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GKN/Melrose Takeover: Update

Volume 790: debated on Tuesday 27 March 2018


My Lords, I would like to repeat a Statement being made in another place by my right honourable friend the Secretary of State for Business, Energy and Industrial Strategy. The Statement is as follows:

“With permission Mr Speaker, I would like to make a Statement about the current takeover bid by Melrose plc for GKN plc.

Following the announcement of the bid, I spoke to the chief executives of GKN and Melrose to understand their plans, and I have done so again as the bid time- table draws to a close and changes have been made from the original terms proposed. My quasi-judicial role requires me to treat all parties fairly, so I should disclose that I have also had a briefing with the chief executive of Dana Incorporated, which has been proposed as a partner in a transaction with GKN.

As honourable Members know, the longstanding British manufacturing and engineering company GKN is subject to a current takeover bid from the British company Melrose plc. One of the most important features of the British economy is that we have a vigorous market for corporate control. Businesses are kept competitive and efficient by the possibility of the current management being replaced by another set of managers if, in the view of their shareholders, they are underperforming and the company could be better run.

However uncomfortable that constant threat may be for incumbent managements, it is an important one and acts against complacency and inefficiency and so is in the interests of employees, customers, suppliers and taxpayers as well as shareholders. It is worth reminding ourselves that shareholders include the pension funds on which millions of working men and women rely for a comfortable retirement.

There are strict and limited grounds for ministerial intervention in proposed mergers. The limited exceptions apply where one or more of the three public interest grounds are engaged. These are those of national security, media plurality and financial stability. The Enterprise Act 2002 gave powers focusing narrowly on those grounds to refer a bid to the Competition and Markets Authority. Such a reference is possible until four months after the completion of a transaction.

I will make such an assessment following receipt of advice from the Ministry of Defence and other agencies on the final terms of a bid, were it to be successful, and I will inform the House immediately if an intervention is launched. However, beyond that formal statutory role, I am concerned to ensure that significant takeover bids shall not act against the interests of our economy, employees or the broader set of stakeholders.

It has long been recognised that companies and their directors have duties which extend beyond current shareholders alone. Section 172 of the Companies Act sets out a requirement for directors to have regard to, among other things, the interests of the company employees, its business relationships with suppliers, customers and others; and the impact on the community and the environment. In my view, this establishes the principle that we expect interests broader than pure shareholder value to be taken into account by directors and in the attitude of the Government.

In the past, some takeovers have had consequences for these groups that were not only deleterious but were at odds with indications given during takeover bids. For this reason, a new regime was established whereby bidding companies can now make legally binding commitments as to their intended conduct in the event of the bid succeeding. Having established this regime, I believe it should be used in takeover bids where the interest of these stakeholders is engaged, as is clearly the case here.

GKN is a valued employer, directly and through its supply chain, and plays an important role in Britain’s automotive and aerospace sectors. Through its research and development it has a vital role to play in our industrial strategy. It also benefits from government-sponsored contracts and participates in sectors which enjoy active engagement from government-sponsored R&D programmes. It also carries responsibility for a large number of pensions that depend on GKN’s prosperity to fund the pension scheme, which is currently in deficit.

Melrose’s business model is based on acquiring, improving and selling businesses to new owners after a small number of years. While this approach can have advantages in terms of efficiencies, tensions can arise between it and the need for long-term investment and stability for important relationships.

With the deadline for the offer period closing on Thursday, and without prejudice to my use of the Enterprise Act powers, which operate according to a longer timetable, I believe that Melrose should set out more clearly its intentions towards wider stakeholders, and specifically to make commitments concerning them in a legally binding form before the opportunity is lost with the closure of the offer period. Accordingly, I wrote to Melrose yesterday asking it to set out clearly its proposed commitments, including on maintaining the business headquartered and listed in the UK; maintaining a United Kingdom workforce and respecting its employment rights, as well as engaging closely with representatives; continuing to pay tax as a UK taxpayer; continuing to invest in R&D programmes, which are crucial to our industrial strategy; investing in the training and development of the workforce, including in apprenticeships; treating suppliers well, including the prompt payment of suppliers; and making arrangements for current and future pensioners which are to the satisfaction of both trustees and the independent Pensions Regulator.

