§ 7.25 p.m.
§ Lord Oliver of Aylmerton rose to move, That this House takes note of the Report of the European Communities Committee on Merger Control (6th Report, 1988–89, HL Paper 31).
§ The noble and learned Lord said: In introducing the Motion standing in my name on the Order Paper, I should perhaps say a brief word about the background to the report to which it relates. Mergers nowadays are never very far from the headlines of the financial press. While the subject may not appear at first sight to be one of riveting interest outside the City of London, it is nevertheless one of immense significance to our national industrial future and to the competitive position of industry in the European Community. In recent years, the provisions of Articles 85 and 86 of the Treaty of Rome have ensured that, even in the case of purely domestic mergers, the European Commission has felt impelled to take an active interest, and, on occasions, to intervene, even in cases where the terms of merger have been approved by our own Monopolies and Mergers Commission.
§ There is, I think, a general concern that critical decisions in relation to United Kingdom industry 462 may be made elsewhere. The Commission's intervention in the British Airways-British Caledonian merger and the involvement of the courts of the United States in the Minorco and Consolidated Gold Fields case are cases in point. On the other hand, of course, industrial rationalisation is not a purely domestic phenomenon. Some, but not all, of the member states of the Community have their own national organs for control of mergers and combinations. The development of the Community and the approach of 1992 have rendered inevitable the establishment of some single legal framework within the Community for the scrutiny and control of cross-border mergers on a supra-national basis. It is against that background that there has been proposed the regulation of the Council of the European Communities which forms the subject matter of the Select Committee's report which it is my duty to introduce to noble Lords.
§ The body of evidence on which the report is based was substantial. The task of the sub-committee was not rendered any easier by the fact that we were, throughout, to some extent shooting at a moving target because revised versions of the regulation emerged—as, I believe, they are still emerging—from Brussels while our deliberations were in progress. That is not a complaint; some of the revisions helpfully met criticisms that were already being formulated in the evidence before us.
§ Ever since the early 1970s, there has been a growing awareness of the need for a comprehensive policy for mergers having a Community dimension. But it was not until 1987, when it became evident after the decision of the European Court in the Philip Morris case that the Commission was not only able but willing to use its powers under Articles 85 and 86 to exercise a measure of control, that the disagreements that had previously hampered progress evaporated. The evidence that we have received indicates that, at least in business circles, the Commission's proposals are now widely regarded, in principle, as an acceptable and, indeed, a welcome development. I believe that the Institute of Directors was the only body that expressed unqualified opposition.
§ In introducing the report to noble Lords, I think that the most helpful thing I can do is to summarise in the broadest outline the proposals as they currently stand and then to identify the areas to which the committee's deliberations were directed as giving rise to concern.
The regulation as proposed applies to all concentrations having a Community dimension. Mergers within the scope of the regulation are to be notified to the Commission before they take effect and provision was originally made in the regulation for an automatic suspension pending a decision as to their compatibility with the Common Market. That has now been dropped from the latest version since the report was published and I think that it is probably a welcome development. The regulation provides a defined criterion for Community dimension which has altered somewhat with successive drafts. It contains in Article 2 an important provision for sanctioning mergers which
are prima facie incompatible on competitive grounds in cases where,
the contribution of the merger to improving production or distribution, promoting technical or economic progress, or improving the competitive structure within the Market outweighs damage to competition".
§ The regulation provides for time limits, which appeared to the committee to be satisfactory if they can be adhered to, for the consideration of projected mergers and there are extensive powers in the Commission to request information and to carry out investigations. Substantial fines are provided for supplying incorrect information and for implementing mergers in breach of the regulation. There is an important provision that the Commission shall have sole competence in relation to mergers within the scope of the regulation and, subject to exceptions which are not at the moment clearly or satisfactorily defined, that such mergers are effectively excluded from national merger control.
§ The sub-committee concluded that it is a logical consequence of the establishment of the internal market that there should be some transfer to the Community of the power to block large-scale mergers, but it should not be too extensive too soon; and before the regulation is adopted we felt that its implications must be very carefully considered. It will obviously be both impracticable and undesirable that all mergers with any cross-border implications should be committed to Community control, and the initial question that has to be tackled is the criterion by which Community jurisdiction is to be defined.
§ As the regulation was drawn at the time of the report, a merger in which each of the undertakings concerned achieved more than three-quarters of its aggregate Community-wide turnover within one and the same member state was excluded from Community control. Subject to that, however, a merger had a Community dimension and was the subject of Community control if two conditions were satisfied. First, the aggregate worldwide turnover of all the undertakings involved must be more than 1 billion ecus—that is £670 million; secondly, the aggregate Community-wide turnover of each of at least two of the undertakings had to be more than 100 million ecus—that is about £67 million.
§ I believe it was the universal view of the witnesses that the only viable yardstick was turnover rather than market share, which is what had originally been suggested as the criterion. But the majority felt that the levels proposed were too low—some felt that they were far too low—and that the result would be to bring mergers within the Community net on a scale which it was beyond the likely resources of the Community to handle. I think that it is this rather than considerations of competition policy which governs the threshold. It was our view that, at any rate as a starting figure, an appropriate threshold would be 5 billion ecus (about £3.25 billion) but that the regulation should contain a mechanism for raising or lowering the threshold, without the necessity on each occasion of unanimity in the Council. This would accommodate inflation and the 464 increasing ability of the Commission to handle a larger volume of work.
§ Such a threshold would, we felt, exclude about 35 per cent. of Community industry and should be within the handling potential of the foreseeable Community machinery. The establishment of efficient machinery and the recruitment of properly qualified staff of the right calibre are of course crucial and must be a condition precedent to any transfer of competence to the Community. That was stressed by a number of witnesses with experience of the working of the Commission, as was the need for procedural improvements in relation particularly to hearing and to the publication of proceedings to the parties and their advisers.
§ Since the publication of the report I understand that there have been further negotiations in the Council, as a result of which the threshold of worldwide turnover has now been raised to the figure suggested in the report (5 billion ecus), that figure to be reviewable in 1992. A merger is also to be outside Community competence if each of the undertakings concerned achieves 66 per cent. (instead of 75 per cent.) of its turnover within the same member state.
§ Perhaps the most controversial areas of the proposed regulation are, first, the criteria for appraisal for compatibility with the Common Market and, secondly, the question of how far any room should be left for the operation of national control agencies in cases within Community competence.
With regard to the first question, the predominant view was that the original version, which referred to,
damaging effective competition by the strengthening or creation of a dominant position in the Common Market"—
a phrase which is the subject matter of an existing jurisprudence in the European Court—was much to be preferred to the existing wording, which refers to the creation or strengthening of,
a position as a result of which maintenance or development of effective competition is impeded".
§ That may not sound a great deal different but it leaves a considerable latitude for debate in an area in which I think certainty is important. It was the committee's view that the original version should if possible be restored. I understand that the committee's preference for the original wording is in fact shared by a number of member states. It is also the committee's view that the appropriate body to exercise Community merger control is the Commission, not some specially created body and certainly not the Council.
§ More controversial is the question of whether, in appraising a merger within its competence, the Commission should be governed by competition considerations alone, whether it should be entitled to authorise even anti-competitive mergers if there are countervailing advantages (as is at present provided by Article 2, to which I have referred) and whether it should be either bound or entitled to take into account social and purely regional considerations, such as the effects of the proposed merger on, for instance, local employment.465
§ There was strong support from some witnesses for the view that competition should be the sole criterion. It was a matter which caused a good deal of heart searching in the committee. We finally felt bound to accept the limited criterion for authorisation proposed in Article 2 as at present drawn but to accept also that the criterion should not be expanded to include domestic and local social considerations. This is a matter upon which noble Lords may hold widely differing views but the committee felt in the end compelled to adopt the view that to open the door to considerations other than those of a Community nature would be to subject the Commission to national, social and political pressures which might very well imperil the integrity of its operation and with which it is in any event ill equipped to deal. There are moreover other provisions of the treaty with social objectives.
Finally, as to the position of national control agencies, all the evidence which the committee received from industry favoured the notion of a one-stop procedure—and I think that is very important. To allow the continuance of control to the agencies of the individual member states to which the merging organisations belong would, I think, cause endless delay, would be self-defeating and would largely nullify the purpose of a single Community control. A merger, once sanctioned by the Commission, ought thereafter to be free from national control. The present draft regulation, however, contains two somewhat obscure provisions reserving power to the national competition authorities, first, where the Commission empowers them to act in order to prevent competition in local markets—Article 8(2)—and, secondly, where it is necessary to promote legitimate interests other than those pursued by the regulation,
provided that such interests are sufficiently defined and protected in domestic law and are compatible with the Common Market".
§ That is Article 20(3).
