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30 Oct 2002 : Column 935continued
Mr. Djanogly: My hon. Friend makes a very good point, and reminds me of the old adage that turnover is for vanity and profit is for sanity. That has the important implication that, in a tough economic environment such as the one that we have now, the turnover might mean that companies will have less profit and that it would be more important to have a higher turnover figure because of that.
Mr. Hoban: I am aware of my hon. Friend's commercial background and his understanding of these issues, and he makes an important point. A company could have relatively low profitability, which might suggest that it had a weak market position and low market share, and that it perhaps did not have the opportunity to impact on the competitive environment in which it operates. Simply because its turnover was more than #70 million, however, that application would be called in and looked at by the OFT. It is, therefore, important to ensure that the turnover level is set fairly and appropriately. The Minister referred earlier to the way in which that level could be reviewed. She intimated that it could be reviewed downwards, and my hon. Friend the Member for Huntingdon (Mr. Djanogly) referred to an upwards review.
Mr. Mark Field: Does my hon. Friend agree that, following the CBI's research to which several hon. Members have referred in this small debate, one of the best ways forward might be for the Government to look at the number of companies likely to be encompassed within the confines of such a turnover test? They could then adjust the test on the basis of, for example, the 20,000 or 30,000 companies that would be subject to the provision. In other words, the measure would have an eye to a much more broadly based market, rather than being overly hamstrung by the purely financial terms of turnover.
Mr. Hoban: I am grateful to my hon. Friend for raising that important point about the number of companies being brought into the provisions of the Bill. My understanding from reading the debates in the other place is that the #45 million level was set with a view to bringing the same number of companies into the net as the #70 million gross asset test would have brought in. I think I see the Minister nodding assent to that explanation, and I am grateful for that. We should not make decisions about thresholds simply on the basis of getting an equivalent number of companies into the net. That would be an inappropriate way of monitoring competition, because we should be looking at the impact of transactions on competition and the market, rather than focusing on the level of turnover.
Mr. Robathan: Does my hon. Friend share my suspicion that there has been no well-justified or empirical analysis of this threshold? We thought that the original figure of #45 million was plucked out of the air. Let us take a median point and pluck the figure of #70 million out of the air, because that seems better and might satisfy us. To a certain extent it has done so. There has not been sufficient analysis of why we should have the figure of #70 million.
Mr. Hoban: I am grateful to my hon. Friend for raising that point, because this is one of my principal concerns. I would not say that the #70 million figure has been plucked out of the air, because that would be unfair to the Government. It is, however, a number with which we are familiar from the gross asset test applied under the previous regime. It is important that we use a sensible figure that is based on empirical evidence. That is the basis of the #100 million that the CBI suggested, which was proposed in amendments in the other place and accepted into the Bill there.
I am concerned that the amendment that the Government have tabled is arbitrary in the way in which it sets a threshold for applications to be investigated by the OFT. The Government should be clear that this is only a holding figure. They should reconsider it in the light of experience and empirical evidence, and I hope that the CBI survey that was used to set the figure of #100 million can be used as a basis for the research
I shall deal first with the figure set for the turnover threshold. The Competition Commission's estimate of the operation of the #100 million turnover threshold is that there would be 50 per cent. fewer mergers under consideration. It is worth reiterating that figure. In fact, the analysis that the Government carried out was based on the Fame database, which gives details of 1,699,137 companies that filed in 200001. That showed that there were 9,966 live companies with assets of #70 million or more. It also showed 7,806 companies with a United Kingdom turnover of #45 million. So, the turnover figure was as close as we could get to that. Only 5,350 companies on the database have a UK turnover of #70 million or more. The figure for companies with a turnover of #100 million was 2,258, compared with the original number of 9,966, based on the assets figure.
Mr. Redwood: We are talking about a merger, so we have to add one turnover to another. Has the Minister any information on how many of the mergers that have been referred and blocked under the present regime would not have been blocked under either the #70 million or the #100 million turnover figure? That is the more interesting figure for us to know.