In addition, stable ownership and financing is an important part of underpinning the trusted relationships which particularly characterise the defence sector. That stability is also important for research and development partnerships which, by their nature, endure over many years, whereas Melrose’s model has been built on short-term ownership. I have therefore sought a legally binding commitment from Melrose to greater continuity of ownership specific to the defence-related businesses, and to exclude the option of a short-term sale of this business without the prior consent of the Government. I have also made it clear that, in the event of a successful bid, the Ministry of Defence would look to require a legally binding commitment relating to the management of any defence contracts. It is important to emphasise that these would be voluntary commitments by the company, over and above questions of the use of Enterprise Act powers, but it is right that these wider issues of public concern should be addressed by Melrose before the bid closes formally. Melrose has, earlier today, given a response to my letter, which I will place in the Libraries of both Houses, alongside my letter to Melrose.

Subject to the powers that I have described, it is for shareholders of GKN to decide which management team they wish to run their company. But my strong belief is that when broader interests are at stake, and having established a new regime in which legally binding commitments about the future can be given, they should be used before the opportunity to do so expires. I will continue to keep the House up to date at every phase of these proceedings, and the House can be assured that I will carry out my responsibilities seriously, meticulously and fairly in representing the public interest in the future of such an important company. I commend the Statement to the House”.

My Lords, that concludes the Statement.

My Lords, I thank the Minister for repeating the Statement made in another place by his right honourable friend the Secretary of State. I think that many Members of your Lordships’ House will think that it is rather troubling and a bit confused towards the end. I shall ask a number of questions in hoping to elucidate that.

GKN is a UK engineering firm, founded in south Wales in 1759, which is now a global engineering business which designs, manufactures and services systems and components for most of the world’s leading aircraft, vehicle and machinery manufacturers. GKN has various defence contracts in Luton, the Isle of Wight and in King’s Norton, including making components for the F35, A400MM, P8, Typhoon, V22, C130, and F22 vehicles. Approximately 58,000 people work in GKN companies and joint ventures in more than 30 countries, including 6,000 here in the UK. It has global sales of £9.4 billion and spends £85 million on R&D in the UK alone. As a percentage of sales, GKN spends about 4% on training, and we are hoping that that will continue.

The motto of the bidder, Melrose, is, “Buy, improve and sell”—in other words, to dismantle a business and then quickly sell each part off. On 8 January, the board of GKN received an unsolicited proposal from Melrose to purchase it; the board of GKN unanimously rejected it, on the grounds that the bid was,

“entirely opportunistic and that the terms fundamentally undervalue the company and its prospects”.

A formal offer from Melrose and various defence documents have been issued since then, and the deal closes this Thursday, 29 March. But despite growing concern it was not until yesterday, Monday 26 March, that the Secretary of State wrote to Melrose to seek the commitments referred to in the Statement and relevant undertakings on a number of key areas. So my first question is: why on earth did it take the Government so long to get involved, and why on earth leave it all so late?

I accept that there are currently strict and limited grounds for ministerial intervention in proposed mergers, in essence where one or more of national security, media plurality and financial stability are engaged. However, the Enterprise Act 2002 powers allow reference on those grounds to the Competition and Markets Authority for four months after the completion of a transaction. Better late than never, perhaps.

In the Statement the Secretary of State said that he would make such an assessment,

“following receipt of advice from the Ministry of Defence and other agencies on the final terms of a bid were it to be successful”.

So my second question is: can the Minister set out the likely timescale for this process, and how it will operate in practice? Will he guarantee to keep the House informed?

The Statement seems to suggest that the reason why the Secretary of State kept a low profile was that he did not want to jeopardise his quasi-judicial role in this takeover battle. If that really is the case, does it not prompt another question? If the Secretary of State for Business is debarred from taking an active interest—and we have to wonder whether that is a sensible position for him to adopt—who in government has the responsibility for looking after our industrial assets, including strategic and defence interests, in this and similar takeovers? I look forward to hearing from the Minister on that subject.

The Secretary of State rightly pointed out in the Statement that in the past some takeovers have had “deleterious” consequences. Presumably that is a reference to the Kraft/Cadbury debacle. He went on to say:

“In my view, this establishes the principle that we expect interests broader than pure shareholder value to be taken into account by directors and”—

this is quite important—

“in the attitude of the Government”.

He lists these as:

“a requirement for directors to have regard to … the interests of the company employees, its business relationship with suppliers, customers and others; and the impact on the community and the environment”.

That is quite wide-ranging, and all very sensible.

All those issues are directly engaged in this proposed takeover. So my fourth question to the Minster is: can he point out how and where these new principles will actually bite? How will they impact in Luton, the Isle of Wight and Norfolk? Will they ensure that the R&D spend continues, that the pensions are secure, and that the training opportunities GKN currently offers will be continued?

