Digital Markets, Competition and Consumers Bill

Debate between Lord Clement-Jones and Lord Hodgson of Astley Abbotts

Report stage
Monday 11th March 2024 Lords Chamber

[Lord Clement-Jones (LD)]

My Lords, the Minister gave a disappointing response in Committee to my amendment on exemplary damages in collective proceedings. In explaining the Government’s decision, he said:

“The bar on the availability of exemplary damages in collective actions was one of the many safeguards put in place when the Consumer Rights Act 2015 was enacted, to ensure a balanced system of collective actions before the CAT which will not lead to a culture of undue litigation and US-style class actions”.—[Official Report, 31/1/24; col. GC 371.]


That is not a particularly helpful way of describing a legitimate assertion of consumer rights in a collective fashion, given the imbalance of power that is there so often in these proceedings. We have heard about asymmetry, and this is precisely that kind of area. Why should they be denied exemplary damages when in an individual case they would have been awarded, for instance where the illegal action has been deliberate?

I thank the Minister for his letter of 27 February. In it, he says:

“These safeguards were put in place when the Consumer Rights Act 2015 was taken through the House to ensure a balanced system of collective actions before the CAT. These safeguards ensure that defendants are protected by avoiding vexatious and unmeritorious claims—or fishing expeditions—while allowing legitimate claims for redress to proceed”—


this is the point where I took a deep breath—

“without defendants feeling pressured to settle despite the likelihood of a strong defence”.

Let us consider who we are thinking of as defendants: quite often in these circumstances, they will be extremely large companies. Is it not time that we reviewed the Consumer Rights Act 2015 in that respect? Surely, in these circumstances, we are talking about big tech, which has all the market power and the ability to finance litigation till kingdom come. Have the Government engaged in any recent consultation on that? As far as I can see, the last consultation they conducted was 10 years ago. I hope that the Minister has some slightly better answers this time around than both those in his letter and in Committee.

I look forward to hearing from the noble Lord, Lord Tyrie, and I encourage him to retable his Amendment 65 on whistleblowing. The government response in Committee and in their letter of 27 February—in contrast to what I have just said—demonstrated a real interest in expanding the regime set out in the Public Interest Disclosure Act 1998. The Government now say that they are currently reviewing the effectiveness of the whistleblowing framework in meeting its original objectives. I very much hope that the Minister can give us a foretaste of the conclusions of that review. I also look forward to hearing from my noble friend Lady Kramer, who has been a champion of whistleblowing rights.

Without anticipating what the noble and learned Lord, Lord Thomas, may say, I welcome government Amendment 62, but the timescale is crucial. We on these Benches will help to facilitate a Bill putting those rights on the statute book in any way that we can. We have received a letter from the Association of Litigation Funders. Without putting too fine a point on it, it says: “This vital role of litigation funding has been highlighted recently following the increased and long-overdue coverage of the Horizon scandal. Alan Bates, the lead claimant against the Post Office, has said that the backing of litigation funders helped him and his colleagues secure justice, expose the truth and clear their names and reputations”. I cannot think of a better reason to make sure that we get the Bill on the statute book as soon as possible. I beg to move.

[Lord Hodgson of Astley Abbotts (Con)]

My Lords, I have Amendment 63 in this group, which is an updated and slightly amended version of Amendment 89A that I tabled in Committee. As the title of the proposed new clause says, the amendment calls for the Government to undertake a review of the third-party litigation funding industry. We discussed my earlier amendment on 31 January, and a lot has happened since. I have been blowing the trumpet since March 2017, and suddenly it appears that the walls of Jericho have fallen down.

I thank the noble and learned Lord, Lord Thomas of Cwmgiedd, who has been kind enough to send me a copy of the draft report by the European Law Institute on the principles that should govern third-party funding. The draft report contained a great deal of intellectual heavy lifting, from which I have benefited greatly.

Most importantly and significantly, I thank my noble friend the Minister and, through him, the Lord Chancellor and the Ministry of Justice for the announcement on 4 March that a review of third-party litigation funding would be undertaken. I am also grateful to my noble friend and his officials for giving me the chance to see some early draft terms of reference and for the opportunity to discuss them with him. I have a handful of points about them that I would like to put on record tonight, and I hope he will be good enough to pass them on to the MoJ, so that they may be taken into consideration as the terms of reference are firmed up.

First, in Committee I explained that I was a very strong supporter of the concept of access to justice, but that we needed to know what sort of justice was being accessed. The noble Lord, Lord Fox—I am sad that he is not in his place, but I did say I was going to mention him this evening—got after me, not entirely unfairly, saying that all my remarks were, as he put it, of second-rate importance and that, without third-party litigation funding, there was no justice at all, to which I reply: up to a point, Lord Copper.

