Enterprise Act 2002 (Specification of Additional Section 58 Consideration) Order 2020
(3 years, 9 months ago)
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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 Stevenson of Balmacara (Lab) [V]
My Lords, I thank the Minister for introducing these statutory instruments today in his usual clear way. As he said, these SIs amend the Enterprise Act 2002 to enable the Secretary of State to intervene in mergers on two new grounds: by lowering the jurisdictional thresholds for reviewing transactions affecting UK-targeted companies involved in AI, cryptographic authentication and advanced materials; and by introducing a new criterion for intervention to preserve UK critical health and crisis mitigation, including but not limited to those needed for Covid-19. He stressed that these were short-term measures until more fundamental reform was taken forward in the now long-promised national security and investment Bill.
I tabled a regret Motion which stems from the report of the Secondary Legislation Scrutiny Committee and relates to four main points. There is a discrepancy between the apparently permanent changes set out in these SIs and the accompanying comment from BEIS that more fundamental change is in train. There is a lack of any information about the timing or content of the national security and investment Bill other than its antecedent, the White Paper 2018, which now seems a very long time ago. The committee suggests that the draft Bill be published forthwith and be subject to comprehensive debate and pre-legislative scrutiny. Further, the committee suggests that a better lens for consideration of the impact of mergers and takeovers would be to include their impact on consumers and consumer detriment. I will briefly expand on those points and look forward to the debates from other noble Lords who signed up to speak.
We broadly welcome the intention behind these reforms, which mirror changes to FDI in other countries, including France, Germany, Australia and Canada. The Minister is right to stress that these do not alter our commitment to having an open economy, which we support, and they are not against FDI, which has done so much to improve the quality of work in this country and the jobs available, and they are certainly not about putting up barriers. The country must remain open for business.
However, experience shows that many new tools must be available if we are to combat action and reaction to pandemics. These reforms presumably reach out, as the Minister said, to pharmaceutical and medical equipment suppliers, but they also seem to extend further. As he mentioned, they look at the effects of the pandemic including on food supply and service providers such as the internet. That is a very wide reach. Will the Minister confirm that this new power could also be used to prevent hostile takeovers of otherwise profitable and stable companies suffering short-term reductions in profitability or depressed share prices as a result of the pandemic or similar emergency? Will he also confirm that notifications to the CMA will remain voluntary, even though the intention remains to mitigate risks in the short term, which suggests that a more direct route of action might be required? Will there be further guidance on what might trigger this power, which has been criticised as being potentially very broad, and, if so, when that will be published?
The Government last lowered the jurisdictional turnover thresholds of the UK merger control regime in June 2018, when we passed an SI concerned with the development and production of military and dual-use technology, computing hardware and quantum technology. At that time, the threshold in relation to UK target company turnovers was lowered from £70 million to £1 million, which is a big change, and the 25% share of supply, which the Minister mentioned, was amended. We supported the moves at that time, but we questioned whether other sectors should be included. But these were described at that time as temporary, short-term reforms, again pending primary legislation. Is that still the situation? Can we expect more changes when the Bill finally arrives? When does temporary and short-term actually morph into permanent?
We now have a proposal to extend these already amended jurisdictional thresholds to three further sectors under quite broad headings—artificial intelligence, cryptographic authentication and advanced materials. The Explanatory Memorandum makes it clear that the intention is to cover producers but also researchers, and it covers suppliers to these companies, so the scope is again potentially very wide. There is a promise of further guidance on this. Will the Minister give us some more information on when that will be available? Again, the notification system will be voluntary, and companies will have to take the risk of the CMA or the Secretary of State initiating an investigation. Is that really the most sensible way of proceeding?