§ One cannot help feeling that this part of the regulation must have been drafted after a visit to the oracle of Apollo at Delphi. It is the committee's view that this must be spelled out with a good deal more precision than it is at the moment before the regulation is in an acceptable form. Defence, national security, financial services and the news media come to mind as obvious candidates for legitimate interests; but this clearly should be defined with greater precision. We were also unhappy with the vagueness of the limits upon the power of the Commission to delegate powers of decision in order to protect competition in local markets, and the possible effect of what seemed to be a derogation from the one-stop shop principle.
§ Subject, however, to the points of criticism raised in the report, the committee generally welcomed the proposal as a logical, practical and sensible step towards 1992. We feel that the Government have been right not to be rushed and are to be congratulated on the progress made so far. An early agreement in the Council would, however, now be very welcome since the formulation of advice to those who are contemplating merger is made very difficult by the continuing uncertainty as to the 466 ultimate form that the regulation will take. There are, however, still matters upon which we should like to see further progress, in particular the points to which I have drawn attention where further definition is required together with further safeguards in relation to fair hearings and procedure. Those are referred to in paragraph 75 of the report. It is a very important matter because in the ultimate analysis the confidence of practitioners will be essential to the proper working of the system.
§ In conclusion, I should like to express my personal gratitude—in which I am encouraged to hope that noble Lords may feel it right to concur—to the members of Sub-Committee E, to the witnesses who so helpfully gave evidence, both oral and written, and in particular to our specialist adviser, Mr. Stephen Richards, who took immense trouble in guiding our footsteps throughout. I hope very much that our deliberations will have made a constructive contribution to progress on the regulation. I beg to move.
§ Moved, That this House takes note of the Report of the European Communities Committee on Merger Control (6th Report, 1988–89, HL Paper 31).—(Lord Oliver of Aylmerton.)
§ 7.48 p.m.
§ Lord Murray of Epping Forest
My Lords, the House is grateful to the noble and learned Lord and his committee for their hard work and for giving us the opportunity of adjusting our minds to a subject that, as the noble and learned Lord reminded us, is never far from the headlines. Although that is true, what do we find when we look past the headlines in the financial columns? Rarely do we find serious discussion about the effects of mergers or takeovers on outputs, exports, investment or employment. Too often we find financial gossip about the escalation of bids, the expectation of higher dividends, short-term financial gains, or which predator is getting the fattest.
Concentrations between undertakings—which is the title of the proposal, for which merger is a shorthand—are indeed increasing in Europe, and they should be if we are to meet and to match with Europe, and if we are to compete with the industrial superpowers of the US, Japan and, increasingly, of the Pacific Rim. The report might with advantage have devoted a little more space to examining and documenting what is happening on the industrial front and in particular on the manufacturing industrial front and what is in prospect for Europe. It might also profitably have spent a little more time on examining the industrial and commercial imperatives of concentration. The report, like the draft council regulation, is almost wholly pre-occupied with "distortion of competition". The bulk of the witnesses, even—surprisingly to me—those from the Confederation of British Industry, based their evidence on the fashionable view that uninhibited competition is the panacea for all our industrial illness. Tell that to the Japanese, my Lords.
Sub-Committee A is at the present time examining the relationships between Japan and Europe and in the fullness of time will be bringing a report, no 467 doubt to your Lordships' House, that will have more to say about that particular subject.
In 1984, Mr. Tebbit, who was then the Secretary of State for Trade and Industry, directed that merger references would be made primarily—indeed almost exclusively—on competition grounds. The 1988 Blue Paper—which is summarised in paragraph 17(vi) of the British report had this to say:The MMC are not"—and the word "not" is italicised—asked to consider whether the merger would be positively in the public interest".It is excluded from the consideration which is to be given to this critical subject. The Blue Paper—the policy of HMG—and to a large extent the commission's proposal and report are in my view unduly pre-occupied with competition when they should be mainly concerned with competitiveness. The two are not the same. Sometimes competition is the best way to increase and improve competitiveness, but not always. Sometimes the elimination of competition is the best way to improve competitiveness when competition leads to duplication and wastes resources.
The commissioner, Mr. Peter Sutherland, appeared to be edging his way towards a recognition of this in his answer to question 120. He appeared to go rather further than Article 2(3) to which the noble and learned Lord, Lord Oliver, has referred and from which I should like to quote. It states:Concentrations which create or strengthen a position as a result of which the maintenance or development of effective competition is impeded in the Common Market or a substantial part thereof shall be declared incompatible with the Common Market unless authorised on the ground that their contribution to improving production and distribution, to promoting technical or economic progress or to improving the competitive structure within the Common Market outweighs the damage to competition".That recognition is at least a small mercy. But it is, I submit, putting the cart before the horse. We need measures to increase competitiveness. If those measures unduly affect the interest of consumers, by all means let us consider that problem and deal with it.
It is heresy these days—and it is perhaps becoming a heresy even on our own Benches—to question whether a consumer is or ought to be king in all circumstances. There are occasions when a consumer takes far too short a view. There are occasions when the interests of groups of producers should outweigh those of consumers. My fear is that the Commission's proposal will make it more difficult for companies in Europe to get together nationally or across borders to compete in the 1990s. As I have said, the proposal largely chimes with British practice, but what has our policy produced? The answer to that can be found in the Blue Paper published in 1988 by the Department of Trade and Industry. I quote paragraph 2.10:The bulk of the evidence (summarised in Annex E) is that the commercial performance of enterprises post-merger has, more often than not, failed to live up to the claims of the acquiring firm at the time of merger".That is documented in Annex E of that Blue Paper which contains nine empirical studies all of which, 468 without exception, demonstrated that mergers have not on balance led to efficiency gains. It is not surprising that they should not have done so because by definition the policy on mergers that has been pursued in this country has been biased against mergers which, by concentrating output, would have maximised reductions in unit costs and optimised our competitiveness.
In short, merger mania has not sharpened UK competitiveness. What it has produced is major job losses and the distraction of top management from producing and selling. Far too many chairmen and top managers of companies have had to spend far too much time looking over their shoulders and waiting for predators, calling for daily print-outs of shareholders to see what is or may be happening to that company. Far too much time has been spent by senior management arranging the affairs of their companies so that their own positions will be protected as well as possible in case of a hostile successful takeover. Nor is there any reason to believe that this situation will improve.
Professor Hamel of the London Business School, quoted in Fortune in December 1988, said:Making acquisitions is the easy part. The fundamental management challenge for European companies is to learn how to integrate their national operations into an effective whole".Professor Hamel's forecast is that this process will take longer and lead to far more corporate divorces after 1992 than most managers expect. The shape of that future is becoming clearer all the time.
I have referred to the challenge of the super competitors, notably from the Far East, and the Pacific Rim. There is a need for a co-ordinated European response, hinted at by Commissioner Sutherland in evidence and also by the noble Baroness, Lady Elles, MEP. I quote briefly from what the noble Baroness, Lady Elles, said in evidence, as it sums up much of what I believe we should be putting our minds to. She said in reply to Question 355:I… refer… to… The Times 1000 Top Companies, you will see that all the major companies are, in fact, American or Japanese and it is because they have had a merger control at their level which is for 230 million or 110 million instead of national merger regulations that have stopped companies growing to a size at which they can operate on a global basis … you are pre-empting possibly the opportunity for companies to grow and become relatively competitive with companies from these other major parts of the world which are at the moment dominant in world trade and commerce".Hints are not enough. This attitude should be spelt out clearly in the draft regulations. Competition is one means, but only one among many, of securing the ends of growth and the improvement of living standards which are recognised in paragraph 4 of the preamble to the proposals. The excessively single-minded pursuit of the will-o'-the-wisp of competition has not served the public interest. There is a proper public interest in the proposals for mergers; an interest in maximising output and employment; an interest in long-term profitability, as against short-term speculative gains; an interest in investment, as opposed to asset stripping; and an interest in enhanced competitiveness with imports and in foreign markets. Those are the questions which ought to be posed to the predators. Those are the tests which should be applied to the proposals.
469 However, above all there is the question whether market share will be enhanced because that of all the tests is the single test which the Japanese have applied with enormous effectiveness winning market share for selected commodities and now for services.
In conclusion, United Kingdom and European firms increasingly find it necessary to plan operations and to compete on a global basis. This means that mergers based on the long-term industrial needs of Europe, not on short-term financial greed, are what are necessary and it underlines yet again the imperative need to develop a proper European industrial policy.
§ 7.56 p.m.
§ Lord Lloyd of Kilgerran
My Lords, many noble Lords will wish me to congratulate the chairman on the production of a unanimous report on matters of such complexity and enormous importance, while shooting, as he said, at a moving target all along the line. I should also like to congratulate him on his brilliant and comprehensive presentation and the skilful way in which he referred to the problems but did not mention many of them in passing.