We—and I hope the review—must not forget that the funders are profit-making entities. This in itself is entirely understandable, but a profit-making entity marches to the beat of a different drum. All I am saying is that the plaintiffs—whose interests, after all, the funders are supposed to represent—are entitled to know about the beat of that drum, the waterfall of the distribution of the proceeds, who pays costs, and all those sorts of issues. If obfuscation takes place, there should be a body—the courts, perhaps—that can step in. Equality of arms demands no less.

My second point is that I hope the review will be prepared to get down into the real practical detail of what is happening in the industry today. High-flown legal principles are really important to provide the right structure but, to be effective and worth while, the review will need people with experience of the third-party litigation funding industry and those with a preparedness to get into the detail and turn over all the stones.

Thirdly, I hope the review will examine the consequences of grouping claims together, in the way that they are put together for funding via a single investment pot. In particular, the review will need to consider the position where firms of solicitors are undertaking the grouping. As I explained in Committee, where several cases are included in a single pot, there is a danger of too early a close-out, from a plaintiff’s point of view, of the remaining case or so, when the funder would like to round up the pot and return the money to its investors. By contrast, when matters are not going so well, it may be in the funder’s interest to prolong the proceedings—not in the interests of the plaintiffs—in the hope that a greater result will come from the last few cases, and the result will be a much more satisfactory outcome. The key differentiation is that the plaintiffs have an interest in the outcome of a single case, whereas the funders have an interest in the outcome of a group of cases.

Fourth is any unwitting exposure to costs. Under the opt-in regime, individuals took their chances when they signed in—not so under the opt-out regime. I think I am right in saying that there is nothing to stop my noble friend the Minister, me, or Members of your Lordships’ House suddenly getting communications saying, “Please send us £100 for your share of unfunded costs of bringing this case”. That seems to be not a likely but a possible situation, and not a very satisfactory one.

Fifthly, for those Members of your Lordships’ House who sat through Committee and other stages of the National Security and Investment Act, when we were seeking to achieve a reasonable balance among interested parties, there is a read-across to this review. It is surely not in our national interest to have unknown funders—perhaps backed by foreign Governments—able to press for litigation claims against high-tech UK companies. Such actions can disrupt the management and development of the company or damage its reputation, and could in some cases give access to its technology. An ability for the Government and/or the courts to require disclosure of beneficial ownership could be of great advantage in the future.

Finally, we are promised a preliminary report this summer and a final report in summer 2025. This will presumably mean that the earliest we can accept draft legislation, if there is any, will be in the 2026-27 legislative programme, leading to stuff on the statute book in 2028. That is quite a long way away, and I hope we are not going to see any slippage in that timetable. I hope that I have been over-pessimistic about what might be achieved, and that my noble friend can reassure us on that.

I end as I began, by thanking my noble friend and the Government for this important development. I hope they will feel able to pass these remarks on to the MoJ and I ask whether those of us who have taken a long-standing interest in TPLF can be kept informed as matters develop, and that we shall have the opportunity to give evidence to the review in due course.

Elections Bill

Debate between Lord Clement-Jones and Lord Hodgson of Astley Abbotts

Report stage
Monday 25th April 2022 Lords Chamber

[Lord Clement-Jones (LD)]

My Lords, I rise to move Amendment 58 and speak to Amendments 60, 61, 62 and 65. The amendments in my name in this group closely resemble those I tabled in Committee and that I spoke to comprehensively then. They all relate to digital election campaign content, and I will not repeat the arguments I made for them at any length today. I am grateful to the noble Lords, Lord True and Lord Parkinson, the Bill team and officials from DCMS and DLUHC for meeting with me after Committee, and for what could perhaps be called a moderately enlightening discussion.

Through these amendments, I have been pursuing four aspects of digital campaigning. First, clear guidance on digital imprints is represented by Amendment 58. I have been assured that the Scottish provisions in law—and hence their guidance—are not nearly as prescriptive as those set out in the Bill. I hope that the Minister will give his assurance that the current interpretation of the Bill means that statutory guidance from the Electoral Commission—when it comes forward—will require the imprint in almost every circumstance to be on the image or post, unlike in Scotland. It is really only on platforms such as Twitter, where there is a character limit, that it can be considered not to be practicable to put the full imprint. In addition, I hope he will confirm there will be an expectation that the forwarding of posts will require either the full original imprint to be included or a new imprint to be placed on the material. There will also, I understand, be rules put in place for when and how long material must be retained for inspection.

