Tuesday 9 March 2021
The Grand Committee met in a hybrid proceeding.
National Security and Investment Bill
Committee (2nd Day)
My Lords, the hybrid Grand Committee will now begin. Some Members are here in person, respecting social distancing, others are participating remotely, but all Members will be treated equally. I must ask Members in the Room to wear a face covering except when seated at their desk, to speak sitting down, and to wipe down their desk, chair and any other touch points before and after use. If the capacity of the Committee Room is exceeded, or other safety requirements are breached, I will immediately adjourn the Committee. If there is a Division in the House, the Committee will adjourn for five minutes.
I will call Members to speak in the order listed. During the debate on each group, I invite Members, including Members in the Grand Committee Room, to email the clerk if they wish to speak after the Minister, using the Grand Committee address. I will call Members to speak in order of request.
The groupings are binding. Leave should be given to withdraw amendments. When putting the Question, I will collect voices in the Grand Committee Room only. I remind Members that Divisions cannot take place in Grand Committee. It takes unanimity to amend the Bill, so if a single voice says “Not Content” an amendment is negatived, and if a single voice says “Content” a clause stands part. If a Member taking part remotely wants their voice accounted for if the Question is put, they must make this clear when speaking on the group.
Clause 6: Notifiable acquisitions
15: Clause 6, page 4, line 14, after “a” insert “foreign”
My Lords, Amendment 15 and other subsequent amendments seek to bring in an exemption from the mandatory filing requirement for acquisitions and investments by entities that are ultimately controlled by UK nationals or nationals from certain countries allied to the UK. It is important to stress that this is to exempt companies from the mandatory filing requirement, not from having to file at all.
The Bill currently provides that the mandatory filing requirement applies equally to all investors, despite the fact that the Government have acknowledged that UK investors are inherently less likely to give rise to national security concerns. A more targeted and proportionate approach, which would better reflect where national security risks are most likely to lie, would be to exempt from the mandatory filing requirement acquisitions and investments by UK nationals or entities that are ultimately controlled by UK nationals.
In addition, investors from countries which are closely allied to the UK, such as Australia, Canada, New Zealand and the US, plus any other country subsequently specified by the Secretary of State, should also be exempt from mandatory filing requirements for the reasons I have already stated. That is the thinking behind my Amendment 95, which is included in this group. To the extent that national security risks arise in relation to any such transaction, the Secretary of State would still retain the power to call in a qualifying transaction for review. As I say, the exemption would relate solely to the mandatory filing requirements.
Amending the Bill in this way would also better align the UK’s regime with those of other countries, such as the US and Australia, which I have already mentioned. I can understand why the Government may wish to appear agnostic when it comes to providing exemptions to UK nationals and friendly countries. While there is no doubt that, for example, investments from China in sensitive sectors would come under close scrutiny under the new regime—no one should pretend otherwise—it is important to bear in mind that only four of the 12 national security interventions under the existing regimes have involved Chinese investments.
It is important for me to acknowledge that the Government have intervened in eight transactions that involved investors from countries that have historically been allies, such as the US, Canada, Italy and Germany; they extracted undertakings from those investors to protect UK national security interests. A consistent theme in those interventions, in addition to the usual concerns about access to sensitive data, has been the Government’s interest in ensuring continuity of supply to critical services to government and to maintain strategic capabilities. Such concerns, I acknowledge, are effectively nationality-agnostic, because they go to ensuring that critical capabilities, skills and manufacturing are maintained in the UK and not moved abroad. As a result, it is likely that in particularly sensitive sectors we will see the Government calling in transactions involving investors from so-called friendly countries and imposing remedies under the new regime. The Government can, via regulation, exempt certain acquirers from notification requirements but no investors or classes of investor are currently exempt. Nevertheless, these interventions happened before the Bill was introduced, so I do not believe that they undermine my point—namely, that friendly countries and UK investors should be exempt from the mandatory filing requirement, which will not exist until the Bill is passed.
I looked at the evidence given to the Bill Committee in the other place and was particularly struck by two interventions from witnesses. One was from Dr Ashley Lenihan from the London School of Economics, who said that for the legislation to cover domestic investors would be “truly rare” in comparison to similar legislation in other countries and, importantly, that the inclusion of domestic investors will
“lead to a much larger volume of mandatory notifications than most other national security FDI regimes”.—[Official Report, Commons, National Security and Investment Bill Committee, 24/11/20; col. 33.]
This brings out the point that was a theme of our debate on our first day in Committee and at Second Reading, which is that the Government have wildly underestimated the number of notifications they expect to get. As I say, I think we are all united in wanting to see this legislation passed, but we all want to see it passed in a form that is workable, does not overwhelm the new unit that the Government are setting up and does not put off investors by placing too onerous burdens on them.
In addition, other evidence given to the Bill Committee in the other place in the same session included that of Michael Leiter, a lawyer from Skadden Arps, a US law firm. He said that including domestic investors “is probably not wise”. He went on:
“I think trying to take a slightly smaller bite of the apple and not including current UK businesses in the scheme would be well advised.”—[Official Report, Commons, National Security and Investment Bill Committee, 24/11/20; col. 42.]
So I pray in aid those two experts in making the point that this amendment in no way undermines the regime that the Government propose to bring in, but it does make it a slightly more practical approach as this legislation beds down. Indeed, Mr Leiter pointed out later that the Bill can still catch transactions in which the ultimate actor may be foreign, because the unit that the Government are setting up can still look at the ultimate parent or, indeed, at a follow-on transaction.
I understand why the Government may want the legislation to pass in its current form—to have a belt-and-braces approach and to avoid people trying to hide behind a UK investor or a friendly foreign investor—but in my view the Government will still have powers to call in such transactions if they believe that this is the case. I beg to move.
My Lords, I am grateful to the noble Lord, Lord Vaizey, for introducing his amendments and explaining some issues that I agree with, such as whether the Government are trying to make a failsafe, will it catch too many people and whether there will be too much to do. Although I understand that there may be different levels of concern, depending on the relationship with the country of the acquirer, I do not fully support the amendments in this group.
Where there are already sensitive industries, especially related to defence, who owns them matters in the sense of whether they are fit and proper for that kind of industry. Those considerations can apply within the UK as well as outside so, at some point, they have to be looked at. The question is whether they should be within the same regime or left to other operations that, the Government have considered, do not necessarily pick up everything.
My experience suggests that, in most instances, companies already used to dealing with sensitive matters would already be alert to what might not be desirable, and that it would either not happen or not happen often, but that does not mean that there should be no way of acting when it does. Therefore, they should all be included within this generic framework.
The Bill will apply to more companies or interests than companies used to dealing with sensitive matters, as I have just called them. Quite a lot still looks speculative, so I wonder whether there is, or in due course might be, further subdivision where certain geographies and industries might have different thresholds, depending on how likely they are to be particularly sensitive.
There will certainly be instances where the ownership interests of Five Eyes countries or other allies are of less or maybe no concern, but that may not always be the case if the security of supply or knowledge base is threatened. There are examples in the defence industry where, following takeovers by US corporations, research has been closed down, leaving only certification, assembly or supply of parts as the UK activity. This has led to a serious loss of forward vision and an undermining of the knowledge base, as well as other issues, such as access to technology. Sometimes that might be accepted, but not always.
It is one thing to recognise that we do not—indeed cannot—stand alone on defence issues, but quite another to accept, always and without review, what might be serious diminution or removal of all active participation. Therefore, although I expect the results of reviews to be different for different categories of acquirer, I do not see how there can be any blanket exclusion at the initial filtering stage. I am very interested in how different thresholds may play a part in reducing the number of transactions that would have to be filtered.
My Lords, my first instinct was to say that the amendments in the name of my noble friend Lord Vaizey are obviously correct. I am sure that the majority of cases that would threaten our national security will involve foreign actors and, like him, I am concerned about the volumes of notifiable transactions.
However, I think that there might be circumstances in which the powers in the Bill could appropriately be used in respect of wholly UK companies. In that respect, I agree with the noble Baroness, Lady Bowles of Berkhamsted. For example, large company A may have a monopoly or near monopoly in providing something critical to our security. Tiny company B may have developed a new technology, which not only achieves a better result in the light of emerging risks, but at a fraction of the price. If company A acquires control of company B, it can kill the new technology and keep its monopoly profits on its old products. Sometimes, large companies acquire smaller ones to avoid disruption to lucrative markets, rather than to exploit their innovations. I do not think it would apply often, but it is a good reason not to restrict the Secretary of State’s powers in the Bill.
My Lords, it is a great pleasure to follow the noble Baroness, Lady Noakes, and to agree with her. The point she made—that competition can be a security issue as well as a trust issue—was one I was going to make myself. I was thinking in particular of the concentration of media ownership and the impact that can have on national security.
As the Committee may have guessed, I am speaking in this group, respectfully but strongly, against the inclusion of any of these amendments in the Bill. If we included these amendments, we would be heading down the road of the Dangerous Dogs Act, generally acknowledged as one of the worst pieces of legislation passed through your Lordships' House. It penalised and gave a death sentence to dogs identified as belonging to certain breeds, which completely misidentified the problem, which was not canine genetics but human owners.
The idea that where giant multinational companies are based—those are the kind we will be talking about in many cases—can give any evidence of their loyalties is a great stretch. I was in the Chamber yesterday, speaking about the stance taken by HSBC in backing the Government in Beijing against the interests of the UK, the joint declaration, the rights of the people of Hong Kong and the rule of law.
I want to note concerns about Amendments 95 and 96, which identify a number of countries—Australia, Canada, New Zealand and the US—to be automatically excluded. That is a large assumption, and we can probably all think of case studies—maybe different ones—where individual owners of companies from those countries can be of great concern. It is not a measure of risk. I cannot help noticing certain characteristics shared by those countries that the proposer might like to consider and how the grouping of those countries might play in terms of the UK’s international reputation.
My Lords, when we discussed the second group, I said that when we are looking at the national security risk, the purposes of the Bill are to define the relevant entities and assets; the extent of control, which is significant for these purposes; and the nature of the acquirer of those entities and assets. I think the third is proving among the most difficult. This group seeks to define that person by reference to their nationality. This is a substantial change to the nature of the legislation, since the purpose of the legislation is to address national security risks; it is not to screen foreign investment in the United Kingdom. The analogies with other regimes—for example, with the European Union’s regulations—do not stretch far because they are concerned with foreign investment.
This group has strayed considerably beyond areas of national security and into the area of what is termed “open strategic autonomy”. I am not sure how open it will prove to be, but it is potentially protectionist by nature. It strikes me that we should really aim to focus on national security, which is the purpose of the Bill, and in the Bill’s broader economic aspects, we should continue to adhere to the principle of non-discrimination. If we include UK domestic actors in the potential definitions of acquirers who raise national security issues, we will be non-discriminatory in our effects, and it is important that we should aim at that. In practice, where national security is concerned, we know that not all foreigners are hostile, and not all those who are hostile are foreigners. So, I am afraid I am not persuaded.
There is also an issue here about authorised countries, which is linked to this but could be separated, although it is not for these purposes at the moment. The Committee on Foreign Investment in the United States has since last year, I think, had excepted states. Interestingly, they are Canada, Australia and the United Kingdom. The list does not include New Zealand for reasons no doubt well known to the United States Administration but not to me, so I am not entirely sure why my noble friend included New Zealand. The criteria appear to be related to the intelligence-sharing arrangements and the extent of defence integration between those countries’ industries and the United States.
Even where the United States’ excepted states are concerned, this is only temporary. There has to be a determination in the early part of next year of whether we have sufficient investment screening arrangements to give the United States assurance to maintain our excepted state position, which I think the Bill will allow us to do. That will be useful to United Kingdom investors into what are known as TID businesses in the United States—those dealing with sensitive technologies, infrastructure and data.
I say to my noble friend that I am not persuaded by this group of amendments, nor yet by the authorised country issue. I suspect the latter issue is one that it might be useful to come back to and think about under what circumstances we differentiate between people from countries that have comparable investment screening regimes in practice.
The noble Lord, Lord Bilimoria, has withdrawn so I call the next speaker, the noble Lord, Lord Leigh of Hurley.
My Lords, the Bill currently provides that the mandatory filing requirement applies equally to all investors, as my noble friend Lord Vaizey said. This is despite the Government stating quite rightly that domestic investors are inherently less likely to pose a national security risk. The Bill is ultimately about managing risk, so we need to ensure that the notifications that the ISU receives are the right sample. Exempting UK nationals from this process would be a far from proportionate approach. Since we are in the business of managing risk in a proportionate manner, we should consider whether investors from specific allies—Australia, Canada, the US and New Zealand have been suggested—should be exempt since, again, the evidence strongly suggests that such investments are less likely to pose a national security risk, although I will come on to one caveat at the end of my remarks.
This aspect would also align more closely with some of our competitor jurisdictions. In any event, since national security is always paramount, it is worth noting that these amendments concern only the mandatory filing requirement. The Secretary of State would remain fully empowered to call in such transactions for review even if they concerned our citizens or allies or were below the threshold for control. That is an important distinction. I hope it means that lots of potential acquisitions by UK players will not get covered by notifiable regulations if we approve these amendments.
I am sure that the legislation is not meant to cover the situation where someone starts a business with a great idea and, say, £1,000. That business might touch on a number of sectors including, say, defence. We know that the sector definitions are very widely drawn. This entrepreneur then goes to some family and friends to seek funding, which might be through an EIS or, even better, an SEIS or possibly an EIS fund. The family and friends are all local. I know one investor who has only ever invested—with great success—in businesses run by someone he has personally met in his local pub. Such investors are vital to the UK economy and, in my opinion, do not carry a risk to security any greater than the person who started the business. As we currently have no size threshold at all, they would be caught by the Bill. It would be a great shame if they decided that they did not want to wait the 30 days or more for the Secretary of State to opine.
We all know the purpose of the Bill and it is not to restrict UK investors investing in UK companies. If we go down the route of exempting UK companies, we need to look more carefully at the definition of a UK company, which Amendment 96 seeks to do. I recognise that this is difficult. For example, many companies have private equity investment in them. They are clearly UK companies with a UK HQ, UK board and UK business but because the general partner investor may be based in, say, Guernsey, for the limited partners requirement—and the limited partner is almost certainly based abroad—they would need to be treated as a UK company to ensure a level playing field.
My noble friend Lady Noakes and the noble Baroness, Lady Bennett of Manor Castle, have made some valid points. It is indeed true, for example, that many companies which are essentially Chinese are listed on NASDAQ. Would we call them American or Chinese? There has to be some very careful examination.
My last concern, which I mentioned in respect of Amendment 95, is to stop shell companies being created in countries such as Australia. Under these amendments, a shell company could buy a UK tech business and be sold immediately thereafter to a non-friendly company. Undertakings would therefore have to be put in to protect against that situation.
My Lords, I agree with the analysis of the noble Lord, Lord Vaizey, that Her Majesty’s Government have underestimated the potential workload that this unit will get, but I am not convinced that his solution to reducing that workload is the right one. We have heard many speeches but I would single out those of my noble friend Lady Bowles, the noble Baroness, Lady Noakes, and the noble Lord, Lord Lansley, as reasons why we should not be separating out one set of companies due to their nationality. The noble Lord made the point clearly that the criterion should be: is it or is it not a national security risk, rather than, does it or does it not come from Hampshire or New Hampshire? That should be the rule running through this.
The noble Lord, Lord Leigh, when moving into caveat territory, started to explain why singling out foreign companies becomes an extraordinarily difficult thing to do. First, what is one, and is it a shell company? Is it listed on NASDAQ but actually resident in Beijing? Those kinds of complications start to point to the Government’s analysis that all companies are in. Clearly, it will be easier for the company whose owner your friend meets in a pub to get through the process and not be called in, compared with one that hails from the Far East, for example. Surely, the process should be the efficiency with which the unit can deal with and dismiss issues quickly, rather than accidentally filtering out things that we should not.
On the concept that, “Our friends are our friends, so we include them as ourselves”, the noble Baroness, Lady Noakes, made the wider point about access to the technology. Access can be cut off by our friends as much as by ourselves or, indeed, by external companies. I am sorry, but I am going to repeat the example I gave at Second Reading. A British company with a US-based subsidiary took the technology to the United States, started to produce it and made one small amendment to that technology. The use and sale of the technology back to the UK was then blocked by the Department of Defense under export controls, because it considered it to then be United States strategic technology. I am sure that such things happen all the time—this example is just one that I happen to know about.
Regional agnosticism, the gospel according to the noble Lord, Lord Lansley, is the sensible approach here, and I hope that the Minister can explain his views on this issue.
My Lords, we have some sympathy with the intention here, which is to seek clarification about whether certain investors or countries should be more or less encouraged to invest here, although this may not be exactly the right way to achieve that. Such clarification is clearly needed and is sought in a different way by Amendment 91, which we will reach next week, I think, and which stands in the name of my noble friend Lord West.
We have had discussions with both researchers and funders, and they support these amendments. They would like to limit the application of the Bill to acquisitions by foreign entities because they are worried about the system being clogged up and think that that would be an easy way to deal with the issue. If one removed investments and collaborations within the UK from the scope of the Bill, that would materially lessen the impact. I think we all sympathise with their aim: we want the unit in the department to focus on where the risk is greatest, and we are all seeking a way to achieve that.
I have a particular question about Amendment 96, which may be more linked to the first amendment than I had realised. Why was the 25% threshold selected for voting rights, partnership and a body corporate in order to define a foreign person? If a hostile state has a stake in or control over a critically important company, but that happens to be below the 25% threshold, it therefore still has access to critical data, technology and intellectual property. That is where the risk to security lies, rather than in whether it is above or below a 25% threshold. The department will have to consider any access to such data if the data itself is key. More than the percentage of ownership, it will be about control, and the figure could be below 25%.
To touch on another point, the policy statement for Clause 14 allows regulations which will prescribe the form and content of a mandatory notice. Can the Minister confirm—I am sure it is the case—that the department will consult the stakeholders across all 17 sectors as they develop the form, so that it is workable and practical and is tested for accessibility with those who will have to use it? Is that possible now or could it be done afterwards in writing?
I thank all noble Lords who have contributed to this very useful short debate. I welcome the amendments proposed by my noble friend Lord Vaizey. Taken together, as numerous speakers have said, his amendments would exempt UK investors and investors from other particular countries from the Bill’s mandatory notification regime. As it stands, both the mandatory and the voluntary notification regimes provided for by the Bill are both actor and nationality-agnostic. The mandatory notification regime is based on the risks posed by acquisitions of target entities due to those entities’ activities, rather than the risks posed by the acquirers. The risks posed by acquirers are then considered on a case-by-case basis by the Secretary of State as part of the particular national security assessment.
My noble friend is right to suggest that, in many cases, acquisitions by UK nationals and UK-based companies, or those based in like-minded countries, are less likely to give rise to national security concerns, even in relatively sensitive sectors. Such acquirers, if their proposed acquisitions do not give rise to national security risks, will find their acquisitions cleared to proceed by the Secretary of State, following assessment or following call-in, should that be necessary, for further review.
However, an acquirer’s nationality cannot tell the Secretary of State everything he needs to know about that acquirer’s intent. For example, it is possible that a UK acquirer may be paid by a hostile actor or otherwise have strong links to hostile actors based outside the UK. A similar rationale follows for the amendment’s reference to other like-minded countries. So, excluding purely on the basis of nationality could create a loophole to exploit.
The particular approach of the amendments in this group also raises some practical challenges. For instance, the references to nationality appear not to deal with the issue of dual nationality; nor is a change of nationality covered. Key considerations in designing this regime have included ensuring that it is not discriminatory, and that it upholds our World Trade Organization and other international obligations in this regard. It is not clear that these amendments would achieve this.
None the less, we wish to consider over time how we might temper and adjust the regime to take account of areas of lower risk. Under Clause 6, the Bill gives the Secretary of State the ability to make exemptions from the mandatory notification regime based on the “characteristics” of the acquirer. This may include nationality if this is judged appropriate and the various issues that I have highlighted can be resolved.
We will of course monitor closely how the regime works in practice to determine through detailed further work and carefully assess whether any such exemptions should be introduced. Any such regulations would be subject to appropriate parliamentary scrutiny through the affirmative procedure.
I welcome the opportunity to discuss the impact of nationality on the regime with my noble friends and to set out our thinking in more detail. However, for the reasons I have given, I cannot accept my noble friend’s amendments. Before I conclude, I can confirm to the noble Baroness, Lady Hayter, that the Government will engage with a number of stakeholders on the voluntary and mandatory notification forms. Therefore, given the points I have made, I wonder whether my noble friend will consider withdrawing his amendment.
My Lords, I am grateful to my noble friend the Minister for his response. Never have I seen so many noble Lords and noble Baronesses arraign so uniformly against an amendment, so the mood of the Grand Committee is clearly against me. In fact, through the powers of my advocacy I think that I even persuaded the noble Baroness, Lady Bowles, to move from being a supporter to an opposer of my amendments, if I followed her speech correctly.
I am not sure that the issue of media ownership threw much light on the power of my amendments. However distasteful we might find the antics of media owners in this country, the British ones are just as guilty as any foreign ones of potentially challenging our democracy.
