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Session 2001- 02
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Standing Committee Debates
Enterprise Bill

Enterprise Bill

Column Number: 253

Standing Committee B

Thursday 25 April 2002


[Mr. Nigel Beard in the Chair]

Enterprise Bill

Clause 20

Duty to make references in relation to completed mergers

9.30 am

Mr. Nigel Waterson (Eastbourne): I beg to move amendment No. 63, in page 10, line 30, leave out 'shall' and insert 'may at its discretion'.

The Chairman: With this it will be convenient to discuss amendment No. 33, in page 10, line 30, after '(3)', insert 'have a discretion to' and amendment No. 64, in page 19, line 11, leave out 'shall' and insert 'may at its discretion'.

Mr. Waterson: We now take a spectacular backwards leap to clause 20 and, as the excitement mounts, move to mergers. We have a fair bit to say on the groups of amendments, and the clause could be heavily amended. It is one of the most important clauses, and many of the points raised in the amendments are later repeated. Therefore, if progress appears to be slow, it is in a good cause, and will save time later in the clause. I should also like to put down a marker—subject to your total discretion, Mr. Beard—that the clause merits a substantial stand part debate, after its amendments, which raise narrow issues, have been debated. The clause is key.

We have three amendments in the group; amendment No. 64 is an amendment to clause 31, but it echoes issues that arise in clause 10. They would give the Office of Fair Trading the discretion, rather than the obligation, to make a reference to the Competition Commission in relation to both completed and anticipated mergers, the provisions for which mirror one another.

There is no politics in the clause. The proposals have been widely consulted on, trailed and discussed. It is fair to say that the principles involved in changes to the mergers and competition regime are broadly supported by the whole gamut of organisations, and by Opposition Members. Points of detail about how the changes will work in practice have been raised by people such as the CBI, and it is our duty to bring them to the attention of the Committee and the Government. There should be more light than heat—famous last words, perhaps—on this part of the Bill.

Under the Fair Trading Act 1973, the Secretary of State has a discretion, acting on the advice of the Director General of Fair Trading, over whether to refer mergers. There is a general acceptance that the tripartite structure has been creaking in recent years and that it needs re-examining. Clause 20 proposes the requirement that a reference is to be made in the cases of completed and proposed mergers, except in certain circumstances, which we will debate later.

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The balance will shift from a discretion to an obligation on the OFT to consider mergers. We, and the business organisations, say that that will lead, in effect, to obligatory pre-clearance for mergers. At the moment, it is a useful and helpful procedure for mergers to be pre-cleared because it saves much cost and anguish later, but it is at the discretion of the parties. We are puzzled as to the reason for the shift. The amendment is probing because we are keen to hear why the Government want to shift the balance.

This provision is all the more strange when contrasted with market investigations under clause 123, where a discretion is conferred. We think that, if clause 20 goes through unamended, it will impose extra burdens on industry and that companies will be much less willing to take a chance on a merger. They will, from an abundance of caution—to use a lawyer's phrase—refer mergers for pre-clearance as a matter of routine. That will have two effects. One, as I have said, will be the burdens placed on industry and the other will be the extra burdens on the OFT.

Although the OFT will be geared up in terms of resources and staffing, it will suddenly get a great tranche of exciting new powers, duties and, as we debated at some length, ''functions''; that seems to be some kind of interim expression. If it suddenly finds that every single anticipated or actual merger is crossing its desk as a matter of practice, I wonder whether it will be able to cope.

The amendments are designed to probe the thinking behind a significant move from the current situation. We think that that move will bring extra burdens to business and to the OFT. We would like the Under-Secretary to explain the reasoning behind it, which, for all we know, might be eminently sensible and well thought through.

Dr. Vincent Cable (Twickenham): I would like to say a few words about the amendment, to which I attached my name. Like the hon. Member for Eastbourne (Mr. Waterson), I was simply curious about why that language had been used. The Government's intentions here may well be very sensible, but it is important to be clear about them. Given that the whole purpose of the legislation is to give the OFT and the competition authorities greater independence and discretion in making their judgments, it seemed odd to circumscribe them in that way.

I have intervened to pursue the Government a little further on their intentions on merger activity in general. A discussion on Second Reading puzzled me a little. I had spoken to compliment Ministers for having introduced legislation that seemed, on the face of it—certainly in the language of this clause and some others—to have the general effect of slowing down merger activity. That seemed basically right. Much business and economic literature suggests that mergers are often unproductive and damaging, are unhelpful to the shareholders of the firms making the takeover and often have widespread negative economic consequences.

