Schedule 5 - Amendments related to Part 3

Enterprise and Regulatory Reform Bill – in a Public Bill Committee at 11:30 am on 10th July 2012.

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Photo of Norman Lamb Norman Lamb The Parliamentary Under-Secretary of State for Business, Innovation and Skills 11:30 am, 10th July 2012

I beg to move amendment 21, in schedule 5, page 79, line 39, leave out paragraph 32 and insert—

32 (1) Section 52 (advice and information) is amended as follows.

(2) In subsection (1), for the words from the beginning to “the Director” substitute “The CMA”.

(3) In subsection (1A), for the words from the beginning to “the OFT” substitute “The CMA”.

(4) In subsections (2) to (6) and (8), for “OFT” (in each place where it occurs) substitute “CMA”.’.

Photo of Hugh Bayley Hugh Bayley NATO Parliamentary Assembly UK Delegation

With this it will be convenient to discuss the following:

Government amendments 22 and 55.

Photo of Norman Lamb Norman Lamb The Parliamentary Under-Secretary of State for Business, Innovation and Skills

This is exciting stuff, so please stay calm if you can, Mr Bayley.

Amendment 21 is a technical drafting amendment—but none the less exciting—to schedule 5 of the Bill on the transfer of functions to the CMA. It will affect section 52 of the Competition Act 1998, which requires the director general of fair trading—the predecessor of the OFT—to publish one-off guidance about the new prohibitions of the Competition Act and the OFT to publish guidance about its duties under the 2004 EU modernisation regulation, with which I am sure hon. Members will be familiar. The amendment of those provisions needs to reflect the transfer of the OFT’s functions to the CMA, including its one-off duties to publish guidance. To ensure that the Bill is drafted in a consistent manner, the amendment will additionally change the reference to the “the Director” in section 52(1) of the 1998 Act to “The CMA”.

Amendment 22 is also a technical drafting amendment to schedule 5 and affects paragraph 5(3)(a) of schedule 2 to the 1998 Act. Those provisions require Ofcom to consult the director general of fair trading before publishing a list of networking arrangements that are excluded from the cartel prohibitions in chapter 1 of the 1998 Act. The reference to the director general was not amended by the Enterprise Act 2002 when the OFT was created, and the amendment will fix that so that the provisions refer to the CMA rather than the director general.

Amendment 55 is a technical drafting amendment to schedule 15 and affects paragraph 5 of schedule 1 to the 1998 Act. Part 1 of that schedule excludes mergers from the chapter 1 prohibitions of the 1998 Act in certain circumstances. The OFT has the ability to withdraw that exclusion, but that ability does not extend to protected agreements, which are defined in paragraph 5 where  references are made to various types of merger reference decisions involving the OFT, the Secretary of State and the Competition Commission. The Bill, as drafted, replaces “the Competition Commission” with “the CMA”. The amendment makes the paragraph more consistent with other parts of the Bill, which provide that merger references are made by the board to the chair of the CMA for the constitution of an inquiry group, and it does so by removing “to the Competition Commission” wherever those words occur.

I am grateful to hon. Members for sticking with me on this exciting stuff.

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Innovation and Skills)

I thank the Minister for explaining the nature of his amendments and my colleagues and the Committee for listening with such rapt attention. Although, as I have said, this is my first Bill Committee, I am aware that what is termed a technical amendment may on occasion hide deeper and more meaningful changes. On this occasion, however, I can find no objection to the amendments.

Amendment 21 agreed to.

Amendment made: 22, in schedule 5, page 81, line 29 at end insert—

‘In Schedule 2 (exclusions: other competition scrutiny), in Part 3, in paragraph 5(3)(a), for “Director” substitute “CMA”.’.—(Norman Lamb.)

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Innovation and Skills)

I beg to move amendment 92, in schedule 5, page 83, line 28, after ‘subsections’, insert ‘(1A),’.

Photo of Hugh Bayley Hugh Bayley NATO Parliamentary Assembly UK Delegation

With this it will be convenient to discuss the following:

Amendment 91, in schedule 5, page 84, line 14, after ‘subsections’, insert ‘(1A),’.

New clause 10—Mergers: duty to take account of longer-term competitiveness in considering whether to make references—

‘(1) Section 33 of the Enterprise Act 2002 is amended as follows.

(2) After subsection (1) insert—

“(1A) When considering whether or not a situation results in a substantial lessening of competition for the purposes of (1) above, the CMA shall take into account the longer-term ability of the merged entity to compete effectively.”.

(3) Section 22 of the Enterprise Act 2002 is amended as follows.

(4) After subsection (1) insert—

“(1A) When considering whether or not a situation results in a substantial lessening of competition for the purposes of (1) above, the CMA shall take into account the longer-term ability of the merged entity to compete effectively.”.’.