My noble friend Lord Lansley was correct to say that I included New Zealand along the lines of the Five Eyes, although I notice that he said that the US regime could be helpful to UK businesses if the UK was exempt from the equivalent provisions in the US. That was the purpose of my amendment.
Fundamentally, the point I was trying to make with these amendments, which did not really shine through, is that I seek not to hide any transactions from the national security regime but simply to avoid an overwhelming number of mandatory notifications for the department. Of all the speeches that I heard, the Minister’s was the most supportive. I noted his very welcome comments that the door remains ajar, as the regime develops, to put in place provisions to ease the bureaucracy and the number of mandatory notifications.
Finally, I was inspired by my noble friend Lord Leigh of Hurley’s speech to potentially draft a new amendment as we progress—perhaps the pub amendment, whereby the only transactions that can be notified in a mandatory fashion to the Government are those that can fit into my noble friend’s local pub. I beg leave to withdraw the amendment.
Amendment 15 withdrawn.
We now come to the group beginning with Amendment 15A. I should inform the Grand Committee that if Amendment 15A is agreed to, I cannot call Amendments 16 and 17.
15A: Clause 6, page 4, line 17, leave out paragraph (b)
Amendment 15A would delete Clause 6(2)(b), because otherwise that paragraph means that someone increasing their interest in a qualifying entity from under 15% to over 15% would then turn it into a notifiable acquisition.
This amendment asks a simple but significant question: why has 15% been chosen and what is the rationale for it? The people we spoke to were a bit bemused by the figure. I think someone mentioned in Committee last week that 15% appeared somewhere else, but those we spoke to across a range of areas could not find, and did not know, where that 15% came from. There is obviously no particular evidence behind it. I am not sure whether it appears elsewhere in legislation, but I am sure the Minister will know the answer and outline the thinking behind that figure.
Not just for pubs but for other early stage start-ups and developments, this could certainly be an impediment to an investment just at the point when it is needed. For these small start-ups there seems to be a more or less continuous need for money, but drip by drip as things develop. It is on a continual basis rather than a great big one-off deal; the more the work begins to show potential, the more extra money is needed. Any concern about suddenly hitting 15% in the case of a small company, particularly a new one, just when it needs the money could jeopardise access to funds when they are most needed.
I am not even absolutely certain about the purpose of Clause 6(2)(b), but, again, I am sure the Minister will elucidate in his reply. Clause 8(2) already describes shareholding thresholds for qualifying entities of a specialist description, where the figures of 25%, 50% and 75% are used, and Clause 8(5) does the same with voting rights. So the references in Clause 6(2)(b) to a 15% threshold for
“a qualifying entity of a specified description”
appear to go over very similar ground, unless the intention is to have two different classes of qualifying entities of a specified description, with the higher-risk one subject to the additional 15% level. If that is the case, it seems to add an extra level of complexity to the legislation. Dropping the 15% level could remove the regulatory burden from at least some fundraising that needs to go on. It might be questionable anyway how much control a shareholding of below a quarter would achieve.
Amendment 29A would delete Clause 8(8), which again is a bit unclear. Perhaps the Minister will be able to spell it out a bit more. It concerns the fourth listed case of a person gaining
“control of a qualifying entity”
as described earlier in Clause 8(1). However, Clause 8(8) is not part of the mandatory regime in the earlier Clause 6, which we are now looking at, because in Clause 8 only cases one to three are cross-referenced with reference to subsections (2), (5) and (6). It does not include subsection (8), so a bit more explanation would be good.
Clause 8(8) is perhaps there to allow for a broad range of call-ins than those covered by the mandatory notification regime, but the imprecision of the language is difficult. It talks of where it
“enables the person materially to influence the policy of the entity”.
As that is fairly broad, it could lead to a lot of excess voluntary reporting and it is hard to know what it means in practice. “Influence” is hard enough to define. Maybe “materially to influence” meets a legal threshold of which I am unaware, but it is quite difficult for a researcher or company to know what that means.
It is true that the CMA uses some of that language when we are talking about much bigger operations. However, it is probably not a phrase that is particularly familiar to most businesses or, indeed, to academia. As I said, it could lead to a lot of extra voluntary notification by parties in an attempt to get certainty. As we have heard, we are worried about too many voluntary notifications clogging up the system.
The reason why 25% in Amendment 17 was chosen might need some spelling out. It may well be correct, but it would be useful to know the thinking behind it.
I beg to move.
My Lords, I will speak to Amendment 17, which is in my name. I thank the noble Baroness, Lady Hayter, for her comments in respect of her amendment, which might actually be a better amendment than mine but none the less would achieve much the same thing. She probably does it in a more elegant way, but the purpose of my amendment is to understand the logic here and to persuade my noble friend the Minister that he should revert to 25% throughout.
The mandatory notification obligation in Clause 6(2)(b), which the noble Baroness, Lady Hayter, wants to delete, is triggered as a result of acquiring over 15% of shareholding or voting rights. In paragraph 52 and elsewhere, the White Paper specifies 25% but forecasts 15% for notifiable acquisitions. Accordingly, it is not, and is not intended to be, consistent with Clause 8, as the noble Baroness said, but that leads us into problems. Let us try to walk through this. It is complicated.
As I read it, Clause 6 is there so that the Secretary of State is given a mandatory notification for them to consider whether a trigger event has happened. Let us look at what a trigger event is, then. For that, we have to rely on Clause 8 to see under what definitions a people has gained control. Clause 8 lists four situations, three of which are where the shareholding is 25% or more. That is fine, but that clearly does not apply in a 15% situation. So you have to rely on the fourth situation, which is set out in Clause 8(8), which bites because it is the scenario where there is the ability, alone or with others,
“materially to influence the policy of the entity.”
Therefore, if an investor goes from, say, 14% to 20%, a lot of work has to be undertaken to see whether that person can materially influence the policy. If the threshold was 25%, there would be no need to do this. So given that it is most unlikely that a sub-25% shareholder can materially alter the policy—more importantly, this will be hard to determine in practice, as the noble Baroness, Lady Hayter, said—are we not creating an unnecessary problem for ourselves? What does “materially influence the policy” mean anyway? Which policy? All policies? Dividend policy? Maybe. Hiring and firing policy? Most unlikely. Again, this will lead to consternation and commercial agreements on shareholders’ rights having to be implemented, which will be hard to negotiate because, when you enter this sort of area, there will be uncertainty over whether you can materially alter policy.
In my plea for certainty and clarity, can we make it 25% throughout? The risk of a 15% shareholder throwing their weight around to demand that action be taken to change a policy that would be against our national interest is somewhat remote. I suggest that, with a 15% threshold, there will be significantly more cases to consider, the overwhelming majority of which will not have national security implications. The current filing threshold of 15% is significantly below the thresholds used in a number of other major foreign direct investment regimes. France’s is 25%, which the amendment proposes, and Canada’s is 33.3%. I note that my noble friend Lord Vaizey is not due to speak on this group, unfortunately, but if he did I am sure that he would continue to encourage the Minister to look to Canada rather than France, which is perhaps a natural progression.
I am aware that some countries have a 15% threshold, but they are not jurisdictions seen as international business headquarters or centres of international business in the same way as we are, and we have to remember that there is a difference. Considering the volume of transactions, it will even, I suggest, lead to transactions that pose a national risk being overlooked because of the volume generated by this very low, 15% threshold.
While we are on this clause, can the Minister help me with Clause 6(3), which is relevant to the clause we are debating? It states:
“But a notifiable acquisition does not take place if complying with the requirement to give a mandatory notice under section 14(1) in relation to the gaining of control, or the acquisition of the right or interest, would be impossible for the person within subsection (2).”
What does “would be impossible” mean? I have asked around, and no one I have asked can be sure. Is this when a public company’s shareholder trips over 15%? What does “complying … would be impossible” mean? Could we all argue that it is impossible, give all sorts of reasons unspecified and that is the end of it? If much, much better brains than mine cannot understand the clause, it must need amending. I cannot amend it because I do not know what it is trying to achieve, but it cannot be good law to have clauses which are not immediately intelligible to, if not the layman, then the reasonably well-informed reader.
The whole of Clause 6 is difficult. It talks about regulations we have not seen and then gives power for those regulations to be amended at will under subsection (5). I think subsection (5) is where a white list is introduced in the regulations, but it, and subsection (6) allow carte blanche and, accordingly, more uncertainty. Can the Minister commit to look at Clause 6 again, specifically with the amendment I have tabled and with the amendment that he can see I will perhaps have to table on Report? Amendment 94, tabled by the noble Lord, Lord Fox, which we discussed the other day, would have helped. Can the Minister give some assurances that parliamentary scrutiny will be given to these regulations?
Amendment 17 looks to strike a more proportionate balance between protecting national security and reducing unnecessary burdens on investors. We want to be seen as an investment-friendly country.
My Lords, I thank noble Lords for introducing their amendments and exploring the reasoning behind them, which I have found helpful. I put my name down to speak to Amendment 17, which was signed by my noble friend Lord Clement-Jones, for whom I am broadly substituting because he is regrettably unavailable until later today. Like the noble Baroness, Lady Hayter, I was wondering why the Government chose 15% as the threshold above which a notification would become mandatory.
On the previous group, I wondered whether we could have different thresholds for different reasons. That would not be without precedent. For example, Australia has different percentage thresholds for lesser and more sensitive assets and different business value thresholds depending on the country of the acquirer. However, here we have 15%, which might be a number above which you fear an activist shareholder, but why?
In the UK, shareholders get some additional rights at 5%: they can go to court to prevent the conversion of a public company to a private company; they can call a general meeting; they can require the circulation of a written resolution to shareholders in a private company; or they can require the passing of a resolution at an annual general meeting of a public company. At 10%, you can call a poll vote on a resolution. At more than 10%, in a private company, you can prevent a meeting being held at short notice. At 15%, you can apply to the court to cancel a variation of class rights, provided that the shareholders have not consented to or voted in favour of the variation. Getting to 25% is significant, because it gives the right to prevent the passing of a special resolution, which could affect various articles and other things. I cannot see that preventing a change in class rights, assuming that a court would agree, is significant. I am slightly bemused about where that 15% number was plucked from.
We get to the point about whether fear of an activist shareholder is what this is all about. We hear of the insistence on having a director, when there is a certain quantity of shares, but they have to be able to control all the other directors, which does not always happen. It brings to the fore a thought about who owns the other shares, which would have to be taken into account in any assessments. Conditions might then be put on a company in respect of what happens to other shareholders to allow a transaction to pass.
As the noble Lord, Lord Leigh, explained, this makes something more complicated for reasons that do not yet seem clear. There are surely other inherent safeguards that would do the job. From that point of view, I support Amendment 17 signed by my noble friend but, as has been explained, there are other ways in which it could be achieved.
My Lords, the effect of amendments in this group may be to restrict the Government’s ability of to act where de facto control is the result of an acquisition. We should not underestimate the ingenuity that could be deployed to achieve de facto control or make it easier for people to escape the Bill where there are substantive concerns. For that reason, I do not believe that we should tie the Government’s hands in this way.
I put my name down to speak on this group, in particular on my noble friend Lord Leigh of Hurley’s Amendment 17, which increases the voting rights threshold for notification from 15% to 25%, and I support the probing Amendment 15A in the name of the noble Baroness, Lady Hayter, which removes the reference to the voting rights test.
While a shareholding needs to be 25% to be certain of stopping a special resolution—the noble Baroness, Lady Bowles of Berkhamsted, referred to that a moment ago—in practical terms that assumes that all other voting rights would be exercised and in the opposite direction. The de facto ability to stop a special resolution kicks in at much lower levels. I am interested to hear what the Minister says about the rationale for 15%.
For many years, I was a director of the Reuters Founders Share Company, which was set up to hold a form of golden share in Reuters to protect the independence and integrity of the Reuters news service and to prevent it falling under the control of any faction. There is a long history to that, which I will not go into. The trigger point for the ability to use the golden share was set at 15%, for the very reasons I have just given. It is the level at which the influence of a shareholding bloc can be significant. In the history of Reuters Founders Share Company, deployment of the 15% was needed on one occasion. For that reason, I am inclined to support the Bill’s cautious approach in this area.
My Lords, I want to say a word on this group, because I am particularly interested in Amendment 29A, which would remove Clause 8(8). This is of interest, not least because of the question of how to define “material influence”, which we will come to later.
Listening to the noble Baroness, Lady Hayter, I understand what she has done; she is testing the question why material influence is there if it is one of the ways in which control of an entity can be established under Clause 8. Currently, it is not referenced in Clause 6(2)(a) as one of the cases by which that control leads to a notifiable acquisition.
Instead, taking subsection (8) out of Clause 8 and putting it into Clause 6(2)(a) would in effect be saying that a notifiable acquisition takes place when a person gains control of an entity. Clause 8 explains how you gain control of an entity. It can be by acquiring various voting shares, as defined, or by exercising material influence over the entity. That has been left out, so putting it into subsection (2)(a)—that is not precisely what we are proposing here, but I am speculating slightly—would be a much cleaner option. It would enable one to do what my noble friend Lord Leigh is proposing, which is to take the 15% out. The 15% is there only because there are conceivably circumstances in which a 15% or more voting share constitutes material influence. As the noble Baroness, Lady Hayter, said, we know that, because the Competition and Markets Authority has on occasion determined such things. It did so on BskyB v ITV, which concerned a 17.9% shareholding, and it did so in the case, which it none the less cleared, of RWE’s stake in E.ON at 16.67%.
We know that voting shares of between 15% and 25% can represent a material influence, but that is not the issue. The point is not about the voting share: 25% is, generally speaking, the voting share that gives rise to an issue of control, but about the need to say, “Material influence is what we are talking about, so why don’t we use that?” Why introduce this potentially rarely used 15% threshold instead?
My contribution is to ask Ministers if they will go away and look at whether it would be cleaner and simpler for Clause 6 to say simply, “A notifiable acquisition takes place when a person gains control of a qualifying entity of a specified description”, and Clause 8 goes on to explain what “control” means.
Were my noble friend Lord Clement-Jones here he would pick up his fishing rod again and say that this is a question of mesh size. But, actually, the issues raised by your Lordships should tell the Government that there is work to be done on redrafting subsections in Clauses 6 and 8 to try to clarify. Whatever we come up with, we need clarity, because there seems to be some dissonance in how this is read and regarded.
The noble Baroness, Lady Hayter, asked the right question at the beginning of her speech, which was: what is the rationale behind the 15%? My noble friend Lady Bowles set out the sliding scale of different accountabilities and rights that come with different levels of ownership and said that there was some logical mismatch with the 15%. The Minister has taken refuge in the past in the policies of the other European Union countries, and the noble Lord, Lord Leigh, can happily put his mind at rest that France uses 25%, so clearly, if it is good enough for France, it will be good enough for the Minister.
On a more serious note, the issue of material control is interesting. We have seen so-called shareholder activists reversing into companies with far less shareholding than 15% and making material changes to the strategy of businesses. So what is material and what is a change? The point that my noble friend Lady Bowles brought up about the nature of the other shareholders cannot be left out.
Tracker funds tend not to be active in the way a long or a short fund tends to be, and clearly shares get loaned in situations of activity. All these add up to the mess which the noble Lord, Lord Lansley, described well: who is in control of the business, and what is material control? To some extent, the difference between 25% and 15% is less important than where the control lies. That is harder to enumerate, and difficult for the market to understand, but it is clear that the way this stands in the Bill will not work. I hope the Government can sit down with their lawyers and drafters and come up with something that we can look at next time which takes on board the good advice the Minister has received from your Lordships.
First, I extend my thanks to the noble Baroness, Lady Hayter, and my noble friend Lord Leigh for the amendments in this grouping. Let me start by addressing Amendments 15A and 17, which concern the scope of the mandatory notification regime.
Clause 6 sets out the circumstances where a notifiable acquisition takes place for the purposes of the Bill. Noble Lords will see in subsection (2) that the types of acquisition covered by mandatory notification are not simply the full list of trigger events in Clause 8. Rather, notifiable acquisitions are objective circumstances based primarily on an acquisition taking a party’s holding of share or votes to or past a particular numerical threshold. The amendment of the noble Baroness, Lady Hayter, would remove subsection (2)(b) to remove the lowest of the numerical thresholds: 15%. My noble friend’s amendment seeks to amend Clause 8(2)(b).
Let me make three points about these amendments, which I trust will address the concerns which the noble Baroness, Lady Hayter, and my noble friend Lord Leigh raised in their opening comments. First, acquisitions that take a party’s shares or voting rights in a specified entity to 15% or more, not exceeding 25%, are notifiable even though they are not, by themselves, trigger events that may be called in by the Secretary of State for scrutiny under the Bill. We have, nevertheless, required such acquisitions to be notified, because increases in shares or voting rights to 15% or more may realistically result in the acquirer having material influence, and therefore control, over the policy of the entity, and that would constitute a trigger event.
The notification requirement is thus intended to ensure that the Secretary of State is made aware of the proposed acquisition and can take steps to determine whether material influence will in fact be required. The 15% threshold is broadly consistent with the UK’s merger framework. As the Competition and Markets Authority notes in its merger guidance, although there is no presumption of material influence below 25%, shareholdings of 15% or more may be examined to see whether the holder might be able materially to influence the company’s policy. We think that this strikes the right balance by requiring parties to focus only on a numerical threshold, while still allowing the Secretary of State to be notified about, and then call in if the legal test is met, more subjective acquisitions of control in the most sensitive sectors.
Secondly, my noble friend made an important point: the investment security unit will be required to process notifications for acquisitions of 15%. We expect that, as with acquisitions across the regime, the vast majority will quickly be cleared to proceed. It is vital that the statutory timescales set out in the Bill for processing such notifications are met to maintain business and investor confidence; the Government will resource the investment security unit accordingly to do just that.
I understand that my noble friend has a particular interest in what “material influence over the policy of an entity” relates to. I assure him that material influence is an existing concept under the Enterprise Act 2002. The Competition and Markets Authority sets out what it considers constitutes material influence in its mergers guidance. The Secretary of State intends to apply this in so far as it is possible in the context of this new regime for the purposes of determining whether control has been, or is to be, gained over a qualifying entity. For the avoidance of doubt, the Government have no plans to publish their own separate guidance on material influence.
My noble friend also queried the reference in subsection (3) to excluding acquisitions that are “impossible” to notify from constituting notifiable acquisitions. Let me explain the reasons for this. The Government recognise that there may be circumstances where it is impossible to notify and obtain clearance from the Secretary of State for an acquisition before it takes place. They could include lack of awareness on the part of the acquirer that they were about to acquire control, or where it was otherwise impossible to notify in the time available before the acquisition took place.
Let me give an example. A beneficiary to a will may have no prior knowledge that that they stand to inherit a stake in a business that would ordinarily be a “notifiable acquisition” and will automatically do so on the execution of the will. The Bill does not exhaustively define the circumstances that are “impossible”. I have given one example around inheritance; others might include bankruptcy, intestacy and by operation of law, but these examples are indicative.
The third point I should make, specifically about my noble friend’s amendment, is that, as currently drafted, it would not simply remove the 15% threshold but replace it with a reference to 25%. On this point, I hope he will recognise that subsection (2)(a) of the clause already provides for this—or, to be specific, very close to this effect—as it draws on the existing numerical trigger event thresholds in Clause 8, which start at acquisitions taking a person’s holding past 25%. As such, the amendment would duplicate those existing provisions and would in fact result in a requirement to notify when acquiring specifically 25% and then again if moving beyond 25% in future. I trust he will agree that we should avoid this, I am sure, unintentional effect.
Amendment 19A in the name of the noble Baroness, Lady Hayter, seeks to prevent notifiable acquisition regulations being used to bring asset acquisitions in scope of the mandatory notification regime. Let me start by setting out why it is important that the delegated powers in Clause 6 are not constrained in this way before I address the amendment itself.
The noble Baroness will accept, I am sure, that the future is uncertain, that the threats we face as a nation inevitably change over time and that the ways in which hostile actors seek to bring us harm are constantly evolving. That is precisely why the Bill extends the new investment screening regime’s coverage to acquisitions of individual assets, not just acquisitions of control over entities. We cannot, and should not, rule out the possibility that changes to the scope of the mandatory notification regime may be required, based on the types of acquisition and not just the sectors in which they take place.
None the less, the noble Baroness has spoken powerfully on a couple of occasions about the concerns of the Wellcome Trust and others, so let me say this categorically: the Government have no current plans to bring assets in scope of the mandatory notification regime, and neither subsections (5)(a) nor (6) require them to do so; they merely allow for that possibility, subject to the restrictions in subsection (7). Were we or a future Government to do so, it is clear that such a move would constitute a major change to the regime. It is difficult to conceive of many instances where consultation with relevant stakeholders would not be a practical necessity for a change such as this.
Let me say for the benefit of the Committee that it was a pleasure for me to join the noble Baroness in meeting the Wellcome Trust yesterday and to hear about the fine work of that excellent organisation. I hope that, as a result of what I was able to say, both then and now, that the trust and the noble Baroness are reassured following the meeting and my remarks that are now on the record. As I have said, we cannot know the future and it is essential that some degree of flexibility is preserved in Clause 6 to allow us to meet tomorrow’s challenges to keep us safe. Therefore, in the light of that, I hope the noble Baroness will feel able to withdraw her amendment.
