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Private Equity (Transfer of Undertakings and Protection of Employment) Bill

7th March 2008

Jonathan Djanogly speaks against a Private Member's Bill that seeks to extend TUPE law to transfer of equity as a "further example of unnecessary meddling in business practices".

12.13 pm

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 UK's 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 Dromey's 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 sector's importance to this country and, indeed, to other countries-countries 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 UK's 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.

My hon. Friend also made the important point that, following investment, privately owned companies are by nature not as easily traded or sold as public companies. That means that private equity will almost invariably invest on a long-term view-say five years-rather than a short-term view. Private equity firms employ around 5,000 people in the UK in financial services, helping to generate £3.3 billion in fees for supporting organisations. That amounts to more than 7 per cent. of the total annual turnover of the UK financial services industry. It is therefore of the utmost importance that the sector is not sent packing overseas for no good reason. This country's light-touch regulatory approach is recognised as key to attracting the industry to the UK, and legislative change must not compromise such an important part of the UK's economy.

The hon. Member for Nottingham, East asked "Why not?" My first answer is that the Bill is technically unnecessary. That view is even supported by the European Commission, which concluded in June that there was no justification for extending TUPE to a change in ownership of shares. TUPE regulations were updated as recently as last year, as many Members have pointed out. However, the updates make no alterations to the well-established principle that TUPE need not apply to share sales. Notwithstanding what was said by both the hon. Member for Nottingham, East and the hon. Member for Stafford (Mr. Kidney), in a share sale the employer does not change, and therefore the employee's terms and conditions of employment do not change either. Accordingly, the employee retains his or her existing employment rights, which are no more and no less than they would be if the sale had not taken place. I repeat: the employee is in no worse a position.

If job losses were incurred as part of the sale process, or after it-for example, if there were asset stripping-the employee would have the same rights as they had when the company was owned by the previous shareholder. Any dismissal would automatically be unfair unless the appropriate regulatory procedures were complied with. Let us be clear: existing legislation already dictates that an employer cannot unilaterally vary a contract of employment. Changes to individual terms and conditions such as pay, hours and holidays can be achieved only through agreement with the employee.

TUPE was enacted with the specific purpose of giving employees of a business who are transferred to a new business in a non-share sale similar rights to employees in a share sale. The hon. Member for Solihull (Lorely Burt) made that point, and it would be bizarre to reverse the process. The extension of TUPE to share sales is therefore unnecessary and irrational, and we do not see how that position has changed. An extension of TUPE would not add significant additional protection, but would lead to more complex and lengthy transactions, ultimately damaging the UK economy.

The Bill's proposed new measures go significantly beyond the provisions in TUPE, and would be considerably more onerous and restrictive than existing legislation. I appreciate what the hon. Member for Nottingham, East said in that regard, but that is the nature of his Bill. We believe that such provisions are a thinly disguised way for the trade unions to exert more influence on mergers and acquisitions transactions in the UK. That of course implies that the subject matter of the Bill really has nothing to do with private equity, as TUPE affects all business sales. I suspect that private equity has been inserted as the proposers believe that inserting a whipping boy is likely to increase interest in what actually is a pretty poor idea.

The hon. Member for Solihull set out the many reasons why the unions do not like private equity. To that extent, the Bill could be called a Trojan horse. Clause 3 goes beyond existing TUPE law by seeking to institutionalise the role of trade unions. At present, under TUPE any collective and recognition agreements will remain in force following a business transfer. Alongside that, any rules for varying, terminating, rescinding or altering matters after transfer also remain in force. However, the Bill seeks to make it impossible to make such amendments following a share transfer, as any changes for reasons related to the transfer would be automatically void unless economic, technical or organisational reasons could be proved. That, therefore, gives trade unions a shield on a share sale and creates the double standard where it is more favourable for buyers to buy a business than to buy shares in the company that holds the business.

Clause 4 provides that information be given to employee representatives such as trade unions before the parties agree that a share sale is to take place. It also gives them the right to commission an expert study, give a formal opinion and receive reasoned response prior to any share sale. Such an expectation is wholly unrealistic. It would result in a dramatic slowing of the transaction process, and potentially give trade unions the power to delay transfers almost indefinitely. The clause places a further onerous obligation on the acquirer in a share sale to disclose five-year business plans on the business it is acquiring.

Mr. Chope: I congratulate my hon. Friend on a very good demolition job. Will he illustrate his last point by reference to what is alleged to be happening in France, where the planned merger between GDF-Gaz de France-and SUEZ has been delayed by more than two years through the employee representative's refusal to provide an opinion as required by French law? Would we in this country not be in exactly the same position if this Bill were enacted?

Mr. Djanogly: My hon. Friend gives a good example, to which I had intended to refer. He is right that there would be the same severe implications in this country. It was asked earlier what would happen if Northern Rock had been sold by way of a private share sale, to the Virgin bidder, for example. That did not happen, of course, but if this Bill had been enacted it would have significantly delayed the sale, leading to extra uncertainty-and certainly also to more worry for the staff concerned, rather than less. As my hon. Friend the Member for Shipley said earlier, in his usual forthright manner, we are not here to support the rights of workers whose work is going to end.

These obligations would be unworkable in a competitive, globalised marketplace that relies on rapid decision making. Moves to exercise such constraints on the UK labour market would inevitably stifle the UK mergers and acquisitions industry, risk damaging London as a worldwide financial centre, and drive investment capital away from British shores into the hands of rival economies.

These measures are also unnecessary in the context of employee protection. Employment legislation already requires information and consultation with employee representatives, including trade unions, at least 30 days in advance if 20 or more job losses are envisaged.