Secondly, banning foreign actors is sought by Amendment 61. The noble Baroness, Lady Scott, and the noble Lord, Lord True, prayed in aid the new £700 limit and the imprint requirements at our meeting at Committee stage, but neither of them addressed the loopholes which will still exist where multiple identities can be created. This is where both Ministers’ statements were inadequate. The new amendment no longer covers British overseas electors, so I hope the Ministers come up with better assurances in this area. There is some consolation in the provision to review the operation of the Bill, but it is important at this stage—at this stage, not later—to take a view whether they are sufficiently watertight as regards foreign actors. This is an area where the Intelligence and Security Committee and the Committee on Standards in Public Life advocated much stronger controls.

Thirdly, Amendment 62 would require promoters to establish advert libraries for digital campaign adverts placed, while Amendment 60 would require detailed information about expenditure on digital campaign material. Here, the main government argument seems to be that the social media platforms that take political advertising—i.e. not Twitter—are keeping libraries already and are different in character, so it would be inappropriate to have a one-size-fits-all regulation. But at the same time, the noble Lord, Lord True, sought to assure me that several important recommendations of the Committee on Standards in Public Life and the Electoral Commission, including those relating to advert libraries and more detailed information on invoices, are still under consideration by the Government. Given the timing of the introduction of this Elections Bill, surely it is high time for the Government to have made a clear decision. What is the state of play here, in terms of a decision having been made on those recommendations?

The fourth area is that of misinformation and disinformation, starting with my Amendment 65 to criminalise false statements about election integrity, which is designed to see what direction the Government are planning to take. As I outlined in Committee, a whole host of Select Committees and the Committee on Standards in Public Life have made recommendations in this area. This has particular relevance in the context of the Ukraine invasion and Russian behaviour in the digital space for many years now. As former President Obama said in a recent interview with The Atlantic magazine,

“if you ask me what I’m most concerned about when I think back to towards the end of my presidency… that is the degree to which information, disinformation, misinformation was being weaponized. And we saw it. But I think I underestimated the degree to which democracies were as vulnerable to it as they were, including ours”.

And the director of GCHQ, Sir Jeremy Fleming, made a strong point about values in his recent speech in Australia. As he said,

“we must make sure that we stay true to our values, those that have made our systems and democracies so successful and will do so in the future too”.

A recent Ofcom study has revealed that 30% of UK adults who go online are unsure about or do not even consider the truthfulness of online information. A further 6%—around one in every 20 internet users—believe everything they see online.

There is, of course, crossover with the Online Safety Bill. I was grateful for the presence of the noble Lord, Lord Parkinson, at our meeting, where he gave some assurance about the operation of the Bill and the powers of Ofcom regarding the design features of social media platforms and the way that their algorithms amplify misinformation and disinformation; about the adoption of the Law Commission proposals for a new offence of false communication; and about the workings of the counter-disinformation unit together with the Defending Democracy programme and the so-called Election Cell—which I was assured was not as opaque as it seems.

I do not expect the Minister to promise amendments ahead of the Online Safety Bill coming to this House, but I hope he will demonstrate a strong awareness of the importance of this aspect of digital campaigning. We will obviously return to this subject when the OSB comes into this House later in the year.

All that said, it is clear that in many of these areas the guidance and review of an independent Electoral Commission is going to be critical together with parliamentary oversight. Responsibility for elections has now transferred to DLUHC from the Cabinet Office but it is no more acceptable for the Secretary of State for Levelling Up to set the policy and priorities for the Electoral Commission than it is for the Cabinet Office.

Given the risk of skewing our political system in favour of the incumbent Government, it is all the more important we hold fast when the issue which we determined in the first group today comes back to this House. I beg to move.

[Lord Hodgson of Astley Abbotts (Con)]

My Lords, I have an amendment in this group—Amendment 59, previously tabled in Committee as Amendment 45B. The purpose of the amendment is very simple: it aims to increase transparency about third party campaigning by inserting this new clause, “Disclosure of status as a recognised third party”.

It is not concerned with the question of the imprints on electronic or printed material, which are, essentially, transitory—they come and go—and which are the target of the amendments from the noble Lord, Lord Clement-Jones, to which the Minister will reply in a minute. It is much simpler than that. It focuses solely on the homepage or the website, if it has one, of a registered third party campaigning organisation. If the amendment were accepted, the homepage of that registered organisation would be required to carry a statement along the lines of “XYZ”—the name of the campaigning organisation—“is a registered third party campaigner under Part 6 of PPERA 2000”, or similar wording.

The purpose behind the amendment is to ensure that individual members of the public viewing the website of a particular organisation are unequivocally, and at all times, made aware that the organisation is an active political campaigner. I have never suggested that this is going to bring about any radical change, but by increasing transparency about who is doing what to whom, it follows the direction of travel that the Government have said underlies the Bill.

