North West, and especially Merseyside, have received an enormous amount of taxpayers' money. I believe it is now up to the people of the North West to use that money to create their own prosperity and to prove the forecasters wrong. I hope that they will do so.
I have reached the end of my speech. There are many detailed and technical points which it has not been appropriate to consider today. We shall shortly be discussing them in Committee, and I look forward to your Lordships' expert suggestions for improving the Bill. I trust that the good relationship between the DTI and noble Lords will be maintained as it has in respect of so many other Bills.
We hope that the noble Lord, Lord Peston, will not feel the need to put down too many amendments purely for clarification of the Bill. I recommend that the Bill be now read a second time.
§ On Question, Bill read a second time, and committed to a Committee of the Whole House.
§ House adjourned at eight o'clock.