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Innovation and Skills)

Amendments 92 and 91 are consequential on new clause 10, which will strengthen the conditions under which mergers should be considered by the CMA. New clause 10 inserts a new subsection into the amended Enterprise Act 2002 on the Office of Fair Trading’s duties to make a reference to the Competition Commission under certain merger situations. The consequential amendments mean that the new clause fits within the transfer of powers. Sections 22 and 32 in the Enterprise Act concern the duty of the OFT to make references to the Competition Commission in relation to anticipated  or completed mergers. This will still only apply when it is a relevant merger situation, with two or more enterprises ceasing to be distinct enterprises—this is slightly technical—and the turn-over of one of those enterprises in the UK is more than £70 million.

Our amendment also retains the test that a merger must result in a substantial lessening of competition in order to be referred. The change is that the new clause adds the following subsection to that test:

“When considering whether or not a situation results in a substantial lessening of competition for the purposes of (1) above, the CMA shall take into account”— this is the key phrase—

“the longer-term ability of the merged entity to compete effectively”.

The new clause will mean that the CMA will take a longer term view of the possible merits and demerits of mergers and takeovers in the UK. I am sure that Members on both sides are familiar with high-profile mergers and takeovers in the past few years, some of which have certainly not been in the best long-term interests of employees, consumers and businesses. Just last week we read the news that the owners of Manchester United will relocate the club’s management to the Cayman Islands and sell off shares with few voting rights in order to pay off some of the debt they used to buy the club.

As a Newcastle fan I have to declare an interest, which is that I hold Newcastle’s success to be much more important than Manchester United’s, but as a football supporter I am with all football supporters in feeling that we too rarely get the owners that the fans deserve. Football has done amazing things over the past decade or so—working to kick out racism and homophobia; reducing hooliganism; making games more family-friendly—but we still have ownership structures that do not act in the interests of the fans or the beautiful game. Indeed, those practices may well be against the new UEFA rules.

Photo of Ian Murray Ian Murray Shadow Minister (Business, Innovation and Skills)

I am delighted to declare an interest as a fan of the famous Heart of Midlothian football club. One of the biggest concerns in Scottish football at the moment is, of course, the demise of Rangers. Ownership of that club, and ownership across football, has been a huge issue and one that it would be very suitable for the new CMA to investigate in the future.

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Innovation and Skills)

I thank my hon. Friend for that intervention. He is absolutely right that takeovers in the football industry have led to a situation in which we have ownership that is not in the interests of football fans. I hope that the CMA will take that into consideration.

Photo of David Mowat David Mowat Conservative, Warrington South

As it happens, I am a Manchester United fan, but the ownership and takeover of Manchester United have absolutely nothing to do with this amendment. This amendment would not in any sense have stopped what happened at Manchester United with the Glazers as far as I can see. If it would, will the hon. Lady say how?

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Innovation and Skills)

I will come to the exact way that the amendment would address some of these issues with regard to takeovers, mergers and other competition implications.

Photo of Neil Carmichael Neil Carmichael Conservative, Stroud

I am a supporter of Newcastle United, so I agree with the hon. Lady on this particular aspect. What I am struggling with is how this discussion has a huge amount of relevance to this particular amendment; chiefly because she is really talking about the structure of companies and clubs, which is more properly a matter for the Department for Culture, Media and Sport and how it might address football governance.

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Innovation and Skills)

I thank the hon. Gentleman for that intervention. He makes an excellent point, which may put Newcastle United supporters in the majority on this Committee—[[ Interruption. ] Perhaps not. He and his hon. Friend are right to suggest that this amendment will not address all the issues around ownership, takeovers and mergers, but it will help to address some of them. I will explain how. Leveraged buyouts in football and more widely should concern us all. Kraft’s takeover of Cadbury is perhaps the best—or worst—example of short-term interests taking precedence over the long-term interests of a great British company. Reflecting on the takeover, Lord Mandelson, the Secretary of State at the time, said:

“It is hard to ignore the fact that the fate of the company with a long history and many tens of thousands of employees was decided by people who had not owned the company a few weeks earlier, and probably had no intention of owning it a few weeks later”.

The Kraft/Cadbury affair flagged a weakness, not just in our regulatory system, but in our economy as a whole. Our approach to fixing it should attack both. This amendment seeks to strengthen the hands of the CMA in any future case and, hopefully, would prevent some of the situations arising in the first place.

The Labour party has an ongoing review into the impact of short-termism on British business. The review is currently nearing the end of its initial phase of investigation and has been carrying out interviews with a wide range of top business people, investors, academics, employees and civil servants. The EEF, IOD and CBI have all expressed their support. It is led by Sir George Cox, a former director-general of the Institute of Directors and a director of the New York Stock Exchange Euronext. Sir George will report in due course. We on this side of the House are committed to putting together a strategy for the UK’s economy that will prevent a fast-buck, short-term culture.