I come to Amendment 29A, the final amendment in this group. It seeks to remove the acquisition of control of a qualifying entity through material influence as a trigger event. This would prevent the Secretary of State calling in such acquisitions. I spoke briefly about material influence a few minutes ago but I will say this. Its inclusion reflects that a threshold relating to shares or votes is not necessarily appropriate in every scenario. Material influence captures acquisitions of smaller stakes or other rights or interests in entities, such as board representation rights, which nevertheless enable a person materially to influence the policy of the entity. Other factors, such as the status and expertise of the acquirer or a relationship of financial dependence, may also be relevant, as I have detailed above.
It is vital that this fourth case stands part of the Bill so that the Secretary of State may scrutinise acquisitions of control over entities, in whatever form that takes. I hope noble Lords will agree that this approach has been carefully considered to reflect the complexity of the make-up of modern entities. Therefore, I am unable to accept this or the other amendments in this group and kindly ask the noble Baroness to withdraw her amendment.
I have received a request from the noble Lord, Lord Leigh of Hurley, to speak after the Minister. I call the noble Lord.
I thank my noble friend the Minister for his very considered comments, in particular his explanation of Clause 6(3). I think it allows a coach and horses to be driven through most of this legislation if someone can claim an impossibility. The examples he gave were excellent but there will be many other examples where people can claim an impossible circumstance. We will come on later to talk about, for example, the position of administrators and liquidators, and I can think of many others as well. I would have thought Clause 6(3) needed refinement.
Both the Minister and the noble Lord, Lord Fox, mentioned “materially control” as opposed to “materially influence”. There is a difference and this is not about materially controlling but about materially influencing. Regarding Clause 8(8), I accept that there are definitions elsewhere of materially influencing the policy. However, I remain of the view that it is not possible below 15%, or indeed below 25%, to materially influence the policy as far as national security is concerned. Therefore, I very much hope that my noble friend the Minister has a chance to reflect on this specifically before Report.
The Minister referred to the meeting that he and the noble Baroness, Lady Bloomfield, very kindly held yesterday with the Wellcome Trust, and I very much welcome the reassurances that he has read into the record today. The shorthand for this is the nervousness in academia of bringing in assets—IP, information, ideas and software—rather than just entities. That was what we discussed at the meeting yesterday, and the Minister has now read into the record the reassurances he gave there, for which we thank him.
I thought that the suggestion—I was going to call it a wheeze—of the noble Lord, Lord Lansley, was rather crafty: if that is what you mean, why do you not say it upfront? However, from what the Minister said, there seems to be a difference between the objective and the subjective criteria. I do not know whether that is why the Government want them in different clauses, but there is a problem with the subjectivity of this phrase. It is not simply, as the noble Lord, Lord Leigh, just said, about material influence rather than material control, but also the policy, and it is hard to define what that means. It seems to me a very subjective test for the big change made in Clause 6. I remain unconvinced that we have got it clear enough.
I thank the noble Baroness, Lady Bowles, for explaining where the 15% figure, to which the Minister referred again, comes from. The CMA uses it when talking about mergers, but we are talking here about big companies, not small ones. However, because there is no threshold, much smaller companies will be covered by this. It may be absolutely important for the takeover of very large companies whether competition is taken out of the market. The Minister knows that, as a consumer champion, I am always very happy for the CMA to look at the impact on competition. However, I have my doubts whether a regime defined for competition in consumer goods and access should be lifted and shifted—the Minister said that there will not be separate guidance—into something that will sometimes affect small start-ups and new developments.
I certainly know more about the subject than I did 43 minutes ago, for which I thank all those who have spoken on the amendment. As has been said, I hope that the Minister and his draftspeople will look at whether this is clear enough, necessary and appropriate for the sorts of investments we are dealing with. When the Minister gives a bequest in a will as the reason for including a particular provision in the Bill, that feels like clutching at straws to me. I hope there are better arguments than that, but, for the moment, I beg leave to withdraw the amendment.
Amendment 15A withdrawn.
Amendments 16 to 19A not moved.
Clause 6 agreed.
We now come to the group beginning with Amendment 20.
Clause 7: Qualifying entities and assets
20: Clause 7, page 5, line 10, at end insert “, save that any entity that has annual turnover in the United Kingdom less than £10 million is not a qualifying entity for the purposes of this Act (other than in circumstances where the acquisition of that entity is by means of artificial arrangements which do not reflect economic reality and are intended to circumvent the provisions of the Act).”
Member’s explanatory statement
This amendment, and the amendment to page 5, line 20 in the name of Lord Leigh of Hurley, seek to introduce value thresholds for qualifying entities and assets (subject to anti-avoidance provisions to prevent the circumvention of the Act), which would bring the NSI regime in line with other leading foreign investment regimes that have de minimis financial thresholds for notification.
My Lords, the Bill is probably more important than many people have realised. I suspect it is not by coincidence that, as I was pleasantly surprised to read in my Sunday papers—on the front page of the business news, no less—it has finally attracted attention from the business community. It has, to be honest, been a bit slow in picking up the significance and importance of this Bill. I am delighted that the noble Lord, Lord Bilimoria, will be speaking to this group of amendments, representing as he does the most important business representative body.
There are significant concerns. Amendment 20 would achieve consistency with other regimes which have de minimis thresholds for notification. A key concern is not to dampen innovation in the UK, where vast VC investment is essential to the growth of businesses, particularly in the tech sector, where we have been spectacularly successful. The cost of investment is high for people watching every penny in a start-up. These are the most mobile entrepreneurs, of course. People just graduating or completing a PhD can choose pretty much any country in the world to start their business. They often start their business knowing it will need a lot of capital to be attractive, and possibly hoping it will be sold to realise capital gain. So, impediments will be a deterrent, particularly for small businesses.
Equally, investors in small businesses want to be sure they can obtain a clean and simple exit. I know that tech businesses can go for astonishingly high valuations and revenue multiples, much to the horror of people like me and, I suspect, other noble Lords in this Committee, who were brought up to regard post-tax profits multiples of seven as perfectly respectable, and are astonished to see revenue multiples of seven on transactions. What we might regard as a small business can have a huge valuation. I hope the Minister finds an acceptable number for a de minimis threshold and, as a result, cuts out a lot of red tape for small businesses, which are looking for government to honour their commitment in these happy post-Brexit days to less red tape for business people—particularly from this Government. Introducing the value thresholds of £10 million in annual turnover in the UK for qualifying entities and £10 million gross value for qualifying assets, subject to anti-avoidance provisions, is a proportionate approach. But, obviously, we look to the Minister to suggest another number if he thinks that is appropriate.
Amendment 52A, which is also in my name, is extremely important. It introduces a fast-track process for transactions that clearly might not raise national security concerns, but which none the less need to be notified due to their targeted activities being in a specified sector. The Bill currently envisages that the ISU will reach an initial decision on whether to clear a notified transaction or call it in for a detailed assessment within 30 working days of accepting the notification as complete. A number of parties who contributed to the public consultation were worried that the ISU would not be able to manage even the modest expected flow of transactions. If a 30-day period is granted and then an extension, which it is within its power to do, one can easily see this becoming the norm. Frankly, this will be far too long. As Ministers know, most things in life, but transactions in particular, have a momentum, and imposing a delay of 30-plus working days could lead to huge uncertainty and worry. People will be aware that the transaction is taking place, and they will be worried about their jobs in case the transaction does not happen. Employers will be nervous, because they will know that this is the point at which their employees are most vulnerable to being poached or headhunted. This long freeze on activity could be a disaster, to the point where business owners become reluctant to take in investment for this very reason, which would be a great shame.
To minimise the deterrent effect of the new regime on foreign investment into the UK, this amendment would introduce a fast-track procedure for non-problematic transactions, enabling the acquirer to request a review period of 10 working days, instead of 30, combined with reduced information requirements for the notification. The use of a fast-track initial review procedure would not prevent the Secretary of State referring a transaction for an in-depth assessment, if considered necessary. The timetable for such subsequent review would not be affected.
Has the Minister considered the effect on companies with solvency issues, in particularly those in administration, which we touched on earlier? An administrator or liquidator, if it comes to it, needs to move fast. As the Minister knows, pre-packs often happen overnight, and are an extremely important part of the insolvency toolbox.
As it happens, as one or two noble Lords kindly remarked earlier, I am giving the Insolvency Practitioners Association’s annual lecture tomorrow. Tickets are still available. As part of my research for this very exciting lecture, I asked a number of IPs for their views on the Bill. To my horror, none had heard of it; they really had not focused on it.
If the Government do not accept this amendment, how will tech businesses that get into temporary cash problems and need an immediate solution—typically because they have good business propositions, but have overtraded or have a slow-paying customer—obtain the help that they need, in the timeframe in which they need it? I hope that the Minister takes this amendment in the spirit in which it is offered, which is to facilitate inward investment into sensible UK businesses.
My Lords, I am pleased to follow my noble friend Lord Leigh. I am sure he is being modest; I would think that tomorrow evening is all sold out. But I agree with him; nobody seems to know anything about the Bill, which is very surprising, given that we are approaching the point at which the trigger events will be in scope and have been for three months. Knowledge about the Bill is woefully deficient. This impels us to crack on, because we have to get this into law quickly, as the period when these trigger events have been taking place, when people do not realise that they are notifiable or that a call-in notice may be issued, is extending every day.
With that said, I will be quick. I forbear to comment on the other amendments and refer just to Amendment 25, which is in my name. It has the effect of adding
“(but are not limited to)”
to Clause 7(5) to find out why it is there. We have the statement under Clause 3, the purpose of which, among other things, is to set out what the qualifying assets are, so we know that. Clause 7(4)(c) tells us that qualifying assets include
“ideas, information or techniques which have industrial, commercial or other economic value”,
which is so broad as to be almost meaningless. It is all-encompassing. Then Clause 7(5) lists a lot of things, but I do not know whether it is exhaustive, as it says they are examples. What I want to know from the Minister is why we are including examples if the list is not exhaustive. If it is not an exhaustive list, why are we not saying
“(but are not limited to)”
to ensure that people realise that it is not an exhaustive list? That is often done in legislation and for good reasons. It is just a drafting practice.
Equally, however, why does this bit of the Bill not refer back to the statement under Clause 3? That would make life a lot simpler: qualifying assets are in these categories and, to see more, look to the statement. Frankly, we will not know until we finally see the statement produced—I know we have seen drafts—whether something is or is not a qualifying asset.
My Lords, it is a pleasure to follow the noble Lord, Lord Leigh, on his amendments. I think he will cause quite a stir when he gives his annual lecture. I will speak first to Amendments 20 and 24. I refer to my interests in the register.
Amendments 20 and 24 take account of the fact that the Bill as drafted does not include any de minimis thresholds for qualifying entities and assets, in stark contrast to other leading foreign investment regimes. The point behind these amendments is to ensure that mandatory notification requirements involving businesses have a de minimis threshold. Not having one would be disproportionate, given the likely cost of making mandatory filings and the relatively low risk of any national security issue arising in the context of such transactions. It would also act as a significant disincentive to global investors and the start-up and early stage businesses that they fund, which may simply relocate to a jurisdiction that takes a more benign approach. As the noble Lord, Lord Leigh, said, this risks seriously dampening innovation in the UK, particularly in the continued development of the technology sector and start-ups, which rely heavily on venture capital investment.
Introducing value thresholds of £10 million annual turnover in the UK for qualifying entities and £10 million gross value for qualifying assets, subject to anti-avoidance provisions to prevent the circumvention of the Act, would ensure a much more proportionate approach. Value thresholds are also used in a number of other leading foreign investment regimes. For example, Australia and Canada use a tiered threshold system based on the identity of the investor and the nature of the business, and, in the case of Australia, the level of control acquired.
The noble Lord, Lord Leigh, also explained the other amendments that he and I put forward in this group, Amendments 52A, 55A, 64A and 67A, which would introduce another red tape busting proposal: a fast-track process for non-problematic transactions. The Bill currently envisages that the investment security unit will reach an initial decision as to whether to clear a notified transaction or to call it in for a detailed assessment within 30 working days of acceptance of the notification as complete. As the noble Lord explained, a significant number of transactions will fall within the scope of the mandatory notification requirements due to the target’s activities being in a specified sector—we have seen those in the document published last week—but which clearly do not raise national security concerns. To minimise the deterrent effect of the new regime on foreign investment into the UK, these amendments would introduce a fast-track procedure for such non-problematic transactions, enabling the acquirer to request a review period, as the noble Lord again explained, within a period of 10 workings days instead of 30, combined with reduced information requirements for the notification.
I have mentioned Australia and Canada; if the Minister would prefer it, I can refer in this case to a special accelerated procedure recently introduced in France for certain transactions. The use of a fast-track initial review procedure would not prevent the Secretary of State referring a transaction for in-depth assessment, as the noble Lord, Lord Leigh, cogently explained, if this was considered necessary and the timetable for such subsequent review would not be affected.
I very much hope that, as I said, these two red tape busting amendments will be very carefully considered by the Government. Otherwise, we seriously risk the Bill’s impact being disproportionate and having a chilling effect on investment.
My Lords, I will speak to Amendments 20 and 24 in the name of the noble Lord, Lord Leigh. The CBI, of which I am president, supports the principle of the legislation in the Bill in protecting national security, which will always be top priority. However, the current drafting makes the practical application of the Bill difficult for business and could lead to additional burdens and complexity at a micro level and be an unintended deterrent to investment at a macro level.
With no set de minimis thresholds for transactions caught by the legislation, there is a risk that a high volume of notifications will inadvertently represent relatively low-risk activity caught by this maximalist approach from legal teams and counsel. On top of that is the extraterritorial nature of the provisions in the Bill. Many transactions involving target suppliers supplying goods and services outside the nation will be caught in the notification requirements. Given this backdrop of a maximalist approach, there is real concern in business that the Government’s capacity to process the projected number of notifications while the regulations are in their infancy will be a problem.
According to the CFIUS annual report, in the United States in 2019, 231 notices were filed for screening, with 113 resulting in investigation. The Government currently estimate, and I wonder whether the Minister can confirm, that there will be 1,800 annual notifications. However, there is concern that the true estimate could be up to 10,000. We should not have the unintended consequence, mentioned by the noble Lords, Lord Leigh and Lord Clement-Jones, of deterring foreign investment just when the UK needs to increase its attractiveness to it. We are just coming through the pandemic, we have had Brexit, and we are establishing ourselves as an independent trading nation—global Britain. We are the second or third largest recipient of inward investment in the world, and a magnet for it. We are a gateway to Europe when it comes to investment, and we need to continue to be so.
Amendments 20 and 24, in the name of the noble Lord, Lord Leigh,
“seek to introduce value thresholds for qualifying entities and assets (subject to anti-avoidance provisions to prevent the circumvention of the Act), which would bring the NSI regime in line with other leading foreign investment regimes that have de minimis financial thresholds for notification.”
Such thresholds provide a critical floor to the regime, ensuring that higher-value, higher-interest transactions, entities and assets are predominantly in focus. Of course the Government should consider national security threats of all sizes. However, in order to provide officials with sufficient breathing space to make a success of the predicted number of notifications, which I spoke about earlier, this threshold should be applied.
Importantly, this amendment would concurrently bring the planned regime in line with other leading foreign investment regimes, as we have heard from other speakers. International comparisons and their consequential impact on the UK’s attractiveness as a location for inward investment should be a continual focus for government when implementing this regime.
Before I come to what the noble Lord, Lord Clement-Jones, mentioned, I should say that the Bill represents a significant expansion of the UK’s FDI. Since the Enterprise Act intervention regime was introduced in 2002, nearly 20 years ago, there have been just 12 interventions on the basis of national security. It appears that this new regime will see a large increase in the government’s workload and, as the noble Lord said, a much stricter regime than those brought in by other countries, including the USA, Australia, Japan and many countries in Europe.
We must not jeopardise, at any cost, our attraction for inward investment. Of course, national security is important, but we have to be a magnet for inward investment and the Bill must not prevent that happening.
My Lords, I am delighted to follow the noble Lord, Lord Bilimoria, who spoke with such passion and, obviously, such knowledge.
I am delighted to support Amendments 20 and 24 and the later amendments in the names of my noble friend Lord Leigh of Hurley and the noble Lord, Lord Clement-Jones. I share the concern of my noble friend Lord Leigh that there appears to be little knowledge of this Bill in the wider business community, but I reassure noble Lords that the law societies of England and Scotland are well aware of this Bill and have raised a number of issues, including the ones we will come on to in Amendment 21 in the name of my noble friend Lord Hodgson.
The Bill as it currently stands leaves a number of loopholes and is loose in its drafting, so Amendments 20 and 24, in seeking to set a de minimis rule, are welcome indeed. They would assist the Government for the reasons the noble Lord, Lord Bilimoria, set out. I welcome the fact that my noble friend Lord Grimstone will respond to this group of amendments and I look forward to what he has to say, but the Government have set themselves a very difficult task. We wish to keep, and possibly increase, the level of foreign investment into this country. It was always one of our greatest achievements while members of the European Union that we attracted more foreign investment than any other EU country. There was a lot of envy of us because of that, because we were, dare I say, a light-touch regime, but there was a regulation in place and it worked effectively.
The noble Lord, Lord Bilimoria, touched on the sensitive issue of the level of referrals or own-initiative investigations which the Government, under the Bill as it currently stands, might bring upon themselves. I wish the department well in that regard. Surely it must be of interest to rule out some that, due to the level of investment, do not attract sufficient concern. If the Government are seeking to maintain a balance, which they have successfully kept to date, between encouraging a high level of foreign inward investment and meeting the national security concerns as set out in the Bill, the terms of Amendments 20 and 24, in particular setting the level of investment as an annual turnover of less than £10 million in particular, would not jeopardise national security concerns.
I also support the later amendments in this group in the names of my noble friend Lord Leigh of Hurley, which seek to set out an accelerated procedure. It cannot be in the Government’s interest to jeopardise what would be a legitimate investment if the procedure was fairly straightforward and could not be met under the terms set out in those amendments. These two sets of amendments in the name of my noble friend Lord Leigh of Hurley would improve the Bill, maintain a flow of foreign inward investment and not unnecessarily jeopardise our national security. I support them, and I look forward to hearing what my noble friend Lord Grimstone says in summing up.
My Lords, I strongly support the amendments in this group, which seek to set up a fast-track process. Anything that can make the processes more friendly to help non-problematic business transactions is welcome. I am very worried about the impact that this Bill, which I support in principle, will have on the UK’s reputation as a good place to invest, and I echo what other noble Lords have already said today. That is why we have to work to make the operation of the Bill as painless as possible for transactions that fundamentally do not raise concerns.
I am less sure about the other amendments in this group. I understand the desire to protect SMEs and start-ups from the full force of the Bill. I do not believe that national security risks can be sized by reference to a point in time, monetary value of current assets or turnover of a business. So I do not support Amendments 20 and 24 in the name of my noble friend Lord Leigh of Hurley.
Similarly, I am not convinced about restricting qualifying assets outside the UK to those in connection with activities carried out in the UK, as envisaged by my noble friend Lord Hodgson of Astley Abbotts in Amendment 26. I do see a need to be able to focus on supply chains as well as on activities carried out in the UK, and I would not want to deprive the Government of the ability to do that if genuine national security issues arose.
My Lords, the noble Lord, Lord Leigh, is correct to say that the Bill is far more important than the outside world seems to realise. When I have been speaking externally, I have been trying to remind people of the Bill’s existence and the need for them to read it. Perhaps we should adopt the policy of the Ancient Mariner and stop in one in three in the street and tell them about it because it does not seem that the message is getting through. Perhaps we will just have to work on their behalf.
A strong case has been made by the proponents of Amendments 20 and 24. When the Minister, the noble Lord, Lord Callanan, speaks on a number of different issues, he often talks about flexibility and keeping options open. This seems another example of where the Government are seeking to keep their options open and, as the noble Baroness, Lady Noakes, set out, there might or might not be good reason for that. When I sat on your Lordships’ Science and Technology Committee, it held an inquiry into the challenge of scale-up and the need for patient capital and for money to come in. It is very clear that the United Kingdom has a way to travel in getting the sort of funding that we are talking about for these scale-up situations. I am interested to hear from the Minister what sensitivity studies have been done on this. How much work has been done in talking to the investment and venture capital community about how it views it? Perhaps the Minister could write to us with the evidence has been received about its reception and the Government’s impression of it. I am persuaded that there is an issue. The question is how big an issue it is, given that we have a suboptimal venture capital regime in this country for this sort of scale-up. How badly and to what extent would damage be wrought?
I read Amendment 25 differently from the noble Lord, Lord Lansley. I read the words “examples include” to mean that that is not exclusive and I think the noble Lord has what he wants without having to put the words in. Perhaps the Minister can clarify that.
I find myself in complete agreement with Amendments 52A, 55A, 64A and 67A. If these transactions are not supposed to be impacted by this, let us get them out of the system as quickly as possible. The doctrine expressed by the noble Baroness, Lady Noakes, about the workability of the regime, the amount of friction it introduces and our responsibility to remove that friction wherever possible is completely correct, so those four amendments deserve noble Lords’ complete support.
