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

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.