Enterprise Bill

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Mr. Barnes: In order to help the Government and the Opposition, and as we have had a full debate on the public interest, I do not intend to speak to my amendment.

Mr. Waterson: I am thoroughly ashamed of myself if my point of order has silenced the hon. Gentleman. I was not making a point about the content of his speech, merely the abysmal failure of the Government Whips Office to establish that the people on the Committee were vaguely supportive of the aims of the legislation.

Mr. Barnes: I feel that the points that I wanted to make have been made and dealt with. Having moved my amendment I do not intend to speak to it. There are later amendments on this clause and it may help the Committee to know that amendments Nos. 125 and 126 will not be moved.

Mr. Waterson: I am grateful for that clarification. Our amendments in this group comprise two sub-groups dealing with two different issues. Amendments Nos. 213, 219, 237 and 253 are on the same issue and would insert the words ''and supplier'' into the clause. The clause as it stands provides that the OFT may decide not to make a reference if it believes that any relevant customer benefits involved in the merger outweigh any anti-competitive effects. That can broadly be welcomed as it gives an element of flexibility, albeit one that exists only in the Bill at present, which I am sure most people would welcome. We take the view, with the CBI, that inserting the words ''and/or supplier'' would reflect the benefits to suppliers of dealing with a single buyer in a market and the fact that customers are not the only party–although they should be at the forefront of our concerns–to be affected by a merger. I hope that those amendments are fairly clear.

Amendments Nos. 214, 218, 234, 238 and 254 are more complicated. They add another ground on which the OFT may decide not to make a reference. There are already two such grounds in the Bill: where the market is not of sufficient importance to justify a reference, an issue to which we shall return in the stand part debate, and where customer benefits outweigh any adverse impact on competition. I stress that those

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are both welcome. With the support of the CBI, we propose a third possibility: the so-called failing firm defence, which applies differently from previous considerations, in that it is applied by the United States and the European Commission.

In the US, a party wishing to rely on that defence must show four things: first, that the failing firm cannot meet its financial obligations; secondly, that it cannot reorganise itself in bankruptcy; thirdly–an important consideration–that it cannot find another buyer whose purchase would pose lesser anti-competitive risks; and fourthly, that in the absence of the merger, its assets will exit the market. In the EU, the failing company defence was first applied in 1993 in a decision in Kali-Salz/MdK/Treuhand, a case about potash.

The Chairman: I remember it well.

Mr. Waterson: I am sure you do, Mr. Beard; you probably received much constituency correspondence about it.

A dominant position was created in the German market for potash but the case was cleared from a reference under mergers legislation in the EU because it was considered that a prohibition would have led to the same outcome in the market as if there had been a clearance. In the Commission's decision, the following three criteria were set out: first, the company would in any event go bankrupt in the immediate future; secondly, the market shares of the company would in any case go to the merging party; and thirdly, there was no less anti-competitive way of selling the company. It is immediately apparent that the main difference between the US and the EU approach is that the latter imposes the additional requirement that the market shares of the failing firm would in any case go to the acquiring party.

The amendments are probing, and we are genuinely interested to hear the Government's comments. I suspect that they considered the failing firm defence but discarded the idea, possibly for good reasons–if so, we would be interested to hear what they are. We propose a test based on the US lines, but as the CBI said in its comments:

    ''adoption of either approach would be acceptable''.

That is probably right and also raises an important issue.

Dr. John Pugh (Southport): I speak partly in the stead of my hon. Friend the Member for Orkney and Shetland (Mr. Carmichael) who, in such a non-competitive situation, has unfortunately had no choice about what airline to take home today. I am sure that if he were present he would make the points that I shall make, to greater effect but with perhaps less brevity.

Amendment No. 212 would insert a provision that the OFT would consider only mergers that it deems ''of sufficient importance''. I am not sure of the reason for that proposed addition; the OFT should consider any good prima facie case. Many of us think that the Bill has a metropolitan bias, and that under its provisions any merger in the south-east or London is necessarily large-scale because of the nature of the

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market. All prima facie cases in the metropolitan area will therefore look good. Equally, all prima facie cases in Orkney will not look so good, and might not be considered.

3.45 pm

I want to find out from the Minister whether the Bill's aim is to discourage non-competitive mergers, or just big non-competitive mergers. I suspect that the latter is the real objective. I can genuinely understand why the OFT would not wish to involve itself in the affairs of every corner shop or locality. Indeed, clear guidelines are given elsewhere in the Bill, for example in clause 21(5), on what might come up for consideration, and on the criteria that might have to be met before anything becomes a matter for the OFT's consideration.

