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One of the important points of difference is that a public company has shareholders who are entitled to know all the information that I mentioned in order to make a decision on whether it is the sort of company that they want to invest in. There is no such requirement on privately owned companies. The TUC points out that that has social and economic impacts on society, and implies that private equity companies and all private companies above a certain sizealthough I have not been able to work out exactly what size it is referring toshould produce such information in order to create a level playing field. In the case of large companies with customers, those customers will be interested to know about the business practices of any company that they are going to buy from. However, a good company should publish that information anyway, without a statutory requirement.
Another reason why the TUC does not like private equity companies is that they are often highly leveraged, which means that there is a high ratio of debt to equity and therefore a riskier future for their employees. It has a point, certainly in the current economic climate, although such companies are prepared to take on what are often much riskier propositions themselves. The TUC also points out that the debt of private equity companies is tax-deductible, so that high performance indicators for private equity companies would be only mediocre if that factor was stripped out of their results. We heard a lot from the hon. Member for Shipley about the wealth-creating abilities of private equity companies, but the TUC is not happy about the fact that those tax factors apply.
Another thing that sticks in the unions throat is the fact that private equity company partners are taxed on the basis of capital gains tax, not income tax, so they can pay only 10 per cent. tax instead of the higher rate of 40 per cent. that they arguably should be paying. That is a fair point.
Even if the points that the unions have made do not impinge on this particular Bill, it may be interesting to give a bit of background. Another macro-economic implication that the unions do not like is that purchasing of publicly quoted companies reduces the size of the stock market, and if the size of the stock market is reduced, the liquidity of capital is reduced, which is seen as vital in ensuring the efficiency of capital investments. In summary, it seems that the unions see private equity as an unwelcome and uncontrolled intruder that gums up the economic works, and threatens jobs and not least the influence and power of the TUC itself.
Will the Bill sort out the problems that I have described? Besides treating large private equity companiesagain, I am not sure what large meanslike publicly quoted companies, it adds further restrictions to the activities of publicly quoted companies as well. That is the information I have from the CBI, and I take on board the points made by the hon. Member for Nottingham, East about having a level playing field. However, the CBI is convinced that there are issues in the TUPE requirements that will have a detrimental effect if they spill over into the
affairs of public companies. If the Bill goes to CommitteeI regret to say that it probably will notit will be important for us to consider those matters carefully. Members of all parties would not want the Bill to reduce the competitiveness of any sector of the market, although I fear that it might.
It is worth repeating that much of what the Bill proposes are protections that employees of privately owned companies already have. They already have a statutory right for unions or other representative bodies to be consulted if 20 or more redundancies are planned, and a right to be informed or consulted about any significant change in the business. If there is no existing works council or employee representative in place, from 1 April, as the hon. Member for Shipley mentioned, a work force of 50 employees or more can initiate procedures to introduce one. They already have the right to ensure that any existing recognition or collective arrangements remain in play; they retain the same terms and conditions, and rights, as they had prior to the sale.
The TUPE regulations were brought in to protect the rights of employees in non-share sales, to give those employees the same rights as those in publicly owned companies. I am not trying to be tautologous, but if the aim of TUPE was to give employees the same rights that those in private companies had already, what on earth are we doing debating whether existing TUPE requirements should apply to private equity takeover companies? The TUPE regulations were revised in 2006 only after lengthy consultations, and I question how relevant it is to bring the matter up again so soon after a lot of time, attention and consultation went into producing the last lot of regulations.
Mr. Heppell: The regulations were introduced in 2006, but most of the discussions about them would have ended in about 2004. During the negotiations, the issue was raised by the trade unions, but it was not acted on. It was not accepted.
I would like to address the extra aspects of the Bill. The hon. Gentleman says that there will be no difference between private equity takeover and public share takeover companies. He has been talking about the need for consultation, butI am looking to him in the hope and expectation that he will be able to help me on thisthere is a concern that the employees of private equity companies will not receive the same degree of consultation. It is worth considering the implications of additional consultation, beyond that provided for under existing employment rights, for the business of a private equity company trying to complete a takeover.
One of the CBIs pointsthe hon. Member for Shipley referred to this, toois that because of the speed at which companies sometimes have to be taken over and turned around, to the benefit of the employees, the requirement for consultation will make the timeline unattractive. If extensive consultation is made an institutional requirement, the mergers and acquisitions landscape may become a lot less attractive for investors, with, as the CBI has said, an injection of a great deal more uncertainty and delay.