I hope the noble and learned Lord, Lord Oliver, will not mind if I address myself in my speech to some suggestions as to how this excellent report among others could be used for the benefit of UK industry or industry generally in the Community. I hope he will forgive me, as I was not a member of the committee, if in construing the evidence I fall into any serious error.
Many companies inside and outside the Community must be considering now how far it is better from an economic point of view to merge or not to merge. As the noble Lord, Lord Murray of Epping Forest, has said, so much of the literature and much of the evidence presented to the Select Committee was not concerned, to use the phrase of the noble Lord, Lord Murray, with the industrial and commercial imperatives so essential for industry. I am not proposing to follow the noble Lord, Lord Murray, along the line that he has taken, with much of which I agree.
The report will clearly be very useful as an up-to-date evaluation of the scope of the subject in an EC context. At least six instruments have been issued since July 1973, several of which are curiously dubbed as "final", apart from a plethora of reports on competition policy, including at least 14 issued by the EC. I feel like saying that enough is enough and asking the question: what action is being taken to help industrialists with this present mass of material?
The report of this Select Committee is well timed. It comes after the massive decision of the European Court in the Philip Morris case referred to on page 6. It deals with the scope of Articles 85 and 86 of the treaty. There is also the UK Companies Bill, which may soon return to your Lordships' House. Parts of it may still be relevant to merger and takeover matters. When the Bill was before your Lordships some time ago there was a discussion about the Panel on Takeovers and Mergers and its code of practice.
470 Perhaps in reply the noble and learned Lord will wish to deal with my next point. There does not appear to be any mention of the activities of that successful takeover panel in the section of the Select Committee's report entitled "Current Position in United Kingdom Law" which appears on pages 7 and 8. Perhaps the reason is that the Select Committee was limiting itself to legislation. However, I have noted the interesting paper headed "Appendix" and entitled Explanation of and matters arising in connection with the City Code on Take-overs and Mergers, on pages 53 to 55. I understand that no useful comments have been made about the activities of that merger.
I strongly support the Select Committee's view on two main issues. The first is the necessity to achieve greater certainty in the field of mergers. That aspect was emphasised inter alia by the noble Baroness, Lady Elles, in her evidence. I should like to pay a warm tribute to her splendid work as chairman of the Legal Affairs Committee of the European Parliament. It is now internationally recognised.
The second view which I support is that expressed in paragraph 89 of the Summary of Conclusions and Recommendations on page 36. It states:It is a logical consequence of the establishment of the internal market that there should be some transfer to the Community of a power to block large-scale mergers".I believe that everyone will agree with that statement. It continues:But before a Regulation is adopted, all implications should be carefully considered".The committee then asks rhetorical questions as to the central issues.
I have great sympathy with the reservations expressed by the Department of Trade and Industry on page 78 of its memorandum dated October 1988, and orally by their witnesses through Mr. Threadgold, the head of the competitive policy division. On 17th January 1989, he told the Select Committee, as appears on page 78 of the report:So the question at issue, therefore, is not whether there should be control of mergers at the Community level but the nature and extent of that control, whether a regulation can provide a more efficient and effective mechanism for such control than the provisions of Articles 85 and 86, and what the balance would be between the Community and national controls. The Government maintains a general reservation, because it is not yet convinced that a regulation would be an improvement upon the present position. Many important questions remain unresolved, and the Government is not prepared to take a decision for or against the principle of a regulation until the shape of the proposal is much clearer".At the bottom of page 78 Mr. Threadgold states:Any measure which reduced the scope for legislative control at the national level would, the Government believes, throw into sharper relief the non-legislative barriers. This would disadvantage countries such as the United Kingdom which is relatively open in this respect".From an industrial point of view it; seems that all those matters are like Mohammed's tomb; suspended in mid-air.
I shall not raise any questions regarding the regional issues. However, I mention the questions and answers arising out of the contribution made by the noble Viscount, Lord Colville of Culross, in question 224 at page 61, and also questions 247 and 248 involving the noble and learned chairman.
471 I wish to raise and adopt a practical and pragmatic approach to the problems outlined by the noble and learned Lord in the report. So many industrialists are spending a great deal of time trying to solve them. At paragraph 88 of the report the Select Committee suggest that block exemptions and other measures to reduce any practical problems should await the development of further case law. I should like to see attention being paid to block exemptions even at this stage. It is my view, with respect, that to maintain the position set out in the report would unnecessarily prolong the uncertainty which UK industrialists may find exists in this field.
From my reading of the report and the evidence, and in view of my contacts with helpful and knowledgeable members of DGIV and DGIII and the Law Directorate of the EC on and off for 25 years, I believe that the question which must be answered is: what should be done in the interest of industry whether in the UK or on the Continent? There is available a line of legal experience and case law. It comes from the Continental Can case in 1973; the Hoffman La-Roche case in 1979; the Pilkington case in 1980; and the Philip Morris case in 1987. They are quite apart from the number of useful decisions made in a number of French, German and United Kingdom cases, including the BA/BCAL case, to which the noble and learned Lord referred, and the Rover case. I was greatly impressed by the analysis of the directive made by the joint working party on competition law found on pages 48 to 52 of the report.
I presume to refer to some of my recent and helpful personal experiences on mergers in the EC context in Brussels. I was invited to attend the colloquium on merger control in the EC held on 11th March 1988. It was organised by seven law firms which had their offices at the happy sounding address of 1 Avenue de La Joyeuse Entrée? I have the transcript of the colloquium in my hand. It was presided over by my old friend, the honourable Sir Gordon Slynn, then Advocate General of the European Court of Justice and now a distinguished member of that court. He made a number of contributions to the ideas on merger control which were of practical value. Somehow or another they appear to have escaped the notice of the Select Committee.
We were presented with a magnificent book containing several hundred pages. I found it most useful because it contains an analysis of the competition and mergers law in the United Kingdom, France, Spain, Italy, The Netherlands, West Germany and Denmark. I certainly recommend the book to the noble Lord, Lord Morris, as bedside reading. The UK contribution to that book was by Mr. Michael Reynolds of Allen and Overy, the well-known London solicitors. I hope that this is not out of order and I hope too that I shall not be derided on my views about what should be done in an EC context as I was, as I shall explain later, over 25 years ago.
I suggest that now is the time for the Government, the Law Society or some academic institution or even the working party which gave evidence to the Select Committee to set up a small working group 472 of lawyers with experience of discussions on issues about DGIV particularly and the EC legal departments. That group should draft a memorandum on merger control specifically based on the present directive for discussion with DGIV. I believe from my associations with DGIV that the members of it would welcome such action.
Before I am told that there are procedural difficulties about taking a practical course of that kind, perhaps I may say that in the field of research and development of intellectual property competition law that procedure was adopted with considerable success in the early 1960s. The United Kingdom was not then a member of the EC and a number of people said that we should not join it. As head of my chambers, I was receiving requests to advise UK firms on the effect of the Treaty of Rome on their Continental business. I was then involved with two excellent juniors in preparing a chapter on trademarks and designs for the third edition of Halsbury's Laws of England and I was also involved in some very heavy international questions relating to trademarks. If possible I wanted some sort of relief from that activity and therefore I became involved with the Treaty of Rome in some detail.
I eventually found myself addressing a conference on harmonization of European laws on intellectual property and mergers and competition law at the George Washington University in Washington DC. At the conference I even recommended that there should be a single European Act to deal with those matters. I still have the report showing that I made such a statement. When it became known in London circles, I was derided by many senior members of the patent Bar for having made such an outrageous suggestion.
However, three of us, a distinguished German lawyer Dr. Röttger, a United States lawyer called Mr. Ladas and myself, being influenced by the attitudes of industrialists in this sphere, presumed to prepare a draft of a European trademark instrument in the framework of the Rome treaty for discussion with EC officials. We were welcomed with open arms. Most of the work was done by the German lawyer in discussions in Brussels and he earned for himself the title of Father of European Trademark Law.
More recently, after the publication of the Green Paper on innovation and intellectual property, to which the Prime Minister wrote the foreword, I had many helpful negotiations in proposals for the benefit of the United Kingdom spare parts industry. Many of those ideas produced in Brussels found their way into the Copyright, Patents and Designs Act 1988.
I have kept in touch with EC laws on competition and merger, particularly Articles 85 and 86 of the Treaty of Rome, for nearly three decades. I have even served for some months on an EC working party on Articles 85 and 86. However, my approach to those matters has been purely pragmatic. Perhaps I may ask rhetorically: how can the Select Committee and all the matters to which I have referred in general terms be used for the benefit of industry in the UK or the EC?