Finally, the Statement contains the view of the Secretary of State, as expressed in his letter yesterday to Melrose, that Melrose should set out more clearly its intentions towards wider stakeholders. He specifically requests it to make commitments in a legally binding form. I have to say that if the commitments specified by the Secretary of State were put in legally binding form, that would go a long way towards allowing us to support the Government in this matter. So my fifth question to the Minister is to ask him to confirm that the Government will refer the proposed takeover to the CMA if they have not received, by close of play on Thursday 29 March when the deal closes, legally enforceable commitments from Melrose on the issues that he has adumbrated already.

I repeat that those issues are: maintaining the business headquartered and listed in the UK; maintaining a UK workforce and respecting its employment rights as well as engaging closely with its representatives; continuing to pay tax as a UK taxpayer; continuing to invest in R&D programmes at current levels; investing in the training; treating suppliers well, including prompt payment of suppliers; making arrangements for current and future pensioners that are satisfactory both to trustees and to the Pensions Regulator; greater continuity of ownership of the defence-related businesses; and a commitment relating to the management of any defence contracts. At present only two of these “asks” will be covered by the legally enforceable commitments offered by Melrose to the Takeover Panel, and one of those only partially. The rest are not. I would be grateful if the Minister would reflect on that.

In conclusion, I have to say to the Minister that there cannot be many people in this country who think that the Government have got a grip on this issue. Voluntary agreements will not work, as we know from recent experience. Today’s weak, late and unenforceable assurances from Melrose are insufficient. There should be statutory provisions, not voluntary aspirations. In truth, without them, there is nothing there to assure the workers, the pensioners or the local communities. Nor will voluntary agreements assuage the concerns about the devastating impact that this opportunistic dawn raid will have on our industrial strategy and our national security. Both in this case and in future cases, we surely deserve better.

My Lords, I want to press the Government a little more on one or two of the issues raised by the noble Lord, Lord Stevenson. One of those is the timing of the letter. The Minister will be very much aware that, presumably, it was meant to elicit information and to express some government concerns to be taken into consideration by the shareholders of GKN before they exercise their votes. However, as he will know, many of the shareholders have already declared —and I think he will confirm that a declaration once made cannot be retracted. In addition, the remaining shareholders have largely had all their internal meetings to come to their final decisions, and cannot pull those meetings back together to reconsider in the very brief timeframe of the next 48 hours. Therefore, if this is something other than public relations, will he explain to me how it is meant to inform shareholders, because I do not understand that? Will he especially, in that case, confirm that he still takes the view that the Secretary of State can call in this transaction, in whatever form it goes through, if concerns remain following the vote?

I scanned through the Melrose response very quickly but there seems to be no mention of the 6,000 workers. There are various assurances on other points but I saw no mention of them. Will the Minister comment on that? I am also concerned that all the various declarations seem to have a timeframe of five years. Considering the length of time needed to plan measures such as the industrial strategy and the sustainable relationships that need to be developed in the aerospace, defence and other fields, five years seems an infinitesimal period. Will the Minister explain why that short timeframe apparently reassures him, because I am not sure that it does me?

Does the public interest definition need to be looked at again as it does not mention workers’ rights or pensioners and does not refer to the industrial strategy, which is supposed to have a much more important role now? Airbus, for example, has expressed concerns about a potential new owner, which could undermine the direction in which the Government are trying to take industry in this country.

My last point concerns an issue I do not fully understand. However, the Minister may be able to help me. I understand that many of the shares are held by arbitration houses, and that rather than buying them and paying stamp duty they have them on loan and are exercising them in that format. Is that really appropriate and is it something else we should look at?

My Lords, I shall make a fist at answering some of the points put to me by the noble Lord, Lord Stevenson, and the noble Baroness, Lady Kramer. However, I apologise in advance if I fail to do so on some points as this issue is highly technical. I want to be very careful about precisely what I say, bearing in mind that my right honourable friend will possibly have to make quasi-judicial decisions following advice from the Ministry of Defence. I am not party to that but the noble Baroness and the noble Lord will understand what I mean: I have to take care over what I say.

The noble Lord’s first criticism was that we were slow off the mark on this issue. I can assure him that right from the start, from the moment we knew there was a bid—it goes back only to January—the Government have monitored this and paid attention to it. As the noble Lord will know, as things have hotted up, we have taken a more active line; hence the letter from my right honourable friend yesterday, to which he and the noble Baroness referred. I will say a little more about that, and about the response today from Melrose.

