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What of the other provisions in the Bill, which are designed to ensure that employees are informed and consulted? As I have said, some aspects of the Bill go further than TUPE. I fear that that might be true of the some of the information requirements in the Bill, particularly in respect of information on the prospects for the company over the next five years. Even if such information could be given accurately, that requirement would place an additional burden that does not exist currently. The Bill also suggests that employees and their representatives must be given sufficient time to get advice on the merits of the transfer and would allow for back-and-forth exchanges on such issues. That could take a significant amount of
time and could add extra uncertainty for employees. Sometimes a takeover may, in fact, be a rescue, making it necessary to proceed with some speed.
The Bill also sets out what the outcome should be if that procedure is not followed. I appreciate that my hon. Friend has said that he had further thoughts about the process since first drafting the Bill, but as it stands it says that the employees or their representatives could go to the High Court to ask for an injunction. That would be a new situation, where we would be asking the courts to decide whether an investment in a company should go ahead. Those provisions, taken together, could significantly inhibit necessary investment in the economy, and in some situations could work against the interests of employees, rather than in their favour.
Of course information and consultation are important, and regulations are in place to deal with that. The Information and Consultation of Employees Regulations 2004, which I shall speak of later in more detail, went a long way towards ensuring that employees are properly consulted and informed about changes to their company, by allowing employees in companies with, at first, more than 100 employees—soon to be 50—to ask for information at any time. The Government put those regulations in place to ensure proper consultation of employees in all companies. However, if the Bill was enacted, what would be the outcome if a TUPE transfer was also a share transfer—that is, if one company bought another and subsumed it into its main operations? Would the TUPE provisions allow for a one-off consultation about possible redundancies, for example, or would there be a much more comprehensive consultation that required the share investor to state all the relevant facts
“in relation to the period beginning with the date the information is provided and ending 5 years after the date of the proposed transfer”?
As has been said, there is no shortage of litigation with regard to TUPE. I fear that the Bill, certainly as it stands, would end up adding to the confusion, not only for the employers—the transferor and transferee—but, in some situations, for the employees as well.
The hon. Member for Shipley (Philip Davies) spoke for some time. I am happy that he acknowledged much of the success of the investment environment. The OECD has rated the UK as having the lowest barriers to entrepreneurship of any major economy, and for the second year running the UK maintains its overall ranking, in a list of 178 world economies, as the sixth easiest economy in which to do business, according to World Bank benchmarks. The UK’s ranking as an economy in which to start a business has improved from ninth place last year to sixth place this year. The World Bank also confirms that ours is one of the top two European economies in which to do business.
The statistics on start-ups in the UK are good: we are the third best of the G7, behind the US and Canada. The UK business population continues to increase, and there are some 1,800 start-ups every working day in England and Wales. Business survival rates are also higher than a decade ago, with 92 per cent. of VAT-registered firms still registered after one year, and now over 1 million more people work in small and medium-sized enterprises than did seven years ago. We want to maintain that environment.
One of the reasons behind the Bill is that, as a result of some high-profile takeovers, fears have been raised that private equity firms can be short-termist and impact negatively on jobs and investment in the companies in which they take an interest. That debate will continue long after today. However, whatever one may think of private equity in all types of businesses—those owned by private equity funds, small businesses or others—change is sometimes necessary. A takeover can sometimes be positive, leading to change that helps to reinvigorate a company and strengthen its prospects. Takeovers can mean long-term investment decisions that improve productivity and profitability, resulting in a stronger company. We should always remember that the alternatives can be worse.
“Private equity” has become something of a catch-all phrase for many different transactions—from venture capital to helping budding entrepreneurs start a company, to the much more high-profile takeovers of companies which have been in the news. As in any field, some companies are good and others less good, but the Bill will not address that issue.
I am sure that, as in other fields, most private equity companies are responsible employers and others are less so, but generally there is little hard evidence to show that employees are disadvantaged when their company is bought or sold by private equity. Indeed, although the evidence base, particularly as regards the UK and European private equity markets, remains weak, and the results are inevitably to some extent conflicting, some facts are beginning to emerge.
Reference has been made to the studies carried out by Nottingham university. Studies from the Work Foundation and other institutions also show that although there can be an impact on employment in the first year after a leveraged buy-out, it often rises strongly thereafter. Far from being predators always out to make a quick buck, private equity firms can bring extra capital and new working practices to a company that is going through tough times. Although there can be job losses in the first year, the record can be better afterwards. Indeed, some of the investments are rescue efforts; it is also worth remembering that there are often job losses in the years leading up to a takeover, which suggests that the company concerned has not been in the best of health.
Mr. Chope: The Minister is making some excellent points, and I wonder whether he could use the good offices of the Leader of the House to arrange a meeting with Mr. Jack Dromey, to persuade him of the wisdom of his remarks.