In his reply in Committee, my noble friend the Minister was rather encouraging when he said:

“On the specific amendment of my noble friend, while the Government entirely agree with the principle that the public should clearly be able to identify recognised third parties, I can reassure the noble Lord that the current rules, supplemented by new rules in the Bill, will provide for that.”—[Official Report, 17/3/22; col. 477.]


He went on to say he wanted to go away to consider it further and asked whether I would withdraw my amendment, which I duly did.

At that point, my noble friend took the trouble to write to me. By this stage, I am afraid his remarks were rather less encouraging. He went on to say in his letter on 4 April:

“I … wanted to reiterate the Government’s position on your proposal to require registered third parties to disclose their registered status on a prominent place on their website, where they have a website … The Government entirely agrees it is right that third-party groups campaigning at elections should be transparent and clearly identifiable. Registered third party campaigners are already … listed on the Electoral Commission’s website, and the Elections Bill will introduce further requirements to ensure that any UK-based group spending over £10,000 registers with the regulator.”


If noble Lords read and consider that carefully, the outcome is quite different from that which would be achieved if my amendment were implemented. Yes, there will be rules about imprints on digital material, which might be strengthened by the amendments of the noble Lord, Lord Clement-Jones, if they were accepted, but unless a member of the public is visiting the organisation’s website because he or she has just received some imprinted material with a digital imprint on it, there will be no way of knowing whether or not the organisation in question is a registered third-party campaigner.

National Security and Investment Bill

Debate between Lord Clement-Jones and Lord Hodgson of Astley Abbotts

Report stage
Thursday 15th April 2021 Lords Chamber

[Lord Hodgson of Astley Abbotts (Con)]

My Lords, since this is the first time I have spoken at this stage of the Bill, I add my thanks to those of my noble friend Lord Lansley to the members of the ministerial team and the Bill team for the time they have given and the meetings we have had to clarify and sort out the delicate balance we are all trying to achieve and the changes being made, which are part of the amendments in this group.

I will focus my remarks on Amendment 8, which returns to whether minority investor veto rights automatically bring the investment in question into the provisions of the Bill. It was an issue I addressed in Amendment 29 in its previous incarnation, along with Amendment 72. I found the Government’s arguments about Amendment 72 entirely convincing, so I have not retabled it, but I am not able to say the same about the response I received to Amendment 29, so I have retabled it and have discussed it with the Law Society, which seems similarly confused.

This is important because if we do not get clarity on this issue, there are at least two possible consequences: a potentially large increase in the number of voluntary notifications required, so further straining the system which the department is setting up, and/or a deterrent effect on people’s readiness to invest in the defined sectors of our economy.

I explained in Committee that a private equity investment essentially has two parts. There is the purchase of the shares, which will take place under the standard provisions of the Companies Act, and that is where the control of the entity lies. In parallel, it will be supplemented by a specially drafted, custom-made investment agreement. This is an agreement which both parties—the investee company and the investor—hope will be put into a drawer and never looked at again but, life being what it is, disagreements take place and the agreement is therefore essentially a protective device for the investor against malfeasance or bad performance by the managers of the company. The Minister needs to understand that it is essentially an agreement about corporate governance, not corporate law, which is how the company is controlled. That investment agreement is likely to require the investor’s consent to a number of major issues, such as approval of the budget, major capital expenditure proposals and so on.

When I describe it like this, it can be seen that these are protective provisions, not proactive initiating ones, but although they are protective, they are extensive, and this is where the use of the words “substantially all” in Clause 8(7) becomes significant. If that is the case, the Bill appears to bring within its ambit a range of private equity investments where the new investor has taken a minority position. It might be assumed that the new investor will be taking a minority position for malfeasance reasons, but there are a large number of reasons why private equity houses do not wish to buy 100% of a company. It may be that the existing management will not sell more than 50%. It may be that the new investor wishes the continuing management to have a real incentive to do well, and therefore likes it to have a larger stake. Last but not least, it may be that the investor has a maximum size of investment he can make and that determines the percentage that the investor can hold. So if you have an investor who can put up only £40 million and the company is worth £100 million, it can take only 40% because that is how the maths work out.

The new investors who are in a minority position need additional protections, and if they can obtain those protections only after making a notification then there are these consequences of more voluntary notifications and some diminution in the attractiveness of the sectors covered by the Bill. That does not seem a desirable outcome.

I have said that significant changes to a company’s status come about not from the investment agreement, but as a result of passages of ordinary or extraordinary resolutions under the Companies Act. Amendment 28 is therefore designed to remove some of the wording of Clause 8(6), which is untried, untested and, at least in the view of a number of law firms, open to interpretation, and replace it with company law provisions with which everyone is familiar.