The outstanding questions that my regret Motion raises and that I would like the Minister to respond to are as follows. As the SLSC says, it is very difficult to scrutinise these SIs. Indeed, it will not really be possible to do so until we see the National Security and Investment Bill itself. When will it be published? Will there be pre-legislative scrutiny? If not, why not? Can the Minister settle the question of whether the changes set out in these SIs are intended to be temporary, in the sense that they might be unwound in the NS and I Bill, once it arrives, or are they permanent? Can he confirm that it remains the Government’s intention to unwind the earlier June 2018 amendments once the new regime is in place, or are they now permanent? Can the Minister confirm whether the new Bill will follow the proposals in the 2018 White Paper? The world is a very different place now, and I wonder whether, for example, the voluntary notification system is really sufficient for national security concerns. Also, will there be turnover cut-offs or sectoral cut-offs? What about regional and place considerations?
Finally, why are consumer interests not given a central part in this process? The CMA, under its recent chair, the noble Lord, Lord Tyrie, was rightly refocusing work around the prevention of detriment to consumers. Its recent consultation on its 2020-21 plan stressed that competition, particularly in digital markets, was getting weaker in many sectors and that practices that damaged effective competition needed to be eliminated. In a sense, this is the other side of the same coin which is being addressed by these SIs.
Baroness Bloomfield of Hinton Waldrist (Con)
I remind the noble Lord of the speaking limit.
Lord Stevenson of Balmacara [V]
I am just winding up. I accept that some mergers and acquisitions affect national security, however it is defined, but all mergers and acquisitions affect consumers, so can the Minister confirm that consumer detriment will form part of it? I beg to move.
Lord Bruce of Bennachie (LD) [V]
My Lords, I thank the Minister for his clear introduction and welcome these instruments. Although undoubtedly necessary, they are a little late. I note the regret Motion of the noble Lord, Lord Stevenson, and the details that he set it out with, but I want to explore how much scope we have to apply these instruments in the rapidly changing world we operate in. In just a few months, the UK will be leaving the shelter of the transition from the EU to full exit on, as yet, unknown terms. The pandemic and the turbulent vacillation over Huawei have brought into sharp focus the weakness of the UK’s competition rules from a strategic point of view.
The failure of the Government to ensure adequate supplies of PPE and the waste of time and money on a predictably failed tracing app exposes vulnerability in terms of both domestic supply and access to global markets. UK research into vaccines and treatments for Covid-19 appear world-class, but they are not exclusive. Trying to ensure that, when suitable developments are secured, the UK population gets early treatment is, of course, justified, but we need to acknowledge that other countries may have more and better answers, and we should not be so protective of our own that we limit our access.
We should certainly facilitate making vaccines and treatments available to poor and vulnerable people across the world. Although foreign investment has sometimes been responsible for UK inventions turning their profit elsewhere, it has also sometimes facilitated extending our global reach, development and application. So, as we start to negotiate new trade deals, caught between not trashing our EU markets while hoping to gain privileged access to non-EU markets, this could lead to arm twisting that may undermine the stated objective of these other orders. In other words, we may wish to apply them, but we may find that it compromises our ability to negotiate trade agreements with other countries.
Finally, can the Minister give a steer as to whether the legislation that the Government are planning for when we have left the EU will be in place by the end of the year, and whether they will respond to pre-legislative scrutiny, as the regret Motion of the noble Lord, Lord Stevenson, requests?
Lord Lansley (Con) [V]
My Lords, I served on the Standing Committee of the Enterprise Act back in 2002, and at that time the public interest intervention was limited to national security and quite narrowly defined. As the noble Lord said when he introduced these orders, it has been extended considerably since. Frankly, I think it is right to do so and I think that these orders are correct, too. In saying that, I stress that the guidance published in June by the Government very well illustrates that. The point was made that if companies developing new antibodies or a vaccine were to be taken over by overseas entities, the potential loss of control of that intellectual property would be very significant.
Much of the public interest interventions now, in these orders and elsewhere, are really about intellectual property. With our Government quite rightly investing a great deal of taxpayers’ money in IP, we must be sure to avoid overseas acquisitions of UK interests that deprive us of the benefit of that UK-generated IP. The turnover test and the share of supply test should be sufficient—but if, for example, one puts IP into a small company which is not necessarily trading otherwise, we may also need a transaction value test, and I hope Ministers will consider that.
I have one final point that I do not want to be lost. I was involved in introducing the public interest test on media mergers in 2003. There is unfinished business in redefining “media” for the purposes of Section 58 of the Enterprise Act, and I do hope that Ministers will get on with that, too.