With this new clause, we do not seek to pre-empt our report. It is not in itself a solution to the deep-set structural problems that we have in our economy. It looks only to address the competition side of the argument and is the first in a series of steps. Our review will set out in more detail the role that Government should have in driving a more long-term approach within UK business. The review is looking at the time scales under consideration by boards and senior management in evaluating corporate risk in opportunities; by institutional shareholders and managers in making investment and governance decisions; and the extent to which these match the long-term needs of business. Changes to the takeover code have already been considered in the wake of the Cadbury takeover by Kraft and proposals to strengthen the position of companies that find themselves  the target of hostile takeover bids were rejected by the code committee following the Kraft affair. The consultation did not attract enough support, but the committee said:

“The Code Committee understands that qualifying periods (or weighted voting rights) could be introduced through changes in company law. If such changes were to be made, the Code Committee considers that it would be logically consistent for the Code to be amended accordingly. In the absence of such changes, the Code Committee does not believe that the Code should be so amended”.

So the code committee believes that the changes should be made through company law.

Peter Cadbury advocated similar changes in that consultation. In a letter to The Times in November 2009, he said:

“Is it too late to implement a measure of this nature before another fine British company is surrendered to short-term interests, and with it the danger that much of its manufacturing base will be transferred to Eastern Europe?”

Peter Cadbury is a direct descendant of the founder of Cadbury Brothers. He has been a corporate finance adviser for more than 40 years and owns a corporate advising business.

That letter was written more than two years ago. On 25 October 2010, the Secretary of State launched what he called

“the first stage of a review into corporate governance and economic short-termism”.

That is the Kay review of UK equity markets and long-term decision making. Yet, 20 months later, we are debating an Enterprise and Regulatory Reform Bill that contains nothing to reform corporate governance or address short-termism.

Photo of David Mowat David Mowat Conservative, Warrington South

Having established that the example of Manchester United has nothing to do with the amendment, I find it difficult to see how the amendment would have made any difference to the outcome of Kraft’s Cadbury bid. There may be public interest issues, but the amendment does not address that takeover. There is nothing in the amendment.

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Innovation and Skills)

The hon. Gentleman displays impatience to get to the root of the matter, which I applaud, but to say that the amendment would have no impact on a case similar to the Kraft Cadbury deal is wrong, and I will explain why.

I was rather looking for an intervention from the Minister to explain how or when his Government will introduce a Bill to address short-termism in the British economy. Last week, Government Members voted against our amendment to require the CMA to have a general regard for long-termism in going about its business, but I hope they will be more supportive of this amendment.

The amendment would give the CMA the power to take a longer-term view on the impact of such deals when deciding whether to investigate further. That is the critical point, to address the hon. Gentleman’s intervention. We believe the Government should be putting in place measures to ensure that short-termism is not rewarded in Britain. Changing the takeover code would be one such measure, but as the code committee has said:

“In the absence of such changes…the Code Committee does not believe that the Code should be so amended.”

In his submission to the committee’s consultation, Peter Cadbury had this to say on the takeover code:

“Recent experience has led me to believe that as a consequence of short termism, the City Code, as presently drafted in respect of hostile takeovers, operates to the considerable advantage of the Offeror, and unfairly against the interests of the Offeree, its employees and the wider interests of the company. I believe that the simplest, and most effective way to remedy this imbalance would be…to disenfranchise all shareholders, who acquire shares during an Offer Period.

A more level playing field needs to be established to allow longer term investors a greater say in determining the future of British…companies, having proper regard to issues affecting management, employees, customers, suppliers and not just the potential for short term financial advantage.”

The then director general of the CBI, Sir Richard Lambert, backed similar changes to the code:

George Cadbury and his family believed that a successful business depended on a long-term partnership between genuine investors, their employees and the interests of their consumers. We share that belief.”

But there needs to be legislation, too. The amendment is not about one company or one episode, but about improving a test that has, in general, worked well over the past 10 years. The Government have talked a lot about fostering long-termism, but we have yet to see any action. Although the amendment does not address the takeover code or company law, I would like the Minister’s views on when his Government will promote long-termism.

Photo of Graham Evans Graham Evans Conservative, Weaver Vale

I would like to make two points. First, the hon. Lady mentioned 2009 and short-termism, but her Government had been in power for 12 years; why did they not do anything about short-termism? Secondly, I remember what happened with Cadbury very well. Irrespective of the takeover by Kraft, which is an international company of very good quality, the Cadbury family and company would probably have closed the plant in south-west England anyway.

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Innovation and Skills)

Like a number of hon. Members, the hon. Gentleman’s position seems to be that he will not support anything that the previous Government did not do, while at the same time criticising everything that they did do. We have acknowledged that stronger regulation should have been in place. Now that the Government have been in power for two years, we might have expected to see progress in that direction.

Photo of John Cryer John Cryer Labour, Leyton and Wanstead

What the hon. Member for Weaver Vale said about the plant in Keynsham may or may not be the case, but the point about the takeover is that Kraft, without being too specific, indicated that the plant would be kept open, and as soon as the takeover went through, it was shut.

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Innovation and Skills)

I thank my hon. Friend for his clarification of that scandalous episode in British business.

Photo of Graham Evans Graham Evans Conservative, Weaver Vale

May I clarify my point? The factory in the south-west was earmarked for closure before the takeover. I am not trying to defend Kraft for a moment. Kraft may have intimated to Mr Mandelson that the factory would be kept open, but irrespective of the takeover, it was earmarked for closure.