When winding up the debate on this amendment on 9 March, the Minister said, “I believe that his”—that is my—

“intent is very much to seek to exclude acquisitions of minority veto rights from constituting trigger events.”

So far, so good. He then went on to say:

“However, the Government consider that the Bill already achieves this goal to some extent”—[Official Report, 9/3/21; col. GC 637-38.]


because of the provisions of subsection (7). That is the heart of the matter. The concern of the Law Society and others is that the Bill creates uncertainty where no uncertainty need exist. That uncertainty can easily be dispelled if we use familiar company law concepts.

To summarise, I argue that if no change is made to guard against these uncertainties, legal advisers to private equity investors can be expected to take a belt-and-braces approach and suggest that on all occasions a voluntary notification should be made. When he comes to reply, I invite the Minister either to say that the Government believe that minority investor rights are not covered by the Bill so that we are all clear about that or, if he cannot say that, to please agree to take a further look at it to try to create certainty and dispel uncertainty, and therefore further ensure that we get the right balance between personal property rights and the nation’s security.

[Lord Clement-Jones (LD)]

My Lords, I shall speak to the Government’s amendment and to Amendment 8 in the name of the noble Lord, Lord Hodgson, but, as regards Amendment 2, the questions raised by the noble Lord, Lord Lansley, are valid and it is rather inexplicable that that subsection of Clause 8 is not included in Clause 6.

When we debated the thresholds for the trigger for mandatory notification, the noble Lord, Lord Leigh—I am sure he will get many tributes today for having pushed the envelope and succeeded in having the Government agree with him—raised issues about 15% versus 25%. The principal arguments were that keeping it at 15% would result in a huge number of notifications, the vast majority of which would not give rise to national security concerns, which would place a significant administrative burden on the new investment screening unit, and that that the current filing threshold of 15%, as set out in the Bill, is significantly below the threshold used in a number of other major foreign direct investment regimes such as France, which requires 25%, Australia which requires 20% and Canada which requires 33.3%. I am delighted that the mandatory notification threshold has been increased to 25%, which was the threshold set out originally in the White Paper. I think the Government’s reversion to their original intent is very much to be welcomed.

As regards Amendment 8, tabled by the noble Lord, Lord Hodgson, not having practised company law for many years now, I can only admire his forensic ability in setting out exactly why we need greater clarity under that provision. He has illustrated that the current language does not provide that level of clarity. In his words, it does not dispel uncertainty, but the language in his Amendment 8 certainly would. I believe it is only in the Government’s and the ISU’s interest to acknowledge that, and I very much hope the Government will accede to his request to provide clarity, either by accepting his amendment or by giving assurance that they will look at it further and take that forward at Third Reading.

National Security and Investment Bill

Debate between Lord Clement-Jones and Lord Hodgson of Astley Abbotts

Committee stage
Tuesday 9th March 2021 Grand Committee

[Lord Hodgson of Astley Abbotts (Con) [V]]

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.

[Lord Clement-Jones (LD)]

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.

National Security and Investment Bill

Debate between Lord Clement-Jones and Lord Hodgson of Astley Abbotts

Committee stage & Lords Hansard
Tuesday 2nd March 2021 Grand Committee

[Lord Hodgson of Astley Abbotts (Con)]

My Lords, this is the first time that I have spoken in this Committee, so I draw attention to my entry in the register of your Lordships’ House. I wish to speak to Amendments 41 and 44 in this group, which I have tabled with the support of the noble Lord, Lord Clement-Jones, for which I am extremely grateful. I am also grateful to the Law Society for its assistance.

The two amendments build on remarks made by my noble friend Lord Vaizey in moving Amendment 5. Amendments 41 and 44 are to Clause 13, which is entitled “Approval of notifiable acquisition”. I am afraid I have to argue that that title is, at best, ingenuous because, under the wording of the clause as presently drafted, there is no requirement for the Secretary of State to register his disapproval; instead, his silence is all that is needed. I argue that, from the point of view of providing certainty for investors, bankers and—last, but by no means least—companies, their management and employees, this is not good enough. Furthermore, this silence inhibits a proper degree of parliamentary scrutiny, making it more likely that cases can be slipped through under the radar. It will also prevent Parliament having the opportunity of examining how practice may be shifting as regards preserving the delicate balance that this Bill seeks to create and maintain between protecting national security and providing maximum safety for investors’ property rights.

We need the spotlight to be shone on those tricky areas so that decisions taken by the Secretary of State have to be justified openly and publicly. That is what Amendments 41 and 44 seek to achieve. Famously, TS Eliot wrote:

“This is the way the world ends

Not with a bang but a whimper.”