The CBI has said that it does not support the Bill, which it believes would be damaging to private equity firms and, potentially, to many other businesses, compromising broader economic success and job creation. The hon. Member for Manchester, Central (Tony Lloyd), who has perhaps now gone to the Library to do his research, queried the CBI's view that the provisions would create uncertainty. They would do so because the sale process would be impeded and delayed, thereby creating uncertainty over the outcome and more concern for staff. To reinforce the point made by my hon. Friend the Member for Shipley, let us not have any quibbling about the fact that the British Private Equity and Venture Capital Association-the BVCA-has strongly opposed the Bill.

Clause 5 allows for an injunction to be taken out to prevent a share sale if trade unions are not consulted. That does not exist even in TUPE, and it would be a disastrous measure for the UK's mergers and acquisitions market. The hon. Member for Nottingham, East said that he wanted to strip out such extras, but I have to tell him that to do so would take him back to the existing law. That leads us to ask why we need the Bill. The timeline of any mergers and acquisitions deal would certainly be delayed while trade unions were elected and consulted, and much uncertainty would enter the process as a result.

Mr. Chope: Does my hon. Friend accept that the promoter of the Bill has now said that he does not wish the injunction provisions in the most recent draft of the Bill to apply? Does my hon. Friend take succour from that, in that it shows that the mood is changing on the Labour Benches and becoming more welcoming towards the whole principle of private equity?

Mr. Djanogly: I agree with my hon. Friend. It seems to me, having listened to the debate so far, that a Bill has been presented that was perhaps drafted by others, and that the amount of thought that went into it before it was presented was not as much as should have been the case. I regret that, because the implications of the provisions for British business are very significant, and because of the upset that the Bill has caused among business organisations, for what I see as very little benefit for employees' and workers' rights. For those reasons, I think that it would have been better if it had not been presented.

The scope of the Bill is uncertain. Although it claims to address issues of job insecurity following private equity takeovers, the fact that it leaves it to the Secretary of State to give a definition of "private equity" makes that an impossible task. Private equity is a highly problematic area to define, and-as my hon. Friend the Member for Christchurch (Mr. Chope) pointed out-there is much dispute, even within the industry, on its parameters. For example, there is much debate on whether it includes venture capital or small innovation businesses, let alone business angels investing alone.

The hon. Member for Nottingham, East's famous explanatory notes-which I have now had a look at; I thank him very much-confuse the issue even more. Paragraph 4 defines private equity organisations as

"companies whose shareholdings are not listed on a recognised stock exchange".

I do not understand the sense of that, not only because there are listed private equity companies, but because it was this Government who put in place the tax measures to encourage people to invest in them. I shall be interested to hear the Minister talk his way round that one.

The uncertainty surrounding the definition of private equity leads to a very real danger that other UK companies will be caught by the Bill. If that happened, the ability of such companies to conduct business in the UK would be extremely inhibited. Again, businesses would be driven abroad, which could be extremely damaging to our economy. TUPE law is highly complex and frequently misunderstood. Extending it to share sales would create uncertainty that, in turn, would erode buyer confidence that profitability in a takeover target's business could be restored and value derived from its investments.

The trade unions must be prevented from slowing up the UK's mergers and acquisition transaction process and wrapping up our flexible labour market in red tape. Only two weeks ago, a huge union-led Labour Back-Bench rebellion in this place forced the Government to review their previous opposition to increased employment rights for temporary and agency workers. Since 1997, and having taken on the EU social chapter, the Government have introduced some 18 Acts and more than 280 statutory instruments that deal directly with employment regulations.

Despite business representatives increasingly speaking out against the growing burden of regulation and the resulting erosion of Britain's competitive advantage, the process of reducing our competitive advantages is now actually accelerating. The impact has been to increase the complexity and burdens on employers while strengthening both trade union and employee rights. This Bill represents a further attempt by unions to push the Government-the Labour party now receives more than 70 per cent. of its money from the unions-into passing laws to make the UK's labour market significantly less competitive. That is a further turn of the Warwick agreement ratchet and we had all better wake up to what is going on before that process kills innovation and job creation in our country.

This Bill is a further example of unnecessary meddling in business practices. It is technically unsuitable and economically misguided. If passed, it would be hugely burdensome for UK companies and would bring unlikely benefits to employees. Accordingly, we shall oppose the Bill today.

12.32 pm



Mr. Jonathan Djanogly (Huntingdon) (Con): Surely the same statutory provisions would apply in respect of any redundancy programme put in place after a share acquisition.

Mr. Heppell: I have lost the point on that.

Mr. Djanogly: The point is that the existing law provides no less protection for workers made redundant after a share sale.

Mr. Heppell: No, it does not. The reality is that Joe or Josephine on the shop floor knows that they are being taken over. Let us be right about this: when private equity companies take over a company, it is because they have a plan to change things. They might be coming in with new investment, but they will want to change how the company is run. A takeover has significant consequences for the work force. When that transfer does not take place, people do not face those consequences.

Mr. Djanogly: I am sorry, but how can the hon. Gentleman assume that there will be considerable consequences for the employees following a takeover? There might be, but there might not be.

Mr. Heppell: How can I be sure that there will be any changes under any takeover? Of course, I cannot be sure. All I can say is that I have eyes in my head and ears stuck on the side of my head, and all my experience of takeovers shows me that in every instance there are significant consequences for those who are employed in those companies. We do not have to be geniuses to recognise that.


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 people's 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. Friend's 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.

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