I thank the noble Lords, Lord Clement-Jones and Lord Bilimoria, for the opening amendments in this group, which give rise to various considerations. We recognise the caveat in Amendments 20 and 24 to mitigate the impact of hostile actors going to complex lengths to hide their interests in a qualifying asset or entity. It is also understandable to set de minimis thresholds. Having the powers in the definition still requires a thought process to initiate using them. There have been several instances in which hostile actors have behaved entirely transparently that have not been identified and prevented. Indeed, mitigating actions may have been rejected even by the Government.
One needs only to recall the debate over the growing dependency of many nations on China and the resultant rejection of identifying potential harm that could result. It could be raised here regarding dependency on research skills and partnerships in the technology fields, with security implications. Indeed, the Government’s assessment of risk can be mysterious. In relation to the Bill, perhaps what we need to see are the ways in which the Government will actively identify evolving and growing risks, whether or not they hide behind complex organisations or a complex process of additionality. Has the Minister considered this and when a risk may change its colours?
To the proponents of the £10 million threshold in the amendments, is there some logic or any evidence that this is indeed the correct level, other than that other jurisdictions may have chosen it? The valuation of some of these types of asset is hard to quantify and the value of a database code or algorithm will be considered much greater once in the hands of a hostile intent. The intention not to overburden SMEs with the bureaucracy of this regime is worthy and commendable, but may not be easily carried out. How many SMEs would be excluded as a consequence and would it also benefit the department not to have to devote resources to excessive screenings of transactions?
Amendments 52A, 55A, 64A and 67A, also thoughtfully proposed by the noble Lords, Lord Leigh and Lord Clement-Jones, are for the fast-track procedure for notifications. Has such a procedure been considered by the Government? It has yet to be identified how the regime proposed by the Bill will deal with so-called everyday transactions in the business community and the amount of resources that will need to be committed to so-called evidently non-controversial activity. Would this allow the possibility of experience gained through the Bill to mature into a more workable format?
In the drafting of the procedure, care would need to be taken regarding the person being given the ability to give the relevant notice. In one interpretation it could be the company initiating such a request, not only the person acting on behalf of the Secretary of State. That would result in everyone requesting a fast-track procedure. The Minister’s remarks will be interesting in this respect. Overall, it would be perhaps best to ensure that the regime is set up in the first instance in the Bill to be properly resourced and to have properly identified targets for all its notifications.
My Lords, I thank my noble friend Lord Leigh of Hurley for his Amendments 20 and 24, my noble friend Lord Lansley for his Amendment 25, the noble Lord, Lord Clement-Jones, for his Amendment 26 and my noble friend Lord Leigh and the noble Lord, Lord Clement-Jones, for their package of Amendments 52A, 55A, 64A and 67A. I will take them sequentially.
I completely agree with my noble friend Lord Leigh and the noble Lord, Lord Clement-Jones, that we must be careful to do nothing that diminishes the entrepreneurial or innovative spirit in our country or to diminish the attractiveness of this country for investment. You might imagine that, as the UK’s Minister for Investment, I am especially concerned about the latter point. In answer to the noble Lord, Lord Fox, I have spoken to many investors and VCs and, once the rationale and the processes of the Bill are explained to people, I have been very reassured by the reception that the Bill has had. The key point one has to explain is that the investment screening unit will be a rational unit that will seek to minimise time spent and maximise efficiency wherever it can.
With the permission of my noble friend Lord Leigh, I will address his Amendments 20 and 24 together, given that both relate to introducing de minimis thresholds into the regime. Clause 7 defines the meaning of “qualifying entity” and “qualifying asset” for the purposes of the Bill. These definitions underpin reasonable and proportionate powers for the Secretary of State to scrutinise acquisitions of control of qualifying entities and assets where that raises national security risks.
My noble friend’s amendments, which I am sure are well intentioned, seek to amend the definitions so that only entities with a UK turnover of £10 million or more, or assets with a gross value of £10 million or more, would be in scope of the regime, save for a caveat on avoidance, which I will come to shortly.
The Bill quite deliberately does not include minimum turnover or values to define qualifying entities and assets. That is a recognition that the risks we face have changed. Acquisitions of small businesses at the start of their ascendency can harm our national security, in particular if they involve the kind of cutting-edge, world-leading technology this country is known for. The Government, and, indeed, Parliament, recognised that in 2018 and 2020 when changes to the Enterprise Act 2002 were made to lower the threshold for mergers to £1 million of UK turnover for some of the most sensitive sectors of the economy.
Those measures were always intended to be interim until the more fundamental reforms we see before us today were made, but they spoke to the same underlying principle that new and advanced technology companies, some perhaps only months old, are often working on the front line of innovation. They might be loss-making or have negligible turnover for the early years of their operation, but their acquisition may well pose national security risks in the wrong hands. I am afraid that national security does not recognise financial thresholds of this sort, and it is the same with individual assets. Novel designs, new technology and world-beating intellectual property could have a financial value below the £10 million that my noble friend suggests and yet still have ramifications for our national security. Of course, we expect that the overwhelming majority of acquisitions will pose no national security risk, and, accordingly, most activities by SMEs and businesses across the economy will be unaffected and will be dealt with very quickly.
I note that the amendments seek to provide an exemption to those thresholds,
“where the acquisition … is by means of artificial arrangements which do not reflect economic reality and are intended to circumvent the provisions of the Act).”
Although I understand my noble friend’s broad intention, it is not clear to me that such a caveat sits comfortably as part of a definition of a qualifying entity or asset, as it essentially concerns the mechanisms and circumstances around how control is acquired. I fear that in the context of mandatory notification, it would introduce uncertainty around which acquisitions of control over entities are legally required to be notified to and cleared by the Secretary of State, and their legal status in circumstances where they have not been and where the UK turnover value of the target is later considered not to reflect economic reality. Certainty of definition is important to investors in relation to the Bill.
Amendment 25, tabled by my noble friend Lord Lansley, seeks to clarify that the list of examples of intellectual property assets in Clause 7(5) that would be qualifying assets under the NSI regime is non-exhaustive. As currently drafted, Clause 7(5) states that examples of intellectual property assets would include, and then provides a list of such assets. The amendment would change this to say that examples of intellectual property assets would include
“(but are not limited to)”
the same list of assets. We have carefully considered this, as has the noble Lord, Lord Fox, and I can confirm that the Bill, as currently drafted, already provides that the list of examples in question is non-exhaustive. The list is there to be helpful, but it is not exhaustive. Of course, as ever, I am grateful for my noble friend’s keen eye for spotting this and for the spirit in which the amendment was tabled.
I now turn to Amendment 26, tabled by the noble Lord, Lord Clement-Jones. I am afraid that even after reading it very carefully I was still slightly unclear on the precise intent of the amendment—I am sure that the noble Lord is entirely clear on it. For the benefit of the Committee, I am interpreting it as seeking to remove the provision currently in Clause 7(6)(b) that an asset situated outside the UK or the territorial sea is a qualifying asset if it is used in connection with the supply of goods or services to persons in the UK. This would mean that an asset situated outside the UK or the territorial sea is a qualifying asset only if it is used in connection with certain activities carried on in the UK. It is important that land and moveable property assets situated outside the UK or the territorial sea and intellectual property assets used in connection with the supply of goods or services to persons in the UK are also captured, as their acquisition can give rise to national security risks to the UK. I will highlight this with an example: the acquisition of a wind farm situated outside the UK and its territorial sea that provides critical energy supplies to UK industry and consumers may give rise to national security risks, even though it is not strictly used in connection with activities in the UK.
Of course, I completely accept that any extraterritorial use of the powers under the Bill should and must be proportionate, as well as meeting the other tests in the Bill. That is why the Bill explicitly sets out a UK nexus requirement that means that the Secretary of State may intervene to assess an acquisition overseas only where it has a clear connection to the UK. Remedies may be imposed at the end of an assessment only if the Secretary of State reasonably considers that they are necessary and proportionate for the purposes of safeguarding the UK’s national security. As such, the extent of an acquisition’s connection to the UK will be a clear factor in that decision.
I thank my noble friend Lord Leigh of Hurley, and the noble Lord, Lord Clement-Jones, for their Amendments 52A, 55A, 64A and 67A, regarding a fast-track process for acquisitions that are notified under both the voluntary and mandatory regimes. As drafted, the Bill provides that the Secretary of State, having accepted a notification, must either give a call-in notice or clear the acquisition within 30 working days. This figure was not just plucked out of the air or arbitrarily chosen by the Government; it reflects detailed work undertaken by my department, in conjunction with a range of other departments, to test past cases and mock scenarios against the regime. I assure the noble Lord, Lord Bilimoria, that, in doing this, my department also gave careful thought to the number of cases we might expect to have to scrutinise under the regime.
A 30 working day review process provides a clear and reasonable timeline for businesses and investors, as well as adequate time for the Secretary of State to determine whether there are national security risks that warrant a call-in. These amendments would allow parties to request an accelerated review process. It is not entirely clear from the amendments whether the Secretary of State would have to accede to such a request, but the Government’s reading is that the amendments would be interpreted as requiring the Secretary of State to do so.
I stress that 30 working days is the maximum. As we have said many times during the debate on this Bill, in many cases, we expect the Secretary of State to be able to review and clear notifications much more quickly than this, particularly when it is self-evident that there are no national security issues whatsoever, which will be the case in the vast majority of these transactions. In that sense, 30 days is a deadline, not a target.
These amendments would mean that the Secretary of State would have 10 working days in which to either issue a call-in notice or clear the acquisition. If the Secretary of State misses this window, no further action on the acquisition would be possible under the Bill, even if it raises a national security risk. The fish would have escaped from the net. It is vital that the Secretary of State has the necessary time to examine an acquisition and make an informed decision about whether to issue a notification of no further action or a call-in notice for all acquisitions, across all sectors, so I cannot accept the amendments.
I am concerned about the lecture that my noble friend Lord Leigh has to give tomorrow evening because, I suspect, there is no tougher audience than that of insolvency practitioners. So, before I close, I will clarify how the 30-day review period works for administrators, in case this question comes up tomorrow evening.
Schedule 1 makes it clear that
“rights that are exercisable by an administrator or by creditors while an entity is in relevant insolvency proceedings are not to be regarded as held by the administrator or creditors”.
In other words, a person is not treated as gaining control of an entity simply by exercising their rights as an administrator during the relevant insolvency proceedings. I hope that that allows my noble friend to put the audience’s minds at rest, if they raise this issue tomorrow night. I hope that noble Lords feel that I have adequately addressed their concerns and I ask that these amendments be withdrawn.
I thank the Minister and all noble Lords who contributed to this group. We did not quite get unanimity, but we got close to it from those who spoke. The second-biggest accolade of my life has to be the noble Lord, Lord Clement-Jones, calling my arguments “cogent”, so I am grateful to him for that.
It is noticeable that the noble Lord, Lord Bilimoria—I know that he speaks on behalf of himself—spoke as president of the CBI. It is regarded by some as the advocate for large businesses, but he recognises that small businesses may struggle with this Bill. Although I take the point of my noble friend Lady Noakes that a very small business could be subject to a national security risk, I have to say to the Minister that there must be some level below which this Bill should not apply. He suggested that the Government start with £1 million as a stopgap, but I started with £10 million. What do you say?
I also take his points that revenue and gross asset definitions are difficult sometimes, but there are other ways—for example, just looking at the amount invested in a project or business. If it is less than £0.5 million, would we really think that there is a national security risk from someone taking a 15% stake? Perhaps we could have another look at that.
I thank the Minister again for his comments on the working days needed. I am sure that he is sincere in his view that this will be a deadline but we have seen circumstances where the deadline becomes the norm, and 30 working days with a possible extension of another 40 is a long time. The takeover panel gives rulings within an hour. I would have thought that the Secretary of State might allow himself to be stretched to having the option of allowing a reply within 10 working days in certain circumstances where it is apparent that an urgent matter needs to be resolved for all sorts of extremely important reasons, as we discussed earlier. It could be an opportunity for the Secretary of State to agree to a sticker of 10 working days, as it were, going on a particular case because of a threat to employment, a threat to a business’s viability or certain other criteria.
One would hope that these probing amendments are taken seriously; I know that they are. Perhaps we can think through how our intention could be reflected in subsequent amendments. I will look at Schedule 1. I may have to share my speaker’s fee with the Minister; that is very regrettable since it is nothing. My point is not so much about assets when they go into administration; I take that point. My point is that, when the administrator or liquidator wants to sell those assets, it is those 30 days that will be impossible for the administrator to honour. Perhaps that is the purpose of subsection (3) under the impossible rules, but I do not think that it is at all. I really think that we need to take another look at what we do in certain insolvency circumstances where cash is urgently needed in a business and we cannot wait 30 working days for such cash to be approved.
With those remarks, I beg leave to withdraw my amendment.
Amendment 20 withdrawn.
My Lords, we now come to the group beginning with Amendment 21.
21: Clause 7, page 5, line 14, leave out paragraph (b)
Member’s explanatory statement
This amendment ensures that only those entities that carry on activities in the UK are qualifying entities.
My Lords, in moving Amendment 21 I will speak also to Amendments 27 and 32.
The first two of those amendments would amend Clause 7, which is entitled “Qualifying entities and assets”. Amendment 32 is a consequential amendment to Clause 9. As has been the case with all the amendments I have tabled, they are designed to give greater clarity to the detail of the proposed regime and maintain the delicate balance between national security and investor rights, which we have all talked about at some length.
I add to noble Lords’ views that the level of knowledge about the provisions of this Bill is pretty low. Last week, I was in the north of England at a conference involving a number of senior professional firms. I do not think that they had hoisted in the reduction in thresholds. They still thought that it was a regime that would apply primarily to large companies. When I raised the point made by my noble friend Lord Lansley—that the regime began to come into force on 12 November last year—they looked fairly astonished.
Turning to the amendments, as before, I am grateful to the noble Lord, Lord Clement-Jones, for his support and to the Law Society for its help in drafting them. First, I will speak to Amendment 21. Under Clause 7(3), an overseas entity is a qualifying entity if, among other things, it
“carries on activities in the United Kingdom”.
It would be useful if we could have some guidance on the meaning of “qualifying entity” under the provisions of this Bill. There is a useful definition in the Bribery Act; it may be possible to bring that across to give clarity to this Bill as well.
Clause 7(3)(b) also provides that an overseas entity that supplies goods or services to persons in the United Kingdom would be a qualifying entity. Other major jurisdictions do not apply their national security laws to investments in foreign entities. The argument is that the Bill should only treat overseas entities that carry on activities in the United Kingdom as qualifying entities, rather than include entities that simply export to the United Kingdom. To achieve this, Clause 7(3)(b) should be removed.
Amendments 27 and 32 would replace Clause 7(6)(a) and (b) with new wording. The background to this is as follows. Clause 7(4)(c) and Clause 7(6)(b) together provide that non-tangible assets, such as ideas, information or techniques, are qualifying assets if used in connection with the supply of goods or services to persons in the United Kingdom. This provision could inadvertently cover UK businesses that buy, procure or use technological products or services supplied by third-party providers. Under this scenario, a UK company that buys in foreign artificial intelligence technology to help to deliver its business objectives could be covered, as could a UK company that uses foreign computer software in, for example, building and maintaining a database.
The situation I just described could be further complicated if a UK business plans to purchase another UK company covered by that scenario. Although it is a UK to UK transaction, under the nexus set out in Clause 7 these types of deals will be covered and caught under the new regime. Solicitors will have a duty to flag that up as a risk when advising corporate clients, which means that many more companies are likely to seek a voluntary judgment from the Secretary of State for reasons of certainty. This is likely to significantly increase the number of applications for a judgment made to the Secretary of State, and so is likely to slow down business. On the other hand, if a deal goes ahead and the ruling is made after it is completed, it could have significant consequences for the organisations in cost and outcomes.
This possible application of the regime to acquisitions by domestic acquirers is unusual compared to other jurisdictions where Governments have taken national security powers. Concerns relating to national security and domestic investments are likely to be able to be dealt with much more expeditiously under existing regulations—for example, confiscation proceedings under the Proceeds of Crime Act or the director disqualification regime. Amendments 27 and 32 would give effect to this simplification. I beg to move.
My Lords, I start with an apology to the Minister. Amendment 26 in the previous group was a rogue and should have been deleted, because Amendment 27, introduced so well by the noble Lord, Lord Hodgson, superseded it. The PBO produced a much better format, so Amendment 26 was left like an orphan in a previous group, but it has been extremely helpful in getting a foretaste of the Minister’s arguments in this group, so I apologise to him, but there is nothing like hearing a good argument twice, and no doubt we will be all that wiser for it.
As the noble Lord, Lord Hodgson, has introduced the amendments so well, he has made it clear that they are intended to do two things: to ensure that qualifying assets are only assets used in connection with activities carried on in the UK, but not the supply of goods or services to persons in the UK; and, secondly, to prevent “in connection with” being interpreted in a way that treats all assets within the relevant supply chain as being within scope, even if owned and controlled by unconnected third parties, which may have no visibility of the activities of businesses further down the supply chain.
As drafted, the territorial scope of the Government’s call-in power is extremely broad, extending to non-UK entities that supply goods or services to persons in the UK, and assets situated outside the UK that are used in connection with activities carried on in the UK or the supply of goods or services to persons in the UK. This extraterritorial application is out of line with the approach taken in most other foreign investment regimes, which focus only on acquisitions of corporate entities registered in the relevant jurisdiction. It is also unnecessary. There are a number of other more appropriate ways to protect against a threat to the UK’s national security in connection with a transaction involving a non-UK registered company or assets that are not located in the UK, such as export/import controls, the network and information systems regime for critical infrastructure and other licensing requirements relating specifically to national security. From a practical perspective, it may also be difficult in many cases for an acquirer to analyse fully all aspects of the supply chain in order to self-assess the risk of a particular transaction being called in for review.
Furthermore, referring to supplies of goods or services captures all aspects of the supply chain, however minor. It is difficult for an acquirer of a business fully to analyse the supply chain, and including this as part of a mandatory regime with criminal sanctions is disproportionate. The proposed requirement for control by the person exercising the relevant activities is necessary to prevent “in connection with” being interpreted in a way that treats all assets in the relevant supply chain as being in scope, even if owned and controlled by unconnected third parties that may have no visibility of the activities of businesses further down the supply chain.
There are other more appropriate ways to protect against a threat to the UK’s national security in connection with a transaction involving a non-UK registered company or assets that are not located in the UK. As I said, most other foreign investment regimes have managed to crack that issue. I very much hope that the Government will think again.
My Lords, I am delighted to support this small group of amendments. I will speak in particular to Amendment 21 for the reasons my noble friend Lord Hodgson so eloquently and effectively set out.
I am very well aware of the concerns raised by the Law Society of England, as set out by my noble friend and the noble Lord, Lord Clement Jones, as to the extraterritorial aspects of the application of Clause 7(3) as drafted. It raises a number of practical problems as to how it will be applied. In the view of the Law Society of England, it is potentially inappropriate in its wording.
I am grateful to my noble friend for stepping up to the plate and tabling these amendments. I hope that my noble friend the Minister will look favourably on them, the reason being that, in the definition of qualifying entities and assets currently given under Clause 7(3), an overseas entity is a qualifying entity if, among other things, it “carries on activities” in the UK. The Law Society would very much like to see further guidance on the meaning of this term, as is the case under the Bribery Act and the Modern Slavery Act. It begs the question as to why the Government have not felt able or willing to bring forward such a definition as part of the Bill. My noble friend must understand that it will be up to the practitioners to apply this wording. The courts could have to interpret it as well.
Clause 7(3)(b) also provides that an overseas entity that
“supplies goods or services to persons in the United Kingdom”
would be a qualifying entity. For reasons of international comity, other major jurisdictions do not apply their national security laws to investments in foreign entities. In accordance with this, I support the Law Society’s conclusion that the Bill should treat only overseas entities that carry on activities in the UK as qualifying entities, rather than including entities that simply export to the UK.
In my view, Clause 7(3)(b) should be removed entirely or the wording proposed by my noble friend Lord Hodgson, which I prefer, adopted. I find the Bill unacceptable as it currently stands. I hope my noble friend the Minister will understand that we are not the ones who will have to apply this. Practitioners have raised these concerns with us for very legitimate reasons.
My Lords, I am glad that the noble Lord, Lord Clement-Jones, cleared up the position of Amendment 26 in the previous group, because I struggled, when I came to this group, to work out what else there was to say. I put my name down anyway to see what would emerge from previous speakers.
I said on the previous group that I had concerns about confining the Government’s powers to exclude those outside the UK that provide goods or services to the UK, because I believe that the Government should have as wide a definition as possible. I absolutely believe in making the processes of the Bill move as smoothly as possible and I do not want to add to what I believe will be the big burden of voluntary notifications. But, when it comes to defining where the Government could act, we need to be broad in our approach. If there is one such potential acquisition only, I would still say that it is worth having the power to go there, because these are serious issues about the national security of our land.
This follows on quite well. Throughout this debate and lots of debates about Bills, we hear your Lordships use the phrase “unintended consequences”. Actually, giving the department credit, I assume that this is an intended rather than an unintended consequence, so I would like the Minister to explain exactly what it is seeking to achieve or prevent happening. What past examples would have been arrested, had this law been available then? Being a practical person, that would help me and others to understand what the Government are getting at.