The Deputy Speaker (Lord Russell of Liverpool) (CB)
The noble Lord, Lord Empey, has been unable to join this call, so I call the noble Lord, Lord Reid of Cardowan.
Lord Reid of Cardowan (Lab) [V]
My Lords, there is obviously a heavy element here of trying to close the stable door after the horse has bolted. Indeed, both horses have bolted: the Covid pandemic and the cybersecurity issue. But the problem is that even now the stable door has not yet been closed effectively. The new grounds on which the Secretary of State might intervene in mergers are short-term measures until more fundamental reform is taken forward through the National Security and Investment Bill, as the Minister said. But we do not know what is going to be in that Bill, so it is very difficult to judge these changes. As the SL committee says, the House will be able to scrutinise the issue properly only when the Bill is being considered. Incidentally, the committee also asked the department to give a timetable for the introduction of the Bill without delay. The Minister missed that point, and I am not aware that any such timetable has been provided or published.
Secondly, if the Bill that is to come before us is based on the 2018 White Paper, this raises a number of other issues of concern. Are these proposed measures really temporary or are they permanent? Will the Bill unwind these and other recent changes to jurisdictional thresholds made in 2018? Will the new regime be mandatory or, as the White Paper suggested, based on a voluntary notification system? Will there be a turnover or market share threshold applied? I regret that none of these questions has really been answered today. I would very much like to welcome these measures, but I think that the House has been left in a very unsatisfactory position.
Lord German (LD) [V]
My Lords, the Government have frequently used the argument that substantial policy changes should not be made as a result of the coronavirus pandemic, and that mixing a permanent policy change with a policy designed to deal with the Covid-19 crisis is to be avoided. In fact, this very argument was used by the Government this week in rejecting an amendment to the rules on bounce-back loans in the Business and Planning Bill. Well, here we have the Government making the very opposite argument to the one they made in another measure affecting the future of our economic base.
Also this week, the Government deployed this argument about a no-smoking ban in the spaces outside pubs and restaurants, where pavements are now being made available to these businesses. So next week, when they try once again to resist these amendments, I hope that they will not try to deploy arguments that run counter to those they are using today. I have no issue with the Government seeking to advance these policy changes, even when opportunities arise from the pandemic. I am simply asking for consistency.
The Government say that these regulations are
“brought into focus by the demands placed on the UK by the COVID-19 pandemic and its impact on the economy”
and that
“as a result of the economic uncertainty caused by the pandemic, usually stable businesses may be suffering a short-term impact to their share price or profitability”.
But they go on to say that the measures are
“not time-limited to the current pandemic”
and are therefore permanent. So, despite what the noble Lord is saying about a Bill yet to come, these regulations are permanent until such time as the Government alter them; there is no time limit in these regulations at all. So, in supporting these measures, I hope that the Government will explain their volte-face on policy-making in the same week—in fact, within the space of three days.
Lord Moynihan (Con) [V]
My Lords, the orders before the House are a considerable intervention to those engaged in or contemplating the acquisition of UK companies. In the context of the specification of additional Section 58 considerations, they seem measured, particularly in the context of Covid-19, and will command support—although it is regrettable that, following the 2018 White Paper, as noble Lords have said, they could not have been considered in the context of the NSI Bill.
However, having lowered the jurisdictional thresholds of the UK merger control regime from £70 million to £1 million in three specified sectors, we are now considering artificial intelligence to become a further sector. I put it to my noble friend the Minister that, despite the Explanatory Memorandum and the information published by government, this could cover all UK businesses involved in artificial intelligence, including providers of components or related services under the share of supply amendment order.
Many of your Lordships and leading lawyers, not least the first-rate team at Herbert Smith Freehills, would welcome the Government making detailed guidance available—quickly—so that sufficient clarity is available to companies either directly involved in artificial intelligence or where artificial intelligence comes within the scope of their business. The guidance needs clarification urgently to avoid unintended consequences away from national security. I look forward to my noble friend the Minister’s reply.