The noble Lord also asked about the timescale and what we will do to keep the House informed. I can assure him that we will keep the House informed as things happen, as my right honourable friend made clear. The Secretary of State set out the statutory timeframe under the 2002 Act. He will inform the House if an intervention is ordered, again in line with his quasi-judicial powers. As I made clear, there are limits to what my right honourable friend can and cannot do. He set out in his Statement just when he could intervene under the terms of the Act. In the third paragraph of the letter to Melrose, he again makes it clear that the Act gives powers to the Secretary of State to act in a quasi-judicial manner.

He goes on to say, when talking about broader stakeholder interests, that in addition to his statutory role, he, as Business Secretary, had a wider concern that,

“where important businesses are involved, takeovers should not act against the interests of our economy, employees or the broader set of stakeholders”.

He adds that Section 172 of the Companies Act, to which he referred in his Statement, sets out that statutory requirement for directors,

“to have regard to, amongst other things, the interests of the company’s employees; the company’s business relationships with suppliers, customers and others; and the impact on the community and the environment”.

A response to that letter came through from Melrose. It is now available in the Library, and I hope the noble Lord, the noble Baroness and others have seen copies of that letter. In the letter, Melrose again set out what it felt it could do, particularly where it agreed with the takeover panel on the form of the legally enforceable undertakings:

“For a period of five years, Melrose will: maintain its UK listing; maintain its UK headquarters; ensure a majority of its directors are resident in the UK …”,

and so it goes on. There are commitments about the amount of research and development it will invest in. That is all set out in what it refers to as its takeover panel-enforceable undertakings. The letter goes on to make further long-term commitments that we hope that it, as an honourable company, will adhere to should it be successful. That is obviously, as my right honourable friend made clear, a matter for the shareholders.

Going back to those initial undertakings about legally enforceable commitments in the letter, the Secretary of State indicated in his letter his wish to see Melrose making those other commitments, to which I referred in the main letter, in good faith. I hope the company will stick to that. Since the noble Lord asked particularly about R&D and training, the commitments about R&D are listed in its letter in the paragraphs about enforceable undertakings, which state:

“Melrose will at least maintain GKN’s current level of expensed research and development investment equal to 2.2% of sales over the financial years 2019, 2020, 2021, 2022 and 2023”.

This is a legally enforceable commitment.

As I said, I am limited in what I can say, and I want to be very careful about what I do say and how far I go because the Secretary of State has to look at this thereafter. I will leave it there and take up that rather technical point that the noble Baroness made about arbitration houses—

Yes, arbitrage houses. I will write to her in due course, because I would not want to give a response that was in any way misleading. I hope that deals with most of noble Lords’ concerns.

My Lords, the House will recognise that this is a very serious announcement about a major British company that is obviously facing some difficulties in its present operation and is now the subject of this takeover bid. It is extremely worrying that this has occurred at a time when, obviously, the future prospects for our economy are far from certain in the present Brexit developments. The Secretary of State was absolutely right to ask for the clearest undertakings, although, as the noble Lord from the Front Bench said, it has come rather late. I do not understand at all the idea that the Secretary of State has up to four months in which to intervene in something that may have already taken place. However, he does recognise that it is not just a matter of national security: the Secretary of State says he has a wider concern that the takeover should not act against the interests of the economy. He asked for undertakings from Melrose Industries plc, but I find them extremely inadequate. The company says that it is prepared to give an undertaking to maintain its UK listing and UK headquarters for five years, and to,

“ensure that the Aerospace and Driveline divisions retain the rights to the GKN name”.

However, it goes on later to say that if a strategic purchaser comes forward with an investment proposal prior to 2023, it hopes that it would be allowed to consider that. It goes on to add:

“Unfortunately, as a result of the nature of the transaction, we have not had access to the information we would expect in order to make detailed commitments”.

By the end of that, I wonder just what commitments are being given. This is a very serious matter and the Government need to think very carefully indeed. I pay tribute to Melrose, which is obviously an extremely successful company, whose business will be to acquire it and to sell it on. No doubt it will make a great success of that, and full marks to it for its approach. Whether or not it is appropriate in this situation, a heavy burden is on the Government to get far clearer and far more binding undertakings that will give some form of security to an essential part of the UK industrial economy.

