National Security and Investment Bill (Twelfth sitting)
Debate between Alan Whitehead and Peter GrantThursday 10th December 2020
(4 years ago)
Public Bill CommitteesRead Full debate National Security and Investment Bill 2019-21 View all National Security and Investment Bill 2019-21 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 10 December 2020 - (10 Dec 2020)
Dr Alan Whitehead (Southampton, Test) (Lab)
I beg to move, That the clause be read a Second time.
Hon. Members will be sad to know that I have failed in the ballot to be one of the 2,000 supporters to watch Southampton Football Club this Saturday. I will reflect on that, but I have already sat here for much longer than 90 minutes in near-freezing conditions, watching two equally matched teams slug it out together, so I am not too upset about it. That is the last thing I will say about the unpleasant conditions in this Committee Room.
I hope this clause will be seen as helpful to the Secretary of State and as an addition to the armoury of this Bill in dealing with the multitude of different circumstances under which influence may be sought, or technologies and sensitive information may be acquired, as we have discussed. It seeks to give the Secretary of State an exercisable power under the clause 1 call-in powers and it follows on from what my hon. Friend the Member for Ilford South said in the previous debate.
Start-ups may be invested in by venture capitalists, but those venture capitalists may turn out to be bodies that are effectively seeking to gain influence in the start-up or small company, by means of investing in it. They are not seeking to control it, or to control either the entity or the asset, in terms of the meaning in section 8 or 9, but to put themselves in a position where it is pretty impossible for those companies to resist providing information to that limited partner.
In the UK, British start-ups effectively rely on foreign investment. In 2019, 90% of large tech investment rounds included US or Asian investors, according to Atomico’s “The State of European Tech.” There are many circumstances in what we might call our UK venture capital ecosystem in which that kind of sourcing of funds is a regular state of affairs. Venture capital-reliant firms in this country are now receiving millions of pounds from Chinese investors, as my hon. Friend the Member for Ilford South has enumerated for us.
Those venture capital investments do not end up, and are not supposed to end up, with the seeking of material control of those companies. As I have said, it would be difficult—practically impossible—for that venture capital-based firm to deny its limited partner investors access to technological information from portfolio companies. In such cases, especially when limited partner investments in the fund take place after an initial trigger event, those would be missed by the Bill as it currently stands. Indeed, that is made tougher still by the fact that most venture capital funds do not publish the names of limited partners. So the Government would not even know when those investments happen and when access to information passes into potentially hostile hands. That series of circumstances is becoming pretty widespread in the high-tech world, and does not appear to be focused on very accurately by the provisions already in the Bill.
What the amendment seeks to do, as I have mentioned, is enable the Secretary of State—if it is considered by the Secretary of State to be an issue that warrants further consideration—to make regulations for the provision of that call-in power outside the terms of clause 9 of the Bill. I think that is a potentially very positive additional power that would reside in the Bill and would be an additional piece of armoury in the hands of the Secretary of State on the basis of what we think is a continuing expansion of investment which may have malicious intent to scoop up, by that venture capital arrangement, a slice of sensitive information.
I was thinking about the equivalent of Chinese dragons in “Dragons’ Den”, taking a portion of the company in return for having a hand in that company’s investments. In a sense, that is what venture capitalists will do under these circumstances. Although the control of the company, as we see in “Dragons’ Den”, remains very much in the hands of the person who has gone into the den in the first place, the investment in that company is nevertheless a source of very substantial leverage in what the company does, what information it provides and what sensitive information it gives out.
I offer this new clause in what I hope will be seen as a very constructive spirit. The clause endeavours to strengthen the Bill by providing a particular option to the Secretary of State, when looking at the entire landscape of how influence is sought, at how sensitive information may be provided and at how assets may effectively be acquired.
Peter Grant
The new clause is a significant improvement to the Bill and I hope that the Government will support it. It takes action to close a loophole that I certainly did not spot reading through the Bill the first time. I suspect a lot of others did not spot it either. It was highlighted by a number of the expert witnesses we spoke to a few weeks ago. They pointed out that a hostile operator does not necessarily need to have control or even significant influence over a security-sensitive operation to be able to do us some harm. One of the examples I vividly remember was that if somebody buys up as little as 5% or 10% of the shares of a company, possibly keeping it even below the threshold where it would need to be publicly notified to Companies House, that might still be enough by agreement to give them a seat on the board of directors. That means they will have access to pretty much everything that is going on within that company. For that kind of scenario alone, it is appropriate that we should look to strengthen the Bill.
The way the new clause is worded is entirely permissive. It would not require anybody to do anything, but it would give the Secretary of State the statutory authority to make regulations, should they be necessary, and to word them in such a way that they could be targeted towards any particular kind of involvement by a hostile power—it is difficult for us to predict now exactly what that might be.
I know that the usual format is that an Opposition amendment is not supported by the Government, but if the Government are not minded to support this one now, I sincerely hope they will bring through something similar on Report or when the Bill goes through the other place at a future date.