In this difficult policy area, a whimper is insufficient. I see no reason why in an open society the Secretary of State should not be under the maximum pressure to provide a clear, concise and public declaration of his decision and the reasons for it. Our society, together with our business and investment community, are entitled to no less, so I very much hope that the Government will be able to accept these two amendments.

[Lord Clement-Jones (LD)]

My Lords, it is very difficult to follow the noble Lords, Lord Vaizey and Lord Hodgson, especially after the quotation from the noble Lord, Lord Hodgson, of which I think we must be very mindful. I support both in their very similar endeavours, particularly the noble Lord, Lord Hodgson, in his Amendments 41 and 44, which I have signed.

The case has been very clearly made that automatic voidness creates excessive legal uncertainty for investors and lenders. The proposed wording would mean no automatic voidness but a power of the Secretary of State to impose it. A voidable power would give the Government power to declare a transaction or part of it void if it gave rise to national security concerns and ensure that workable steps can be taken to unwind the transaction to the extent considered necessary. While it is clearly important to apply significant sanctions when a transaction subject to the mandatory notification obligation is completed without first obtaining approval from the Secretary of State, such sanctions must also be workable in practice. Treating such a transaction as automatically void, as envisaged in Clause 13, will give rise to a host of practical difficulties and is simply not workable in practice.

--- Later in debate ---

[Lord Hodgson of Astley Abbotts (Con)]

I put my name to this amendment, but somehow along the way I was left off the speakers’ list, so I am glad to have scraped back on again. My noble friend Lady McIntosh made the case for the amendment clearly and decisively, so I will merely sweep up and say that, at Second Reading, there was general agreement that we were seeking a balance between the fact that the country had to be protected from overseas powers gobbling up key companies in key sectors, yet at the same time keeping our economy open for inward investment, particularly in the tech sector, where we have such a worldwide reputation. We all agreed then, and agree this afternoon, that that is the difficult balance that we seek to strike.

Of course, once the Bill passes into law, Parliament’s opportunity to examine and, where necessary, recalibrate that balance will be limited, to say the least. When the noble Baroness, Lady Bennett of Manor Castle, talks about the dangers of the markets, I think she is headed in completely the wrong direction, with due respect. My concern about the Bill is about not markets but mission creep: that we will end up with the Bill doing nothing that was anticipated when it was first drafted.

Like my noble friend Lady Noakes, I have no doubt that the Minister and his officials will say they have a very clear idea of how the provision will be used, and there is no question of mission creep under the Bill. As we all know, Ministers, parties and policies change, and there are serious dangers if we do not accept some form of amendment such as this.

First, there is the issue of employment under paragraph (a). How easy is it to see a future Secretary of State, faced with some politically unhelpful headlines about unemployment following a potential takeover, being tempted to press the national security button to avoid some disobliging comments? Under paragraph (c), we should never underestimate the lobbying powers of big companies. Hell hath no fury like a big company that finds its market invaded by a smaller, nimbler competitor offering a better, cheaper product or service. The smaller competitor, perhaps growing faster than its internally generated funds can support, may need to find outside capital, and some of that outside capital may come from overseas—it is likely to. How convenient for the big company if it can lobby the Secretary of State to block funding for the growth of its successful smaller rival on the grounds of national security.

Those are just two examples where mission creep might occur; there are plenty of others. I hope the Government will understand that the purpose behind this amendment is to make sure that the Bill continues to do what it says on the tin.

[Lord Clement-Jones (LD)]

My Lords, it was a pleasure to put my name to the amendment in the name of the noble Baroness, Lady McIntosh, because I think that I understand its intentions entirely. It is also a pleasure to follow the noble Baroness, Lady Noakes, and the noble Lord, Lord Hodgson, in their elucidation of what the amendment is about. I think the noble Baroness, Lady Bennett, has entirely misunderstood the essence of this amendment.

Earlier in Committee today we were trying to get some sort of definition of national security, and I think that the noble Lord, Lansley, in his inimitable way, managed to unpick that rather successfully. As far as national security is concerned, it is a mission impossible to try to carry everything in one bundle in a definition. This tries the other way on and, as the noble Lord, Lord Hodgson, said, it is designed to avoid mission creep. It is trying to make sure that the definition of national security is not used as a blanket term to cover damage to the economy and society. It has the huge benefit of simplicity; it tells us what is not in national security rather than what is in it. It clarifies that certain factors such as employment, reciprocal investment or trading opportunities, and protectionism will not be taken into account when assessing national security. If there was mission creep in the way that was described, it would undermine legal certainty and damage investor confidence in the way that we have heard from a number of noble Lords.