This clearly does not have extraterritorial reach, as my noble friend Lord Clement-Jones said. It seeks to deal with all activities when it might be better to separate and segment them. I take the point of the noble Baroness, Lady Noakes; it would help us if we understood what the Government are getting at with this wording.
I thank the noble Lord, Lord Hodgson, for his three amendments in this group and the noble Lord, Lord Clement-Jones, for adding his name to the first, Amendment 21. He has an alternative to Amendment 27, Amendment 26, which was in the previous group, but both amend activities in general, so that they are more specifically attached to the person controlling those activities. The noble Lord, Lord Clement-Jones, has recognised his amendment as “rogue”.
The noble Lord, Lord Hodgson, queries the extension of Clause 7(3)(b) to suppliers of
“goods or services to persons in the United Kingdom”,
and asks for an explanation. Have there been previous incidents and what specific goods or services were involved, with what implications?
Clause 7(6) specifies land as well as “moveable property” and, in relation to Amendment 27 of the noble Lord, Lord Hodgson, gives rise to my reflections on the question of land and its use. While clearly an asset, the distinction is not made between the Bill’s application to ownership of land, in the sense of control, and any lease of its use, whereby a person other than the owner could be said to be in control. The Bill merely has the words “used in connection” to activities. Is this distinction relevant and what proof would be needed to clarify which person is in control of land?
One of the key sentences in the Government’s Statement of Policy Intent is in the section on acquirers:
“Clearly, national security risks are most likely to arise when acquirers are hostile to the UK’s national security, or when they owe allegiance to hostile states or organisations.”
Land, and the use of it in such a context, is made relevant as a qualifying asset. Yes, an operation needs to operate somewhere and will require land. Does this require any further reflection with regard to the workings of the regime? Can land in a particular country be considered a particular threat?
Amendment 32, in the name of the noble Lord, Lord Hodgson, to Clause 9, regarding control of assets, returns us to Clause 7(6). The Minister may wish merely to identify the strategic risk attaching to land in particular locations only.
My Lords, I welcome these amendments from my noble friend Lord Hodgson of Astley Abbotts, which concern the extraterritorial application of the call-in power. Amendment 21 seeks to ensure that where an entity is formed or recognised under the law of a country or territory outside the UK, it will be a qualifying entity only if it carries on activities in the UK but not where it supplies goods or services to persons in the UK, as the clause currently provides.
I am afraid that I was slightly unclear on the precise intent of Amendments 27 and 32 so, for the benefit of the Committee, I am interpreting them as seeking to remove the provision currently in Clause 7(6)(b): that an asset situated outside the UK or the territorial sea is a qualifying asset if it is used in connection with the supply of goods or services to persons in the UK. This would mean that an asset situated outside the UK or the territorial sea is a qualifying asset only if it is used in connection with certain activities carried on in the UK.
It is important that entities formed or recognised outside the UK which provide goods or services to persons in the UK are captured through the Bill as their acquisition may give rise to national security risks to the UK. The noble Lord, Lord Fox, asked for some examples, and I am happy to provide them. For example, a foreign-registered company that does not carry on activities in the UK may still provide essential goods or services to parts of our critical national infrastructure. If a hostile party were to acquire control over that supplier, it could use that control to degrade our infrastructure. To take another example, imagine an overseas supplier of machinery or compounds to a UK-based entity producing cutting-edge advanced materials for our military. Control over that supplier could provide a hostile party with an insight into certain military capabilities or a means to sabotage the work of the UK entity to harm our military. As my noble friend Lady Noakes recognised, this could have a severe effect on national security.
Similarly, it is important that land and moveable property assets situated outside the UK or the territorial sea and intellectual property assets used in connection with the supply of goods or services to persons in the UK are also captured as their acquisition can give rise to national security risks to the UK. For example, as I have said previously, the acquisition of a wind farm situated outside the UK and its territorial sea that provides critical energy supplies to UK industry and consumers may give rise to national security risks, even though it is not strictly used in connection with activities in the UK. If the noble Lord, Lord Clement-Jones, would like to hear this example a third time, he only has to lay a further amendment.
Of course, any extraterritorial use of the powers under this Bill should be proportionate as well as meeting the other tests in the Bill. That is why the Bill explicitly sets out a UK nexus requirement that means that the Secretary of State may intervene to assess an acquisition overseas only where it has a clear connection to the UK. Remedies may be imposed at the end of an assessment only if the Secretary of State reasonably considers that they are necessary and proportionate for the purpose of safeguarding the UK’s national security. As such, the extent of an acquisition’s connection to the UK will be a clear factor in that decision.
The Bill also explicitly limits the application of remedies to persons outside the UK to those who have a clear connection to the UK—for example, UK nationals or companies, or those who carry on business in the UK.
I am conscious that I may not have answered fully the questions from the noble Lord, Lord Grantchester. If I reflect, after looking at Hansard, that I have not, I may write to him. I understand, taking these amendments as a group, the desire to probe the Government in this area, but I hope that, with this explanation, my noble friend will feel able to withdraw his amendment.
I have received one request to speak after the Minister from the noble Lord, Lord Fox.
I am probably being extremely stupid here, so please forgive me. In the first example of a foreign business supplying a critical operation in this country, I understand that that would be a problem were it taken over by a hostile nation. Let us imagine that a Belgian company, or perhaps a Canadian one, is being taken over by a company or a regime that we consider hostile. What is the Secretary of State’s next move in stopping it happening? I do not understand what the Secretary of State’s remit is over that Belgian or Canadian company, other than to suggest to the recipient of the supplies in this country that they have to change their supplier.
I thank the noble Lord, Lord Fox, for that question. I assure him that it is not stupid. I think the answer is in what I said towards the end of my speech. The Bill explicitly limits the application of remedies to persons outside the UK to those who have a clear connection with the UK, for example, UK nationals or companies, or those who carry on business in the UK. That provides the nexus back to the UK, which I think the noble Lord was searching for.
My Lords, I thank all noble Lords who have participated in this debate. I was extremely relieved to hear from the noble Lord, Lord Clement-Jones, that Amendment 26 was a rogue amendment. He and I had both put our names to it originally and I withdrew mine. When I found that he had left his there, I thought he had seen some angle and I was going to be blown apart and take a torpedo amidships. I am grateful to hear that it was a rogue amendment.
I am grateful to my noble friend the Minister for the examples. I am still reaching for the implications of the question asked by the noble Lord, Lord Fox. I am not yet convinced that the qualifying entity idea has been probed enough, given that it has proved effective in the Bribery Act and has a similar purpose there. I will read what he has to say, think about it and maybe bring this back for a further discussion. In the meantime, I beg leave to withdraw the amendment.
Amendment 21 withdrawn.
22: Clause 7, page 5, line 17, after “land” insert “subject to subsection (7)”
My Lords, I am delighted that it will be my noble friend Lady Bloomfield answering for the Government on this occasion. Almost every amendment that I have put forward has had a substitute Minister step in and I am flattered that every member of the team wants to have a go at one of my amendments. I will be as brief as possible because it is important that we make as much progress as possible on the Bill. I hope that all the noble Lords and Baronesses who are no doubt lined up to rubbish my amendment will do so as briefly as possible.
Amendment 22 is about land. The Government have stated they expect to use their call-in powers in relation to acquisitions of land only where the land is being acquired proximate to a “sensitive site.” However, there is currently no definition of what is meant by “proximate”—near—in this context, and the location of sensitive sites will not necessarily be public. Given that the onus will be on acquirers to assess the risk of an acquisition of land being called in for review, the Bill should expressly specify that land will be regarded as a qualifying asset only if it is located within one mile of a sensitive site. No doubt we can debate that distance as we progress.
An online checking service should be set up to enable acquirers to confirm whether this is the case for a proposed transaction. Such an online service could be set up without revealing the precise location of a sensitive site, and it would certainly not need to reveal why that site is deemed by the Government to be sensitive. It merely needs to alert the acquirer that their acquisition falls within the remit of the Act. A similar service—and I keep praying in aid other regimes from friendly territories—is currently provided under the CFIUS regime in the US. Users of the CFIUS Part 802 geographic reference tool, released online this time last year, can input a property address then determine its proximity to certain sensitive facilities.
The thinking behind my amendment is that what one might perceive to be a relatively routine transaction—the purchase of an asset—should not be inadvertently caught by the regime. In this case, the asset is land, and we have debated this extensively in previous amendments.
My second amendment, signed by the noble Lord, Lord Clement-Jones—who will, no doubt, talk intelligently about it—is in the same vein. It merely seeks to ensure that business-as-usual procurement, such as the purchasing of software licences or standard network equipment, is not captured in the definition of a qualifying asset and so avoids referral requirements. What links these amendments—though one focuses on software licences and the other on land—is purchases by companies in the normal course of business, which one would not necessarily expect to attract the attention of the national security authorities in the way the acquisition of a company would.
I have been as brief as possible. I look forward to the critique of the amendment in forthcoming remarks and to the Minister briefly explaining the Government’s position.
My Lords, I am pleased to have the chance to speak briefly to Amendment 38. This group is linked, in so far as we are all addressing issues relating to limitations on the interpretation of the “qualifying asset” in Clause 7. Amendment 38 in my name is particularly directed towards the issue of such assets in Clause 7(4)(c)—ideas and related intangible assets—where they are licensed. In particular, Amendment 38 seeks to regard such assets, which are licensed on a non-permanent basis, and where ownership of the asset is not transferred to somebody else in any permanent or substantive form, as not being controlled. This relates to the set of exceptions in Clause 11, which sets out those circumstances in which assets are not to be regarded as controlled.
We need to do that because Clause 9, “Control of assets”, is very widely drawn—deliberately, I am sure, and probably rightly so. It says that control of a qualifying asset can result in the person being able to use the asset. Of course, if an asset is licensed to somebody for their use, they could be said to be controlling it. But anybody licensing it to them will be doing so with restrictions and provisions. To that extent, they are not controlling it; the person who has licensed it to them is controlling it. So we have an issue not only of definitions but of scope.
The definition of control should not extend to where somebody had something licensed with restrictions imposed upon it. The definition of using the assets is probably, in that sense, too wide to be applied in this case to those kinds of innovative assets. To whom is this important? It is very important to those whose job it is to bring forward innovation and to license their intellectual property, and to do so in circumstances where they continue to control its use and exploitation. We do not want the routine use and exploitation of assets or intellectual property to be seriously impeded every time it is licensed or for this to be regarded as potentially the control of a qualifying asset and hence notifiable. Amendment 38 gives us an opportunity to set proper limitations on the use of licensing for assets on a temporary basis.
My Lords, my reason for speaking in this group relates to licences. I generally support the thrust of Amendment 23, if there can be appropriate definitions, but I was not quite sure whether I agreed with Amendment 38. I disagreed with the explanatory statement of the noble Lord, Lord Lansley, because whether or not the licenser maintains control depends on quite a lot of things.
An IP licenser may be able to impose conditions when a licence is first granted, but what happens after that and how much control there is over future events is up to whatever is agreed in the licence. If the price and conditions are right, it could be a fully assignable licence; it could be assignable with or without consent of the IP owner; it could be exclusive, so that the IP owner no longer has any rights to use it themselves or to license others; or it could be a sole licence that also effectively restricts supply under the IP. A licence can therefore be for something that is relevant to national security and have both ownership and security of supply implications.
In paragraph (c) of Amendment 38—the substantive economic ownership point—I am sure the noble Lord, Lord Lansley, is trying to exclude the exclusive licences that are assignable because, as he would say, economic control had been obtained. I am not sure whether that is the right way to define it, but I understand the sense of what he is trying to do. However, I wonder whether that also captures what could be restriction of supply issues. Those can also happen through licences that would not necessarily mean economic control.
The whole matter of licences is quite interesting, but they can be unique—I used to do them for a living, so I should know. We therefore have to be careful about clarifying, perhaps in a more substantive way, the things that one wants to exclude from review. I think it is necessary to exclude some, because I am absolutely certain that you would get an even bigger deluge if you did not. It may be that things that count as ordinary licences, where there are many licensees—rather like in the other amendment—and no security of supply issues, can be treated the same as any product for sale. However, wherever there is a sole or exclusive licence in particular, it would be necessary just to have a look to make sure there was nothing that you might want to do something about. There could quite possibly be something if it was in a relevant technology area. However, the noble Lord, Lord Lansley, has drawn an interesting point to our attention.
My Lords, as has been mentioned, the amendments in this group have a common factor very much along the lines of what the noble Lord, Lord Hodgson, said: that it is really important to look at the nature of qualifying entities and assets under Clause 7 with a keen eye. I think that the debate will continue beyond Committee.
One has to make choices here where one thinks it is appropriate to go for a change. I would give this a score of one out of three. I put my name to Amendment 23 in the name of the noble Lord, Lord Vaizey, because the argument there is very straightforward. As he said, it is about “business as usual” procurement and the purchasing of things such as software licences and standard equipment, so that, even if it might technically be caught by the sectors, it is not captured in the definition of a qualifying asset. This is so that, again, we do not have a vast quantity of referral requirements for what are essentially day-to-day transactions, which could be a massive burden on business. The noble Lord made the argument extremely well there.
I am much more nervous about the proposition of taking land out of this, particularly when it comes to reversing the requirement: that is, you publish the sensitive sites and then say whether the transaction is caught because it is next door to that site. The way in which the qualifying entities and assets clause is currently set out, with sensitive sites not being published, is probably a rather safer way of dealing with national security, but that is a purely personal view. I hope that we keep things that way round.
It was a great pleasure to hear what my noble friend Lady Bowles had to say about the third proposition, given her experience and expertise in the whole area of intellectual property. That was exactly my reaction: that licences are animals that can vary in many different ways. As she said, they can be exclusive or non-exclusive, long-term or short-term. I agree that they are not as easy to define as an asset transfer, such as an assignment of copyright or other forms of intellectual property. Nevertheless, in substance, they can mean the transfer for quite a period of time—indeed, the wholesale transfer of knowhow—just as much as an assignment can. One therefore needs to be somewhat wary.
Then you start getting into paragraph (c), as proposed by Amendment 38, which says that
“substantive economic ownership of the asset has not been transferred”.
That is virtually impossible to define for this particular purpose. I am wholly sympathetic to the idea of screening and filtering in a way that cuts back red tape, but at the same time one must recognise that intellectual property is one of the most sensitive aspects that needs to be caught by this Bill. That is the future. Intangible assets are the real Crown jewels of national economies. We must be very careful about that.
The amendments in this group split into two: Amendments 22 and 28, and Amendments 23 and 38. Amendments 22 and 28, drawn to our attention by the noble Lord, Lord Vaizey, continue reflections on the term “land” through consideration not only of any strategic placement in its own right but in relation to proximity to a sensitive site, as provided for under the US security regime. Here in the UK, Amendment 28 has it as
“any site identified as such by the Secretary of State and published”.
What that proximity is and whether it might need to be adjacent are further considerations.
Amendment 23 seeks to ensure that a disproportionate burden is not placed on businesses generally, although I am not sure whether the drafting of the amendment—
“which are not generally and widely available on the commercial market”—
is quite right. More normal “business as usual” procurement, such as the purchasing of software licences and standard network equipment, does not need to be captured in the definition of a qualifying asset. Procurement is not mentioned in the impact assessment. Certainly there needs to be a balance between protecting procurement contracts and not overburdening “business as usual” procurement. How many notifications does the Minister expect to see arising from procurement, however it may be interpreted?
The data infrastructure section of the consultation document and the Government’s report published last week state that one option for mitigating risk includes producing procurement guidance for data infrastructure operators. Will the Government publish this before Report? Does the Committee need to ask what procurement guidance for other sectors needs to be included, most notably defence?
Amendment 38, tabled by the noble Lord, Lord Lansley, seeks to carve out from the regime
“Intellectual Property (IP) licences that do not transfer ownership of the asset to the licensee … as the licensor can impose restrictions on the use of the IP.”
It identifies that clarity is needed on how hostile actors may seek to circumvent the provisions of the Bill to acquire important IP or influence the company’s assets that they seek to acquire. This is a difficult area of increasing sophistication. In the Commons deliberations, Charles Parton of the Royal United Services Institute—RUSI—commented:
“On the question of intellectual property rights, China has a very rigorous campaign to get hold of our IP.”
David Petrie from the Institute of Chartered Accountants in England and Wales remarked:
“It is possible to gain access to intellectual property through means other than ownership, so … that is something that the unit is going to have to assess on a case-by-case basis.”—[Official Report, Commons, National Security and Investment Bill Committee, 24/11/20; cols. 12-55.]
I listened carefully to the noble Lord, Lord Lansley, but it is not clear how permanent transfers might be defined so as to be workable and worth while, as explained by the noble Baroness, Lady Bowles.
I thank my noble friends Lord Lansley and Lord Vaizey, and the noble Lord, Lord Clement-Jones, for these amendments. They seek to clarify and reduce the scope of the regime in relation to asset acquisitions. The Government expect that the majority of trigger events of national security interest will be traditional mergers and acquisitions, but the Secretary of State must also be able to intervene in the rare circumstances where acquisitions of individual assets, rather than entities, may raise national security risks. The Bill as drafted provides that land, tangible moveable property and intellectual property fall within scope of the regime as qualifying assets; this has a degree of extraterritorial application.
Amendments 22 and 28 seek to restrict the inclusion of land as a qualifying asset only to land located within one mile of a sensitive site, and to require the Government to create an online checking service to identify land that is regarded as sensitive. Amendment 23 seeks to exclude “business as usual” procurement, such as the purchasing of software licences or standard network equipment, from the definition of a qualifying asset. Amendment 38 aims to ensure that intellectual property licences that do not permanently transfer ownership of the IP to the licensee are not treated as an acquisition of control over that IP.
I will first turn to Amendments 22 and 28. In limited cases, the acquisition of land can give rise to national security concerns, in particular, but not limited to, proximity risks. The UK Government do not publish the location of the sites in the UK that they consider sensitive from a national security perspective. To do so would give rise to risks to national security: it would serve as a directory for hostile actors who wish to acquire land proximate to sensitive sites, as well as actors who wish to harm us in other ways. Acquisitions of land and other assets that do not pose a national security risk can be pursued with no expectation of being called in. Parties who are unsure or believe that the land in question may be proximate to a site where the Secretary of State is likely to have concerns can voluntarily notify and receive clearance if no national security risks arise.
Risks to national security can also arise from acquisitions of control over land more than one mile from a sensitive site. Indeed, the US regime under the Committee on Foreign Investment in the United States, to which my noble friend referred and to which the amendment alludes, includes a limit of more than one mile for some sites. For example, if we are concerned about a hostile party having a good line of sight to a sensitive site, a plot of land sitting atop a hill more than a mile away might still present an excellent view and the associated security risks. Although most land-based risks are expected to relate to proximity to sensitive sites, not all will. In particular, the Secretary of State will be entitled to take into account the intended use of the land, which may be divorced from any proximity concerns.
I will now turn to Amendment 23. Noble Lords are right to argue that, in most cases, there is unlikely to be a risk to national security from the acquisition of control over intellectual property that is generally and widely available on the commercial market, but such a scenario cannot be ruled out. As set out in the draft statement provided for in Clause 3, which was published alongside the Bill, the Secretary of State expects to intervene only very rarely in acquisitions of any assets. The draft statement lists intellectual property in relation to which the Secretary of State expects acquisitions to be more likely to give rise to national security risks, although this does not include intellectual property that is easily available.
Turning to the detail of the amendment, there is no generally recognised definition of an asset being
“generally and widely available on the commercial market”.
For example, it does not specify where or to whom the asset should be available. It may be that certain intellectual property is in general widely available but is not generally or widely available to certain parties. We may wish to ensure that those parties continue to struggle to access that intellectual property.
I now turn to Amendment 38. As currently drafted, an acquisition of control over intellectual property does not require the acquirer to gain ownership of that IP. This is because acquisitions of control over intellectual property, where the asset is being licensed on a non-permanent basis, can still give rise to national security concerns. Such an exemption could allow hostile parties to use licensing arrangements to avoid the regime, for example by leasing intellectual property for an arbitrarily long period of time rather than buying it.
Temporary access to sensitive intellectual property may, for example, also allow a hostile party to copy and transfer abroad parts of it. Of course, the licensor may have some level of control over the use of its intellectual property, and any assessment of a possible risk to national security would take this into account. However, in the same way that there is no guarantee that a party selling sensitive intellectual property would ensure that the sale does not give rise to national security risks, there is also no guarantee that a party licensing intellectual property would do so.
By way of conclusion, I appreciate that these amendments are motivated by a desire to limit how assets are covered by the regime without adversely affecting the Secretary of State’s ability to protect national security. They would effectively limit the scope, but they would also inadvertently expose our national security to additional risk, which I have confidence is not the aim of my noble friend. In answer to the question posed by the noble Lord, Lord Grantchester, about how many notifications we expect to arise from procurements, the number is expected to be very low, and we will indeed publish guidance on those procurements.
For these reasons, I hope that the noble Lord will withdraw his amendment.
I have received requests to speak after the Minister from the noble Baroness, Lady Bowles of Berkhamsted, and the noble Lord, Lord Clement-Jones. I will call the noble Baroness first.