Nadhim Zahawi
I am grateful to the hon. Member for Southampton, Test for setting out his case for the new clause and to the hon. Member for Glenrothes for his contribution.
When I first read the new clause, I was fortified to see that, despite previous debates that we have had in this Committee, Her Majesty’s Opposition are clearly now firm converts to the “may by regulations” formulation. I am incredibly grateful. We have found much common ground in the course of our line-by-line scrutiny, but this was, I admit, an unexpected area of consensus.
My understanding is that the new clause would enable the Secretary of State to, by regulations, introduce a new trigger event covering circumstances in which a person acquires access to, or the right to access, sensitive information, even if the party does not acquire control over a qualifying entity or asset. The hon. Member for Southampton, Test may have in mind particular circumstances relating to limited partnerships and the role of limited partners.
The attempt to potentially include access to national security sensitive information as a separate trigger event is, in some ways, a reasonable aim, but I fear that it would, at best, sit awkwardly with a Bill introducing a new investment screening regime that is specifically designed around acquisitions of control. At worst it would bring into scope a huge swathe of additional circumstances, outside the field of investment, in which the Secretary of State could intervene, which could be notified by parties and which could create a backlog of cases in return for little to no national security gain.
For example, such a new clause could raise significant question marks about whether the appointment of any employee who might have access to certain information would be a trigger event in scope of the Bill. I am almost certain it would. Similar concerns would apply in respect of any director, contractor, legal adviser or regulator who might have access to sensitive information. That is not the Government’s intention.
If limited partnerships are the specific target of the new clause, I can reassure the hon. Gentleman that there is no specific exemption in the regime for acquisitions of control over a limited partnership. Of course, in practice, the rights of limited partners are, by their nature, limited, so we expect to intervene here by exception. But those acquisitions remain in scope of the call-in power, along with any subsequent acquisitions of control over qualifying entities by the limited partnership—particularly where there are concerns about the general partner who controls the partnership, or limited partners who are exerting more influence than their position formally provides.
I should also highlight that the Bill already covers acquisitions of control over qualifying assets, the definition of which includes
“ideas, information or techniques which have industrial, commercial or other economic value”.
For the purposes of the Bill, a person gains control of a qualifying asset if they acquire a right or interest in, or in relation to, a qualifying asset that allows them to do one of the two things set out in clause 9(1). That means that an acquisition of a right or an interest in, or in relation to, information with industrial, commercial or other economic value that allows the acquirer to use, or control or direct the use of, that information is in scope of the Bill. Therefore, depending on the facts of a case, an investment in a business that, alongside any equity stake, provides a person with a right to use information that has industrial, commercial or other economic value may be called in by the Secretary of State where the legal test was otherwise met.
The Committee heard from our expert witnesses that these asset provisions are significant new powers and that it is right to ensure that we have the protections we need against those who seek to do us harm, but I firmly believe we must find the right balance for the new regime. That is why acquisitions of control over qualifying entities and assets are a sensible basis for the Bill. Broadening its coverage to ever-wider circumstances risks creating a regime that theoretically captures everything on paper, but that simply cannot operate in practice, due to a case load that simply cannot be serviced by Whitehall. I urge the hon. Member for Southampton, Test to reflect on that point, given all we have heard in the last few weeks about the importance of implementation and resourcing, and I respectfully ask him to withdraw the new clause.
National Security and Investment Bill (Eighth sitting)
Debate between Alan Whitehead and Peter GrantThursday 3rd December 2020
(4 years ago)
Public Bill CommitteesRead Full debate National Security and Investment Bill 2019-21 View all National Security and Investment Bill 2019-21 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 3 December 2020 - (3 Dec 2020)
Dr Whitehead
The amendments relate to clauses 19 and 20. Amendment 20 might be regarded as slightly unusual, as it seeks to remove a number of sentences in the Bill: to be precise, lines 24 to 27 on page 12—it would remove clause 19(2), while amendment 21 would remove clause 20(2). The Minister might be saying to himself that Oppositions usually try to restrict Ministers’ powers, yet here we are trying to extend their powers through these amendments. I want to explain why we think that is important.
We want to hear from the Minister why he thinks those particular paragraphs should remain in the Bill, and how the restriction that they place on the Secretary of State’s activity is advantageous to the Bill’s main purpose. The paragraphs that the amendments would take out relate to the power to require information and the power to require the attendance of witnesses and seek evidence. I am sure that hon. Members can read clause 19 for themselves, but I will point out the key part:
“The Secretary of State is not to require the provision of information under this section except where the requirement to provide information is proportionate to the use to which the information is to be put in the carrying out of the Secretary of State’s functions under this Act.”
That is to say that unless it can be, or is, established that the requirement to provide information is proportionate to what the Secretary of State wants to do under the Act, the Secretary of State is not able to require the provision of information. That is effectively what the clause states.
We have already heard during evidence to the Committee that there may well be a complex web when it comes to getting information and working out what is and is not relevant, particularly if a hostile power or body is seeking to take over a company or gain access to its information and IP. The information may well not consist of what it appears to consist of, or there may be a number of paths by which that information can be obtained.