The Government have kept assuring us that this is not, in the words of the noble Lord, Lord Callanan, a national interest Bill but a national security Bill. That is exactly what this amendment is trying to ensure—that we do not have that all-encompassing national security definition used by lobbyists or others to try to bring things into the net. I have seen it happen in the United States. The CFIUS is absolutely that kind of spider-like operation that brings in all sorts of spurious transactions. I very much hope that we will keep this provision absolutely focused, and this amendment is a very good way of doing it.

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[Lord Hodgson of Astley Abbotts (Con)]

My Lords, Amendment 7 shortens the period in which the Secretary of State may give a call-in notice following a trigger event, under the provisions of Clause 2, from five years to two years. I am grateful to the noble Lord, Lord Clement-Jones, for his support.

It was interesting that, when giving evidence to the Public Bill Committee in the other place, on 24 November, Michael Leiter—perhaps related to Felix Leiter—head of national security and the committee on foreign investment at Skadden, Arps, the major US law firm, described the Bill as

“a rather seismic shift in the UK’s approach to review of investment.”—[Official Report, Commons, National Security and Investment Public Bill Committee, 24/11/20; col. 46.]

He stressed the importance of clarity in what was proposed, given the criminal penalties that are now being introduced and that there is no interim period for familiarisation.

This amendment and all the others that I have tabled, two of which I have already spoken to, aim to test both the clarity and, importantly, the practicality of the proposals that the Bill contains. I stress that practicality because, there can be a danger, when Bills like this are in Committee, of focusing on legal terminology and overlooking the flesh and blood consequences of the decisions that Parliament is about to take. I hope that the Committee will forgive me if I spend a moment on two real-life examples, because they give useful background to this and my other amendments.

Members of the Committee may be aware that I am chairman of the Secondary Legislation Scrutiny Committee of the House. In December 2019, our committee was notified of the laying and simultaneous making of two statutory instruments: SI 2019/1490 and SI 2019/1515. The full title of SI 2019/1490 is the Public Interest Merger Reference (Gardner Aerospace Holdings Ltd. and Impcross Ltd.) (Pre-emptive Action) Order 2019. The full title of SI 2019/1515 is the Public Interest Merger Reference (Mettis Aerospace Ltd.) (Pre-emptive Action) Order 2019. These were the first referrals under the new regime with reduced thresholds, and this was the very first time that the Government used pre-emptive powers; that is to say that they were seeking to stop a takeover before any offer was made, rather than reacting to an offer once made. These two statutory instruments therefore give us a glance into the world that the Bill takes us into.

I shall say a couple of words about the protagonists. Gardner Aerospace, the predator and potential acquirer, is based in Derby. It was acquired by Chinese investors in 2017 for some £300 million and has since made a number of acquisitions in the aerospace sector. Mettis Aerospace, one of the targets, is based in Redditch and has sales of £86 million, which is above the old threshold. It is substantially profitable—it made about £9 million of profit before tax—and has some 500 employees. Its customer list reads like a who’s who of world aviation and its two leading customers are Airbus and Boeing.

Mettis’s roots can be traced back to the early days of British aviation. For those who like a historical note to our debates, it produced the framework that held in place the bouncing bombs under the Lancasters flown by Guy Gibson and the men of 617 Squadron in their successful raid on the Ruhr dams in the Second World War. A few years later the company produced the fan blades for Frank—later Sir Frank—Whittle’s first jet engine.

Mettis is owned 25% by the management and 70% by a private equity firm called Stirling Square Capital Partners. The fund through which the investment is being made is based in Luxembourg. Stirling is based in London but, judging by its list of partners, has a strong orientation towards continental Europe. The investment will almost certainly have been made on behalf of third-party investors who have pooled their funds for Stirling to manage. Such investors may very well come from all over the world and this is unlikely to be their only investment in the UK, so if they perceive the treatment of any one of their UK investments as being inequitable, there will inevitably be a ripple effect on their readiness to invest in the UK generally. Mettis made it clear to the Competition and Markets Authority and the Government that it had not put itself up for sale. Gardner’s approach had not been sought and was regarded as being what in the trade is known as a fishing expedition. The outcome was that Gardner pulled away on 27 February, following a heavily redacted CMA report published on 13 February.