473 As I said, DGIV and other DGs in the EC would welcome a positive approach being made from lawyers in this country on an informal basis to try to help British industry more, if I may say so, than they will be helped by the contents of this report of the Select Committee.Those kinds of tactics have been used often before. There is a plethora of directives, case law and advice available. Should we now not make use of this excellent report in some practical way rather than letting it wither away on some departmental shelves?
§ 8.25 p.m.
My Lords, I was concerned about taking part in this debate at all, but following the noble Lord, Lord Lloyd of Kilgerran, is always a joy. I was delighted that he offered me an addition to my bedside reading. Having heard his fascinating and interesting speech, I now have so much interesting and useful information that I do not believe that I need read the book which he highly recommended.
My Lords, I should like to thank the noble and learned Lord, Lord Oliver of Aylmerton, for chairing this committee and for all the hard work it has done. It has been my experience in the few years for which I have been a Member of your Lordships' House that the more difficult and complex the subject being considered, the clearer and better is the report which is published as a result of those considerations and discussions. I must say that I find this report extremely interesting.
It was a nice irony for me to read—many other noble Lords on the committee will know about this—that the United Kingdom, as the Department of Trade and Industry calls itself in a rather "twee" way, has reserved its position on the principle of an EC merger control regulation. It would be nice to know what will happen to the report of the noble and learned Lord, Lord Oliver of Aylmerton, whose only conclusion was that the committee reserved its position. It recommended that this very important subject should be discussed in the House of Lords. Oddly enough, I strongly welcome the fact that Her Majesty's Government—it is not the Department of Trade and Industry but Her Majesty's Government—reserved their position because those matters are of far wider import than the rather arcane subject of mergers might suggest.
I do not believe that I am being too apocalyptic if I suggest that kings no longer surround themselves with men-at-arms and governments do not send vast armies to war in order to gain economic advantage over their neighbours or to protect a perceived economic advantage. Those kinds of battles for supremacy take place in the boardrooms of the multinational companies of the world. Those kinds of battles have an enormous effect on the social life and indeed the wealth of the individual nations. That is why this is such a critically important subject.
Different countries take different attitudes to these matters. This has been of enormous impact on 474 political decisions. That is why I welcome some of the evidence which was strongly opposed to the Commission's suggestion, which oddly enough was accepted by the committee, that the Commission should be able to authorise potentially anti-competitive mergers on the industrial policy criteria proposed.
With respect, I believe that that is a very dangerous position because that is asking the Commission—and I stress that—to take what are fundamentally very important decisions on matters of industrial strategy. I do not think it right for the Commission to look at that; it should be considered at a high political level. Notwithstanding that, I happily endorse the conclusions of the committee.
There are two other matters that I would like to raise. The noble and learned Lord, Lord Oliver of Aylmerton, spoke on the critically important question of timing. It is important that the timetable for takeovers contained in, for example, our own City code should be able to accommodate the prenotification prodecure laid down by the regulation. It is a procedure which of course I welcome. This generally happens as regards the domestic procedures via the Office of Fair Trading and in relation to the decisions that the Secretary of State has to take. My noble friend will no doubt recall the Irish Distillers and Plessey cases in 1988 which confirmed the need for co-ordination between domestic and European requirements.
I should like also to stress the need for a clear filter mechanism, again analogous to the OFT procedures, which lead to the Secretary of State announcing a decision on a merger. While it can be said that the original European timetable has been improved since the original proposals, there is as yet no certainty that the Commission will, or could, adhere to the timetables. For example, Article 6(3) on the initiation of proceedings states:decisions pursuant to paragraphs (1) and (2) shall be taken within a period not exceeding one month, unless the undertakings concerned agree to extend that period".If, following the initiation of proceedings, a proposed concentration is to be cleared without further reference such a decision is to be made within a further one month as stated by Article 9(1), with the identical caveat for extensions. One assumes that this ability to extend is only with the agreement of all parties, although that is not clear; in which case agreement is unlikely to be forthcoming in a unilateral offer.
However, the concern about unilateral offers can be taken one stage further since it is understood—at least, it is my understanding—that decisions of the European Commission could be appealed to the European Court of Justice. Obviously, a case has to be made but it presumably can be made by any party who disagrees with the Commission's finding. As we all know, the position is different from that which operates at present in the United Kingdom, where decisions of the Monopolies and Mergers Commission may be subject to juducial review and the only matter which can be considered is whether the decision of the MMC was arrived at correctly. My concern of course is that the scope for frustrating a hostile bid could be widened under this regulation.
475 My other concern is in regard to scope. It is worth recalling that in the domestic experience only a very small percentage of relevant bids is actually referred. I believe the figure is approximately 3 per cent. The financial criteria of the 1,000 million ecus and the 100 million ecus were clearly explained by the noble and learned Lord, Lord Oliver, so I shall not go through that again. However, I believe that the case for making the criteria larger is a strong one. The criteria seem to be low, and I suggest that, for example, any Community acquisition of over 100 million ecus by a substantial and geographically well-spread corporate entity—for example, ICI—may well be caught. It is not immediately apparent that the Commission intended the drafting to have this effect and it may well be subject to amendment. Further, the financial parameters are also likely to be the subject of much discussion and, I repeat, they most probably will be.
There is another matter that concerns me regarding scope. The December draft of the regulation stated in Article 2(2):concentrations which do not create or strengthen a position as a result of which the maintenance or development of effective competition would be impeded in the common market or in a substantial part thereof shall be declared compatible with the common market".The converse is stated in Article 2(3). While there has not been a more up-to-date public document on the regulation, my understanding is that the wording of these two articles is likely to be subject to revision—I hope that it is—which may introduce an element of clarity and substance into the question of what is or is not an impediment in the market. If, however, this wording has the effect of restricting the number of cases which come within the scope, then in a sense I welcome it.
I come to my final point, having spoken for far too long, for which I apologise. This refers to the one-stop considerations. I believe it is extremely important that if these regulations are adopted the position is made extremely clear not only for those making offers but also for those receiving offers and not least for national regulators within all the countries of the European market.
§ 8.26 p.m.
§ Viscount Chandos
My Lords, I too thank the noble and learned Lord, Lord Oliver of Aylmerton, not only for his fine introduction to this evening's debate but, even more so, for the clear and incisive report which the sub-committee under his chairmanship produced.
The complexity of this subject is really no less for practitioners in this area, whether as industrialists, lawyers or bankers, than it is for laymen, and the report is a model of clarity and logic. Your Lordships may remember that I am a practitioner of sorts, so I have a professional interest to declare; though my remarks are intended to be as far as possible from a political standpoint rather from that of a banker.
The committee opens its opinions, as the noble and learned Lord, Lord Oliver, noted, by saying that it,accepts that it is a logical consequence of the establishment of the internal market that there should be some transfer of 476 competence from Member States to the Community of the power to block large scale mergers".The debate on 1992 earlier this month demonstrated that your Lordships generally accept the importance and the inevitability of the single European—or internal—market and the logical consequences of that. For a more fundamental appraisal of the relationship between Britain and the Community I should like, if a little bare-faced advertising is allowed, to encourage your Lordships to speak in the debate which I hope to have the privilege of introducing in two weeks' time. Therefore, I shall adopt the same attitude as other noble Lords tonight to the opening opinion of your Lordships' committee and address myself briefly to the central question arising from that: how much transfer of competence and over what timescale?
While it might be argued that the criteria for distinguishing between mergers over which the Commission is to have jurisdiction and those which would escape Community consideration is the most important issue, I believe that these criteria become less of a critical question if the relationship between the Community and national authorities on all transactions is satisfactorily defined. In comparison, issues such as the suitability of the Commission itself rather than a new purpose-built body in the image of the United Kingdom's MMC as the appraiser, the staffing implications of the Commission, and so on, seem secondary but not unimportant details. The committee suggested that all the main questions were interlocked, but I do not believe that we cannot nonetheless grade them in importance.
The committee stated that it was,impressed by the almost unanimous support from industry and their legal advisers for single control at Community level of mergers".I think that experience has shown that companies have not inevitably been consistent in their advocacy even of national merger policy, particularly as predator turns to potential victim, or, as I am sure a sober banker should express it, offeror turns to offeree. I therefore have to say that I am less impressed by this unanimity at this stage than was the committee, and suspect that after the first British company succumbs to a contested takeover, approved by the Commission with the UK authorities having no power to rule independently, the unanimity may prove to be very fragile.