Miss Johnson: The right hon. Gentleman will appreciate that I do not have the whole analysis file here, but very detailed work went on. I hope that I have explained one approach that was made by the Government, and why the figure was picked out as being the best stab that we could make. We shared our findings with the CBI, which undertook further analysis using the different methodology to which other hon. Members have referred. That suggested that it thought that the #100 million figure would be more appropriate, but its approach is based on measuring the average turnover of the companies that happen to meet the assets test, establishing a ratio of that turnover to assets and applying the ratio to the #70 million assets threshold to establish an equivalent turnover threshold. We think that that is an unreliable way of doing it.
Changing the test means that we will inevitably cover a slightly different range of companies. We certainly think that new technology companies whose turnover might significantly exceed their asset base might be covered by the new test for the first time. I return to my original point, with which I am sure all hon. Members agree, that we are seeking to find an equivalentby moving from the assets test to the turnover testthat captures those companies within the regime for consideration. As I have said, many of the cases are just cleared mergers or investigations that are not taken further. It is important that we look at the same segment in relation to competition issues.
It is also important to note that the turnover threshold relates to the turnover of the target company, to which the right hon. Member for Wokingham (Mr. Redwood) referred. A large company may acquire any company with a turnover up to the threshold without qualifying under this test.
I hope that I have explained why we have got to where we are. We have all agreed that we need to compromise. Clause 27(4) contains a requirement for the Office of Fair Trading to report to the Secretary of State on the appropriateness of the level. I believe that we need to reconsider this matter as time goes on.
Assurances that the Government gave in the other place about the three-year review need to be seen in the light of the original #45 million figure. We have the same interests as Opposition Members and will want to consider how the #70 million figure is emerging to see that it is broadly producing the same playing field for competition merger concerns to be considered as the present regime does, with the improvement of the turnover test. I hope that Opposition Members will support these amendments.
(a) the Secretary of State has reasonable grounds for suspecting that it is or may be the case that
(i) a relevant merger situation has been created or that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation; and
(ii) a concentration with a Community dimension (within the meaning of the European Merger Regulations), or a part of such a concentration, has thereby arisen or will thereby arise;
(b) a reference which would otherwise be possible under section 21 or 32 is prevented from being made under that section in relation to the relevant merger situation concerned by virtue of Community law or anything done under or in accordance with it; and
(c) the Secretary of State is considering whether to take appropriate measures to protect legitimate interests as permitted by article 21(3) of the European Merger Regulations.
(2) The Secretary of State may give a notice to the OFT (in this section Xa European intervention notice") if he believes that it is or may be the case that one or more than one public interest consideration is relevant to a consideration of the relevant merger situation concerned.
(3) A European intervention notice shall state
(a) the relevant merger situation concerned;
(b) the public interest consideration or considerations which are, or may be, relevant to a consideration of the relevant merger situation concerned; and
(c) where any public interest consideration concerned is not finalised, the proposed timetable for finalising it.
(4) Where the Secretary of State believes that it is or may be the case that two or more public interest considerations are relevant to a consideration of the relevant merger situation concerned, he may decide not to mention in the intervention notice such of those considerations as he considers appropriate.
(5) No more than one European intervention notice shall be given under subsection (2) in relation to the same relevant merger situation.
(6) Where the Secretary of State has given a European intervention notice mentioning a public interest consideration which, at that time, is not finalised, he shall, as soon as practicable, take such action as is within his power to ensure that it is finalised.
(7) For the purposes of deciding whether a relevant merger situation has been created or whether arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation, sections 22 to 31 (read together with section 33) shall apply for the purposes of this section as they do for the purposes of Chapter 1 but subject to subsection (8).
(8) In their application by virtue of subsection (7) sections 22 to 31 shall have effect as if
(a) references in those sections to the decision-making authority were references to the Secretary of State;
(b) for paragraphs (a) and (b) of section 22(9) there were substituted X, in relation to the giving of a European intervention notice, the time when the notice is given";
(c) the references to the OFT in section 23(2)(a) and (b) included references to the Secretary of State;
(d) sections 24, 30 and 31 were omitted; and
(e) the references in sections 22 to 28 to the making of a reference or a reference were, so far as necessary, references to the giving of a European intervention notice or a European intervention notice.
(9) Section 41(3) shall, in its application to this section and section (Scheme for protecting legitimate interests), have effect as if for the words Xintervention notice" there were substituted XEuropean intervention notice"."