My Lords, I note exactly what my noble friend has said. As he said, my right honourable friend has up to four months to consider these matters, depending on the advice he receives from colleagues in the Ministry of Defence. I am also grateful to my noble friend for referring to the response from Melrose. It is not for me to say whether that is a good or bad response; I just note that, ultimately, it has to be a matter for shareholders and others. But parts of that, as I made clear—the letter is now in the public domain—will be enforceable commitments, albeit some of them for only five years, and another part will be undertakings of a less enforceable nature. It is not for me to defend or attack that letter. I have simply set it out as the response that my right honourable friend the Secretary of State received from Melrose following his letter, in which he set out, first, his legal obligations under the 2002 Act—which gave him a relatively limited power to intervene, which is quite appropriate. Secondly, however, he stressed—I am grateful to my noble friend for underlining this—the wider interests he has as Business Secretary and the wider interests that the directors have under Section 172 of the Companies Act as regards what they must look at. In the end, the shareholders will have to take a view on that matter. As I said, it is possible that my right honourable friend will have to make a decision in a quasi-judicial manner. He must await advice on that, and at that stage, if appropriate, he will intervene.

My Lords, I share the view that this takeover proposal is important for the UK economy. My noble friend the Minister refers to legally binding contracts. There have been cases in the past where contracts have not been fulfilled by those taking companies over. What will be the consequences if these legally binding contracts are broken? In particular, since it seems unlikely that the takeover company in this case will retain indefinitely the company it has taken over—the expectation is quite the contrary—how will the legally binding commitment be carried forward as regards any future owner of the company?

My Lords, I would need to take advice on that. I was quoting the letter from Melrose back to my right honourable friend the Secretary of State. In that letter—in the paragraph headed, “Takeover Panel enforceable undertakings”—Melrose states:

“We have been able to agree with the Takeover Panel”—

I imagine this is a matter for it—

“the form of the following legally enforceable undertakings”.

I am not aware of how and in what way those would be legally enforceable, but that is the assertion it made.

My Lords, surely one of the most worrying aspects of this matter is the suggestion that a company whose business is very much concerned with national security could be bought and held for only five years by a company whose business seems to be a quick turnover on selling and buying businesses. In five years’ time, as I understand it, the business could then be passed on to China or almost anybody, which has severe implications for the five-year term. I notice that the five-year issue was not in the Minister’s Statement. It seems a crucial, central aspect of the issue. Can we know why the Government were not frank enough to put it in the Statement?

Again, I am not sure that I can take my noble friend much further than I did earlier when I talked about the advice that my right honourable friend needs to receive from the Ministry of Defence. Under the 2002 Act, there are limited grounds on which the Secretary of State can intervene in matters of this sort, one of which is on grounds of national security. He needs to take advice on that and, if appropriate, he can then act; but as I said earlier, he needs to act in a quasi-judicial manner. If the other two reasons for intervening do not come into play, my right honourable friend would not have the ability to intervene because national security would not be affected. It would be for my right honourable friend to take that advice and come to a decision, but these matters have to be decided in a quasi-judicial manner and I therefore do not want to say anything that might damage his ability to do that in any way.

My Lords, I apologise to the Minister in advance if I should know the answer to this question. Can he tell your Lordships’ House if any such legally enforceable undertakings have, in the past, ever been enforced by the Takeover Panel? What have been the consequences of such enforcement action? That seems to be at the heart of the concern of your Lordships’ House. In what sense are these undertakings enforceable?

I am always filled with dread when experienced colleagues such as the noble Lord get to their feet and say that they should know the answer to a question. I do not know the answer to that question, but I will commit to write to him about occasions when, and if, such legally enforceable commitments have been enforced, and I will make sure that it is copied to other noble Lords who have taken part in this debate.

My Lords, my noble friend and other colleagues have brought forward the term of five years as though it was reassuring, but surely all the issues that are alive now will be equally alive in five years’ time. Merely pushing a cataclysm back does not solve the problem. Can we have some assurance that the Secretary of State will look to the longer term and not merely to the contractual niceties that he has set out so far? Can the Minister answer the question—a question to which I too should know the answer—of what the extent of his power to intervene is if he decides to do so?

I do not think that our national security is limited to five years, and I do not think that the 2002 Act says that. These commitments have been made by Melrose. I am sure that it will be for my right honourable friend to consider national security on a long-term basis. I hope the noble Lord will understand that I cannot pre-empt how my right honourable friend might consider that.