I have one comment and one question. My comment is that I understand everything the Minister said and I broadly agree, but I think the Government underestimate the amount of licensing they might find has to be reported, because licensing is the new sale. That is the way everything is going: there is no outright purchase of anything any more; everything is licensed, whether the programmes you use on your computer or anything else. Indeed, accounting standards even drive towards that kind of model because in some instances it becomes increasingly difficult to fit true sales into the new IFRS. I cite IFRS 15 as an example.
I meant to ask my question, but I spoke a bit too spontaneously to remember it. I am interested in follow-on activities. If, for example, you have a clearance on an investment into, say, some university research but that also encompasses a right to have a licence, would that licence to the same organisation automatically be cleared if the investment has been cleared or would you have to go round the loop again? You could apply the same to any assignment of a licence: if it is assigned to an essentially similar kind of business and a previous notification has not resulted in a clearing, can you be confident that you do not have to notify again on the basis of such a previous clearance?
The noble Baroness makes some very good points—I am conscious of her much greater knowledge of this area than I have—particularly the point she makes about licensing being the new sale. I am pretty confident that we have taken these points into consideration. On her specific point about whether investments would be cleared, the true answer is that every notification would be counted separately.
My Lords, I bow to my noble friend’s much superior knowledge on intellectual property issues. I entirely agree with her. That is a good reason for keeping provisions about intellectual property broadly speaking as they are. My noble friend pointed out to me that nowadays even Rolls-Royce engines are licensed as opposed to sold, because so much data is given off by their operation. That is proprietary in itself. So it is very difficult to distinguish between an outright sale and a licence in commercial life.
I wanted to come back because I did not think that the Minister was quite positive enough on Amendment 23 from the noble Lord, Lord Vaizey. I laughed out loud; that particular response was like an episode of “Yes Minister” because it tried to draw distinctions that were not particularly helpful in the circumstances. Somebody was being extremely clever when they put the paragraph together, but I do not think it pushes back the argument why that day-to-day type of software —that sort of absolutely bog-standard commercial licence equipment—should be captured in the definition of a qualifying asset. I will look very carefully at that very well-crafted paragraph again before Report.
My Lords, I would never put my noble friend the Minister in the same paragraph as “Yes Minister”. She is a far classier act than that and a wonderful and effective force in your Lordships’ House. But, in a hesitant fashion, I will say that, when listening to the Government’s response, my concerns continued to grow. It seems that their position, which is perhaps understandable, is that they have crafted a Bill that covers every conceivable transaction. Then they will see how it works in practice, over the next couple of years, and gradually narrow it down. That was the tone of the response that I got from my noble friend Lord Callanan. When my noble friend Lady Bloomfield was responding, I began to wonder whether the sale of an iPhone to a Chinese government official in a phone shop in Westfield in Shepherd’s Bush would count as a transaction.
I echo what the noble Lord, Lord Clement-Jones, said: one has to understand the day to day. That sounds deeply patronising, but it is not meant to be. As one debates the Bill, one has to think about the day-to-day operations of business. It is certainly the case—it is no secret—that businesses have approached all noble Lords to shine a light on the kinds of licences that they procure every day. All I say to the Minister is that, if the Government carry on in this way, once this becomes legislation, they will be inundated with notifications with which they really do not want to deal. It may be that they rely on effective officials and civil servants to fast-track those notifications through, as quickly as possible, but they might find that the tidal wave overwhelms even those excellent officials. I simply make that point; I am delighted to withdraw my amendment.
Amendment 22 withdrawn.
Amendments 23 to 28 not moved.
Clause 7 agreed.
Clause 8: Control of entities
29: Clause 8, page 6, leave out lines 20 to 22 and insert “enable the person to secure or prevent the passage of any resolution in respect of any matter governing the affairs of the entity that is equivalent to a matter that can be passed by way of ordinary resolution or special resolution under the Companies Act 2006.”
Member’s explanatory statement
This amendment tightens the scope of the trigger event so that it does not capture minority investor veto rights that would not give rise to national security concerns.
My Lords, in moving Amendment 29, I shall speak also to Amendment 72. They take us back to some of the issues touched on in our earlier debate on the group beginning with Amendment 15A, and the way that control is exercised in companies and what it means. These two amendments are designed to tease out and provide clarity and protection for third-party investors, who may find that they have invested in a company that, in turn, has been caught up in the provisions of the Bill. I seek the Government’s explanation for how this will work.
Amendment 29 amends Clause 8, “Control of entities”. There is concern about the clause arising from the wide definition of control contained in subsection (6). The real background is as follows. Investments in unquoted companies are normally governed by an investment agreement. When all goes well and the investment performs as expected, the investment agreement remains in a drawer and is never looked at but, sadly, not all investments perform as hoped, and not all directors and managers behave impeccably. Investors need protection against egregious behaviour by company managements.
What form could such behaviours take? It could be a proposal to make an acquisition—not one involving national security issues—the size of which would put the original company at risk if it were to go wrong. It could be a decision to spend a large sum of capital on a scheme that is ill thought out and ill considered, potentially putting the entire venture at risk. It might be a decision by the management to award themselves large salary increases. It might be a decision to recruit to a senior position in the company someone who has a public reputation that is not impeccable or who is perhaps related to one of the existing management team. For obvious reasons, investors need special protection against such behaviours and, as a last resort, the power to block them. It is not clear whether the existence of such blocking powers could bring the company within the control of entities provisions of Clause 8.
These protections for investors have nothing to do with national security; they are concerned with corporate governance and behaviour. An inability to allow those protections will surely be a significant disincentive to third-party investors, so Amendment 29 provides clarity that such protections will not be caught by the Bill. The arguments I have just rehearsed lie behind Amendment 72, which amends Clause 26—“Final orders and final notifications”. It seeks to make it clear that any unwinding or divestment order made by the Secretary of State in no way undermines investor rights of the sort I have been describing. I beg to move.
I shall refer only to Amendment 30, in my name, in this group. Earlier, we discussed the question of material influence. At this point in Clause 8, the fourth case to which we referred—the control of an entity—is, under subsections (8) and (9), effectively material influence. Looking at this, I could not understand why this bit of Clause 8 did not simply replicate Section 29 of the Enterprise Act, which is concerned with obtaining control by stages. I will not read the whole thing, but it is essentially about where a transaction or, in this case, a series of transactions—I will come back to that point—can be treated as occurring simultaneously, but which enables a person
“directly or indirectly to control or materially to influence the policy”
of the enterprise, or enables that
“person or group of persons to do so to a greater degree”.
We have here different language, and I would like the Minister to kindly explain how it works. I can see that it will be a person together with others, because of course it brings in holding an interest or a right by virtue of Schedule 1—working together with others—so that might be sufficient to say “directly or indirectly”. So, that might be covered by a common purpose, the connected arrangements and so on. But subsection (9), as it qualifies subsection (8), appears to suggest that if somebody already exercises a material influence over an entity, the fact that they increase their material influence by stages is not defined as control, unless it is one of the other cases set out in the clause. I think that is a gap. I think it ought to be included, and the clause ought to be constructed in a manner similar to the way in which the Enterprise Act enables control to be acquired by stages. I am not particularly asking for my drafting to be incorporated, but I invite Ministers to see whether it will be simpler to take out subsections (8) and (9) and insert something drawn from and similar to Section 29 of the Enterprise Act when we come back to this at Report.
My Lords, it follows from the speeches of the noble Lord, Lord Hodgson, who introduced Amendments 29 and 72 so well, and the noble Lord, Lord Lansley, who has taken us very carefully through subsection (8), that Clause 8 is a strange beast. It is a mixture of the absolutely specific and then the rather vague in its different cases, which contrast extraordinarily. I have signed Amendment 29, in the name of the noble Lord, Lord Hodgson, which tries to deal with the vagueness in subsection (6) because the scope of that trigger event—the third case—is very broad and unclear, as he described.
It is not clear precisely what resolutions govern
“the affairs of the entity”
as set out in subsection (6). It could potentially capture typical minority investor veto rights or negative protections, which would not give rise to national security concerns. The amendment put forward by the noble Lord, Lord Hodgson, and supported by me, would narrow the scope, while ensuring that where a person can pass or block resolutions that cover matters akin to those covered by, say, ordinary and special resolutions under the Companies Act 2006, the ability to secure or prevent those resolutions would still be caught—even where the thresholds for passing those resolutions differ from the thresholds for passing ordinary and special resolutions under the Companies Act.
If shareholders of an overseas company can amend the company’s constitution, or wind up the company by passing a resolution with a threshold of 60% of the votes, any shareholder that increases their shareholding from less than 60% to 60% or more will be caught by the third case, if this amendment is accepted. At the moment, that subsection really repays some attention and I very much hope that the Minister will reply positively on this.
Amendment 72, also put forward by the noble Lord, Lord Hodgson, and explained clearly by him, would
“give investors certainty that any divestment or unwinding order will not render their contractual arrangements unenforceable”,
so they could contractually anticipate the consequences of an unwinding order. That is extremely important. If you cannot do that and everything is void, then you cannot make arrangements that stick after the voidness.
A long time ago when I knew some law, I think we talked about severable contracts. One would find that part of a contract was void but provisions that applied to circumstances in which the contract was void, or voided, would still subsist. It is important that those provisions continue after the voiding decision has been made and I very much hope that the Bill can be amended accordingly; otherwise, many companies trying to anticipate its impact will be absolutely confounded. They will have no way through what will be, in any event, a pretty difficult commercial situation.
My Lords, I put my name down to speak in this group to support my noble friend Lord Lansley’s Amendment 97, which he has not spoken to. I shall speak to it in this group anyway in case he had no further intention of speaking to it when it comes up later as we go through the amendments on the Marshalled List.
Amendment 97 would remove former spouses from the list of connected persons who are defined in Schedule 1. I was fairly sure that this was a novel and unwelcome addition to the normal scope of connected persons found in legislation. In my view, it is not a common-sense interpretation of what a connected person is. For example, if I had had a brief marriage in my youth, Schedule 1 would continue to count my long-gone husband as a connected person of mine for ever, which is just not sensible. It also includes former cohabitees, so the possibilities of connected persons seem to be endless.
My view of the definition of connected persons was compatible with tax law, company law and even money laundering rules, but I discovered that this wider definition, extending to former spouses, is in the Insolvency Act 1986, which was a surprise to me. That definition was later picked up by the Pensions Regulator. The fact that precedents have somehow managed to find their way into the statute book or into regulations does not make it right, and I will support my noble friend Lord Lansley’s Amendment 97 if he chooses to propose it at some stage in the future.
My Lords, it would seem, when looking at Clause 29 and listening to the reasoned arguments of the noble Lords, Lord Hodgson and Lord Clement-Jones, that the Government would be hard put not to agree with the objectives they set out for this amendment, so I suppose we have to listen to the Minister to hear why the Government think that the Bill already does the things which this amendment seeks to achieve, unless the Minister wants to explain why those objectives are wrong. There is a similar argument to be made about Amendment 72, which is more complex. Again, why would the Government not wish to achieve what this amendment is seeking to achieve? If they do, it is not clear in the Bill.
I dubbed Amendment 97 the Gilbert and Sullivan amendment, because you have the cousins, the sisters and the aunts all lining up in the connected parties list, or perhaps not. The noble Lord, Lord Lansley, would probably have made a fabulous argument, but in his stead the noble Baroness, Lady Noakes, makes very good points.
Coming back to the substantive point about Clause 8, we have had a long debate on the group beginning with Amendment 15A, and a smaller, shorter debate that has focused on similar issues. My noble friend Lord Clement-Jones called Clause 8 a hybrid, being both specific and broad. I hope the Minister and the Bill team will take from this that there is work to be done on this clause. It is quite clear from the debate we have had that tightening and clarifying are required to take the Bill into Report. Otherwise, I suspect there will be a lot of recalls coming from the sort of debate we have seen, particularly in the Amendment 15A group, but also, to some extent, from this one.
My Lords, I am still slightly reeling from having to find names of people long since in my past, but maybe Hansard can piece things together.
We have heard today, both in this group and in others, and in the representations that we have all seen, that there are considerable investor concerns about bits of the Bill, some of which Amendments 29 and 72 in particular seek to address. It is important to recognise, although it has been made clear by people in Committee, that the Bill marks a radical transformation of national security screening for mergers and acquisitions. It is a new and different regime, so it is essential that the Government not only maintain business confidence but gain more confidence from businesses and the investors in them. That was why, on the first day of Committee, we set out why we thought we needed a definition of national security to provide clarity for businesses and investors and to build trust in the regime.
However, as has been said in this group, one of the things that would help that confidence is better drafting. The noble Lord, Lord Fox, is right when he says that more work is needed. I know it is the second day back at school, but it feels as if the homework has been self-marked and now needs a slightly more thorough look. As everyone has said, it is not that anyone has objections to the purpose of the Bill; the concerns are about the wording and perhaps the breadth of its scope.
Clause 8 defines the circumstances in which a person gains control of a qualifying entity, thus constituting a trigger event that may be subject to assessment under the regime. This is clearly a key part that must be got right. Amendment 29 would narrow the third circumstance to make sure that it does not capture minority investor veto rights, as has already been mentioned. Perhaps the Minister could clarify whether it is expected that minority investment veto rights would be captured.
The group of amendments raises some broad questions about the number of cases in which a person gains control of a qualifying entity. We are interested in why other cases are not included. We do not necessarily want them included but want to work out the limits that brought certain things to be put in the Bill. It is quite interesting to know what is not there. For example, is an acquisition involving state-owned entities or investors originating in a country of risk to UK national security not a concern? It is not mentioned. Neither is a person who becomes a major debt holder and could therefore gain influence over the entity’s operation and policy. Is that not of interest? It is not that I want to include them, but I am really interested in how the definitions were put together. Maybe the Government, either in writing afterwards because it may be more detailed, or in answer today could spell out why these particular cases were selected and the sort of advice that was taken in the selection process.
Amendment 97, which the noble Baroness, Lady Noakes, has discussed, raises the question of why a former partner should remain a person of concern. Probably all of us here have had difficulties with being a politically exposed person, a PEP. We have found it very difficult sometimes just to open or become a signatory to a charity’s accounts because of being a PEP. A number of difficulties were had, but I think they have been got over now after some work in this House. It really did affect those of us who have step-children and former partners and siblings we never see, and things like that.
This issue needs a little more clarification and protection, if you like. No investor or anybody involved in this wants to get caught up by something which they could not have thought at the time was of any interest. I understand that it might look suspicious if somebody divorced their partner two days before to get rid of some assets, but this is a very wide net. Perhaps the Minister can explain why this clause is needed and needs to be drawn quite as widely. This is a net that would catch whales, never mind tiddlers.
My Lords, I begin by briefly extending my thanks to my noble friends Lord Hodgson and Lord Lansley for tabling the amendments in this group relating to the circumstances determining the control of entities in the Bill, as well as arrangements and the impact of final orders on contracts.
I am conscious of the complexity of some of the matters that we are debating. If I am not able to explain or elucidate these points fully in my comments, I will of course write to noble Lords. I will also be happy to discuss them with noble Lords outside the Committee. Some of these things are quite difficult to get straight across a table like this.
I will start by addressing my noble friend Lord Hodgson’s Amendment 29. For the purposes of the Bill, Clause 8 sets out the circumstances in which a person gains control of a qualifying entity. It explains the four ways in which control can be gained. Subsection (6) sets out the third trigger event:
“The third case is where the acquisition is of voting rights in the entity that (whether alone or together with other voting rights held by the person) enable the person to secure or prevent the passage of any class of resolution governing the affairs of the entity.”
I think that there is broad support for that concept. However, Amendment 29 seeks to narrow this so that only acquisitions of such voting rights over matters that are equivalent to those which require the passing of ordinary or special resolutions under the Companies Act 2006 would be a trigger event.
I sincerely pay tribute to my noble friend for seeking to ensure that the regime is as reasonable and proportionate as possible. I believe that his intent is very much to seek to exclude acquisitions of minority veto rights from constituting trigger events. However, the Government consider that the Bill already achieves this goal to some extent as subsection (6), which my noble friend seeks to amend, is of course subject to the qualifying provision in subsection (7), which explains how references to voting rights in an entity apply to different sorts of entity.
In the case of an entity that has a share capital, this means voting rights conferred on shareholders to vote at general meetings of the entity on all or substantially all matters. In the case of an entity that does not have a share capital—this is where some complexity arises—this means the voting rights conferred on members to vote at general meetings of the entity on all or substantially all matters. The important words in both cases are
“all or substantially all matters.”
I therefore suggest, with deference to my noble friend, that minority veto rights would be captured by subsection (6) only where such voting rights provide the holder with a right to vote on all or substantially all matters, which perhaps takes it rather beyond the worry that some people had about these minority rights being constrained.
I hope that this puts the mind of the noble Baroness, Lady Hayter, at rest but, again, if a further discussion is needed to clarify how this works, I would be very happy to hold one. I also hope that the Committee agrees that it is only right that minority veto rights, in circumstances where they really are broad enough to cover all or substantially all matters, should be in scope of the Bill. For all intents and purposes, they are the same as majority rights if they are able to do that.
I am grateful to my noble friend Lord Lansley for Amendment 30 in respect of Clause 8 and the definition of control of entities for the purposes of the Bill. This clause reflects the fact that there are ways of obtaining control over an entity other than just acquiring shares or voting rights at significant thresholds. As part of the new regime—I say without excuse that we have made this embracing because of the importance of national security—the Secretary of State must be able to scrutinise lower stakes of shares and votes or other rights or interests acquired by a person that allow them materially to influence the policy of the entity. This is consistent with the UK’s merger framework, and businesses and investors alike have welcomed our adoption of the familiar material influence concept that they have been accustomed to under the Enterprise Act 2002.
I should be clear that we see material influence as the lowest rung on the ladder of control for the purposes of the Bill. It is not a scale in and of itself. We are not looking to degrees of material influence; we are saying that material influence is material influence, and as such should be the lowest rung on the ladder of control.
I am afraid that my noble friend’s amendment would introduce an unwelcome element of uncertainty in this. I believe that businesses and their advisers are familiar with the concept of material influence, and this amendment would adapt the concept with its reference to “a greater degree”. I am not really sure that people would understand how you scale material influence up and down in that way because it appears to create a sliding scale of material influence. I appreciate the spirit that lies behind the amendment, but it would introduce a frankly impossible complexity for people to understand.
I am afraid that, contrary no doubt to my noble friend’s intention, it would therefore threaten the clarity and predictability of the UK’s system and in itself would see the investment security unit deluged with a wave of notifications—something that I know noble Lords are keen to avoid—for every right or interest acquired by those already holding material influence but less than 25% stakes. It would cause people to have to think, “Gosh, have we achieved a bit more material influence by doing this? Does this mean that we have to notify again?” We are trying to see it as a non-scalable, absolute concept.
My noble friend Lord Lansley also asked why we have not used other concepts in respect of bringing enterprises under control under Section 26 of the Enterprise Act 2002, such as control in stages. That comes back to my previous point. It is because the Bill covers a much broader range of circumstances than the Enterprise Act. While there are things in common with the competition assessment framework for mergers in places, we have deliberately created a bespoke regime to reflect its sole focus on risks to national security. By creating individual trigger events at certain share or vote thresholds and the acquisition of material influence over policy, I hope that the Bill makes clear to parties the circumstances in which control can be gained over qualifying entities for the purposes of this regime. This approach, combined with the trigger events relating to assets, provides the holistic regime needed to address the risks we face.
Amendment 72, tabled by my noble friend Lord Hodgson, would add wording to Clause 26 to make it clear that any final order made by the Secretary of State would not result in the voiding of any underlying agreements between parties. In this instance, I am pleased to be in a position to completely assuage my noble friend’s fears.
Clause 26 sets out the Secretary of State’s power to make a final order following a call-in and assessment of a trigger event. In issuing a final order, Clause 26(5)(a) —I see that the noble Lord, Lord Clement-Jones, is already examining this paragraph to see whether he agrees with my interpretation—gives the Secretary of State the power to require a person “to do, or not to do, particular things”. I am advised that this does not include the power to void contracts or other agreements. This is because the power “to do, or not to do, particular things” does not extend to being able to decide the legal validity or enforceability of a contract or agreement.
The final order may require an acquisition to be unwound or the acquirer to divest themselves of their acquisition, or a part of it, but, as we know from other amendments tabled on day one of this Committee, that is not the same as voiding. Following a final order, which requires an acquisition to be unwound or divested, it will be up to the parties to implement the rest of their contract.
Amendments 97 and 98, also tabled by my noble friend Lord Lansley, allow us to get into the detailed provisions of Schedule 1, which I am sure we will all do with enjoyment. Paragraphs 8, 9 and 10 of Schedule 1 deal with the issue of “connected persons” for the purposes of the Bill, whereby two or more persons who are connected to each other are each treated as holding the combined interests or rights of both or all of them. This means, for example, that a husband and wife who each own 10% of shares in a company are, for the purposes of the Bill, deemed to each hold 20% of shares as they are connected persons. I believe my noble friend’s amendment would remove former spouses, former civil partners and former cohabitees from the circumstances where two or more persons are deemed connected persons.
