Restrictive Trade Practices (Sale and Purchase and Share Subscription Agreements) (Goods) Order 1989

HL Deb 26 June 1989 vol 509 cc533-6

5.54 p.m.

Lord Strathclyde rose to move, That the draft order laid before the House on 22nd May be approved [21st Report from the Joint Committee].

The noble Lord said: My Lords, In moving the draft Restrictive Trade Practices (Sale and Purchase and Share Subscription Agreements) (Goods) Order 1989 I shall speak also to the draft Restrictive Trade Practices (Services) (Amendment) Order 1989. The two orders are being considered together as their purpose and effect are the same. The only difference is that one relates to goods agreements, the other to services. The orders have to be made under different powers, which also accounts for their slightly differing form.

I must apologise to your Lordships for the fact that pages 2 and 3 of the printed version of the draft order relating to goods agreements have been transposed during printing. I hope, however, that that will not cause us any practicl difficulty during our consideration of the orders, and counsel to the Lord Chairman of Committees has confirmed there are no legal obstacles to the orders being debated in this form. I apologise for any confusion that may be caused.

I should also point out that when the draft order relating to services agreements was laid for the first time, counsel to the Lord Chairman of Committees drew my department's attention to a technical error in the schedule to the order. Paragraphs 6(1) and 8(1) of the schedule referred erroneously to Part III of the Restrictive Trade Practices Act 1976, a part which relates only to the exercise of order-making powers applying the Act to services agreements. They should have referred to the Act as a whole.

The draft was withdrawn and re-laid with the necessary amendments. I can assure your Lordships that those are purely technical amendments and that none of your Lordships who reads the draft as originally laid but who has not had the opportunity to read the revised version will have been disadvantaged.

The orders before the House today modify the application of the Restrictive Trade Practices Act in relation to two categories of agreements: first sale and purchase agreements, under which one or more persons agree to sell shares in a company or the whole of their interest in a business to a purchaser; and secondly, share subscription agreements, under which one or more persons agree to subscribe for new shares in a company.

Such agreements constitute some two-thirds of all agreements submitted to the Office of Fair Trading for registration under the Act. They are registrable if two or more of the parties to them accept relevant restrictions on their commercial freedom. For example, the vendors, shareholders or employees of a company being sold may undertake not to compete with the company for a specified period in order to avoid undermining the value to the purchaser of the good will and know how acquired with the business, yet the vast majority of these agreements are found on inspection not to contain restrictions of such significance as to call for investigation by the restrictive practices court. The Secretary of State is able therefore to accede to the Director General of Fair Trading's request for directions discharging him from his duty to refer them to the court. It is common in the case of such agreements for restrictions to be accepted only by the vendors or by individuals; to relate solely to the ability of such persons to compete with the business or company which is the subject of the agreement; and to go no futher than is reasonably necessary to protect the value to the other parties of the purchase or investment made.

We are most grateful to all those who responded to the consultations on the draft orders. The reaction to the orders was almost entirely favourable and a number of helpful suggestions were made to improve their clarity and workability. As a result we are confident that we have achieved an appropriate balance between the reduction of burdens on businesses and the maintenance of competition, while at the same time minimising as far as possible the degree of complexity of the proposed orders to ensure that firms and their advisers are clear whether or not agreements need to be furnished under the Act. I therefore have no hesitation in commending them to the House. I beg to move.

Moved, That the draft order laid before the House on 22nd May be approved [21st Report from the Joint Committee].—(Lord Strathclyde.)

Lord Williams of Elvel

My Lords, the House will be grateful to the noble Lord for setting out the reasons behind the Motion and these two orders. The House will also be grateful to him for apologising for the fact that the order of the pages in the printing unfortunately became mixed up. The fact that I found one of the orders upside down in the Printed Paper Office did not detract from the confusion that this caused.

These seem to be quite unexceptional orders. There is only one point that I wish to make to the noble Lord and it is this. It is perfectly true that non-competition clauses in sale and purchase agreements are standard practice where a private company is being bought, or where it is effectively being bought, or where a major shareholder is being bought out or subscribed out, if I may use that expression. It is perfectly normal to have non-competition agreements that the vendor undertakes not to engage in a practice that would be competitive to the purchaser because the goodwill of the business has to be protected. That is fine in respect of private companies and small businesses.

Can the noble Lord tell me how far this order goes? There have been occasions, most notably recently in the City of London, where immediately after a purchase a group of people who would normally be expected to abide by a non-competition clause in the sale and purchase agreement have detached themselves from the successor company and formed their own business. It has been shown that it is very difficult to prosecute those people under the contract in question and that, in the event of a major defection—we are not worried about small cases—where the good will of the business is damaged, the only recourse may be under the Restrictive Trade Practices Act.

I merely ask that question because I believe that there is a threshold beyond which the agreement should be registrable. Perhaps the noble Lord could help me by assuring me that this does not damage the good will of businesses where non-competition agreements properly should be registered with the director general to be enforced, requiring to be registered officially when the deal is completed.

Lord Strathclyde

My Lords, before I reach that point, perhaps I could mention something else about the order which I think is relevant to the debate. Perhaps first I could say what the position would be of the exempted agreements under existing mergers legislation. The orders we have before us will only have the effect of exempting the agreements concerned from the scrutiny under the Restrictive Trade Practices Act. They will not prevent the application of the Fair Trading Act provisions to mergers underlying such agreements.

Furthermore, concerning agreements that are not within the scope of the exemptions, there is no presumption that sale and purchase or share subscription agreements not meeting the conditions for exemption as laid down in the orders will be significantly anti-competitive, merely that they require individual scrutiny by the director general on a case by case basis, using the normal processes of the Act.

If they subsequently turn out not to contain restrictions of such significance as to call for investigation by the court, they will be eligible, as at present, for directions under Section 21(2) of the Act. The agreements are dealt with under the Restrictive Trade Practices Act 1976, which requires the furnishing to the Director General of Fair Trading for registration of agreements between two or more persons carrying on business in the UK in the supply or acquisition of goods or services under which certain kinds of restrictions are accepted by two or more of the parties to the agreement.

The director general is under a general duty to refer registrable agreements to the restrictive practices court for consideration of whether or not the restrictions they contain are contrary to the public interest. Section 21(2) of the 1976 Act enables the director general to make representations to the Secretary of State to the effect that the restrictions in a particular agreement are not of such significance as to call for investigation by the court. If the Secretary of State agrees, he may issue directions discharging the director general from taking proceedings in respect of the agreement during the continuance in force of the directions.

The vast majority of registrable agreements, including almost all sale and purchase and share subscription agreements, are currently dealt with in this way. Therefore the availability of remedies in contract law will not be affected by the order that we are discussing today. Registrability of the agreements does not render their enforcement any easier, so these orders should not affect the situation to which the noble Lord referred.

Lord Williams of Elvel

My Lords, does the noble Lord not agree that in practice it has been difficult to enforce such contracts; and that, if there is a remedy in the sense of the RTP Act, where the director general has to refer such agreements to the restrictive practices court, that remedy should not lightly be removed if the enforcement under contract is difficult, as has been shown?

Lord Strathclyde

My Lords, certainly that is quite a significant subject area which is being continually discussed by the department. At the moment, however, we are dealing with this specific aspect which does not cover some of the problems that have been raised by the noble Lord. However, I take his point and I shall discuss it further with the department to see whether anything needs to be done in the future.

On Question, Motion agreed to.