Companies and their advisers have learnt the ropes in the UK and I have no doubts that a company losing its independence, with the Commission's approval only, will be convinced, rightly or wrongly, that it could have won its cause with the OFT and the MMC in this country. But until that actually occurs, of course it is natural for industry and its advisers to prefer the prospect of one-stop shopping for merger control. Incidentally, that inelegant phrase "one-stop shopping" was very prevalent two or three years ago in the world of financial conglomerates or, to pursue the analogy, financial supermarkets. The intervening years have perhaps taken some of the gloss off such groups and the concept of one-stop shopping and I suspect that, in the area of merger control as well, the attributes of one-stop shopping will not necessarily include 477 quality, speed or cost-effectiveness, compared to the service provided by a sensibly co-ordinated combination of European and national regulation for even the largest mergers, at least for a significant transitional period.
I say this even though I am more in sympathy with the approach of the Commission generally to merger control than I am with that of the Government. I believe, as I have argued to your Lordships previously, that the definition of the public or national interest should be less exclusively based on competition and more broadly based in all sectors of industry and commerce and not just areas such as defence, financial services and other specific cases. Even in the case of banking your Lordships will remember that the Government, during the passage in this House of the Banking Act 1987, chose not to take specific powers to intervene in takeovers of banks on the grounds of national interest but instead only to rely on the existing broad general powers even if these are very infrequently utilised in merger control as practised by this Government.
It is not clear of course to what extent the influence of this Government or any of the other 11 will in the event direct the Commission's criterion away from a broader approach including social and regional considerations, to a predominantly competition-based one. I therefore welcome the committee's recommendation that the limited powers under Article 2 be adopted to allow the Commission to approve a merger deemed to be anti-competitive for reasons of broader industrial policy. I believe however that it is correspondingly more questionable to rule out any consideration of social, regional or employment factors.
The noble and learned Lord, Lord Oliver, argued that to impose this burden on the Commission risked, as I understood it, a breakdown of its efficient working and represented a mandate outside its competence. But if mergers of companies above the threshold of 5 billion ecus, or whatever subsequent figure is adopted, are to be removed from the jurisdiction of national authorities, while the Commission's brief excludes criteria such as social and regional factors, then we have the absurd position of the largest mergers in this country being subject to narrower definitions of public interest than smaller ones.
I believe that the fine principle of belt and braces should apply to merger control for all companies over which it is agreed that the European Commission should have some jurisdiction for a period of several years after implementation of the proposals. Whatever extra costs or longer delay (which I do not believe are inevitable) are caused by two-stop shopping, I believe that they are worth bearing to try to ensure that the public interest is truly represented as well as possible, while the efficacy of the Commission's appraisal and adjudication can be monitored.
If the criteria which are agreed for the Commission are relatively narrow and competition-based, I am more doubtful that we can, with any degree of comfort, cede national control over any mergers in the foreseeable future. But if, as I hope, the 478 Commission is given the broader mandate which it has sought, I would be cautiously optimistic that, after a period of the national and Community authorities working in tandem, exclusive authority in respect of most industries could ultimately be granted to the Commission.
But as the noble Lord, Lord Murray of Epping Forest, argued so well today—as did many others of your Lordships in the 1992 debate—we are entering such a critical period for the next stage of British industry's reshaping, that I do not believe that we can safely or responsibly abdicate national merger control at any level of size, least of all for the largest and inevitably most economically critical transactions, until the Community's machine has been extensively tested and proved sound. Yes, the long-term aim should be for increasingly exclusive authority for the Commission, but let us not risk the safety of all the passengers in the UK's economic aeroplane by letting the European pilot go solo too early.
§ 8.37 p.m.
§ Baroness Birk
My Lords, I wish to add my congratulations to the noble and learned Lord, Lord Oliver, not only for the way in which he introduced the report this evening, but also for both his excellent chairmanship of the sub-committee of which I had the honour to be a member and his infinite patience with witnesses and members of the sub-committee alike. For someone who has sat on one of his sub-committees it is impossible not to come to the conclusion that even the most ardent and laissez-faire European sitting on such a sub-committee would be worried about what will be the consequences of certain regulations unless some changes are made to them or some further interpretation is firmed up over and above what exists at the moment.
With a great deal of trepidation, which was greatly increased when I heard the noble Lord, Lord Lloyd of Kilgerran, I decided to intervene in this debate on one specific point; namely, the question of criteria for the authorisation of a merger. The argument that non-competition criteria should be taken into account by the commission when ruling on a merger under the terms of the Council Regulation was, unfortunately, rejected by the committee. It approved of the limited power under Article 2 to authorise a merger on the grounds of industrial policy—that is, if its,contribution to improving production and distribution, to promoting technical or economic progress or to improving the competitive structure within the Common Market outweighs the damage to competition".I believe that it would not be unfair to say that on the sub-committee there were some feelings of unease about this; namely, that it would not be appropriate to include social, regional and employment criteria in a competition regulation. All the witnesses concurred in this view with the exception of the Law Society of Scotland, which gave both written and oral evidence. The society believes that the proposed regulation's concentration purely on competition issues should be challenged. Article 23 of the Single European Act inserted new articles 479 into the Treaty of Rome. These included an obligation to seek to reduce the disparities between regions and a provision that the implemenation of the single internal market should contribute to this reduction in disparities. It could therefore be argued that, under the treaty, regional issues should not be considered only in the context of specialist measures such as the structural funds, but should be integrated in all policy decisions, including those concerned primarily with competition and trade. In its written evidence to the committee the Law Society of Scotland argued that:the Commission should be empowered to look at the impact of a merger not only on the economy of the EEC as a whole, but also on a national or even regional economy, such as that of Scotland".On 6th December 1988 Commissioner Sutherland, who was then the commissioner responsible for this area, gave evidence to us. In answer to question 112 on page 19 of the report he stated that:only the criteria set out in the regulation—compatibility, prohibition and authorisation—will be used and, if social issues are to be involved, they must be subsumed under one of the competition criteria.He was then questioned closely and quite toughly by members of the committee on the problems of unemployment which could arise in various areas as a result of mergers going through, or alternatively, as could happen, as my noble friend Lord Murray pointed out, not going through. The Commissioner referred to Article 2(3), which did not take very far those of us who were trying to find some trickle of light which would help us to deal with the problem. Later, in answer to a question in which I pointed out the confusing and unsatisfactory nature of the proposals, Commissioner Sutherland said on page 21 of the evidence:With regard to the formal point, I think when we use the words 'other than those pursued by the present regulation' in Article 20(3) we indicate we are referring to other matters which are not within the purview of Article 2 and, therefore, we are saying that any other legitimate interest—legitimate within the law of the Community—can be pursued by national authorities other than competition issues. So we do not feel that we are impeded.That seemed to contradict some of his other answers. On the other hand, to be fair, he was anxious to get the regulation through by the end of the year. In that he was not successful.
My noble friend Lord Murray mentioned the grant for rural development. Since January this year 24 per cent. of the United Kingdom has been eligible. This means the Highlands and Islands of Scotland, rural Wales and parts of England—areas which require help for development. It does not make a great deal of sense to me to create unemployment through competition policy and then try to deal with some of it under a structural fund in which one hands out money but not necessarily jobs. When BP took over Britoil it was then agreed that the headquarters should remain in Aberdeen. Where possible, many of us would like to see that type of decision being made in the future.
I found extremely depressing the evidence from the Department of Trade and Industry on this point. As has already been pointed out, the Government 480 evidently take the view that the sole criterion should be competition and that therefore there should be no mechanism for the authorisation of mergers which are admittedly anti-competitive even if they have other redeeming features. The evidence of Mr. Treadgold can be found on page 80 of the evidence. In answer to a question asking whether mergers will go through regardless of the fact that employment will be devastated in a particular area, Mr. Allen from the Department of Trade and Industry replied:That is broadly consistent with the Government's approach to mergers in the UK.All this has an even wider span. The point was elaborated by James McLean of the Law Society of Scotland in his oral evidence to the committee. He said, in answer to question 248, on page 61 of the evidence:If the regional and social element is not enshrined in the merger regulation at a Community level it may, with the passage of time, become extremely difficult for Member States themselves to take account of those values in national legislation. It would look like discrimination in the context of the Single Market".It is essential that the question of criteria should not be left as it is at the moment but should be pressed hard before it is too late. The regulation has not yet completely gone through. We understand that the Commission want to finalise it by next month. I feel that it is even more important to get it right. If necessary we must fight to try to get something of what I have been putting forward into the interpretation of the regulation and perhaps to insert some definitions in Article 20(3), which would obviously be the place to do it. I hope to do that before it is too late.
§ 8.47 p.m.
§ Lord Grantchester
My Lords, it was a great honour to take part in the proceedings before the Select Committee which produced this report. I should like to start by commending my noble and learned friend Lord Oliver of Aylmerton for his guidance in leading the committee through its deliberations. At this stage I also wish to record my praise for the officials who assisted the committee in its work and who efficiently and competently prepared the innumerable technical and legal papers, drafts and advice for our consideration.