Mr. McFadden: I am sure that the Leader of the House has more important business to deal with than arranging meetings for me. I may have something more to say about meetings later.
As I was saying, the evidence does not show that private equity takeovers are always a negative or about making a quick buck. Private equity firms often hold on to companies for a lengthy period, to add value to their business before selling them on. The average is about three years, which is often longer than the average time for which institutional investors hold on to their shares. The recent study prepared for the World Economic Forum concerns mainly the American
market. According to that study, while jobs might fall initially, over time more new greenfield—so to speak—jobs were created than jobs were lost. Rather than damaging companies, private equity investment often quickened the pace of restructuring, allowing jobs to be created and making the most of new challenges and new markets, as all good management must do.
Let me now deal with how the TUPE regulations currently operate. As my hon. Friend the Member for Nottingham, East said, the TUPE regulations were revised in 2006, after extensive consultation, to give greater clarity to their provisions and to when they apply. Although there was always an attempt to adhere to the principle of allowing employers the flexibility and freedom to pursue economic activity, with fairness to employees, the review resulted in the regulations being extended to protect employees in transfers of the provision of services or contract provision, as well as in transfers of a business.
As my hon. Friend said, private equity has hit the headlines recently, but there were not hugely strong demands to extend TUPE to private equity share transfers when the consultation took place. The revision did, however, include a provision to allow more flexibility when a company is subject to insolvency proceedings, allowing the Government to pick up the costs of redundancy, the underlying aim of which was better to enable the sale of insolvent businesses as going concerns.
The hon. Member for Ribble Valley (Mr. Evans) asked a couple of times about the situation in Europe. The idea that share transfers should be included in the scope of the acquired rights directive was recently examined by the European Commission, which last year conducted a comprehensive review of the operation of the directive in all member states. The answers on the questionnaire of both member states and social partners were taken into account.
The directive, which is based on article 94 of the treaty, is aimed at protecting business employees in the event of a change of employer, particularly to ensure that employees’ rights are safeguarded. It works on the premise that there are differences between member states regarding the protection of employees in this area, and stresses the impact that those differences can have on the operation of the single market. Consequently, it concludes that it would be advisable to harmonise that protection. The Bill would go further than the provisions in the directive.
“The aim of harmonisation is twofold: to ensure comparable protection of employees’ rights in the Member States and to approximate the obligations which the rules of protection place on European undertakings”.
The Court of Justice has indicated on several occasions that the rules of the directive are to be regarded as mandatory, in that it is not permitted to derogate from them in a manner that is detrimental to employees. Consequently, an employee cannot waive his or her rights under the directive, and those rights cannot be limited—neither with the employee’s agreement, nor if the disadvantages resulting from renunciation are compensated in some other way.
On 31 August the directive had formed the basis for some 44 judgments from the Court of Justice, 30 of which concerned its scope and, in particular, the concept of transfer.
The European Commission’s report added:
“The transfer of ownership of the majority of the shares in an undertaking or a change in the majority of shareholders does not constitute a transfer because the legal personality of the employer is unchanged. The Commission considers that a revision of the Directive, extending the definition of ‘transfer’ to include a change of control, as proposed by the European Confederation of Trade Unions, is not justified at this stage. Although a change of control can lead to changes in the undertaking, the employee’s legal position vis-Ã -vis the employer is unchanged. In any case, Directive 2002/14/EC4 (the information and consultation directive) makes such changes subject to appropriate information and consultation procedures.”
So the Commission’s view was that such a change was unnecessary.
The report also examined the workings of article 7 of the directive, which concerns the obligation to inform employees in the event of a transfer. That is a major part of the Bill. Under article 7, both the transferor and the transferee are required to supply certain items of information to the representatives of their respective employees. Whereas the obligation to report is general, the obligation concerning consultation is limited. The latter obligation exists when the transferor or the transferee envisages any measures in relation to the employees, for example a reduction in the work force.
“with a view to reaching an agreement”.
Member states are required to take all appropriate measures to ensure that the representatives of employees are appointed with a view to ensuring the provision of the information and consultation referred to in article 7. The directive gives member states considerable latitude when defining the procedures for nominating employees' representatives, and the obligations apply irrespective of whether the decision resulting in the transfer is made by the employer or by an undertaking controlling the employer. The report concluded:
“Nearly 30 years after its adoption, the Commission believes that Directive 77/187/EEC continues to play a key role in protecting employees’ rights.”
Let me now say a little about what private equity itself is doing. As my hon. Friend the Member for Nottingham, East said, there has been controversy, and as I said earlier, the private equity industry has recognised that transparency and the lack of information about private equity are issues, which is why it asked Sir David Walker to produce voluntary best-practice guidelines. They apply to UK private equity firms and to companies owned by them. Unlike the Bill, they are aimed principally at the large public-to-private buy-out end of the market. That sector consists of a relatively small number of firms, but between them they have made the largest acquisitions.