Lord Adonis (Lab)
My Lords, I support these orders but, crucially, they depend on the role of the Competition and Markets Authority. I wish to put two specific questions to the Minister, if I may, because there is real concern about the CMA being both weak and leaderless; it is by definition leaderless because its chair has just resigned.
First, can the Minister tell the House when it is intended that the new chair of the CMA will be in place? Secondly, I assume, subject to what the Minister said, that the recruitment process is ongoing. When the Government seek to recruit that chair, what will their response be—because potential candidates will definitely ask about this—to the remark of the noble Lord, Lord Tyrie, in his resignation letter that he sought to set up
“a new type of competition authority, one better equipped to understand and respond to what most concerns ordinary consumers”?
Do the Government agree with that prospectus for the CMA in future? If so, pursuing what the Minister said about having a robust, pro-competition stance, will that approach be embedded in the expectations of the new chair when they take over the CMA, which I think we all hope will be at an earlier rather than a later date?
Baroness Falkner of Margravine (Non-Afl)
I welcome the inclusion of public health emergencies as a public interest consideration under these measures.
I know that other countries have experience of why these measures are needed; take the recent example of the German biotech firm CureVac, which was in the process of launching an IPO on the NASDAQ this month. According to the Financial Times, the German Government, acting on the basis that the US Government had sought to take over the group in order to secure a supply of a Covid-19 vaccine, bought a 23% stake in it—equivalent to €300 million—through KfW, the state-owned development bank. They were able to do so because German legislation from 2017 allows them to intervene in any acquisition of a German company if it endangers “public order” or “Germany’s fundamental security interests”. The House may be interested to know that several Chinese actors had bought out or tried to buy strategic German firms until that point.
I also want to press the Minister on why our categories of these sectors are so relatively narrow. The German legislation now takes in companies that produce software for power plants, energy and water supply networks, electronic payments, hospitals and transport systems, in addition to the normal national security considerations. The German Government widened their legislation because, as they put it at the time,
“German companies are often forced to compete with businesses in countries that have a ‘less open economic system than ours’.”
No prizes for guessing which country that might be, given the Statement yesterday. I hope that the Minister will take a closer look at what can be done to secure our broader national interests in the forthcoming Bill.
Baroness Bennett of Manor Castle (GP) [V]
My Lords, it is a pleasure to follow the noble Baroness, Lady Falkner of Margravine. I will come at this from a slightly different perspective but I agree with many of the concerns that she expressed.
In his clear and informative introduction, the Minister expressed what I think many would regard as a surprising faith in the intentions of most investors in this country. He suggested that they are not motivated by opportunism. That is not the perspective of many when they look at the hedge funds, the tax haven-based investment vehicles and the non-taxpaying, faceless, unidentifiable ownership that characterises so many sectors of our economy.
I offer the Green Party’s support to the regret Motion. There are concerns about the process, the way this is being approached and the reach of it, but none the less, it is clear that we need far more control over and focus on the ownership of key sectors of our economy. Does this SI reflect a broader change in the Government’s view and perspective? I do not expect to see it in this emergency action, but in the forthcoming legislation, will the Government consider dealing with crucial issues such as food supplies, transport companies and the companies that supply so many of our outsourced public services?
Taking the example of food, if the Government wish to explore this further, I point them to the excellent work of the Canadian scholar, Dr Jennifer Clapp, who has looked at how the ownership of food companies, agrochemical companies and seed companies has led to a lack of competitiveness, global issues, a lack of transparency and real threats to the global food supply; of course, the same threats apply to the UK. Are the Government looking to deal with those?
Lord Liddle (Lab) [V]
My Lords, I am a strong believer in the virtues of competition and an open economy. I was alarmed to hear of the resignation of the noble Lord, Lord Tyrie. I would like the Minister to follow up on what the noble Lord, Lord Adonis, said.
I am also, and have always been, a long-term sceptic about the so-called free market in corporate control. There seems to be very little evidence of mergers bringing long-term benefits, except for those who take fees from them and for senior managers who benefit from inflated share prices. I support policies that throw grit in the wheels of the M&A process, such as restricting voting rights to long-term shareholders.