We are here concerned with a proposed Council regulation of the European Community. The document before the Select Committee was amended at least twice during our deliberations. Towards the end, the commissoner responsible for the preparation of the regulation, Commissioner Sutherland, completed his term of office and was replaced by Commissioner Sir Leon Brittan. It will therefore come as no surprise that several of the key features of the draft regulation are still the subject of discussions and further consideration both within the Commission and between the governments of the member states.
In such circumstances I should like to comment on the position which is likely to arise in the United Kingdom when the directive or regulation takes effect, I hope your Lordships will allow me to indicate what appear to be the most likely eventual key provisions. First, there is to be a European 481 Community merger control, solely exercisable by the Commission, subject only to one exception for the legitimate interests of member states.
Secondly, this European merger control relates to all mergers of two or more undertakings having a combined pre-taxed turnover of more than an amount which is still in discusson but which looks at the moment as though it will be the equivalent of £1.3 billion. Thirdly, a merger would be disallowed if it creates or strengthens a position as a result of which the maintenance or development of effective competition in a substantial part of the Common Market would be impeded.
Any regulation containing such key provisions is, of necessity, going to require the United Kingdom Government to reconsider the whole of their policies on monopolies and mergers. Those policies should be reconsidered as soon as possible because commerce and industry cannot effectively plan for the future without such guidance. Contrary to many current beliefs, the City is well informed on the probable effects of the EC proposals on industry and commerce in general.
I turn first to the major mergers within the Commission's primary competence. If the trigger amount in terms of turnover is satisfied—whatever the amount eventually agreed to may be—the undertaking which is proposing the merger will have to approach the Commission for its approval before doing anything else. Here the undertaking has to satisfy the Commission in relation to a negative proposition that the proposed merger will not create or strengthen the position as a result of which competition in the Common Market would be impeded. The Commission addresses itself to that question, subject only to the jurisdiction of the Court of Justice of the European Community.
I am sure that your Lordships will appreciate that the foregoing involves the abandonment of parliamentary oversight of merger decisions. The EC commissioner will be the person having the responsibility for the ultimate decision and he or she is not answerable to Parliament. I understand that there is a procedure in the European Parliament under which a commissioner can be required to justify a decision within his or her sphere of responsibility to that body. But such a procedure is not at present as well-developed as the control Parliament can and does presently exercise over Ministers in this country.
There is one exception to the test which I have stated in relation to major mergers. The draft regulation provides that notwithstanding the provision conferring sole competence in relation to major mergers on the Commission,Member States may take appropriate measures where necessary to protect legitimate interests other than those pursued by this Regulation … provided that such interests are sufficiently defined and protected in domestic law and that such measures are compatible with other provisions of Community law".As I understand this provision, the United Kingdom may give the appropriate Minister, in the circumstances stated, power to consider and block a major merger. But if he does so or purports to do so, the question whether the measures are appropriate in order to protect national interests which are to be 482 regarded as legitimate can and will ultimately be referred to the European Court of Justice. It will be the European Court of Justice which will consider whether measures are appropriate and legitimate.
There is therefore a great potential here for a major conflict of interest and policy, unless the grounds on which this exception is allowed to operate in this country—and indeed in other member states—are properly cleared in advance of our approval of the regulation. So the questions which arise here for consideration are, first: what measures will be regarded as appropriate? Secondly, what interests will be regarded as legitimate? Thirdly, what action is to be taken to remove the possibility of future conflicts by getting this matter—if I may put it this way—sorted out with the Commission at this stage? Fourthly, what legislation will be required within the United Kingdom to ensure that the United Kingdom legislation comes within the requisite exception?
That deals very hurriedly with the major mergers. Other mergers which are not within the Community's sole competence are the second side of the question which ought now also to be considered. The intention behind the draft regulation being to give the Commission primary competence on major mergers, the rather confused present situation will continue to apply to the remainder unless something is done. I shall term these other mergers minor mergers for the moment. First, such a minor merger under the present position can contravene Article 85 or Article 86 of the Treaty of Rome. Article 85 prohibits restrictive agreements between competitive undertakings and Article 86 prohibits agreements or arrangements which are an abuse of a dominant position.
Those are the Community law provisions, but there are United Kingdom provisions which apply in this respect. They really relate to a merger which creates or enhances a 25 per cent. market share or which involves a takeover of assets of a value in excess of £30 million. Such a merger can be prohibited by the Secretary of State if it operates against the public interest, which is defined by the relevant statute.
It seems to me that if the United Kingdom law has to be amended to comply with the proposed merger regulation in relation to major Community mergers, it would be sensible to review our legislation in relation to other mergers at the same time. I should therefore question whether such consideration is being given to the present position; whether consideration is being given to the continued application of Articles 85 and 86; and whether there is any way of excluding those provisions from mergers within the United Kingdom.
Proceeding on that basis, there would still be a need for a merger control authority in the United Kingdom. First, it would have to consider the protection of our legitimate interests in the United Kingdom in relation to major Community mergers. Secondly, it would have jurisdiction in relation to all minor mergers having a United Kingdom dimension where the relevant turnover was below the trigger amount in the regulation. In considering those mergers, is it really sensible to maintain the present 483 public interest tests in relation to them, when the tests there are no longer applicable to major mergers which come within the Community's regulation for major mergers?
My questions there are: is there to be a complete overhaul of United Kingdom legislation in that way? Will the minor mergers in the United Kingdom continue to be subject only to the public interest test or will the test be modified to bring it into line with the competition test in force throughout the Community?
In conclusion, I should like to dispel any illusion that if the proposed regulation is put into effect all commercial and industrial undertakings throughout the Community will, in practice, be able to benefit equally thereunder without regard to national frontiers. Undertakings in the United Kingdom are far more open to takeovers than those in other Community countries. In France and Germany, undertakings are subject to a measure of control by the local banks, which regard their customers and their interests on a long-term basis. In Italy and Spain, undertakings are controlled by a system of cross-holdings. In the United Kingdom, as a result of high inflation and taxation, income profits, compared with capital profits—the old notion of long-term investment—have been subject to the professional managers' needs to produce monthly results above the average market rise. People tend to look at short-term rates rather than at long-term benefits.
As the United Kingdom is an open market, it is now being entered by American, Japanese and South American business interests which wish to establish manufacturing bases within the Community before 1992. They cannot easily obtain such bases in other European countries. In our short-term interest, the introduction of those United States and Japanese interests may assist our balance of payments, but I ask whether it is in our long-term interest to see the control of manufacturing undertakings passing out of the United Kingdom in that way and their future profits going abroad. Our City institutions should now be encouraged to start taking a longer-term view of investment.
§ 9.2 p.m.
§ Lord Hacking
My Lords, I did not put my name down to speak in your Lordships' debate this evening because I was uncertain whether I would be able to attend the debate and certainly the early stages of it. With your Lordships' permission I should like briefly to intervene to ask the Minister a few questions of which I have already given him informal notice.
The premise upon which I put my questions to the Minister is that this is a most excellent report produced under the chairmanship of the noble and learned Lord, Lord Oliver. I do not anticipate the Minister in any way disagreeing with that proposition. Secondly, the premise on which I put my questions to the Minister is that the committee has come out with some very sound recommendations. Again, I am not expecting the Minister to disagree about that. The question is, where do we go from here? More specifically, what 484 assistance can the Government give for the fulfilment of the recommendations of this committee?
I cite one area for your Lordships' consideration and the consideration of the Minister. The noble and learned Lord in introducing the committee's report spoke about the transfer of competence and spoke about the need, before the transfer of competence takes place, as identified in the draft directive, for there to be adequate staffing at the Commission and DG IV when dealing with the anticipated increased work load of competition work at the Commission. Specifically, the noble and learned Lord's committee set out three conditions which it was suggested should be met: first, that there should be sufficient additional staff; secondly, that there should be high calibre staff with relevant experience; and, thirdly, there should be the effective deployment of that staff within the DG IV. I am referring to paragraphs 80, 81 and 82 of the committee's report.