However, a clearly anti-competitive small-scale merger could occur, and not in the usual way, in which potential players take up the small-scale market, as would generally happen in a metropolitan area. A market judgment might be formed between, say, two regional airlines, where no players enter the market. Alternatively, the market might be of such small scale that it would not justify the capital investment needed for another player to come in. I accept that in those circumstances we could argue under another clause that the consumer might feel a proportionate benefit from no competition.

The failure of a competitive market in a small locality in the corner of the United Kingdom is surely as crucial to the thrust of the Bill as the failure of competition in a metropolitan area or where markets are necessarily large. I wonder what mechanism the Under-Secretary has for ensuring that such cases come up before the OFT, and are not dismissed simply because they are not ''of sufficient importance''. My feeling is that in certain areas, nearly every issue will be deemed not to be of sufficient importance.

Mr. Jonathan Djanogly (Huntingdon): I should like to tell the hon. Member for Southport (Dr. Pugh) that, as there is a de minimis provision of £45 million, I am not sure how many businesses in Orkney are likely to be affected.

Amendment No. 124 would adopt a relatively tried and tested concept that has been used in the United States for a fairly long time. I support my hon. Friend the Member for Eastbourne in asking why we are not adopting the failing company exclusion. The concept is not entirely alien to the United Kingdom. Indeed, for companies listed on the stock exchange there are, under the stock exchange rules, various circumstances in which failing companies can be excluded from those regulations if they are in difficulties.

We must also appreciate that if a company is insolvent or on the brink of insolvency, onerous restrictions on the directors come into play under the Insolvency Act 1986, to name but one piece of legislation. The restrictions deal with whether the company is to continue trading, and if it is, where it will get its finance from–equity or loans. If it cannot do either, the company is wound up. Not taking on that failing company test could lead to companies going towards insolvency faster because a sale could

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not go through. If the money runs out, the business has to be sold or wound up. That could mean that without the test jobs could be lost.

Mr. Purchase: The hon. Gentleman might be correct in thinking that a company that finds itself insolvent must cease trading or quickly make arrangements to cover its liabilities. Is there a danger in the provision that holding out the hope of a merger with another company might prevent the directors of a failing company from making one of two choices: to cover the liabilities quickly by overdraft facilities and personal guarantees, or to put the company into administration? Is there a danger that the proposal would encourage a no man's land where shareholders and creditors would get the worst of all worlds?

Mr. Djanogly: I do not think that there is a danger, because we are not talking about small businesses where personal guarantees could be relevant. If a company has a £45 million turnover, it is unlikely that refinancing would involve the directors putting up personal guarantees. They would have to have a massive sum of money from a bank. Most companies would probably be stock exchange listed, and would have to go to the market quickly to get money. Interestingly, in that circumstance the stock exchange waives the requirement for them to issue some of the paperwork that they would usually have to complete. However, having to go through the merger regime could lead to insolvency and a much higher risk of jobs being lost.

Mr. Lansley: The amendments relate to suppliers and customers. I want to discuss two amendments that were tabled by my hon. Friend the Member for Eastbourne. He did not elaborate at any great length.

If one were to observe a situation in which a merger gave rise to sufficient concentration to remove competition in purchasing, it is debatable whether one could distinguish any benefit to the supplier that would not also lead automatically to customer benefits. If a company has sufficient market power–in this case, proxy–to control purchasing to that extent, presumably it would also have the necessary market power to be able to impose price increases or quality changes in the product that would be to the detriment of the customer but to the company's advantage. It is therefore likely that benefits to the supplier and to the customer go hand in hand. I am sure that my hon. Friend the Member for Eastbourne has recognised that there is a danger under the amendments that supplier benefits could be construed without any customer benefits flowing from them. It may be in the interests of some suppliers to have some concentration among their customers that does not necessarily benefit customers further down the line.

I am grateful to my hon. Friend for raising another interesting issue. One may lose sight of the nature of the competitive market in which one is working if one only looks downstream from the companies concerned, albeit at every stage downstream to end-use customers. One may see some concentration at one point in the market, but competition occurring above

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that in the customer supply chain would make entry to that marketplace easy. Whether it would be right to restrain a merger between companies operating at that level is an issue for further scrutiny.

 
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