There are also public interest arguments where interventions by government can be justified on specific grounds. That is why I support these measures, but with some important qualifications. First, ministerial interventions must be transparent and on the basis of clear criteria, with a published assessment of the reasoning and an assessment of costs and benefits. The Huawei affair has strengthened my scepticism about ministerial interventions. Secondly, this needs a new, strong public body that is independent of Ministers to advise on the public interest. Thirdly, employees should have stronger rights in these circumstances. Fourthly, when we take action on public interest grounds, I urge us to act in concert with our European friends; otherwise, Britain could easily end up the victim of retaliation.
Lord Chidgey (LD) [V]
My Lords, I thank the Minister for his introduction of the order, which I support. I note that section 2 of the Explanatory Memorandum confirms that Section 58 is amended to specify an ability
“to combat, and to mitigate the effects of, public health emergencies as a public interest consideration … in mergers and acquisitions”.
The Government already have the power to investigate mergers and takeovers for reasons of, inter alia, national security, market dominance, protecting supply chains and UK financial security.
As the noble Lord, Lord Liddle, mentioned, France, Germany, Italy and Spain all have in place controls such as this. The EU is worried that foreign investors may try to acquire European companies in order to take control of key technologies, infrastructure and expertise. A focus of the EU regulator is to counter unfair competition from state-owned firms, which are the backbone of economies such as China. European companies have long been in the sights of Chinese rivals, including major state-owned enterprises. In the current public health crisis and economic downturn, they are more than ever vulnerable to hostile bids from overseas. In his response, will the Minister say what steps the Government are taking to liaise with our European neighbours to benefit from collective conformity?
The priority of any Government is the safeguarding and security of the people. Managing the Covid-19 pandemic is a case in point. Enabling vaccine research and protecting the ownership of PPE manufacturers and similar supply chain organisations are vital. Hostile takeovers instigated not by genuine business progress and development but an intent to damage or otherwise UK interests must be prevented.
The UK has been threatened with retaliation and retribution for the banning of Huawei technology on security grounds. Will the Minister confirm that these extra measures are essential to ward off the threat of asymmetric attacks and cyberattacks which may diminish our Covid-19 response?
Lord McCrea of Magherafelt and Cookstown (DUP) [V]
My Lords, I thank the Minister for laying out the Government’s case for the addition of a public interest consideration to the Enterprise Act 2002, with specific reference to maintaining in the UK the capability to combat and mitigate the effects of public health emergencies. I acknowledge that much has been done by the Government to protect UK citizens during these long and weary months of the pandemic, and we must always be on the alert for any loopholes in legislation. The situation as it already stands allows the Government to intervene in qualifying mergers and acquisitions on the grounds of national security and media plurality, and the previous Labour Government added financial stability following the financial crisis.
It must be acknowledged that foreign investment has provided many valued jobs in recent years, especially in Northern Ireland. It is imperative that we keep an open economy, especially when we endeavour to present ourselves to the world as a global player seeking beneficial free trade agreements with many other countries, having removed ourselves from the shackles of the EU.
I accept that many formerly successful businesses of varying sizes have suffered in terms of financial profitability because of the present Covid-19 crisis and may be vulnerable to takeover bids. This addition to Section 58 of the Act allows the Government to intervene to maintain the UK’s capability to stop unscrupulous investors advancing self-interest at the expense of the welfare of the British public. Therefore, I feel the measure proposed is timely and appropriate, and I support it.
The Earl of Lindsay (Con) [V]
My Lords, I welcome these two orders, but I want to raise an issue that is referenced in paragraph 8 in the accompanying report from the SLSC, of which I am a member. The issue is the lower turnover test threshold of more than £1 million below which the Government cannot intervene. Why is there any lower threshold at all when it comes to protecting the public interest in the relevant sectors?
It is entirely possible that a business with a turnover of less than £1 million could in other respects be of sufficient public interest for the Government to be justified in intervening. Recent new tech start-ups, for instance, or spin-out enterprises, perhaps from a university vaccine research programme, could well have a turnover of under £1 million but none the less meet the public interest criteria.