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Innovation and Skills)

It is my recollection that Kraft did more than intimate; it gave the impression to the wider public that the factory would remain open.

Photo of Ian Murray Ian Murray Shadow Minister (Business, Innovation and Skills)

The point is that there were two very critical reports by the Select Committee on Business, Innovation and Skills into the undertakings that Kraft gave when it took over Cadbury. Immediately after the transfer of business, Kraft’s undertakings did not come to fruition, including various pension funds undertakings.

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Innovation and Skills)

I thank my hon. Friend for bringing those excellent Select Committee reports to the Committee’s attention. As I think we would all agree, in that case, the merger process left a lot to be desired, which gives us even more reason to look for measures to promote long-termism.

Photo of Iain Wright Iain Wright Shadow Minister (Business, Innovation and Skills)

To clarify a point on which the Business, Innovation and Skills Committee is very firm, in its takeover proposal of September 2009, Kraft said:

“Our current plans contemplate that the UK would be a net beneficiary in terms of jobs. For example, we believe we would be in a position to continue to operate the Somerdale facility, which is currently planned to be closed and to invest in Bournville, thereby preserving UK manufacturing jobs.”

A week after the takeover, Kraft announced that it would shut the Somerdale plant. When the takeover panel investigated the matter, it said that

“Kraft’s initial statements in relation to Somerdale breached the Takeover Code”, particularly rules 19.1 and 19.3. Are we not discussing the fact that Kraft’s initial communication, on which shareholders may have made a decision, was misleading?

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Innovation and Skills)

I thank my hon. Friend for that intervention, which clearly shows that Kraft misled shareholders and the public, rather than making general intimations. That point goes to the heart of the need to change the culture of the City and of takeovers, and the amendment aims to be part of that.

Photo of David Mowat David Mowat Conservative, Warrington South 12:00 pm, 10th July 2012

I make the point again that I do not defend what happened with the Kraft takeover. There may be public interest issues around the takeover and, as part of that, the takeover code, but new clause 10, which is concerned purely with the competition issue, would not have made a difference to the outcome, so the point is not relevant to new clause 10.

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Innovation and Skills)

I thank the hon. Gentleman for that intervention, and for saying the public interest test needs to be changed. I will come on to that. To be able to say that new clause 10 would not have made any difference, we would need to be able to look into the minds of those considering the consequences of the merger at that time.

New clause 10 requires the CMA to consider the long-term ability of the resulting entity to compete effectively in the market. If an entity is laden with debt, that has an effect on its ability to compete effectively, as I will show. The amendment by itself would no doubt give speculators, such as those who were involved in  that Kraft Cadbury takeover, something to think about before buying up shares in companies for a few weeks before selling them on at a higher price after a deal has been done.

The amendment does not go as far as many of my hon. Friends, and perhaps some Government Members and people in industry, would like. It does not attempt to change the reasons for public interest referrals so as to include, for example, employment or investment concerns. It does not attempt to change the takeover code either. That may come, but the Opposition like to be evidence-based in their approach, rather than take an “anecdotes r us” approach. Our proposals will follow on from our reviews and the evidence we find in them.

The amendment looks purely at the competition consequences following a takeover, but it gives the CMA the power and the duty to look at the long-term competition consequences. That makes absolute sense in pure competition terms. It is all very well to say that a merged entity will not result in a significant lessening of competition, which is the test, but what happens if it is so reliant on debt that it cannot compete effectively?

We can, and should, recognise that the ownership structure may determine the strength of a company as a competitor in all markets. In the football market, the chocolate market and all other markets, the ownership structure may determine the competitive strength of a company. It may be desperately trying to maintain its cash flow to make its interest payments and not go under. If it does not go under, it certainly will not be a competitor. A recent US research paper, “Bankruptcy risk model and empirical tests”, by H Eugene Stanley and colleagues, found that the relationship between relative debt and bankruptcy risk generally followed a power law. That means that a company with half the debt is twice as likely not to fail. So there is certainly a relationship between debt structure and the likelihood of bankruptcy, which in turn has an impact on the level, and likelihood, of competition.

This is a very reasonable amendment. It deals purely with the competition issues. It does not attempt to change company law or the takeover code, but it also sends a strong signal. It should be the first step in helping to build the economy of the future—the economy that my right hon. Friend the Leader of the Opposition has called for, which is based on long-termism, patient investment and responsibility shared by all, not on predatory behaviour.

Photo of John Cryer John Cryer Labour, Leyton and Wanstead

It is always a pleasure to serve under your chairmanship, Mr Bayley. I want to speak briefly again about the Kraft takeover, partly because there seems to have been a misapprehension among Government Members, particularly the hon. Member for Skipton and Ripon. I am sorry that he is not here today. I imagine he is out on manoeuvres in preparation for the day when the trade unions try to take over the world and he is summoned by destiny to prevent that. The hon. Gentleman gave the impression that even questioning a particular takeover or merger makes us a cross between Bismarck and Stalin, wanting to nationalise everything that moves.

