Enterprise Act 2002 (Specification of Additional Section 58 Consideration) Order 2020
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Lord Callanan
That the Order laid before the House on 22 June be approved.
Relevant document: 21st Report from the Secondary Legislation Scrutiny Committee (special attention drawn to the instrument)
The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)
My Lords, I thank the Secondary Legislation Scrutiny Committee—particularly my noble friend Lord Lindsay—for reviewing this order and the Enterprise Act 2002 (Share of Supply) (Amendment) Order 2020. The committee reported on these orders, noting that it considers that policy changes made by them are potentially very significant. I look forward to debating the nature of them with colleagues here today. These orders are being debated together because their causes and their consequences overlap. Both amend the circumstances in which the Government can intervene in mergers and acquisitions. Both respond to a need exposed or magnified by the Covid-19 crisis, and both amend the Enterprise Act 2002, which set the legislative framework for the Government to intervene in qualifying mergers and acquisitions.
I will explain briefly what each order intends to achieve and the rationale for so doing, beginning with the specification of additional Section 58 consideration. Section 58 of the 2002 Act specifies the circumstances in which the Government can intervene in mergers on public interest grounds. There are currently three such grounds: national security, media plurality, and financial stability, the last being added in 2008 following the financial crisis. The order adds a fourth public interest consideration to that list, namely the need to maintain in the UK the capability to combat and mitigate the effects of public health emergencies. In short, it ensures that the Government have the power to preserve critical public health and crisis mitigation capabilities in the UK, and that they can therefore safeguard the welfare of the British people.
The need for such measures has been exposed by the Covid-19 pandemic. All Members will recognise the hard work, dedication and commitment of firms up and down the country in responding to the crisis. They have been critical in getting us through the pandemic and will be just as important in rebuilding the economy in its aftermath. However, the very qualities that made these firms so critical to our response put them at risk from opportunistic investors. The vast majority of investors are an immense boon to this country, but an unscrupulous minority use UK capability to advance their own agenda at the expense of the British people.
Recently, we have seen attempts across the world to buy priority access to vaccines, to control the flow of personal protective equipment and to limit the availability of certain drugs. The Government have been clear that we will not allow this to happen to UK firms as a result of qualifying takeovers. The order creates the legislative framework to prevent that from happening.
Companies directly involved in combating public health emergencies, such as drug companies, are those that are most at risk. However, this order also allows intervention to maintain UK capability in mitigating the effects of a public health emergency. That might be necessary if there were risks to firms in our food supply chain, for example, or to companies that allow us to work safely during a pandemic by helping to slow the spread of a virus while allowing us to mitigate the impact on our economy. Such companies may include internet providers, for example, whose fibre broadband allows people across the country to work from home, order food and essentials from their living room and keep in touch with family members.
The second order that we are considering today—the Enterprise Act 2002 (Share of Supply) (Amendment) Order 2020—amends Section 23A of the Enterprise Act 2002. That section includes a list of “Relevant enterprises”, which are sectors where the threshold for government intervention in a merger is lower than that for other businesses. The relevant enterprises listed in the Act are all in particularly sensitive sectors where there is a public interest or a national security case for allowing the Government to intervene more readily. As it stands, Section 23A sets out three such sectors: military or dual-use technologies, quantum technology and computing hardware. The order adds a further three relevant enterprises to the list: “artificial intelligence”, “cryptographic authentication” technologies and “advanced materials”.
Businesses falling within those categories are often at the forefront of research and innovation. They are small businesses producing cutting-edge technology which may not yet be commercially viable, but which can have implications for our national security. Break- throughs in those fields underpin other areas of societal and economic development and are critical to areas such as defence and security. Ownership of businesses in those areas can therefore undermine our national security through espionage, sabotage or exerting inappropriate leverage, and puts us at risk of losing our advantages in security and defence.
I repeat that the vast majority of investors in this country have entirely noble intentions. The order seeks to deal with the tiny minority that invest maliciously with a view to exploit or do harm. The Covid crisis has brought this matter to the fore, magnifying the potential risk to national security. The depreciating effects on sterling and the financial pressures of a decrease in investor confidence all make us more exposed to opportunism. It goes without saying that the Government must be able to mitigate national security risks, and this requires our being able to intervene in mergers in the areas set out in this order, all of which are critical to our nation’s security.
In addition, we propose to make a second instrument before commencement of the share of supply order by the negative resolution procedure. That will allow the Government to intervene in mergers involving the new relevant enterprises where their UK turnover is more than £1 million. That is consistent with the other relevant enterprises listed in Section 23A. The order is a short-term measure that will apply until more fundamental reform can be taken forward in the national security and investment Bill. Such a measure is necessary given the immediate risk that we face as a result of the pandemic.
Having set out what these two orders will do, I will now say briefly what they will not do. They do not affect our commitment to an open economy. They do not alter our appetite or our enthusiasm for investment into the United Kingdom, and they do not change the fact that now, more than ever, foreign investment is the lifeblood of our economy. It created more than 57,000 jobs in 2018 alone. We have no wish to create barriers to business—quite the reverse—and permitting intervention does not mean that the Government will interfere unduly. There have been only 20 interventions under the Enterprise Act and none has resulted in blocked mergers. Rather, these are proportionate, reasonable and necessary measures to maintain capability in public health emergencies and to protect our national security, ensuring that the UK is open for business, but not open for exploitation. I beg to move.