The guidelines set out principles to ensure that there is timely and effective communication with employees in particular at a time of strategic change as soon as confidentiality constraints are no longer applicable. They encourage the industry to ensure that employees
are consulted as far as possible—which, as has been pointed out today, is best practice anyway—and to ensure that the company performs to the best of its key asset, which is of course the ability of the people who work for it.
In his guidelines, Sir David considered the issue of why TUPE would not apply to private equity transactions. He explained:
“These regulations apply to business transfers...and are designed to safeguard the rights and obligations of the employees, for example, by providing protection for employees from dismissal for the sole or principal reason of the transfer itself, whilst still allowing a dismissal for a reason connected with the transfer where that reason is...economic, technical or organisational...Where a business is acquired by means of a transfer of shares, the TUPE provisions do not apply since the contracts with the employees are maintained and remain with the entity that has been purchased and are subject to existing legislation applicable to the proper treatment of employees.”
That point was made by the hon. Member for Solihull (Lorely Burt). Sir David added, however:
“Whilst the guidelines in this report do not seek to address the provisions of TUPE”—
which, as he says, is rightly a matter of employment legislation—
“they are explicitly attentive to the interests of employees, who are a major stakeholder in the company and the major contributor to a company’s success.”
He called for an end to what has been perceived as excessive secrecy from employees by UK portfolio companies, and for a commitment by private equity firms to communicate and engage effectively with employees either directly or through their portfolio companies.
The report recommends that a portfolio company should include as part of its audited annual report and accounts the following enhanced disclosures, which should focus on substance rather than form, and on the economic reality of a company or group rather than its legal structure. It states:
“The report should include a substantive business review that contains all the material necessary for an understanding of the development, performance or position of the company’s business, including the main trends and factors likely to affect the future development, performance and position of the company’s business; and information for the company’s employees, social and community issues, including information about any policies of the company in relation to those matters and the effectiveness of those policies. The financial review should cover risk management objectives and policies in the light of the principal financial risks and uncertainties facing the company, including those relating to leverage, with links to appropriate detail in the footnotes to the balance sheet and cash flow section of the financial statements.”
The Government believe that that is the right approach, and that it is in the interests of the private equity industry to provide information that will improve public understanding of the industry by demonstrating its contribution to the UK economy and employment.
Most good employers recognise that companies are increasingly dependent on human creativity, and a company that does not care what its staff think does not get its staff to “buy into” its new market goals and aspirations, and is less likely to be successful than one that does so. I am delighted that for the second debate
running on these issues we have heard about the excellent employment practices to be found in Swansea, which perhaps reflect such points.
The concept of having a job for life is now unusual, and if people have to change jobs in the future it is important in order to succeed that they have both the hard skills in terms of qualifications and the soft skills in terms of experience. That is why the Government, and my right hon. Friend the Secretary of State for Innovation, Universities and Skills in particular, are investing so much in improving the skills of people at work to ensure that they can continue to learn and adapt throughout their working lives. That has replaced the old concept under which learning stops at the end of formal education or soon afterwards.
I would like to deal in more detail with some of the specifics of the Bill. Clause 2 deals with individual employment rights where a transfer takes place. The TUPE regulations implement the acquired rights directive, which exists to protect employees where a business, part of a business or a service provision has been transferred, within the meaning of the regulations, from one employer to another. Employees need that protection because without it they would be forced at a time of uncertainty to negotiate a new contract with a new employer. Under a share transfer, however, the identity of the employer does not change, so it is not as though employees in that situation are without protection; they continue to enjoy the protection of the employment contracts that they have. The employee’s contract of employment is still valid and cannot be altered without the agreement of both the employee and the employer. I cannot therefore see why such a new provision is needed or that it would afford employees any further protection where shares pass from one company to another.
Clause 3 of the Bill deals with collective employment rights. The Bill’s supporters fear that changes of ownership could lead to a new approach by an employer towards its recognised trade union, that collective agreements could be set aside, or that the union could be derecognised. Union derecognition in this country is relatively uncommon. There are tens of thousands of recognition arrangements in this country, but, according to the best estimates available, there have been very few derecognitions since 2000.
My hon. Friend the Member for Nottingham, East will recall that this Government introduced a statutory procedure for union recognition, which came into force in 2000. That provides a workable system for a trade union to become recognised where a majority of the work force want it. Under the procedure, the Central Arbitration Committee can compel an employer to recognise a trade union, when the employees want it. The Central Arbitration Committee has awarded recognition in more than 180 cases. Those awards either followed an independent and secret ballot of the affected work force, which indicated a clear majority in favour of recognition, or were granted without a ballot because a majority of the affected work force were already members of the trade union in question.
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