My view is that there should be a national or public interest test when judging major takeovers and mergers. That would not affect many takeovers and mergers,  only certain key ones, such as the Kraft takeover of Cadbury. The record that Kraft had at that point was not widely admired. Kraft had managed to expand consistently over many years, but not by the efforts of the people running the company. It had a record of taking over company after company, closing plants and very often shipping out production to developing countries, at much lower rates of pay and often without the quality controls we expect in this country, Europe and north America. It had become laden down by debt, as my hon. Friend the Member for Newcastle upon Tyne Central mentioned.

On the other hand, Cadbury was, and still is fortunately, though it is only three years since the takeover, a company that had expanded about six years in succession by its own efforts. It is arguably one of the most successful and recognised brands in British history. That is what led to a campaign against the takeover by, among others, the Daily Mail, hardly an organ of the hard left. The chief executive of Kraft refused to talk to the Select Committee inquiries, which were very good and produced admirable reports, and refused to meet anybody connected to Cadbury, such as employees’ representatives, other than the management. Cadbury had a very good history of industrial relations.

The takeover happened only three years ago, but we will be looking at the consequences for a long time. I hope it works out well; I do not want to sound like the voice of doom. I hope things go well for the people working at Cadbury and Kraft, but it is early days. We have to see what happens. Such a takeover would not have occurred in Germany, for instance, because the Government would have been able to say it was not in the national interest and would not allow it to happen.

It is not the only takeover in British history that has been deeply controversial and perhaps to have had the potential to undermine a strategic part of the economy. I will give one example. We think now of the 1970s as an era of massive regulation and Government intervention. To some extent that is a myth. One takeover that springs to mind was that of Norton Villiers Triumph in 1975. Basically, the company was the entire British motorcycle industry. It was taken over by a corporate raider with all sorts of promises of expansion. Within weeks, all three plants—all in the west midlands, an area with economic problems—were closed down and asset-stripped, and that was more or less the end of the British motorcycle industry, at least for quite a long time.

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Innovation and Skills)

I thank my hon. Friend for citing an excellent example. The nature of the ownership of the party taking over the company and its asset-stripping led to a substantial reduction in competition in the motorcycle industry in the long term. That is exactly the sort of example that the amendment is designed to capture.

Photo of John Cryer John Cryer Labour, Leyton and Wanstead

I am grateful to my hon. Friend. That is absolutely true. Japanese companies were able to become more dominant, not due purely to the excellence of their products, but because their British competitors had been removed from the market.

I must comment briefly on football as I feel strongly on the subject. As someone who is mad keen on all sorts of sport, I feel that money and corporate interests have  become far too dominant in many sports, particularly football. We have seen that in the history of many clubs. I have an uneasy feeling that we will see a lot of premiership clubs experience enormous financial difficulties over the next few years. I hope I am wrong, but we might see some go to the wall. That sort of corporate dominance will, I suspect, dominate the Olympics. I accept that is completely beside the point, before the hon. Member for Warrington South intervenes on me. It has nothing to do with new clause 10; I just wanted to get it off my chest.

In conclusion, I see new clause 10 as a modest safeguard. It would not be an undue intervention in the workings of the market or the economy. I want to see a national or public interest power given to the Secretary of State. We would then have to put our faith in the Secretary of State to intervene appropriately, as I am sure he would, because he is such a decent sort of bloke. New clause 10 would be a start and I hope that the Minister will consider accepting it.

Photo of Norman Lamb Norman Lamb The Parliamentary Under-Secretary of State for Business, Innovation and Skills

I guess I need to declare an interest again, to set the record straight. I am a Norwich City supporter. I suspect I am on my own in that in this room—I have no support here.

I thank Opposition Members for their suggested new clause and amendments. Following the interesting debates that we had last week around similar issues, we have considered these amendments at some length. I am also grateful to Members for talking after a sitting last week about the new clause and the seriousness with which they wanted to address the issue in debate. I completely accept their seriousness in wanting to address the need for long-termism in the economy. As I understand it, they are concerned about corporate takeovers that are cleared by competition authorities because they have no detrimental impact on competition, but which may have other consequences later down the line. We very much share those concerns around long-termism in corporate behaviour, but the question is about the mechanism to address it. There is a danger that we would load the competition authority with the responsibility of addressing all ills of corporate behaviour, when it might be inappropriate to do so.

When Lord Mandelson was giving evidence at the time of the Cadbury-Kraft takeover—I know that Opposition Members take his words seriously and follow his every word—he said:

“You have to form a judgment about whether it is desirable and necessary to change legislation to introduce some sort of public interest criterion that the Government might operate in relation to takeovers and mergers. I am unconvinced that such a change is necessary or desirable. I would rather stick, for the time being, with the terms and the spirit of the 2006 Companies Act, which said that directors needed to discharge their responsibilities by taking a properly balanced view and pursuing ‘enlightened shareholder value’, a value that is not limited to the short-term. One, incidentally, that recognises the value of effective relationships with employees, stakeholders and suppliers and, indeed, the community more widely. This approach, in our view, is likely to drive long-term performance and maximise overall competitiveness of that company.”