We have discussed the scope of the Bill at some length. Again, there is a big concern about leaving the definition of private equity to the Secretary of State, as defining the term will be extremely difficult for any person or organisation to do. We have discussed whether the term will include venture capital or small innovation businesses. The word large does not really help us understand exactly what sort of animal we are talking about. That is another aspect of the industry, which is so fluid and moves so quickly, changing its composition quite rapidly. It is therefore much more difficult to pin down who is involved, at what stage, and what level of consultation would be appropriate, for both small and large businesses.
I know that the hon. Member for Nottingham, East has his heart in the right place in wanting to prevent exploitation, but just as with the Temporary and Agency Workers (Equal Treatment) Bill, promoted by the hon. Member for Ellesmere Port and Neston (Andrew Miller), the problem is that we are talking about different aspects of business, with different needs and requirements. A one-size-fits-all approach is unlikely to fulfil the requirements of a diverse industry with different needs.
If the Bill drove private investors away, as the hon. Member for Shipley said, there would be plenty of other fluid and attractive markets elsewhere in the world. We have been successful in attracting investment into this country. Although we must have a balance of fairness for all people who work in this countrythat is absolutely a givenat the same time, our flexibility and fluidity enable us to achieve that competitiveness and attractiveness to investment of all different types.
A highly significant and beneficial impact on employment and the economic prosperity of the UK.
That is because of private equitys unique abilities. It will often look for underperforming businesses and inject much-needed capital into them. Private equity can restore profitability and turn failing businesses around in a relatively short period. However, to do that it often has to make unpalatable decisions, such as those involving job losses or culture change. People may lose their jobs, but in the long run that may be the only way for more jobs to be saved.
The World Economic Forum found that despite initial job losses, private equity firms create 6 per cent. more greenfield jobs. They also create faster growth: their annual sales increase at an average 8 per cent., compared with 6 per cent. growth for FTSE 100 companies. The Bill would stifle that market, and for that reason, the Liberal Democrats do not support it.
Mr. David Kidney (Stafford) (Lab): Like the hon. Member for Shipley (Philip Davies), I congratulate my hon. Friend the Member for Nottingham, East (Mr. Heppell) on his success in the ballot. I have taken part in it for 11 years without success, but that experience does not dim my pleasure at my hon. Friends success and his choice of Bill, which I am pleased to support today.
I support the Bill in a framework of fairness. Admittedly, my focus is on the fairness of the treatment of the work force, whose very livelihoods are at stake during the transfer of an undertaking. However, more widely, I should also say that I do not come to this debate with any bias for or against any particular form of enterprise. There is also fairness in the world of business, if there isto use the clichéa level playing field between businesses in respect of how they compete to take over other businesses.
What is unfair at present is that the work force of a company that changed hands for £100 would be protected by the 2006 TUPE regulations, but the work force of a company whose shares changed hands for £100 million would not. That is the unfairness that I want us to address in this debate.
It is true that the TUPE regulations protect a work force of one business that is sold to another from the automatic termination of their contracts as a result of the transfer; at common law, they would all be dismissed as a result of the transfer, but the TUPE regulations continue their employment. If, however, simply the shares in the employer are sold, there is no transfer of the business and therefore no common-law termination of the contracts. In that one regard, it is fair to say that as far as the work force are concerned, there is no difference between TUPE and a private equity purchase. The TUPE regulations give protection from automatic, unfair dismissal related to a transfer of employer; such protection is not given when there is a transfer because of the sale of shares to a private equity business.
The final point about information and consultation has been a subject of great debate today. It is important to point out that the TUPE regulations give a specific right to the work force to have information on and be consulted about the transfer long enough before it takes place. There is no such protection for the work force under general law or other forms of general regulation about consultation and information. That point is crucial to my hon. Friends Bill. There are subsidiary points in the TUPE regulations about collective trade union agreements and acquisitions from insolvency which the Bill also seeks to apply to such cases; they are significant, but of a lower order than the rights that I have already mentioned.
My hon. Friends undertaking to the House today is important. It is to reassure people who might previously have objected to the Bill on the grounds that it would extend the protection given by the TUPE regulations. That is not his intention, and he has made that clear today, which is helpful.
In an intervention, I made a point that I want to repeat now. Given that sovereign wealth funds are beginning to wash up on this countrys shores, there will be significant changes of ownership in the coming years. If we allow one form of ownership, buying up the shares, to have less legal impact for the people who make that decision than the other, buying the company and obliging those involved to follow the 2006 TUPE regulations, when people start to choose the easier route for themand the harsher one for those who work in the businesses targeted with those fundsI predict that our constituents, the media and hon. Members will start to ask why we did not close that loophole when we had the opportunity. My hon.