The £1 million threshold is even more questionable when one factors in the detrimental impact of the Covid-19 pandemic on business turnover and consequently the increased vulnerability of some businesses to predatory and opportunistic mergers and takeovers. A relevant business that had a turnover in excess of £1 million and was meeting the necessary criteria for intervention at the start of the year could now have a turnover of less than £1 million because of the pandemic; hence the simple question I pose to the Minister: why have a minimum threshold at all?
Lord Mann (Non-Afl) [V]
My Lords, I am still struggling a little to work out how the coronavirus crisis directly links into the dangers of malign investment in the artificial intelligence sector, which was cited by the Minister. Nevertheless, I welcome this move.
I have long called for more state intervention in particular in our newer and more vulnerable sectors in the way in which Germany and France have for the past 30 or 40 years been able to protect their industries better than we have. To catch up, as we leave the European Union, will make us more robust and competitive internationally.
The Government are taking a lot of more state powers to themselves—this is an example of that—but that needs to be counterbalanced by transparency. Transparency means not just that things are clean but that things are seen to be clean. It is imperative that the Government show the way in ensuring that there is full transparency of the Government overall and of individual Ministers in relation to every decision made in future in relation to, for example, mergers and takeovers.
Overall, this move to further state intervention is to be welcomed. One could call it rather Wilsonian in its style, and therefore it should be acceptable to everyone across the House.
Lord Kennedy of Southwark (Lab Co-op) [V]
My Lords, I support my noble friend Lord Stevenson’s regret Motion. The essence of my noble friend’s Motion is that, while broadly welcoming the intention of these orders, there are grave concerns about the controls available and when temporary becomes permanent in all but name. It all seems very unsatisfactory.
I concur with many earlier speakers’ concerns about our ability to protect the population’s access to sufficient supplies of vaccines and PPE. The record of the Government in the present pandemic is nothing to be proud of. With the horrific death rate, which is the worst in the whole of Europe, the Government have to do much better and should be ashamed of their record. I recall SMEs which produce PPE in the UK being unable to find markets in the NHS and instead selling their goods abroad.
A number of noble Lords have raised concerns about the CMA, its perceived weakness and when we can expect its new chair to be appointed. I share those concerns. Will the Minister address those points in his reply and, in particular, comment on the resignation of the noble Lord, Lord Tyrie, from his position as chair? I agree with my noble friend Lord Mann’s comments that many other countries in Europe, such as Germany, have done a better job of protecting their businesses than we have in the UK.
The Deputy Speaker (Baroness Garden of Frognal) (LD)
The noble Baroness, Lady Wheatcroft, has withdrawn from the debate, so I now call the noble Lord, Lord Holmes of Richmond.
Lord Holmes of Richmond (Non-Afl) [V]
My Lords, I thank my noble friend the Minister for the clear and comprehensive manner in which he introduced these orders. I declare my interests as set out in the register.
I fully endorse the comments of my noble friend Lord Lansley apropos the urgent need for an updated and applicable definition of “media” in the Act, and I ask my noble friend how this work is progressing. Will the Government consider looking at the level of public investment in businesses and at whether they would be in need of, and would take a positive attitude towards having, protection against hostile mergers and acquisitions activity? There have been a number of high-profile cases of incredibly successful businesses that have been well run but built largely on public money. Should there not be the potential to block these takeovers, with the Government, in investing in these companies with public money, taking a more direct stake? This could add to potential work on a sovereign wealth fund. I would welcome my noble friend’s comments on that.
Finally, will the Government consider adding to the list of areas that he set out? Of course it should include AI and cyber, but will he and the Government consider looking at distributed ledger technology, nanotechnology and some specific aspects of financial technology—fintech—which I believe would also warrant being included in the list? Not least of those is distributed ledger technology, which is likely to become one of the most powerful forces globally and on which the UK has a real edge, which is worth protecting. Perhaps in conclusion I may gently point my noble friend towards the report that I wrote in 2017: Distributed Ledger Technologies for Public Good. I would be very happy to discuss this with him and would welcome his comments on these areas.