He did not want to interfere with the competition regime or framework.

The Kay review delivered an interim report on its findings in February and will make recommendations to the Secretary of State in its final report later this  month. The review will inform future Government policy on addressing short-termism in equity markets and corporate governance more widely. The Government will consider the review’s recommendations carefully.

There has been a lot of reference to the Kraft-Cadbury takeover. I have no detailed knowledge of the absolute circumstances, but I would not defend anyone who misleads in any public statements and I fully recognise that there were difficulties in the early stages of the takeover. While I recognise that the loss of jobs following the takeover was immensely distressing for everyone involved, fears about the future of Cadbury—the hon. Member for Leyton and Wanstead said that he hopes it remains successful—under Kraft’s ownership are not supported by recent evidence; £50 million has been invested to improve the competitiveness of Cadbury’s plants over the past two years. Bournville is now Kraft’s global centre of excellence for chocolate research, where £70 million has been invested and 54 additional high-value jobs created, with another 44 at Kraft’s R and D facility in Reading. Elsewhere, Oreo biscuits are being manufactured in the UK for the first time, creating new jobs in Sheffield, and investment has been made in Kraft’s coffee operations in Banbury. Overall, Kraft has invested £130 million in its UK business since the acquisition.

It is worth reinforcing the point—I know that Opposition Members accept this—that we must never allow the debate to become one about the wisdom of allowing foreign investment in our country. It is essential and a clear priority for this Government to make the UK an attractive place to invest and base a business. Anything that seeks to dissuade foreign investors from coming to the UK and investing here would absolutely be a retrograde step. We must always remember that.

The shadow Minister chastised the Government for taking two years to address long-termism. I must say that the Opposition took 13 years and never addressed long-termism in the economy. The Government want to build a stronger culture of long-term commitment to sustainable company growth based on co-operation between ultimate owners, fund managers and the corporate sector. We do not want investors to try to make a quick profit at the expense of the long-term health of the UK economy. However, I am not convinced of the appropriateness of the competition regime in achieving those aims. The competition regime is there for a specific purpose: to ensure that the economy is competitive in the interests of consumers. We must always remember that central duty.

The new clause would place a duty on the CMA to take into account the longer-term ability of a merged entity to compete effectively when it is considering whether to make a reference under phase 2 of the merger regime. The purpose would be to allow mergers to go ahead only if the merged company is judged to be able to compete effectively in the long term. Another way of looking at the duty might be to oblige the CMA to consider whether the merger might improve the ability of one or both of the merging parties to compete in the longer term.

The CMA—the OFT in the existing regime—will make a reference to phase 2 if it believes that it is or may be the case that first, a relevant merger situation has been created, and secondly, the situation has resulted or may be expected to result in a

“substantial lessening of competition within any market or markets for goods or services in the UK.”

To the extent that the ability of the merging parties or the merged entity to compete impacts on the level of competition in the market, the CMA will already have to consider that as part of its assessment of any merger, just as the OFT and the Competition Commission do. Their task is to assess whether the merger will substantially lessen competition in the market, which would be bad for consumers and the economy more widely. It is very much a competition test, in line with tests used in other countries around the world. However, if the CMA was required to take a broader view of the ability of the merged entity to compete, it would take the UK’s regime out of step with the international standard and blur the clear lines between the current competition test and other considerations.

The Opposition have rightly lauded the international standing of the UK’s competition regime, but if the amendment were accepted, it would put at risk the UK’s international standing, because it would introduce factors that would not be central and appropriate for its competition duty into the equation that the CMA would have to consider. For example, a merger that created a monopoly would almost certainly create an entity with an enhanced ability to operate effectively in the long term. However, it would not be a good thing for competition or consumers. We have to stay focused on the importance of promoting competition in the interests of consumers. Aside from the fundamental point about moving away from a purely competition-based test, the amendment would add a requirement for the CMA to consider the long-term ability of the merged entity to compete.

Currently the OFT and Competition Commission consider the impacts of any merger versus the counterfactual—what would have happened if it had not gone ahead—over the foreseeable future. There is no precise period for how long this is, and it will vary from market to market. For example, the appropriate period in, say, power generation markets and social media markets is likely to be quite different. The further one looks out from that particular point in time, the harder it becomes to predict what the competition environment will look like in the years ahead.

Furthermore, there will be all sorts of other external factors that would have an effect on the ability of the merged entity to compete effectively, and which competition authorities are not best placed to try to predict. I therefore think that we need to be careful about extending the competition regime in the way that the amendments propose. However, as I have said, we have a lot of sympathy with the purpose and intent—I will not use the word “sentiment”, which was perhaps overused last week—behind the amendments. Indeed, the intent of encouraging long-termism in companies is something about which the Secretary of State, the Government and I are passionate.

The issues have already prompted several work areas to be taken forward by the Government. I should make it clear that the measures in the Bill that seek to strengthen the voluntary merger notification system are in part a response to those issues. These will provide strength and powers to the CMA to pause mergers, so that it can investigate the issues and ultimately address any competition issues effectively.