Friend the Member for Nottingham, East has given us such an opportunity today, and I hope that we will take it. Our constituents will want to know that there is transparency in the arrangements for buying up companies, that there are not distortions in the working of the market, and that employees have protection in such situations. We have the opportunity to make that happen today.
When the TUPE regulations were first introduced into law in 1981, at that stage they did not protect outsourced services such as catering and cleaning. The 2006 regulations did extend to those areas, so we have made changes in the past to ensure that workers are properly protected. I argue that we should make another change to protect another group identified today. If some people say, The law is clear, they are not covered, and that is that, I ask them to consider the case to which the Library research paper refers, Millam v. Print Factory (London) 1991 Ltd., a Court of Appeal decision last year. In that case, a company did indeed think that by buying all the shares it avoided its obligations under the 2006 TUPE regulationsand the Court of Appeal told it that it was wrong. Because of the way in which the company conducted itself after it bought all the shares, it was caught by the regulations. Retrospectively, it found that it should have been obliged to follow the regulations.
Mr. Djanogly: The hon. Gentleman makes exactly the point that many Conservative Members have been making. Even if there is a share sale, it does not discount peoples existing rights, particularly in relation to unfair dismissal and redundancy.
Mr. Kidney: Obviously, I do not agree, because the rights involved are specific to a transfer situation and are provided by the TUPE regulations and not by general law. My point is that those who think that they are safe from the TUPE regulations might find themselves caught by a subsequent court action. That is an uncertainty in the market from which I would have thought that business people would want to be free. If we make the position clear in law by adopting my hon. Friends Bill, we will do them a favour too, although I repeat that my prime focus is to do a favour to those whose jobs are at stake and who are worried when such a takeover takes place.
The Government considers that, ideally, everyone should know where they stand when a business sale or reorganisation, or a contracting-out or similar exercise, takes place, so that employers can plan effectively in a climate of fair competition and affected employees are protected as a matter of course.
Mr. Jonathan Djanogly (Huntingdon) (Con): I disclose my interests as a partner in a law firm that acts for various private equity firms as well as for employees made redundant by companies in which private equity has invested.
The Conservative party opposes the Bill, which is unnecessary, misguided and would have an extremely negative impact on the UKs position as an attractive place to do business. The hon. Member for Nottingham, East (Mr. Heppell) professes to be no expert in this area, and not to understand some of the details of the Bill. That prompts the question: who does understand the Bill, who has drafted it, and who is really behind it? He was also honest in that regard, in saying that it was Jack Dromey. I shall return to the unions position on the Bill later.
The Bill would extend the application of the Transfer of Undertakings (Protection of Employment) Regulations 2006 to the acquisition and disposal of substantial shareholdings by private equity companies. However, in practice, it would extend far beyond the realms of private equity and is an issue of major concern for all types of companies in this country. The United Kingdom is a major location, if not one of the principal locations, of choice for international business, not least private equity transactions. The hon. Gentleman says that he is not picking on private equity, but he must realise that his Bill, or rather Jack Dromeys Bill, is a savage attack on the private equity industry. I think it right, therefore, that some Members, including my hon. Friend the Member for Shipley (Philip Davies), have chosen not to underestimate the sectors importance to this country and, indeed, to other countriescountries that would welcome an end to private equity investment in the UK as a result of the Bill.
Private equity has existed in this country for more than 20 years, and according to Treasury figures has invested more that £75 billion worldwide in 22,000 businesses during that time. The British Venture Capital Association puts the figures at nearer £80 billion and 29,000 businesses since 1984. The size and scope of the UKs private equity sector is now second only to that of the sector in the United States. In 2005, 1,500 companies were financed by private equity in the UK, and there were 20 deals involving more than £250 million. In 2006, BVCA members brought more than £10 billion-worth of investment to the UK, and private equity-owned businesses generated sales of some £420 billion and paid the Treasury £26 billion in tax. Last year another 1,300 companies received investment from private equity.
About one fifth of the private sector work force are now employed by a private equity-owned business. As was noted by my hon. Friend the Member for Shipley, a survey carried out last year by the Financial Times revealed that the 30 biggest private equity deals in 2003-04 created 36,000 more jobs than they cut. Three quarters of those new jobs were created by the organic growth of the companies, and private equity-owned firms have outpaced public companies in employment growth. Over the past five years the number of jobs in private equity-owned companies has increased by 9 per cent. per annum, compared with 1 per cent. in the FTSE 100. According to the recent study by the World Economic Forum, which was mentioned by my hon. Friend, private equity-owned firms are responsible for 60 per cent. more greenfield job creation than their peers. Greenfield jobs are defined as jobs that would not otherwise have been created. In other words, private equity-owned companies create more jobs than other businesses.
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