Lord Callanan
First, I thank all noble Lords for their valuable and well-informed contributions to this debate, with the normal high standard of speeches that we have come to expect in this House.
Both these orders are reasonable, proportionate and essential. As has been said, we live in unprecedented times and it is right that, during such times, the Government reassess their powers to intervene in mergers and acquisitions. This crisis has revealed the need for the powers contained in these orders. Government must be able to act to protect our public health emergency capabilities and to scrutinise worrying mergers in the sensitive sectors we have set out. It is worth noting that many comparable countries have taken similar actions, as indeed was pointed out by the noble Lords, Lord Stevenson and Lord Chidgey, the noble Baroness, Lady Falkner, and a number of other noble Lords.
In recent weeks and months, we have seen allies such as Australia and Japan, as well as some of our European partners, update their investment screening regimes to ensure that risks around public health capability can be mitigated. Countries around the world, including the USA and Australia, and a number of our European allies, have also taken similar steps to protect their national security from opportunistic investment in sensitive sectors. We are not alone in taking these measures.
As I have said, these orders do not impact on our commitment to an open, international economy. We have always enthusiastically welcomed inward investment and championed international trade, and we will continue to do so.
I reassure the noble Lord, Lord Foulkes, that we do not expect to need to use these powers frequently, but we will not hesitate to use them if and when the need arises. We have no wish to stifle creativity, nor to burden business with regulatory red tape—quite the opposite. We believe that these measures are a proportionate reaction to the risks before us. We do not intend these orders to deter genuine investment and we do not believe that they will. Indeed, these orders are in keeping with our approach to maintaining an attractive, secure environment for international investors.
I repeat that the amendment to Section 23A of the 2002 Act is a short-term measure that will apply until more fundamental reforms can be taken forward through the national security and investment Bill. Indeed, the noble Lords, Lord Stevenson, Lord Reid and Lord German, and the noble Baroness, Lady Bowles, asked about the NSI Bill. It is right that the Government take a considered and evidence-based approach to long-term reform in this area. As was pointed out, the consultation took place in 2018, and for various reasons the Bill was not introduced at the time. It is a top priority for this Government, but it is right that, in the current circumstances and environment, we look again at the policy to ensure that it is fit for purpose. We are of course in a different geopolitical climate from that of 2018, and it is vital that the Bill provides the right protections. It was announced in the Queen’s Speech for this Session and it will be brought forward in due course. I am afraid that that is as specific as I can be on timing.
A number of questions were posed to me and I will try to deal with as many as possible in the few minutes available to me. The noble Lord, Lord Stevenson, asked whether this will allow for intervention on purely economic grounds. The answer to that question is no. The company involved must be able to provide capability in the UK to combat or to mitigate the effects of a public health emergency.
The noble Lord, Lord German, asked whether the public health measures would persist once the NSI Bill comes into force. The answer to that is yes. We intend to keep the public health emergency interest consideration as part of the Enterprise Act, so that is permanent, but the national security measure will be repealed by the NSI Bill.
The noble Earl, Lord Lindsay, asked about the threshold. The lower threshold of £1 million is considered to be the appropriate level of turnover to capture those businesses that, although fairly small, have a critical role in matters that may affect national security. We believe that that threshold is right.
The noble Lords, Lord Adonis, Lord Liddle and Lord Kennedy, pushed their luck—as is traditional—and went on to subjects which were not directly relevant to the matters under consideration in this debate. Nevertheless, I always try to be as helpful as possible to the noble Lords, so I will say a few words on the CMA. We already have a highly regarded competition regime and it is the role of the CMA to promote competition for the benefit of consumers, business and the economy. We will be appointing a new chairman in due course; the noble Lord will be the first to hear it about it when we do.
The noble Baroness, Lady Falkner, and the noble Lord, Lord Holmes, asked a very good question: why these particular sectors? It is always difficult to define such things but we believe that these sectors are where the risks from mergers that are not covered by the existing thresholds are the highest, and where it is important to act quickly to deal with these issues. Due to the current economic disruption, companies in such sectors may find themselves in difficulty; it is right that the Government are able to step in for national security reasons if required. There is always a difficult balance to strike but we believe that these measures are proportionate and strike the right balance with economic investment.
The noble Lord, Lord Chidgey, asked about cyber acts. The measures in respect of cryptographic authentication are indeed intended to help defend against cyberattacks, as are the reduced thresholds on quantum and military. The noble Lord, Lord Mann, talked about state intervention; I maintain the point that the orders do not provide a direct burden on business but rather enable the Government to intervene, if necessary, on a public interest consideration. We believe that this is a proportionate measure to mitigate against the risk.
The noble Baroness, Lady Jones, returned to one of her favourite subjects: facial recognition. I can tell her that some parts of facial recognition technology will indeed be covered by artificial intelligence and cryptographic authentication. She will be delighted to hear, I am sure, that facial recognition will be covered under the NSI Bill; I look forward to debating the matter further with her then.
To conclude, these orders form key parts of our Covid-19 response and learning. They ensure that the UK can maintain the capability to combat and mitigate the effects of public health emergencies in respect of qualifying takeovers, and they ensure that the Government can intervene more readily in areas of business where mergers implicate the security of our nation. I repeat that they in no way affect our openness to foreign investment; we continue to welcome genuine investment from around the world into this country. Rather, they reflect the fact that our economy can thrive only when the health and security of the British people are protected. With that, I commend these orders to the House.