In addition, following a consultation last autumn, the Takeover Panel to which the shadow Minister referred and which oversees the City code on takeovers and mergers, made a raft of changes to the takeover code to strengthen the position of target companies during takeovers. The changes have already shortened virtual bid periods, reducing the period of uncertainty for target companies. There has also been an increase in representations from employee representatives—it is important that their concerns are heard—as a result of the changes that have been made.

Stemming from concerns around short-termism in corporate behaviour, we also have Professor John Kay’s review. He is conducting an independent review of investment in UK equity markets looking at how to encourage shareholders to support long-term decision making by UK companies. The principal focus is to ask how well equity markets are achieving their core purposes—improving the performance of UK companies and enhancing resulting returns to investors.

The Government look forward to receiving Professor Kay’s recommendations, and we will consider them carefully. We will work with hon. Members on the issues the review raises to promote a long-term approach by UK companies. I am sorry that I have to disappoint hon. Members once again, but I do not believe that their amendments are the best way of achieving their aims. If Opposition Members think about the potential consequences of their amendments in facilitating a monopoly situation, while it might be sustainable for that organisation, it would, as I said earlier, be completely contrary to the principles of competition.

I hope I have reassured the Committee that the Government share concerns about the importance of promoting long-termism, and we are already exploring ways to address them. I therefore urge the hon. Members concerned not to press amendments 91, 92 and new clause 10.

Photo of Iain Wright Iain Wright Shadow Minister (Business, Innovation and Skills) 12:15 pm, 10th July 2012

I was not planning to speak in this debate, but I am very conscious of what the Minister has said. He has made a thoughtful response and he mentioned four important points. First, he mentioned the vital role played by foreign direct investment in the competitiveness of the British economy. The Opposition agree with that. We have seen how over the last 25 years or so in the automotive industry it has revolutionised productivity and efficiency to the point where the British car industry is now one of the best in the world. The Minister mentioned three other principles: the interests of consumers; the duties of directors under the 2006 Act; and the ability of companies effectively to compete in the long term. Can I take him back to Manchester United as a case study with regard to those three principles?

I declare an interest. I am a season ticket holder at United: Hartlepool United, which is obviously the best and most successful club in Hartlepool. This is an important point. The people who have taken over Manchester United took over a successful debt-free company and bought it by loading it up with debt. Off the top of my head, the annual turnover of Manchester United this year is around £367 million. Interest payments are around £71 million. In the last three or four years Manchester United as a company has made an operating loss. In addition, the prospectus for the listing on the  New York stock exchange published last week revealed that members of the Glazer family have taken out loans at preferential rates on the back of Manchester United’s assets.

Manchester United does not seem to have been run in the long-term interests of the club or its supporters. My understanding is that season ticket prices and other prices at Old Trafford have gone up substantially since the Glazer family took over. As for the issue of the owners of the business extracting value as quickly as possible, regardless of the long-term value and regardless of the club’s long-term ability to compete effectively both domestically and in Europe, Manchester United did not win the premiership this year and the prospectus for the New York stock exchange says that interest payments may hinder its ability to compete and buy players in future.

On the basis of all that and the three principles that the Minister mentioned—the interest of consumers; the ability of the club to compete effectively in the long term; and the duties of directors under the 2006 Act—how does he think Manchester United has been run? Is there anything that can be done with regard to directors’ responsibilities? Is he looking at this to make sure that we can have effective competition? I shall be very interested in his thoughts.

Photo of Norman Lamb Norman Lamb The Parliamentary Under-Secretary of State for Business, Innovation and Skills

The hon. Gentleman raises legitimate concerns about the way in which football is administered and how some owners have acquired clubs through debt. I just do not think that they are competition issues. That is where the problem lies. I come back to the point that I made right at the very start. We can identify all sorts of concerns about corporate behaviour but we should not load all of those concerns on to a competition authority which is there to ensure that there is a well- functioning, competitive economy which acts in the interests of consumers. I share the hon. Gentleman’s concerns about the matters he has described, but I do not think they are relevant to the operation and function of this organisation.

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Innovation and Skills)

I start by thanking the Minister for his response and for the thoughtful way in which he has considered the aim of the amendment and the best way to achieve it. I also thank my hon. Friends for their contributions. The debate has highlighted the fact that the Opposition see real competition issues when it comes to debt-fuelled mergers and takeovers that have happened in football and other areas for some time.

The Minister began by saying that our concern was about cases where there was a takeover without a substantial lessening of competition, and that we wanted to be able to address it in some other way. That is not entirely accurate. The point and principle of the new clause is about takeovers where there is no apparent substantial lessening of competition in the short term, but there may be in the long term, taking into account the ability of the merged entity to compete. The Minister is absolutely right—and other Members have made the point—that this does not address all the concerns about takeovers. It is because we do not want to load other concerns on to competition law, such as employment issues, which my hon. Friend the Member for Leyton and Wanstead  raised, or investment issues, that we are proposing this reasonable first step to enabling the CMA to look at the longer-term ability of the resulting entity to compete.