Lord Campbell-Savours (Lab) [V]
My Lords I want to speak to the share of supply order and take one area of interest to me as a former member of the Intelligence and Security Committee: cryptographic authentication. It is an area where the security services might have a particular interest and might have to intervene in the national interest, and an area where we might be particularly vulnerable.
I believe that, following the introduction of this order, which will survive in one form or another well beyond the Covid crisis, the services should produce a report annually for the ISC to consider, setting out in some detail not only their activities in monitoring this area but their actions which they believe to be countering inappropriate activity. For example, government action arising out of hysteria over China has to be monitored, because it must not go unchecked. It would then be for the chairman of the ISC, following consultation with the services and then the committee as a whole, to decide what material could be included in the annual ISC report to Parliament, with suitable redactions.
Baroness Jones of Moulsecoomb (GP) [V]
My Lords, I want to focus very specifically on facial recognition and other biometric recognition systems. When I led a Question for Short Debate in your Lordships’ House on facial recognition, many of your Lordships voiced concern, or at least expressed the need for wider debate, on this topic. Some drew special attention to the capabilities of the private sector, which are frequently much more advanced than any system used by our police and security services.
For that reason, will the Minister confirm that facial and biometric recognition will fall under the category of artificial intelligence in this order and will therefore be subject to enhanced scrutiny in any potential takeover or merger? Will facial and biometric recognition be specifically addressed in the upcoming national security and investment Bill? In addition, can he make clear what is being done to prevent these technologies being used by state or non-state actors who might wish to do us harm?
The Deputy Speaker
The noble Lord, Lord Balfe, has withdrawn from the debate, so I now call the noble Lord, Lord Foulkes of Cumnock.
Lord Foulkes of Cumnock (Lab Co-op) [V]
I support my noble friend Lord Stevenson in his request for pre-legislative scrutiny of the national security and investment Bill. If the Minister cannot reply today, can he write to us all?
As a former member of the ISC, I fully support any efforts by the Government to ensure that British industries relevant for national security purposes cannot be acquired by hostile states. However, I see a potential danger from the wide powers being given to the Secretary of State, which, in a national security setting, are exercised largely behind closed doors, with submissions from the MoD and the intelligence agencies. Therefore, I hope that any national security intervention will come under the scrutiny of the Intelligence and Security Committee, enabling, we hope, effective scrutiny of the Secretary of State, even with Chris Grayling as its chair.
Can the Minister ensure that there is no way in which the real ownership of the companies involved will be kept secret by registering them in one of the overseas territories or Crown dependencies, making it difficult to detect potential security threats? Finally, there is a possibility that the Government will use these enhanced powers to implement a “jobs for the boys” approach to mergers and acquisitions. We have seen what can happen when friends of Dominic Cummings are given these kinds of contracts. I hope that we can have an assurance that we will not see that kind of thing in this instance.
Baroness Uddin (Non-Afl) [V]
My Lords, taking part in the Business and Planning Bill has pushed me to venture into this debate, and I add my small voice of support for the Motion of Regret in the name of the noble Lord, Lord Stevenson of Balmacara. I agree with the noble Lord, Lord Bruce, that we should remain mindful of our international obligations towards developing countries with regard to potential vaccine development.
I also agree with the sentiment that the Government must ensure that they have the capacity and confidence to guard against future threats. I understand their wish to be self-reliant when dealing with current and future public health crises in order to safeguard the welfare of the British people and intervene on grounds of public interest.
The new categories of businesses to be subject to the share of supply test are justified—although I would like to see the list widened—given the terrible complications and supply shortfalls that we have experienced during the pandemic. As a nation, we must be more alert and prepared for any potential second wave and other detrimental advances arising from external hostile forces that might be a peril to our national interest.
I also welcome the lowering of the thresholds, but I agree with noble Earl, Lord Lindsay, about not having any. Indeed, this might have been a factor that led to companies in the UK producing PPE and other medical instruments and making them available abroad while our capacity was drastically low.