It would be inappropriate to speak on behalf of your noble Lordships—I would not dare to presume to do so—many of whom might have a thing or two to say on the cordiality or otherwise of their relationships with former partners, but we must recognise that the nature of those relationships may, in the extremely limited circumstances where they arise under the Bill, lead to parties operating in a connected fashion. The Government, therefore, consider that the approach in the Bill is the right one. It broadly emulates the existing approach under the Enterprise Act 2002 when determining whether there has been a merger, as provided for by the definition of “associated persons” in Section 127 of that Act. Of course, this does not mean that acquisitions by such connected persons are any more likely to raise risks to national security, but it closes off a potential loophole.
Amendment 98 continues our examination of the points of Schedule 1. Paragraph 2 explains how joint arrangements, whereby two or more persons arrange to exercise their rights in a predetermined way, are covered by the Bill. Paragraph 5 explains how rights are treated as held by a person who controls their exercise by virtue of an arrangement. Paragraph 12 defines “arrangement” for the purposes of the schedule.
The amendment seeks to provide greater flexibility for when an arrangement may be considered to exist under Schedule 1. It would provide that an arrangement may be determined by reference to
“its nature or terms, the time it has been in existence, actions taken by persons in apparent furtherance of an arrangement, or otherwise.”
The amendment would not retain the current stipulation in paragraph 12(2) of Schedule 1 that something does not count as an arrangement
“unless there is at least some degree of stability about it (whether by its nature or terms, the time it has been in existence or otherwise).”
The current approach of the Bill mirrors the definition of “arrangement” in Schedule 1A to the Companies Act 2006, in relation to the register of persons with significant control over a company. It is important that the Bill looks for consistency with other terms familiar to investors, advisers and companies, wherever possible. The Government believe that businesses, investors and their advisers will welcome the consistency of that approach.
The most significant addition is the reference to
“actions taken by persons in apparent furtherance of an arrangement”.
We do not consider that there is anything currently in paragraph 12(2) that would prevent such circumstances being taken into account, so the point is not required. The amendment would remove the need for there to be some degree of stability about the arrangement, which we would consider a misstep. A one-off co-ordination on something relating to the running of an entity is unlikely to signify an arrangement, such that the combined rights of the persons should be treated as held by each of them.
Again, I apologise for the complexity of some of these arguments. To conclude, for the reasons that I have outlined, the Government do not consider the amendments tabled by my noble friends necessary or appropriate. I gently ask that they be withdrawn.
I have received requests to speak after the Minister, from the noble Lords, Lord Lansley and Lord Fox. I first call the noble Lord, Lord Lansley.
My Lords, first, I express my warm thanks to my noble friend Lady Noakes, who happily introduced Amendment 97 far better than I would have. I had neglected to notice that we had reached Schedule 1, since we had not even reached the clause that introduced it. Not noticing that was entirely my fault.
If I may, I will go away and read what my noble friend said about Amendment 98, because it is purely a matter of trying to get the drafting right. He may well be correct on that.
On the other two amendments, I kindly ask my noble friend to reflect. The issue about former spouses reflects what is said in Section 127 of the Enterprise Act 2002, but this includes cohabitees, who are not in Section 127, which was subsequently amended to include civil partners. “Associated persons” has turned into “connected persons” and has broadened in ways that nobody told us was a policy.
My other point about the Enterprise Act is that I do not understand what my noble friend is saying. Earlier, he told us that the Government would not issue new guidance about material influence, because the CMA has issued guidance. I have read the CMA’s guidance and it clearly includes reference to obtaining control by stages. Obtaining control by stages, in Section 29 of the Enterprise Act 2002, includes a reference to that
“person or group of persons … materially to influence the policy of … the enterprise … to a greater degree”.
I have not invented this; it is in the Enterprise Act 2002 now. If my noble friend proposes to use the CMA’s guidance and says that everybody is happy that we are using an established understanding of what material influence is, I suggest we go away and look at whether we can use the language and guidance of the Enterprise Act to make it consistent with the practice that people have understood for the best part of 20 years.
This covers similar territory to Amendment 30 and the answer that we were given to it. I will read that carefully, as some of the answers are complex, as the Minister himself said. I ask that the Minister reads his answer carefully because, knowing what he knows from his previous life, there will come a realisation that we are not quite where we should be on this.
[Inaudible.] I am always slightly nervous when I hear Ministers talk about creating bespoke regimes because it brings to mind the gaps we might inadvertently allow to appear. The length the Minister has had to take to try to explain the way Clause 8 will work—I thank him very much for doing so—indicates that we need to look again at its practical implications. In essence, we are trying to decide whether the shoe pinches and whether it pinches in an unhelpful way. I am not sure that the “substantially all” get-out clause will always work, because in some cases investors will have very substantial rights or protection that might affect substantially all the activities of the company. But that is something one needs to take advice on. I am extremely grateful to the Minister for the trouble and time he has taken to answer the debate. For the time being, I beg leave to withdraw the amendment.
Amendment 29 withdrawn.
Amendments 29A and 30 not moved.
31: Clause 8, page 6, line 38, at end insert—
“(10) For the purposes of this section, acquiring a right or interest in, or in relation to, an entity by way of security does not constitute obtaining control over the entity, and any such rights or interests held by way of security do not constitute any of the cases described in this section.”Member’s explanatory statement
This amendment seeks to ensure that transactions are only caught where the person gains actual control of a qualifying entity and would exempt securities or other situations where no effective control is obtained.
My Lords, I speak to Amendments 31 and 33, which relate to the continuing debate on Clause 8 and Clause 9 on the control of assets. The effect of Amendment 31 would be to ensure that an event is triggered only where the person gains actual control of a qualifying entity, and it would exempt securities and other situations where no effective control is obtained.
The definition of “control” in Clause 8(1), as has already been said, is framed very widely. It refers to 25%, 50% and 75% shareholding or voting thresholds, which correspond to those applied in the context of the people with significant control regime. Clause 8 also includes provisions adapting the above scenarios to cater for entities that do not have a share capital, such as partnerships.
This should be read alongside Schedule 1, which I suspect the Minister might allude to, which provides for particular cases in which a person is to be treated, for the purposes of the Bill, as holding an interest or right. In particular, paragraph 7 of Schedule 1 states:
“Rights attached to shares held by way of security provided by a person are to be treated as held by that person … where apart from the right to exercise them for the purpose of preserving the value of the security, or of realising it, the rights are exercisable only in accordance with that person’s instructions, and … where the shares are held in connection with the granting of loans as part of normal business activities and apart from the right to exercise them for the purpose of preserving the value of the security, or of realising it, the rights are exercisable only in that person’s interests.”
However, this clarification does not fully account for the situation where a lender becomes the registered holder of shares in security, as is the case with the legal mortgage over shares under the law in England and Wales, or a shares pledge under the law of Scotland.
Where the shares in an entity are transferred in security to a lender, the lender may find first that they have gained control of the entity under scenario one, notwithstanding the fact that under the terms of the security actual control remains with the security provider, for example, through the voting rights being exercisable only in accordance with the security provider’s instructions, as envisaged by paragraph 7 in Schedule 1 and that secondly, they would have triggered the second limb of the notifiable acquisition test.
As paragraph 7 of Schedule 1 refers only to:
“Rights attached to shares held by way of security,”
arguably it covers only the rights attaching to shares and not the ownership of the shares themselves—in other words, the rights rather than the ownership. As a legal mortgage over shares is unusual in England and Wales, but a shares pledge is the only way to obtain fixed security over shares under Scots law, this issue disproportionately affects Scots law fixed security over shares; that is, fixed security over shares in Scottish companies. As I have said in previous interventions on this Bill, the importance of the financial services sector and therefore the law of Scotland requires this to be addressed.
Effectively, we are talking about a situation where, for example, a bank providing a loan to a business takes security over shares unrelated to that business. In that context, the bank neither seeks nor exercises control of the shares; similarly if a parent company for example gives security to its bank over the shares of a wholly-owned trading subsidiary. In this case, the parent company retains direct day-to-day control, which would pass to the bank only in the case of default. Yet, as drafted, there is a risk that taking a fixed security over Scottish shares could trigger the provision, which would be highly disadvantageous to the Scottish economy specifically.
Given that a notifiable acquisition that is completed without the approval of the Secretary of State is void, the Law Society of Scotland argues that paragraph 7 of Schedule 1 should be extended to cater for the situation where shares are held in security by a lender. Paragraph 7 should similarly be extended to carve out security over qualifying assets since the security could be read as giving the security holder rights equivalent to those set out in Section 9. It would be helpful to include an express carve-out that nothing here is triggered simply by the act of holding any asset in security.
The society recognises what the Government are trying to achieve and addresses the situation where the borrower defaults and the terms of the security usually dictate that the asset will be sold. The transaction will therefore form a trigger event in the same way as any other transfer. I guess in rare circumstances, the holder of the security—that is, the lender—might seek to appropriate the asset. However, such appropriation could be caught within the meaning of a trigger event and if it were determined that the lender in question was not a suitable person to acquire ownership and control of the entity, the society considers that it would be possible for the conditions attached to the transfer to stipulate that the new owner would be obliged to sell their shares. They would thus be compensated for the value of their shares and any national security risk would be avoided.
I turn to Amendment 33, which has a similar purpose addressed to assets—namely, to ensure that transactions constitute a trigger event only where the person gains actual control of a qualifying entity and to exempt securities or other situations where no effective control is obtained. Where a lender holds as asset in security that lender may find that it has gained control of that asset, notwithstanding that under the terms of the security actual control remains with the security provider where they are in possession of the security. The second limb of the notifiable acquisition test may be triggered even when no effective control has passed.
Under Scots law, fixed security over incorporeal moveable property, which in English law is intangible property, can be achieved only be transferring the asset to the creditor. This includes, among other things, shares, insurance policies, contractual rights and intellectual property. For those assets where a real right of security can be treated without the transfer of ownership, such as land, a new real right is still being created in favour of the creditor. This right contains certain inherent negative controls—for example, a prohibition on sale—and certain positive controls: often the borrower must insure the property. I think we all know that this is common practice in mortgage arrangements and, as drafted, there is a risk that taking a fixed security over a Scottish asset could trigger this provision and this also would be highly disadvantageous to the Scottish economy.
Taking this into account, it would also be helpful to include an express carve-out, where nothing is triggered by the act of holding any asset. As stated in relation to the previous amendment, provision can be put in place to ensure that the Government’s interests are protected in the event of a default or the transfer of the assets, if triggered in the normal way. As already stated in the context of Amendment 31, such appropriation would be caught within the meaning of the trigger event. Conditions could attach to the transfer to stipulate that the new owner would be obliged to sell the asset; they would be compensated and national security risk avoided.
It appears that the Law Society of Scotland has identified practical issues for financial transactions under Scots law, which these amendments seek to address while fully recognising the Government’s national security objectives. It is a Scots law difference which could affect Scottish banks and Scottish mortgages but does not appear to have been considered in the Bill’s drafting. I hope that the Minister will be able to take this away and confirm whether the Bill needs to be changed in this way to ensure that the Scottish economy does not suffer what could be significant disadvantage as a result. I beg to move.
My Lords, I have tabled two amendments in this group, Amendments 34 and 35, which I shall now address. Again, they seek to provide clarity on the detailed operation of the Bill. As before, I am grateful for the support of the noble Lord, Lord Clement-Jones, and the Law Society.
Amendment 34 proposes a clarifying change to Clause 10(2)(b). It is argued that the existing wording of the clause means that any changes of ownership within the group of a company falling into one of the relevant sectors will require a notification. For example, an ultimate parent company might hold an interest in one such company through a wholly-owned subsidiary and, as a result of a decision to reorganise the group, it is decided that the parent should hold the interest directly. The holding company has the shares transferred to it. Any such holdings which are acquired after the commencement date, when the Bill becomes an Act, will have been through the security screening process, so there is surely no need for further consideration of what is essentially a paper transaction.
That leaves us with the question of how to deal with similar intragroup transfers where the initial investment was made before the commencement date. In such cases, of course, no screening will have taken place. Amendment 34 would require such changes to go through the standard notification and approval process.
Amendment 35 again seeks to provide clarity about how the Bill will operate in practice. Applying the current drafting of Clause 10 to a group which has multiple separate entities appears to require each of them to make a separate notification of a potential trigger event. That surely cannot be a sensible approach and, if followed, is likely greatly to increase the bureaucratic burden of form-filling and checking, and be a strain on the ISU. Amendment 35 establishes that, in the case of a corporate group, only one trigger event would arise and only one such notification would therefore be required.
I speak in support of Amendments 31 and 33. As I have the same brief, I do not intend to speak for long but I support all the arguments put forward by the noble Lord, Lord Bruce of Bennachie. I also state that I am a non-practising advocate of the Scottish Bar and a member of the Faculty of Advocates. If my noble friend the Minister is not minded to support the amendments, may I suggest that he meet the noble Lord, Lord Bruce, and me—if the noble Lord, as the author of the amendments, is agreeable—and, I hope, representatives from the Law Society of Scotland?
I honestly believe that this is a potential unintended consequence of the Bill, which could seriously disadvantage not just the Scottish legal profession but, more importantly, the financial service sector and financial investment sector in Scotland, which, as the noble Lord said, is sizeable in its contribution to the economy and employment. I endorse everything that he said and congratulate the Law Society of Scotland on bringing this to our attention. My understanding is that if the Bill is enacted as drafted, it could have grievous consequences for Scots law, Scottish practitioners and the financial sector. It behoves the Government to look favourably on the amendments. If not, I hope we can have the earliest possible meeting to discuss these matters in more depth.
My Lords, I am not going to speak for any length on Amendments 31 and 33. I just hope that the Minister has a battery of Scots lawyers advising on these amendments because it sounds as if they could be of huge significance and the issues under Scots law may well have been ignored in the drafting of the Bill. I am looking forward to hearing the Minister’s response, no doubt on advice.
I support, in particular, Amendments 34 and 35, tabled by the noble Lord, Lord Hodgson of Astley Abbotts, which he introduced so well. The common factor is that the existing wording of Clause 10(2) appears to catch intragroup investments where an ultimate parent company holds an interest indirectly through a wholly-owned subsidiary and decides to transfer the interest to itself so that it is held directly. Such transactions do not raise new or additional national risks as there is no change in the substantive control. For mandatory filings, as he also described, the initial acquisition will already have been notified and reviewed. Proposed Amendment 34 therefore makes sure that only those transactions where the initial investment took place before the commencement date are caught; they will thus not have been reviewed. Without this provision, each entity within a corporate group would need to make a separate notification for a single trigger event.
Amendment 35 deals with cases where corporate group companies comprise multiple, separate entities because Clause 10, as drafted, also appears to require each entity within the corporate group to make a separate notification for a single trigger event that takes place relating to the group.
These are well-crafted amendments and were well described by the noble Lord, Lord Hodgson, who, as he said, is supported by the Law Society. We have a Law Society group of amendments here relating to England, Wales and Scotland. I am sure that the Minister will have huge pleasure in responding on this group.
My Lords, I have no new information to bring to the Committee. As we have heard, a number of transactions appear likely to be caught under the Bill which are probably outwith the intention of the authors of the Bill. I think the Minister has to explain why these provisions are in it, rather than noble Lords who tabled amendments having to explain why the provisions should be taken out. We look forward to his explanation of that and, perhaps, his reassurance to the Committee that the Bill is really fit for purpose across the whole of the UK, including for the Scottish legal system.
My Lords, with thanks to all noble Lords who have spoken with such knowledge and eloquence on the amendments tabled, I will begin by speaking to Amendments 31 and 33 in the names of the noble Lord, Lord Bruce of Bennachie, and my noble friend Lady McIntosh of Pickering. The noble Lord, supported by my noble friend, clearly raises important questions on the juxtaposition of Scottish law with the powers that we are looking at in this group.
I am grateful to the Law Society of Scotland for having supported this and, if I may, rather than attempting to deal with these points on the hoof I will take them away. I commit to being in communication with noble Lords as to what needs to be done, if anything, in relation to them. More generally, perhaps putting the important Scottish points on one side for the moment, I completely agree with the noble Baroness, Lady Hayter, that the Bill has to work for every part of the United Kingdom.
These amendments concern Clauses 8 and 9 and the circumstances where acquisitions of control of entities and assets take place for the purposes of the Bill. They seek, I believe, to ensure that rights or interests in, or in relation to, entities and assets held by way of security are exempt from the regime, on the understandable basis that lending and debt arrangements do not give rise to control. Let me agree right away with the thrust of the concern expressed by the noble Lord and my noble friend. The Government do not consider that the provision of loans and finance is automatically a national security issue. Indeed, it is part of a healthy business ecosystem which enables businesses to flourish and grow in this country. Lenders need confidence that they can see a return on ordinary debt arrangements to provide that service, which is of course vital to the proper functioning of the economy. But we must recognise that there are, in a small number of cases, national security risks that can be posed through debt. I will come to this in a moment.
Access to finance is crucial for so many businesses and, to grow and succeed, they will often take out loans secured against the very businesses and assets they have fought so hard to build. That is why the Bill allows the Secretary of State to scrutinise acquisitions of control that take place when lenders exercise their rights over the collateral. The important point is that it is not where the lenders have hypothetical rights but where they exercise their rights over the collateral. This approach is needed because it will prevent hostile actors artificially structuring acquisitions in the form of loans which, following a swift and convenient default—let us put it that way—might otherwise allow them to evade scrutiny. This is a proportionate approach, and one that I am confident will keep finance flowing into UK companies and infrastructure while ensuring that our national security can be protected.
Amendments 34 and 35 in the name of my noble friend Lord Hodgson relate to Clause 10, which, in combination with Schedule 1, sets out various ways in which rights or interests are to be treated, for the purposes of the Bill, as held or acquired. These include indirect holdings whereby, for example, a person holds an interest or right indirectly if that person has a majority stake in an entity that is part of a chain of entities, each of which holds a majority stake in the entity immediately below it, the last company in the chain of which holds the interest or right. That example is relevant because Amendment 34 seeks to ensure that intragroup investments are not covered by Clause 10 and, as a result, Schedule 1 as well.
My interpretation is that my noble friend wishes to prevent internal reorganisations within the same corporate chain of entities from resulting in trigger events by virtue of Schedule 1. I confirm to the Committee that, in the vast majority of cases, that will not have an impact but, depending on the facts of the case, internal reorganisations may be in scope of the Bill. That is because there may be rare cases in which internal reorganisations pose national security risks. That may be true even if the ultimate beneficial owner is the same before and after the trigger event: for example, if there are concerns about changes to the level of control acquired by other links in the chain as a result of the internal reorganisation.
Clause 10(2)(b), which the amendment seeks to amend, is therefore important, because it makes it clear that in circumstances where a person is already treated as holding an interest or right, when something happens that would be regarded as the acquisition of that interest or right by the same person, then it is treated as such.
This means, for example, that an ultimate beneficial owner at the top of a corporate chain transferring existing majority holdings held by entities lower down in the chain to those above them could be a trigger event if it can be regarded as an acquisition by virtue of Schedule 1.
Amendment 35 would insert a new subsection into Clause 10 to provide that only one trigger event arises where more than one person is treated as acquiring an interest or right due to the provisions of Schedule 1. I can clearly see that my noble friend is seeking to help the Government by looking to ensure that the investment security unit is not deluged by duplicate notifications by corporate chains each time a new acquisition is made by an entity towards the bottom of the chain.
I can assure him that we are carefully designing the notification process and forms so that, wherever possible in situations such as these, a single notification providing all the details of the entities in the same corporate structure can be considered together. That is different from his amendment, which would seek to provide in the Bill that only one trigger event takes place. I am afraid that the Government consider that this would introduce ambiguity into the Bill, as it would not make it clear which trigger event is the one which takes place, and which should be discounted.
Hostile actors could try to exploit such a provision to avoid scrutiny by using shell companies at the bottom of long and complex corporate chains to acquire sensitive entities and assets. If only one trigger event is considered to take place by virtue of Schedule 1, the entity immediately above it in the chain could notify the acquisition, while not necessarily disclosing the control acquired by more troubling persons higher up the chain. In these circumstances, the amendment would mean that these could not be treated as separate trigger events, whereas surely they should be.
With the arguments I have outlined and my undertaking to write to the noble Lord, Lord Bruce, and my noble friend Lady McIntosh about the important Scottish matters they raised, I ask that the noble Lord agrees to withdraw the amendment.
I have received one request to speak after the Minister, from the noble Lord, Lord Clement-Jones.
My Lords, I thank the Minister for his response. No doubt the noble Lord, Lord Hodgson, and my noble friend Lord Bruce will respond very positively to the Minister’s offer on Amendments 31 and 33.
I must say that on Amendments 34 and 35 the Government are really tying themselves in knots in the way that the mesh—to come back to the Minister’s splendid fishing analogy—is woven in this Bill. This is catching minnows—it is catching transactions such as these intragroup transactions. I will read very carefully what the Minister has to say, but, given the number of fish caught by this that will have to be continuously thrown back in the sea after a period—as we have discussed, one that could be unduly protracted—this really is a catch-all Bill the longer we talk about and debate it. I do not think any of us is particularly comfortable with that in this Committee; we have to find a way of making it more proportionate. That will be the key task of the House as the Bill goes forward.
My Lords, I thank the noble Lord for that comment. Let me take it on the chin and, if I can, answer it.