It seemed to me that if the effect of legislation was to throw sand at merger activity, it might be desirable

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and that the only people to be upset by it would be those in the City who earn fee income from merger and takeover activity and executives with stock options who can currently take advantage of big fluctuations in share prices. I felt that if the legislation were to slow down merger activity, or make companies think twice about it, that would be desirable.

The Under-Secretary, however, in her reply to me, specifically made a point of giving reassurance—not to me, but perhaps to others—that the legislation would not have any effect on the amount of mergers taking place. I was puzzled by that and by why the Under-Secretary felt it necessary to decline the compliment that I had paid her through her legislation.

The hon. Member for Eastbourne has done a useful service in teasing out from the outset the purpose of the language. Is it intended, as I hope, to introduce a more cautionary note before companies embark on merger activity, or is there some other reason? As the hon. Gentleman said, it is purely a probing amendment. We are interested in knowing from what direction the Government are coming at the problem.

Mr. Jonathan Djanogly (Huntingdon): I back up the comments made by my hon. Friend the Member for Eastbourne. It cannot be assumed that the only exclusions that will always be relevant to subsection (1) are those set out in subsection (2). Other situations may be relevant or may become relevant. Whichever way one looks at it, there is always going to be a subjective element in the way in which subsection (2) is interpreted, and therefore other issues could come up. The effect of a merger will always need to be reviewed on a case-by-case basis, looking at who may be affected and who may be helped by the proposals. That needs to be examined in the context of those issues' relevance to competition as a whole.

The OFT is, of course, going to be forced to make a reference unless subsection (2) comes into effect. As the hon. Member for Twickenham (Dr. Cable) rightly said, that could lead to a waste of taxpayers' money, let alone shareholders' money, through unnecessary advisers' costs. Wider discretion than is currently being suggested should be given. We should also keep in mind that, over the years, different Secretaries of State have interpreted the existing provisions in different ways. I fully support the idea of de-politicising the concept of merger activity. On the other hand, it is not always a political issue because priorities and the way in which things are looked at can change over time. To that extent, I support the amendment, which identifies that and attempts to make the situation more adaptable.

Mr. Ken Purchase (Wolverhampton, North-East): I wish to make a short intervention on the question of whether the OFT ''shall make a reference''. The exclusions are very comprehensive, and narrow the opportunity for the OFT to make such a reference. There may be circumstances that, while falling foul of those exclusions, would, in the minds of the members or the director of the OFT, suggest that a reference ought to be made.

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I agree with the hon. Member for Twickenham that often the only beneficiaries of what not too long ago we used to call merger madness were the fee takers from the City firms of accountants and solicitors. Others who know the west midlands will share my view that the beginning of the end for the Goodyear plant in Wolverhampton was the attempt by the Goldsmith empire to take over the Goodyear company. Ten or 15 years ago, it cost Goodyear £60 million to ward off that takeover bid.

There is a view, which I regard as perverse, in the City that takeover activity keeps managers on their toes, but the overall effect has been unhelpful to British industry, and particularly productive industry. Rather than widening the exclusions, the idea of using some force—the OFT ''shall make a reference''—is right. I should not like to see that narrowed in any way.

Mr. Mark Field (Cities of London and Westminster): I appreciate that we shall come back to some of the larger-scale issues relating to clause 20 in the stand part debate. However, I should be interested to receive some guidance from the Under-Secretary on my concern that much has been made of part 3 of the Bill in some way removing Ministers from the running of the merger regime. I am greatly concerned that potentially quite of lot of behind the scenes pressure will be brought to bear.

I do not share the view expressed by my hon. Friend the Member for Huntingdon (Mr. Djanogly), that politicians should necessarily be taken out of the merger arena. In part, those are political decisions and one has to accept that. Business and industry quite understandably look for clarity, consistency and some sort of predictability, but as political fortunes and ideas inevitably ebb and flow, the idea of there being predictability from decade to decade is a fallacious one.

However, my concern is that the OFT does not have a discretion because a statutory rule is in place. Each amendment makes reference to the fact that the OFT ''shall'' rather than may have a discretion to act in a certain way, which may result in even more political pressure behind the scenes. I am interested to know what the Under-Secretary has to say about that. Once the OFT is effectively no more than a rubber stamp, it will presumably be at the next stage when political pressure comes into play.

We shall discuss the whole issue in the broader surrounds of clause 20 and others, but with that concern in mind, I would be interested to hear what the Under-Secretary has to say.

9.45 am


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