Photo of Norman Lamb Norman Lamb The Parliamentary Under-Secretary of State for Business, Innovation and Skills 12:30 pm, 10th July 2012

Does the hon. Lady share my concern that if she takes her amendment to its logical conclusion, it potentially protects the interests of a monopoly that might be in the process of being created through a merger? I made the point earlier that a merger creating a monopoly would almost certainly create an entity with an enhanced ability to operate effectively in the long term. Surely that is not what she would want, because it would be completely contrary to the interests of competition and therefore in the interests of consumers.

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Innovation and Skills)

I thank the Minister for the opportunity to clarify that. No, I do not share his concern. I do not know whether he has had advice from competition lawyers. It is clear to me that the test is about a substantial lessening of competition and for that reason we are not changing the test. A monopoly is an absence of competition, so if a monopoly were to be created, that would undoubtedly be a substantial lessening of competition in the short term and in the long term. That scenario is not a danger, given that a monopoly is the absence of competition. On that basis, this clause seeks only to give the CMA the opportunity to look at the longer-term competitive environment and to address the concerns of debt-fuelled takeovers where the resulting entity will be less able to compete. My hon. Friend the Member for Leyton and Wanstead gave an example of that in the motorcycle industry. We have discussed the football industry, where competition happens both on the field and in the boardroom, and the example my hon. Friend the Member for Hartlepool gave of Manchester United being in less of a position to compete for players would certainly impact on its ability to compete on the playing field in the longer term.

This amendment is very reasonable and quite a small first step. While the Minister talked about the importance of not confusing public interest and competition law, I believe there may be an argument for extending a public interest, but that is not what this amendment proposes. It focuses clearly and specifically on competition law. As for inward investment, I support the Minister’s and my hon. Friend’s points that in this clause we are in no way looking to deter those who wish to invest in this country. Inward investment has been a major force for good in many areas and in many industries. However, when it comes to competition law, inward investment, like all investment, should be considered on the basis of the resultant competitive environment. Where the resultant entity is going to be less able to compete effectively in the long term, that should be an issue for consideration by the CMA.

The Minister implied that this was something that the CMA does already, in considering the ability of the resultant entity to compete, and that what this amendment would change would be by making it consider the ability of the resultant entity to compete in the longer term. That gets us back to the agenda of promoting long-termism, which is where we on this side want to focus the measures in the Bill. So unless the Minister would like to clarify the ability of the CMA to look at the long-term ability of the resultant entity to compete, I would like to test the opinion of the Committee on this amendment.

Question put, That the amendment be made:—

The Committee divided: Ayes 9, Noes 12.

Division number 21 Decision Time — Schedule 5 - Amendments related to Part 3

Aye: 9 MPs

No: 12 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

Photo of Hugh Bayley Hugh Bayley NATO Parliamentary Assembly UK Delegation

With this it will be convenient to discuss Government amendments 24 and 25.

Photo of Norman Lamb Norman Lamb The Parliamentary Under-Secretary of State for Business, Innovation and Skills

There is more exciting stuff to come, so hold tight, Mr Bayley. Amendments 23, 24 and 25 are technical, drafting amendments to schedule 5 which deals with transfer of functions to the CMA. Amendment 23 removes the current provision in the Bill that specifies that where the CMA exercises functions under or by virtue of sections 56(3) and 56(6) of the Enterprise Act, this function is to be exercised to a group rather than the board. These latter provisions cover the case where a phase 2 public interest merger inquiry reverts back to an ordinary merger inquiry because the Secretary of State decides not to make an adverse public interest finding or the CMA cancels a public interest reference under section 53 of the Enterprise Act but the effect on competition still needs to be investigated. In such cases the functions of the CMA are to be exercised by the merger inquiry group rather than the CMA board.

Amendments 24 and 25 also give these functions to the group and furthermore clarify that where the group has taken its final decisions on the merger and then disbanded, the CMA board may enforce the orders made by and undertakings agreed by the group. The amendments uphold the separation of decision making between the board on one hand and the independent panellists on the other, which is so important to the success of the CMA, while also giving the CMA an efficient and effective mechanism for enforcing an independent group’s remedies after it has been disbanded.

Amendment 23 agreed to.

Amendments made: 24, in schedule 5, page 89, line 12, at end insert—

‘( ) after “(6)” insert “—

(a) ”.’.

Amendment 25, in schedule 5, page 89, at end insert ‘, and

( ) at the end insert ‘; and

(b) for the purposes of section 34C, the group constituted in consequence of the reference under section 45 is to be treated as if it were constituted in consequence of a reference under section 22 or (as the case may be) 33.”’.—(Norman Lamb.)

Schedule 5, as amended, agreed to.

Schedule 6 agreed to.

Clause 20 ordered to stand part of the Bill.

Clause 24 ordered to stand part of the Bill.

Schedule 8 agreed to.

Clauses21 and 22 ordered to stand part of the Bill.

Schedule 7 agreed to.

Clause 23 ordered to stand part of the Bill.

Clauses 25 and 26 ordered to stand part of the Bill.

Schedule 9 agreed to.

Clause 30 ordered to stand part of the Bill.