Some of the hostile actors that we are trying to prevent acquiring sensitive matter are extremely sophisticated and wily. It is not appropriate to go into details, but we know this. We know that they are absolutely capable of structuring transactions to find the most minute loopholes and acquire control of assets that affect our national security. I think we all accept the premise that national security is paramount, and to protect ourselves against these threats we have to have these complex arrangements.
I completely understand noble Lords’ points that some of the things we are describing are complex almost to the point of absurdity. However, they have to be if we are to protect ourselves against these hostile actors. This is key and something that we will have to keep coming back to. It is why it will be so incumbent on the investment security unit to act sensibly and pragmatically. When things have to be notified to catch the important fish—in the noble Lord’s analogy—they will have to be dealt with quickly and moved out; otherwise, we risk circumventing the very thing that we are trying to avoid with this Bill, which is threats to our national security.
I thank the Minister for his response. Given the detail of the response to the other amendments, I might have hoped that the department would be able to give us a little more detail on Amendments 31 and 33, but I genuinely accept his offer to write. I thank the noble Baroness, Lady McIntosh, for her support and suggest that the Minister takes up her offer, on behalf of us both as well as the Law Society of Scotland, to meet to try to find a way through this, because there are clearly some practical concerns about the impact of the Bill as it stands.
These amendments do not seek to undermine the Bill in any way. The concern is that the Bill unintentionally undermines the good working of the legal and financial services sector in Scotland, and it is clear that the Bill needs to take that into account. I accept and appreciate the sincerity of the Minister’s offer, but I suggest that a meeting that includes the Law Society of Scotland would be a more practical way forward than just an exchange of letters. I beg leave to withdraw the amendment.
Amendment 31 withdrawn.
Clause 8 agreed.
Clause 9: Control of assets
Amendments 32 and 33 not moved.
Clause 9 agreed.
Clause 10: Holding and acquiring interests and rights: supplementary
Amendments 34 and 35 not moved.
Clause 10 agreed.
Clause 11: Exceptions relating to control of assets
36: Clause 11, page 7, line 20, at end insert—
“( ) For the purposes of this Act a person is not to be regarded as gaining control of a qualifying asset to the extent that the use of a qualifying asset is conducted wholly within the activity of a United Kingdom-based higher education or research institution.”Member’s explanatory statement
This amendment would provide a “safe harbour” in relation to assets wholly controlled within UK higher education and research institutes.
My Lords, we come to a group that contains just one amendment in my name, Amendment 36, which touches on the issue of higher education. We will, at a later stage, deal with the question of the time taken to review notifications. That is a pretty central issue for higher education, but I do not propose to talk about that in this group.
Judging from the earlier discussion between the Minister and the noble Baroness, Lady Hayter, about the meeting to discuss research and higher education interests, I am sure that this is well known to Ministers. The purpose of Amendment 36 is to create a safe harbour for activity undertaken by and maintained within British universities and research institutes. I can perfectly well see the objection to a safe harbour for this activity. It was well illustrated by a report published by my noble friend Lord Johnson of Marylebone and looking at the extent to which there were, in his instance, Chinese interests in university research in this country. Something like 30% of all principal research activity in higher education has Chinese interest somewhere in it.
The point is this: Clause 9, which we have just agreed, extends as structured to the right to use qualifying assets. The breadth of qualifying assets, when one considers them alongside the right to use them, brings in the Lambert report principles, which universities use for research activity. They extend the right to use to their financial, or mostly industrial, sponsors, so a large number of research activities in universities might be the subject of notifications.
I will shorten this debate by saying that, if one does not go down the route of a safe harbour for universities, we need a very positive approach to Amendment 88, in the name of the noble Baroness, Lady Hayter, which says that universities need specific, detailed guidance about the circumstances in which they need to make notifications. Otherwise, the number of notifications will be very large and there will be a substantial diversion of activity of the investment security unit away from areas where the risks are greatest to volume activity, where risks are lower.
I know that universities have plenty of experience—I will come on to in the next group of amendments—of working with the Export Control Joint Unit. If they have a similar relationship with and understanding of the requirements when notification is appropriate and when they can avoid voluntary notifications in large numbers, higher education will be able to live with this regime far better than they fear at the moment.
I move Amendment 36, but I encourage the Minister to respond positively to Amendment 88.
My Lords, this amendment seeks to ensure that research and development partnerships, such as those that are widely formed between companies and universities to create intellectual property and therefore qualifying assets, are not required to provide notification of the creation of these partnerships. If these partnerships lead to the creation of a qualifying asset, the trigger event should be determined to be the point of creation of the qualifying asset. It would minimise the notification burden on business and industry, and avoid discouraging these important relationships. This is the theme of many of my amendments.
To give your Lordships some background, UK companies are major funders of research and development at British universities across the world. They enter into hundreds, if not thousands, of research agreements every year. Those agreements can be a simple, straightforward funding of a PhD student or major multilateral projects valued at many millions of pounds. Business enterprise R&D represents something like two-thirds of the total, according to the latest figures from the Office for National Statistics. The biggest sectors for business enterprise R&D overlap significantly with the 17 sectors identified in the Bill. For example, computer programming is almost £2 billion, aerospace is almost £2 billion and software development is £1.5 billion.
This business investment, allied with our world-class universities, means that the UK is obviously at the forefront of many of these technologies, from quantum technology to artificial intelligence. The purpose of the research is, of course, to create new technology and new intellectual property that can be used by those British companies to grow British businesses, but at the beginning of any partnership the creation of intellectual property is simply an aspiration. It is certainly not guaranteed.
These projects risk being caught by the same minimal risk issue flagged in other debates on the Bill where companies seek pre-emptively to notify where there is a risk of a trigger event because there is a lack of clarity on this issue. All the amendment seeks to do is to postpone the need to consider notification until such time as the research has been successful, in effect by creating a qualifying asset.
My Lords, I am very pleased to have put my name to all three amendments in this group. Rather like the noble Lord, Lord Lansley, I think that we have to find a way to deal with research and development partnerships in higher education. These are various alternative ways to do that, but whichever one is chosen we must find a constructive way. Having a debate and discussion at this stage is really important.
Although the Bill does not directly reference universities and a great deal depends on the Secretary of State and his statement saying how he will define and use the powers, given the width of the sectors it is clear that there is an intention to catch those partnerships entered into by universities. The Bill’s scope is so wide that it means universities could have to refer a significant proportion of their routine business collaborations for screening.
A key concern is that it is unclear which types of asset transaction should be referred for screening. The proposed definition of assets that should be referred to BEIS is very broad and could cover a significant proportion of what universities might consider run-of-the-mill engagement with businesses, including contract research, consultancy work and collaborative R&D. Elements of the Bill, while introducing measures to protect national security, could have unintended consequences for future investment in UK R&D and could cause BEIS to be overloaded with referrals from the university sector.
Up to 95% of Russell group research contracts grant external partners some form of intellectual property and could therefore be captured by the voluntary regime, given the current broad definition of assets. With uncertainty over definitions, universities will be forced to adopt a cautious approach and therefore will expect to refer a significant proportion of the partnerships that I have mentioned: their contract research, consultancy, and collaborative research projects, including those conducted with British businesses. This will add to lead-in times and create red tape for universities and businesses. That surely cannot be for the benefit of R&D in our universities.
As chair of the governing body of a research-intensive university, I can testify to the fact that protecting sensitive research from hostile foreign actors is now a priority for universities. Universities dedicate significant resource to complying with export control legislation and are now working to implement recommendations arising from last year’s guidance from Universities UK, Managing Risks in Internationalisation. As a result, enhanced due diligence processes have run in parallel to concerted efforts to secure R&D investment from domestic and international businesses. This includes due diligence on risk assessment, international research partnerships, policies and contractual agreements to protect intellectual property and dual-use technologies and export control legislation.
As the introduction to the guidance says:
“Although this is the first time Universities UK … has produced guidelines on this subject, the risks described here are not a new phenomenon … What has changed is the dynamism of the threat landscape and the centrality of universities, science and technology to the future security and prosperity of the UK. As their role and significance increase, universities become more valuable targets. Senior leaders must be aware of the risks and ensure that all members of their community are aware of their own roles and responsibilities in this regard.”
There is a very clear understanding of exactly what the risks are and the due diligence that needs to be put in place. A proportionate screening regime could protect the UK from foreign hostile actors but minimise red tape for university-business collaboration, boost the Government’s ambitions to support a global Britain and maintain the UK’s status as a science superpower.
At Second Reading, the noble Lord, Lord Callanan, said that his officials
“have been engaging closely with the Russell group; we will continue this engagement as the Bill goes through the House to ensure that universities have smooth engagement with the new regime where necessary.”—[Official Report, 4/2/21; col. 2393.]
Perhaps the Minister can tell us what those exchanges have produced to date because engagement is crucial and we must find a solution that creates a proportionate set of circumstances for our universities.
My Lords, although I spoke at Second Reading and have lent my name to later amendments, supporting my noble friend Lord West and the noble Lord, Lord Butler, I have to say that most of the content is way over my pay grade. I have learned an awful lot as I have listened to the debate this afternoon.
My position on the Bill is the same as on the CHIS Bill: I am with the Government. I realise that higher education is large and varied but I am not prepared to give it the blind support that I have done in the past. As such, I do not support Amendment 36.
I want to raise three aspects: pay, academic freedom and security, as it is tied to the Bill. The pay of vice-chancellors is out of control and, like the Army, where no general gets the sack for failure, no vice-chancellor walks the plank. That is due to poor governance, so it is not down to a single person. Many salaries are well north of £250,000 a year—some are £500,000 a year—with whopping increases into five figures annually, on top of which there are vast expenses and, sometimes, free accommodation. In the meantime, the so-called world-beaters screw down the staff on flimsy contracts, with pensions constantly under attack. The treatment of students during the pandemic has been appalling, in some cases. It reminds me of what I read about the Victorian mill owners’ treatment of their workers—but the students are the payees, not the employees. The leadership is not world-class, except as in snouts and troughs.
Then we see the negative aspects of academic freedom —that is, its decline—becoming the norm. The Civitas report makes for very disturbing reading. The study of campus censorship over the three years between 2017 and 2020 is grim. It covered all 137 registered universities and 22 variables were assessed. Noble Lords will be pleased to learn that I do not intend to detail them, but the key finding was that only 19 of the 137 universities were considered “the most friendly”. Seventy—that is 51% of them—were not performing well and were classed as “moderately restrictive”, leaving 48 universities, including some of the highest-ranked ones, performing badly on free speech. They were classed as the most restrictive. It would take too long to list them so I shall give just seven examples: St Andrews, Cambridge, Oxford, Liverpool, Exeter, UCL and Imperial College, London. There are more. There is a very strong correlation of them with the high pay of vice-chancellors. The Russell group of world-class universities did not come out very well either: 42% were recorded as “most restrictive”; 54% were “moderately restrictive”; and only one registered Russell group university came out with a “most friendly” score.
Before I come to my final point, it is worth pointing out that your Lordships’ House does not hear much about this aspect of education. The last time I checked, which was about three years ago, there were over 40 university chancellors in your Lordships’ House. That speaks volume.
My final point on why Amendment 36 should not be accepted by the Government is that too many universities are almost subsidiaries of the Chinese Communist Party Ltd. Tom Tugendhat, the chair of the Commons Foreign Affairs Select Committee, has called for a clamp-down on British university research relationships with China to stop the flow of intelligence secrets. Bloomberg has reported that UK intelligence agencies are concerned about these links and the passing of sensitive information about defence technology from the UK to China. Too much Chinese money is going into UK universities. It is alleged that at least 20 British universities have relationships with 29 Chinese universities with strong ties to the Chinese military, as well as some of China’s largest weapons producers.
Earlier today came the report from the Policy Institute, The China Question. I have not had time to read it all, so I will make just two or three points. In 1990, there were 100 co-authored papers between Chinese and UK universities. By 2000, it was 750. In 2019, there were over 16,000. The report, which I have only glanced at, points out the reliance on significant tuition fee income by UK universities from China, which is used to cross-subsidise research. This creates a strategic dependency and potential vulnerability. We are not managing the risks associated with this aspect of our education and Chinese influence.
In short, it is a sorry tale from higher education. While I support my noble friend Lady Hayter’s Amendment 88, the Government should reject Amendment 36 out of hand.
I remind the noble Lord, Lord Rooker, that this is a particular Bill designed to do a particular thing. It is not a higher education Bill. While he may feel strongly about many of the issues, I will not comment on them, because they do not fall into the remit of the Bill. I point out that I am also not a university vice-chancellor.
The noble Lord, Lord Lansley, set out the danger, and this was supported by my noble friend Lord Clement-Jones. If this Bill is used to police these issues, the deluge that will fall on the agency will be huge. We are back to the point that my noble friend made on the previous group: we are creating a Bill that does everything, then the Government will gradually calibrate what they do and do not need to do. That is not the best legislative approach.
There are issues with the research relationships that universities may have, but this Bill is not the policing agency that we should be using for them. I do not 100% agree about the outset of a relationship, as set out by the noble Lord, Lord Vaizey, in his and my noble friend’s amendment. Sometimes that has to be looked at, as well as the outcome of that relationship, but I do not think this Bill is the place to do it.
To steal a word that was used earlier and use it differently, we are also looking at the nexus between this and export control. Universities seem much more comfortable with export control, and if there is an issue with universities it could be addressed through the increased and more rigorous use of these measures, not through this Bill.
I return to the point which I asked the noble Lord, Lord Grimstone, about last time and which I put to ask the Minister now, what are we seeking to stop? In other words, in putting this Bill together, how many partnership agreements does the Bill team imagine would have been stopped by this process? What sort of things are the Government seeking to arrest, stop or cancel compared to that which the export control regime would be doing anyway?
My Lords, as the Minister knows and as has been said, there is considerable concern in the higher education and research sector about the potential impact of the Bill on research partnerships. We agree with the intention of Amendment 40, which is, as we have heard, to provide clarity for the sector. Indeed, it reflects a recommendation from the Russell group which said that a key concern is that it is unclear which type of asset transactions should be referred for screening. That will cause problems for the group as well as to the unit, which could have simply too many referrals. Amendment 40 is also to ensure that research and development partnerships, such as those between commercial organisations and universities to create new intellectual property and potentially qualifying assets, are not required to provide notification of the creation of such partnerships.
Amendment 88 in my name and that of the noble Lord, Lord Clement-Jones, reflects similar concerns. I hope it takes an approach that the Government are able to accept. It would require the Government to publish specific guidance for the HE and research sector, including a clear explanation of asset transactions indicating how contract research, consultancy work and collaborative research and development are affected and how the provisions apply to strategic security partnerships and domestic partners. The amendment also requires—and this is key—the Government to consult the higher education and research sector in a meaningful way in advance of the guidance so that the published guidance reflects what is workable for both sides, particularly in relation to that definition of assets which otherwise could lead to great uncertainty. The amendment therefore is about developing guidance and promoting good practice in that it should be done in co-operation with the sector. I thank my noble friend Lord Rooker and the noble Lord, Lord Lansley, for their support for this approach. The wording of my amendment may not be perfect, and we could perhaps tweak that on Report, but it will be important to have this in the Bill.
Perhaps the Minister who is about to reply—or may be doing that next week—would indicate the Government’s acceptance of this need for guidance as well as the way of getting it. As the Russell group says, without clear guidance a significant proportion of universities’ routine engagement with British business could be inadvertently captured by the Bill. We are all in favour of that engagement between universities and business. We want to make sure it happens. Any hiccups could delay time-sensitive research deals if the unit was preoccupied with this.
Universities want to help make this Bill work. They acknowledge that there are risks. I disagree with the noble Lord, Lord Fox. I think that the issue raised by my noble friend Lord Rooker about the amount of collaboration with certain countries is key and we must face up to it. I think that the leaders of the universities are aware of that. They want to be part of the solution, so I hope that the Minister will accept Amendment 88.
Let us try to get this done in five minutes.
I thank the noble Baroness, Lady Hayter, and my noble friends Lord Lansley and Lord Vaizey for tabling these amendments. I will begin with Amendments 36 and 88, which concern the Bill’s effect on higher education. Amendment 36 seeks to exempt from the regime the use of qualifying assets where that use is conducted wholly within the activity of a UK-based higher education or research institution. Amendment 88 seeks to introduce guidance to explain some of the Bill’s provisions in relation to higher education.
First, I intend to provide some general assurance to the Committee about the asset powers under the Bill. There are no asset transactions that must be notified to the Secretary of State as assets are not subject to the mandatory notifiable acquisitions regime. To quote the statement published on introduction, interventions in asset transactions by the Secretary of State are expected only in
“the headline sectors in which national security risks are more likely to arise than in the wider economy”.
The draft statement states more broadly:
“The Secretary of State expects to intervene very rarely in asset transactions.”
In relation to higher education, I assure the Committee that we do not generally expect the acquisition of qualifying assets for exclusive use by UK-based research or higher education institutions to give rise to national security concerns.
Indeed, to go further, the use of assets where there is no acquisition of a right or interest resulting in control over a qualifying asset would not even constitute a trigger event, although my understanding is that Amendment 36 seeks to go wider than this. We do, however, expect national security risks to arise in the higher education and research sectors sometimes. For example, hostile actors could seek to set up a UK-based research organisation and acquire sensitive assets through this vehicle, or enter into some form of agreement with one and gain control over sensitive assets that way. Exempting such acquisitions from the regime would therefore create a notable gap in the Secretary of State’s ability to safeguard national security.
Turning to the likelihood of the Secretary of State calling in acquisitions related to contract research, consultancy work and collaborative research and development, and the request for guidance, I point the noble Baroness to the three levels of risk set out in the draft statement. The intention of the statement is to provide guidance on the expected use of the call-in power by the Secretary of State. The three levels of risk in the statement give a hierarchy of how likely the Secretary of State is to call in an acquisition. The most likely areas of concern are “core areas”, “core activities” and “the wider economy”. Acquisitions in “core areas” are likely to be of most interest to the Secretary of State. “Core activities” are likely to fall within the “core areas” but may also fall outside them. This covers the sectors proposed to be set out in regulations under Clause 6. The Government have consulted on the definitions of the sectors to be covered by Clause 6 and published their response at the beginning of this Committee. “The wider economy” concerns everything else. The Secretary of State considers these areas unlikely to pose risks to national security. Therefore, they are unlikely to be called in under the NSI regime. I am confident that higher education and research institutions will be able to assess their activities and decide in which of these three areas of risk they fall.
I want to take a moment to assure the Committee that BEIS consulted Universities UK, the University Alliance and the Russell group on the national security and investment White Paper, published on 24 July 2018. They were very helpful. Of course, since the introduction of the Bill, as my noble friend Lord Lansley noted, BEIS has continued to engage with a number of research and academic institutions, including the Russell group. The Government very much appreciate the Russell group’s ideas on inclusion for guidance.
Turning to strategic security partnerships and domestic partners, the Bill deals only with acquisitions of control over qualifying entities and assets; it does not regulate these strategic security partnerships specifically. Any acquisitions of control made by such a partnership will be subject to the Bill in the same way as any other qualifying acquisition—namely, the Secretary of State’s likely interest in them is illustrated in the draft statement under Clause 3.
I now turn to Amendment 40 in the names of my noble friend Lord Vaizey and the noble Lord, Lord Clement-Jones. This amendment concerns Clause 12, which provides supplementary provisions about trigger events, including details about when they take place. The amendment seeks to make it clear that, in relation to the creation or potential creation of a new qualifying asset, a trigger event can take place only upon the creation of that asset.
The Government also consider that acquisitions of control over qualifying assets can take place only from the point of their creation, whether in tangible or intangible form. I reassure the noble Lords that the Bill as drafted provides for that. They will, however, be aware that the Secretary of State’s call-in power applies both to trigger events which have taken place and to those which are “in progress or contemplation”. The point at which a trigger event is in progress or contemplation will clearly depend on the facts of the case, but it could include circumstances where research and development partnerships are agreed, and it is abundantly clear what assets are to be developed and what control the funder will be acquiring over them.
We think that this is the right approach, as the primary focus of this regime is acquisitions of control over existing entities and assets. We cannot hope to know the future and how technology and national security risks might develop in every circumstance, so it is right that control of new assets can occur only once they have been created.
With the arguments I have outlined against the amendments in this group, I ask that noble Lords agree not to press them.
Before I call the noble Lord, Lord Lansley, to respond, I need to make the Committee aware of the Procedure Committee’s guidance about five hours of sitting, which expired five minutes ago. I do not want to put pressure on the noble Lord to respond on a very detailed debate, but if his response is brief we can probably include it. If not, it might be that the Whip needs to consider moving an adjournment.
Amendment 36 withdrawn.
37: Clause 11, page 7, line 26, leave out “or 9”
Member’s explanatory statement
This amendment removes the reference to Article 9 of the Export Control Order 2008 (S.I. 2008/3231) which was revoked by regulation 4(7) of the Export Control (Amendment)(EU Exit) Regulations 2019 (S.I. 2019/137).
Amendment 37 agreed.
That concludes the Committee’s work this afternoon. I remind Members to sanitise their desks and chairs before leaving the Room. I thank very much the broadcasting team and the support team for their assistance.
Committee adjourned at 7.37 pm.