What was the reason for the committee expressing that concern? It is to be found in the evidence which was put before the committee. I cite two examples of it. The joint working party of the legal profession expressed considerable concern about staffing needs. I refer to paragraph 2.5 of its written submissions to the committee which reads as follows:If the Commission is to meet the 2 month time limit"—that is for the commencement of proceedings—it is essential that it is to be adequately staffed. Recent UK experience indicates that even normal merger clearances may take 4 to 6 weeks to process, and the UK authorities usually have to consider the impact of mergers on the UK and are dealing only with Government Departments in the UK. In determining the appropriate turnover and market share thresholds to be used in the Regulations, the Working Party urges the Commission not to underestimate the time and resources necessary both to assess the economic impact of Community wide mergers in a variety of industries …and to liaise with … the authorities in those Member States directly concerned by the merger".Those of your Lordships who have read the report may recall that there was some significant evidence put before the committee by the chairman of the Monopolies and Mergers Commission in oral testimony before it. I am referring to the testimony of Mr. Sydney Lipworth which is to be found on pages 4 and 5 of the evidence before the Committee. He cited the demands upon the Monopolies and Mergers Commission of certain recent mergers. Of those he particularly cited the BA/B.Cal. merger of November of the year before last and described that as a "fairly heavy merger". He said that six members of the group dealt with it, supported by 16 members of the staff. He spoke of a nine-day hearing concerning this proposed merger and calculated that something like 527 man days were involved. That is a colossal workload and if there is to be a transfer of competence and an increase in the workload of the Commission there must be an anticipation of the great need to deal with staffing.
Specifically, I ask the Minister what assistance the United Kingdom Government will provide concerning the first condition identified by the noble and learned Lord's committee: sufficient additional staff. What representations or influence will Her Majesty's Government use at the Council of Ministers to ensure, among other matters, that 485 appropriate funds are available for a sufficient additional staff.
Further, concerning the high calibre of staff with relevant experience, are Her Majesty's Government able to assist the Commission in secondment of experienced men and women, possibly from the Monopolies and Mergers Commission, who would be available on a secondment basis, to assist DG IV. Then in order to meet the third condition, what will Her Majesty's Government do to support the effective deployment of staff within DG IV. That is a mattter for the Commission, as recognised by the noble and learned Lord. Nonetheless, there is an area of influence here.
Those are the questions I wish to put to the Minister because the valuable report which has been put before your Lordships deserves to have influence in the Commission and to have its main recommendations fulfilled.
§ 9.10 p.m.
§ Lord Peston
My Lords, I think that I am the last to add my congratulations to the sub-committee for a superb report. It gives a very clear exposition of the directive and of the UK position with respect to monopolies and mergers control. We are also told much of interest about what happens in other countries.
Much as I would be extremely interested in the massive volume to which the noble Lord, Lord Lloyd of Kilgerran, referred, which covers these matters, perhaps he can arrange for it to be sent to your Lordships. I should certainly then read it with great interest. I congratulate the sub-committee on the brevity of its report. It is immensely useful to your Lordships, to the other place and to the wider public of practitioners, lawyers, academics and, not least, academic economists. I look forward to the Minister's reply. The report, I hope, is taken seriously by Her Majesty's Government.
Having said that, I am not uncritical of the report. I shall make one or two critical remarks about it, not least along the lines of what was said by one or two of my noble friends. Before that, apropros at least one of my noble friend's contributions, I ought to reveal at least one bias, namely, that the doctrine of consumer sovereignty is one that I believe in strongly. It never occurred to me to regard it as a heresy. I believe that if my own party had listened to my views over the last 25 years on that doctrine we should be sitting on those Benches and the noble Lord, Lord Strathclyde, would be sitting on these Benches. However, as noble Lords will see, I do not have an uncritical view of the consumer sovereignty problem and I wish to place it in the context, mentioned by my noble friends, of employment and the maintenance of full employment.
Before I come to the question of criteria, let me say that I certainly see a need for a Community-wide body to investigate mergers and, more generally, to investigate anti-competitive practices which affect the single market. In my view—I am not a legal expert—more can be done and could have been done under Articles 85 and 86 than has been done. That does not detract from the need for the directive. 486 Equally, the need for a vigorous, dare I say more vigorous, competition policy on local and national markets does not undermine the value of the directive.
The problem is to which mergers the Community regime should apply. We have the usual problem of the desirablity of discouraging mergers and the undesirability of building yet another massive bureaucracy which would be swamped with too much work. In my judgment, the committee is right, at least for the moment, to suggest that, to start with, only the very largest mergers should be considered. Again, expressing a personal view and assuming it was successful, I should want in due course to go some way towards the lowest limits suggested by the Commission.
May I comment on at least one other aspect of the draft regulation? A part that I would most wish to support concerns pre-notification. As the noble and learned Lord, Lord Oliver, pointed out, there will be mandatory pre-notification under the directive. My noble friends and I tried hard during the debates on the Companies Bill to amend the Fair Trading Act 1973 to make pre-notification here mandatory. I repeat the point that I still do not understand the Government's position. Essentially they say that it works as if it were mandatory; therefore, there is no reason to make it mandatory. I take exactly the opposite view. There is every reason to make it mandatory.
It may have been the noble Lord, Lord Lloyd, who mentioned the Takeover Panel. It is an oddity, so far as I know, that the Takeover Panel does not exist in the same form anywhere else. I would have liked to see more comment on the Takeover Panel in the report. I revert to my own and my noble friends' view that the Takeover Panel should have a statutory foundation. These ideas were rejected by the Government. I can only repeat that we still hold those views and that they are particularly heightened by the obligation to pre-notify in the regulation.
On the question of who should do the work, I do not see—and I think that most noble Lords agree—how this work can be devolved to the national level either singly or severally. I also agree with the committee that it is not obvious how something akin to the Monopolies and Mergers Commission could be set up at the Community level. Having said that, and reflecting on the committee's report, I wondered whether a case could not be made to establish an independent body to scrutinise the Commission's report on a merger before action could be taken. I throw that out to show that while other noble Lords may find this subject not of riveting interest I actually find it of riveting interest.
On staffing there is a general problem of getting people of ability in this area with the requisite skills. In the United Kingdom we have always lacked economists, lawyers and accountants with a sufficient appreciation of each other's disciplines. This is partly a weakness of our higher education system. However, the professions themselves have never been sufficiently interested in each other.
I, for one, would like to see set up an educational research group in one of our major law departments; 487 say, one which has an interest in monopolies and mergers. If such a group were set up I would very much like to see it have a European dimension as part of its remit. Those of us who have any experience of the United States have always been enormously impressed by how their lawyers, accountants and economists know about the other relevant disciplines. That is all I have to say on staff, but it is an important point because if we are going to do good work in this area we need first-class staff.
May I turn to the relationship between the Community and national merger control. I think that I am slightly at odds here with your Lordships' committee. I can see that if a merger is not cleared at the EC level it cannot logically be cleared at the national level. But supposing it is cleared at the Community level? Let us assume that the Community sees no Community problem. I cannot see logically why a country still could not decide that it had deleterious effects at the national level. Therefore if it had powers to act and investigate it at the national level, I cannot see remotely why it should be prevented from doing so. I simply do not follow the committee on that point. There is an asymmetry there between whether it is cleared or not cleared. I would be convinced that the argument that I have put forward is the correct one. If it were cleared at the Community level, it does not seem to me that it should be taken for granted that it should be cleared at the national level.
We then come to the related question that noble Lords have raised, which is the criteria to be applied. We should remember at all times—and this is set out clearly in the sub-committee's report—the criteria that define the public interest so far as concerns the United Kingdom as set out in Section 84 of the Fair Trading Act 1973. Those criteria are meant to guide the Monopolies and Mergers Commission. Again I and my noble friends have argued that they should also be the explicit guides to the Director General of Fair Trading and the Secretary of State. We wanted those written into statute, but we failed in that regard.
I cannot see how we could proceed in the European direction—which is something I am keen for us to do in this area—without arguing that those same criteria should apply. I simply do not see logically how that could be so. One or two noble Lords have pointed out the contradiction between national and European activity. I do not think that we can throw away the criteria which we have used here for so many years and which we take so seriously.
Having said that, first and foremost merger policy must be about competition. That is why it was invented in the first place—to deal with the possibility of anti-competitive practices and restraints of trade. However, first and foremost does not mean solely. That is the key point. There are other considerations to be taken into account.
Some, as the sub-committee recommends, are concerned with so-called national interest. The problem there is that while it would be very nice to be able to say that we believe that national interest has to be taken into account, to do so one has to be precise. My limited experience of government has 488 taught me that that is one area in which governments would never be willing to be precise. They would always want national interests to be a kind of rag-bag which would cover any matter which was exercising them at a particular time. Therefore including the national interest criterion does not please me a great deal, although I always stand to attention when the words "national interest" are mentioned.
The important issue is what the committee refers to as national controls for the purpose of protecting employment or other social or regional interests. The committee do not favour that. I understand their doubts, particularly their administrative doubts. However, I part company with them on this matter.
To revert to my point about consumer sovereignty—which I strongly believe in—to be a consumer you have first and foremost to be a producer, to earn an income, and then you can spend. The whole doctrine of consumer sovereignty is predicated on full employment. If full employment is not guaranteed or employment considerations are not borne in mind then the case for consumer sovereignty is weakened. To put it differently, the case for taking employment—and that undoubtedly includes regional aspects of employment—into account is overwhelming.