The story of Impcross is quite different. It is a much smaller company based in Stroud, Gloucestershire, with a turnover of only £11.9 million, so it would not have been eligible under the old thresholds. It lost money in the year to 30 June 2019, but only a small amount—£350,000—and, significantly, it is controlled by one person. Its accounts reveal a person of significant control, or PSC, holding between 50% and 75% of its shares. That has been built up over a lifetime and it would not be unreasonable if that director now wished to realise the fruits of his efforts. If the state stepped in to prevent that—we cannot be certain exactly what happened—without offering any alternative solution, it seems a hard moral choice. Either way, it all took a lot longer to resolve and it was only on 10 September that Gardner withdrew.

In speaking to Amendments 41 and 45 a few minutes ago, I argued that it was not good enough that, under the provisions in Clause 13, all the Secretary of State had to do to void an acquisition was to say nothing. For Mettis, this was not a problem: the company was clear that the approach was not welcome. For Impcross, there were 10 months of uncertainty with the Secretary of State appearing to set up a sword of Damocles but apparently never having to cut the string. That cannot be the right way to provide certainty for investors in the UK tech sector.

I have one final point. In our debate a moment ago on Amendment 6, tabled by the noble Baroness, Lady McIntosh, the Committee expressed concerns about the degree of parliamentary scrutiny of developing practice in this sensitive area. The two cases I have referred to were authorised by a statutory instrument. Statutory instruments are not amendable, and it would seem vanishingly unlikely that either House of Parliament would seek to reject one—the nuclear option—so any scrutiny of future practice will be at a very high level, and even that scrutiny will be ex-post. Both the above SIs were made and laid on the same day, 6 December 2019, at a time when Parliament was in any case not sitting because of the general election. It would be worthwhile if the Minister could confirm whether in this brave new world of these pre-emptive actions, each would still be the subject of a separate SI, so affording at least some degree of parliamentary oversight.

I turn now to the details of Amendment 7. I have tabled it because giving the Secretary of State the ability to unpick a merger or takeover after five years is to ignore the real world. Acquisitions are made with a view that two plus two will make five and that overall, they will be profit-accretive. In the event, that promise is often not achieved, but that is the idea that people set out with and to do that, changes have to take place at various levels.

First, the acquiring company will want to ensure that the financial performance of the two companies are managed on the same basis so that one company’s financial reporting systems will disappear. Secondly, it is inevitable that in any acquisition, there is extreme nervousness among the staff of the two companies about winners and losers in the new configuration. That nervousness can be reduced by an exchange of staff between the two companies, so that they get to know each other. Thirdly, it is unlikely that it will be cost-effective to maintain two separate research and development facilities, so they will be merged as one. Fourthly, marketing and sales teams are likely to be combined to broaden and deepen product range and market reach. Finally, it may be concluded that the new entity would be more effective and profitable if it operated from a single site, so one facility will be closed and the site sold.

Within five years, all of these steps could have taken place and if they had, the companies would be indistinguishable. I appreciate absolutely that the Government need some power to reach back where a case may have been slipped past them, but I argue that two years should be sufficient. At the same time, there is at least a likelihood of there still being a unit that is sufficiently independent to resume an independent life.

Members of the Committee may remember their days in primary school and the magic of mixing paints. If one mixed blue and yellow paints together then, suddenly and miraculously, one had green paint. That is in effect what one does with the merger of two companies: you mix a blue and a yellow company, and the result is a green one. After some time, and certainly after five years, the two constituent parts will be indistinguishable. That of course is vital, considering the position of investors who may find that they still own an investment which they thought had sold five years previously. I would argue that a maximum of a two-year clawback will provide a better balance between the interests of all the parties in this delicate area. If my noble friend is not inclined to accept the amendment, will he tell the Committee how his officials will undertake the practical challenges of separating the green paint into its original blue and yellow parts? I beg to move.

[Lord Clement-Jones (LD)]

My Lords, I speak in strong support of Amendment 7, in the name of the noble Lord, Lord Hodgson. I am a former company secretary and legal adviser to a publicly listed company. I know from personal experience what it is like to wait for competition decisions, takeover panel decisions and for all the uncertainties of regulation external to the company as a result of its commercial activities.

Given that, I am entirely in sympathy as the noble Lord, Lord Hodgson, has set out what he calls the flesh-and-blood consequences of the two case studies that he put forward extremely graphically and well. Not least, he has hinted at some of the issues around statutory instruments and the level of scrutiny. There is little that I can add to what he has said about the undesirability of having a massive period of time within which a Secretary of State can act—up to five years. However, I would like to add to the practicality issues that the noble Lord has raised.

The longer a deal has been in place, the more difficult it will be to void or avoid—that is, unwind—a transaction. Unwinding a transaction after five years is a very long time in commercial terms. Thinking back to my own career, subsidiaries are sold, businesses are purchased and the commercial realities change over five years. It would be exceptionally difficult, even if it were possible, for a listed company involving public transactions to unwind those transactions.