I accept that, under these extenuating circumstances, for matters related to the availability of vaccines, essential food products, pharmaceuticals, and internet and communication infrastructures, we should intervene to protect our public interest. At the same time, any interventions must be transparent and beyond retrospective reproach, as suggested by my noble friend Lord Liddle, unless it is a matter of defence and state security.
Finally, a question arises about the financial impact of government intervention and how we safeguard parliamentary scrutiny and democratic oversight. Should the Government need to assist or rescue companies and intervene in merger processes, they should do so with thorough consultation with relevant trade organisations—
Baroness Bloomfield of Hinton Waldrist (Con)
I remind the noble Baroness of the time limit for speeches.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, I give a “better late than never” welcome to these statutory instruments, because protection of national interests, such as security of critical supply, critical infrastructure and defence of our science, technology and intellectual property base, has for too long been neglected and sacrificed on the altar of “We can buy it in” or, worse, takeovers have been celebrated as “evidence that Britain’s low-tax economy could attract major foreign investment”, which I believe is what some said of Pfizer’s proposed takeover of AstraZeneca in 2014.
It is a good thing that Vince Cable did not see it that way, and I recall that the present Prime Minister did not see it that way either. It is a pity that the Government’s public interest powers to cover the pharmaceutical and science sectors were not extended then, as was mooted. After the financial crisis, the financial sector was added for public interest protection. After a health crisis,
“public health and crisis mitigation capabilities”
have been added, and the farrago of Huawei and Hong Kong alerts us to reasons to have threshold-lowering measures for sensitive technology.
I see the creep towards a more comprehensive policy, but we are too slow. Other countries took faster measures to stop the buy-up of companies while they were cheap, a measure more needed in the UK as takeover is easier. I understand the concern not to overstep, but I share the broad sentiments expressed in the Motion in the name of the noble Lord, Lord Stevenson, that having good time and opportunity to scrutinise the national security and investment Bill would assist in finding the right balance for strategic economic security, preserving international reputation and even reducing risk of retaliation.
We have had a White Paper consultation already, and reports abound that further changes may be in train. However, there are opponents, especially in those business quarters that make significant money out of the UK’s easy takeover regimes. Do not listen to them: being a global investment and business centre does not have to be on a “UK for sale” basis. Many countries are sprucing up their FDI requirements in the light of experience, and they do not all have minimum turnover requirements, which I also challenge, as did the noble Lord, Lord McCrea. Having a broader set of FDI requirements does not undermine the key words from the Enterprise Act that there should be transparent and predictable decision-making. It is important to retain that, and the comments of the noble Lords, Lord Moynihan, Lord Adonis and Lord Liddle, are relevant to that.
I like the headlines from the new Dutch FDI proposals: ensuring continuity of vital processes; integrity and exclusivity of data and know-how; and avoiding the creation of strategic dependency. We have already ended up with strategic dependency in our energy sector— a matter that has exercised minds in several Lords committees, including the Economic Affairs Committee, of which I am a member, in its 2017 report on electricity. I welcome the inclusion of intellectual property in the additional share of supply order. However, like the Dutch, I would have included know-how, which has all too easily been lost in the past. I agree with the comments of the noble Lord, Lord Lansley, about IP held in separate small entities. It is of course a subject dear to my heart, as a patent attorney, and I have also had the dubious pleasure of coping with the vagaries of MoD secrecy orders on intellectual property, making me well aware of the difficulty that there can be in assessing relevance—which will be reflected in any government team trying to assess strategic issues.
Although couched in terms of security and investment, these are matters of competition policy, which is a sensitive issue on the international stage. Even for a body as strong, well-established and independent as the EU Commission competition body, it works best when there is political consensus. While I was ECON chair in the European Parliament, I was deeply involved in competition policy, bringing about procedural changes and new legislation. That happened largely because the Commissioner recognised the advantages of parliamentary support, not least in its external representation. Now, as the UK forges an independent competition policy—notwithstanding what may or may not be in a Brexit agreement—and hones foreign direct investment policy, I hope that the Government will draw on support from consensus. Competition disputes can last longer than Governments, and the undermining of strategic interests certainly does.
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.