Noble Lords will be aware that I am as extreme as any of your Lordships in my antipathy to mergers. I believe that on the whole they do more harm than good. I have argued and I continue to argue that it should be necessary to show positive net benefits before mergers should be allowed to proceed. However, markets, even competitive markets, are imperfect. It is for that reason that other considerations—social, regional, and employment considerations—must be looked at. In saying that, I do not go to the other extreme of saying that they are the only issues that need to be looked at. I simply want to see them weighed in the balance. I very much agree with my noble friends, notably my noble friend Lady Birk, that it will not be acceptable to ignore those matters.
Finally, I should like to echo the words of the noble Lord, Lord Lloyd of Kilgerran, and to some extent the noble Lord, Lord Grantchester, in asking what action is being taken or will be taken. What will be the consequences for the UK if the directive is put into practice? In particular, can we expect that when the Companies Bill returns to your Lordships' House there will be government amendments recognising the existence and the potential of the directive and recognising more generally the European dimension in monopolies and mergers policy?
§ 9.24 p.m.
§ Lord Strathclyde
My Lords, I too join other noble Lords in thanking the noble and learned Lord, Lord Oliver of Aylmerton, for his excellent introduction to the debate and, in particular, for the way in which he explained the deliberations of the committee. I should also like to associate myself with the words of my noble friend Lord Morris when he said in his opening remarks—at least, I think that this was what he said—that the more complicated the subject, the better the report.
489 We have heard a variety of interesting views on this important subject this evening. The problem before us is to establish how best to deal with merger control at the Community level. Those who say that a Community merger control regulation, as currently proposed, would provide the ideal solution to that problem are mistaken. There is much in the Commission's proposals which could and should be clarified and improved.
The European Commission's proposals for a Community merger control regulation have been on the table, in various forms, for over 15 years. But the approach of the single European market has given them new impetus and the pace of discussion has quickened markedly over the last 12 months.
As 1992 approaches, the remaining barriers to trade among the Community countries will gradually be removed. That will no doubt increase the scope for competition from the rest of the Community and increase the importance of that factor in the consideration of mergers.
We welcome the changes being prepared as part of the approach to the single market, provided that they lead to a more competitive market in Europe, which will encourage dynamic and successful business that can compete effectively on the world market. While on that subject, I should say that I look forward to the debate of the noble Viscount, Lord Chandos, on the Community in a couple of weeks' time.
As your Lordships' comprehensive Select Committee report explains, certain mergers may already be controlled at the European level, under Articles 85 and 86 of the Treaty of Rome. We are therefore not trying to determine whether there should be control of mergers at the Community level, but rather which mergers should fall to Community control, and how the Commission should assess them.
The Commission's proposals for a Community merger control regulation require unanimous agreement in the Council of Ministers. In discussions on the draft regulation, the UK continues to maintain a general reservation on the principle of a regulation. That is because we believe that it is very important to consider the Commission's proposals as a package. Many key questions remain unanswered and we shall maintain such a reservation until the proposals as a whole go a good deal further towards meeting our concerns and until the Government are convinced that a regulation would be an improvement on the current position under existing Community law.
Some of the critics of mergers policy in the UK, who argue that it is too parochial, have gone on to say that implementation of the proposed merger control regulation would provide the ideal solution. We believe that that is too simplistic a view. As I said, a degree of control over mergers at the European level does of course already exist in the form of Articles 85 and 86 of the Treaty of Rome. However, the extent to which these articles are applicable to merger situations is limited. That is why the Commission is seeking a specific instrument 490 for the control of mergers at the Community level. It is an open question whether the regulation should necessarily provide a better regime for controlling Community mergers than the existing regime of Articles 85 and 86. That will of course depend on how it is framed. That is why we attach great importance to negotiating constructively on the detail of the proposals.
The noble Lord, Lord Murray of Epping Forest, said that, post-merger, companies' performance was often disappointing. I agree with what the noble Lord, Lord Peston, said—at least, I think that we agree—but it must be for the market to decide and for investors to assess the situation. It is not the role of government to second-guess commercial judgment. The noble Lord, Lord Murray, went on to look at the aspect of companies needing to prove that merger proposals are positively in the public interest. To reverse the burden of proof in that way is inconsistent with the Government's general approach that the market and the shareholders are best placed to decide the outcome of mergers. It would make mergers much harder to carry out and would weaken the discipline of the market over incumbent company managements.
The Government are fully committed to preventing a small number of mergers which are genuinely anti-competitive. But the presumption underpinning all that we do is that in the vast majority of cases the market should be allowed to get on with it. The noble Lord gave an interesting exposé of the Government's merger policy as outlined in the Blue Paper. I believe that he will not be surprised to hear that I am not entirely convinced by his arguments.
My noble friend Lord Morris asked a number of questions on the procedures and the clarity of drafting of Article 2. Of course these require further discussion, such as the extension of timescale for the initial Commission scrutiny of mergers and the drafting of Article 2, but I agree that further work is needed to ensure that procedures are fully worked out and that the bases for decisions are clearly understood. Discussions with the Commission are continuing on all these matters.
I particularly enjoyed the delightful speech of the noble Lord, Lord Lloyd of Kilgerran, who gave the view of the practitioner. In particular he highlighted in the committee's report the lack of comment on the takeover panel. I am sure that the noble Lord is aware that the adoption of the Community merger regulation would not materially alter the operation of the takeover code or its present consensual basis in the United Kingdom.
I felt that the speech of the noble Baroness, Lady Birk, was especially thoughtful and her remarks were backed up by the noble Lord, Lord Peston. I have to say that merger control is not intended to freeze a company's status quo. It cannot guarantee employment and of course rationalisation may take place even when no merger has occurred. It has to be part of the management or commercial decisions which a company may take for itself. Mergers may have an effect on local employment but to seize on the immediate effects of mergers as reasons for 491 preventing them would drastically reduce parts of the economy and its flexibility. Nevertheless the Government take note of the sentiments of the noble Baroness.
We agree with the noble Lord, Lord Grantchester, that this regulation if adopted would contain very important provisions, but we do not consider that this will require reconsideration of the Government's mergers policy. There is no reason for that policy to be reviewed in the light of the regulation. Merger references to the MMC will continue, whether or not the regulation is adopted and our policy for deciding whether to refer will remain the same.
The noble Lord also asked about minor mergers and their applicability to Articles 85 and 86 of the treaty. The Commission has proposed that mergers below the thresholds would not apply because the Commission argues that they do not have a Community dimension. Of course we are examining that approach.
The noble Lord, Lord Hacking, gave me notice of the points that he might raise if he were in the Chamber—and I am glad to see that he is. Commissioner Brittan has assured all member states that timely steps will be taken to ensure that adequate and able resources are put in place in good time to ensure that the proposed timescales for decisions can be met. The Commission understands that member states will wish to be satisfied on this point before a regulation could be adopted.
The noble Lord, Lord Peston, gave us the benefit of his views and I admire his logical approach to a whole range of problems. In particular he asked about the inconsistency of the European and national criteria for vetting mergers. At the European level the Government's view is that competition should be the criterion. At the national level the Government have emphasised that competition is also the main criterion. However, I follow the noble Lord's argument and there could be an interesting philosophical discussion about what would happen at the two different levels. The Government certainly do not intend to let a regulation be rushed through in an unsatisfactory form. They share the view expressed in the noble and learned Lord's report that there would be no point in a council recommendation which left major areas of uncertainty.
As the report indicates, despite some recent improvements and clarification in the commission's proposal, there are several major issues of central importance still to be resolved on the regulation. There remains a great deal of detailed technical work still to be done.
In conclusion, perhaps I may thank again the noble and learned Lord, Lord Oliver, for his introduction. Perhaps I may say that the report will continue to be studied by the Government with great care.
§ Lord Oliver of Aylmerton
My Lords, in winding up the debate I do not propose at this hour of the evening to take up more of your Lordships' time in seeking to defend the report against criticism. I 492 accept straight away the criticism of my noble friend Lord Murray of Epping Forest that the report concentrates on the legal rather than the practical implications in the general context of competitiveness. We were very conscious that the role of national authorities and national interests is one of the great difficulties in particular when deciding how one reconciles the continuation of a national control by 12 different member states with the philosophy of a Community control and possibly a one-stop shop.
These are difficult questions. In recommending the report for debate the committee was very much aware that much of what emerged from the report would be of a controversial nature. This debate has amply illustrated that. I have regarded my task as presenting rather than defending the report. I believe and hope that the debate we have had tonight has been a most useful and constructive one. I am grateful to noble Lords who have been kind enough to compliment me on my very minor part in the production of the report. It only remains for me to thank those noble Lords who have spoken.
On Question, Motion agreed to.