From our expert witnesses we heard some interesting examples of things they thought looked rather far from the central activity of information provision. For example, on academic projects, in his expert evidence, Charlie Parton from the Royal United Services Institute told us:
“It is quite difficult to distinguish some of these and to know about them all, but a few weeks ago The Daily Telegraph did a story on, I think, Oxford University and Huawei’s commissioning of research. I think there were 17 projects. I looked at those, and I am not a technologist by any means, but some of them rang certain alarm bells.”––[Official Report, National Security and Investment Public Bill Committee, 24 November 2020; c. 6.]
He was suggesting that, of a number of those postgraduate and PhD projects, there were some that he might have put a question mark against and others not, but he was not sure which were which. Nevertheless he seemed to think that some of those research projects—although they were cited within the ordinary parameters of whatever the research project might be, and who might be collaborating with whom, and who might get what information out of that—might ring alarm bells. That was in terms of who was collaborating, how the information might be used and where it might be going.
Peter Grant (Glenrothes) (SNP)
I think I understand what the amendment is intended to achieve, but is not the hon. Gentleman concerned about the danger of almost explicitly building in a recognition that the powers in the Bill do not have to be used proportionately?
Dr Whitehead
The hon. Gentleman raises an important point. I will come to the word “proportionate” in a moment, because that is an important part of this clause. I hope I can satisfy him about my concerns about the word “proportionate”. He may want to come back when we have that discussion.
We heard from Sir Richard Dearlove, who said that,
“the Chinese are highly organised and strategic in their attitude towards the West and towards us. For example, some of the thousands of Chinese students who are being educated in Western universities, particularly in the UK and the United States, are unquestionably organised and targeted in terms of subjects”.––[Official Report, National Security and Investment Public Bill Committee, 24 November 2020; c. 19.]
Before we go any further, perhaps I should say that I have nothing against Chinese students coming to the UK. On the contrary, I think that in general, Chinese students in UK universities is a very positive thing, and spreads a very good element of international learning into the process. I also think we might be reasonably confident that those Chinese students are getting as much from us, in terms of our way of life and our way of organising things, as we are from them. I do not think Sir Richard Dearlove’s point was partial towards Chinese students, but he made the point that he thought that some of those students may have targeted, or have been targeted towards, particular subjects and areas in the UK and the United States. Again, that is extremely difficult to find out and go forward on.
I am citing those particular expert witnesses in the context of this area of information, particularly concerning somebody—a company, an organisation, or indeed a state actor—that has hostile, malevolent intent towards the information that they have. It is not very likely that they will simply present that information in a ring binder with coloured markers, specifying where the various bits are; it is a very different process indeed. The clause therefore appears to very much limit the extent to which the requirement to provide information can be carried out, and it does so by requiring the provision of information to be proportionate to the use to which the information is to be put.
The word “proportionate” is very important here, and is potentially a real problem in terms of ensuring that the search for information that may be necessary by diverse means can be carried out properly. On the surface, looking at the ordinary language, one might say that the use of the word “proportionate” is a thoroughly good idea. If we apply the ordinary language test—what is the opposite of proportionate?—the opposite would be unproportionate; we would not want the Secretary of State to go about this in an unproportionate way. However, in legal terms, the word “proportionate” has rather a different context,
Proportionality as a legal term is a relative newcomer to the legal lexicon. It entered the legal arena—I am not saying that it had not been used before, but it was put forward as a concept around which a lot of other matters might turn—with the civil litigation reforms introduced in April 2013, known as the Jackson reforms. They covered the concept of proportionality in legal terms as it relates to costs in legal cases, but the question of proportionality was discussed in a wider context. The concept of proportionality, which had not been a particular issue in legal matters before, stuck itself firmly into the legal lexicon. Since then, there have been a number of debates about whether ways of apportioning legal costs were proportionate, even if they might otherwise be seen as reasonable.
Up until that point, the guidance on the issue of proportionality came from Lord Woolf in the Court of Appeal in—I am sure hon. Members will remember the case well—Lownds v. Home Office, where he concluded that if the legal steps that had been taken had been reasonable and necessary, the other party could not object to the cost of these steps on the grounds of proportionality. The test of reasonability and necessity overrode the question of the grounds of proportionality.
That is what changed in 2013 with the civil litigation reforms. An interesting commentary was made in an article published on 12 March 2014 in The Law Society Gazette, entitled “Proportionality and legal costs”—I am saying all this because I am not sure I will get the article to Hansard easily.
The author had this to say about the meaning of proportionality:
“However, the meaning of proportionality is not straightforward and the new rules do not provide clear guidance on how proportionality should be applied. The suggestion seems to be that a body of law will develop on a case-by-case basis until gradually the meaning will become clear. Until that happens, litigants, legal advisers and judges will have to guess at what costs will be considered proportionate in particular circumstances.”
Dr Whitehead
Yes, it is. Only one Member has left the room, so we are still in good order.
Peter Grant
I fear that the hon. Gentleman is taking the definition of proportionality into a context very different from what is mentioned here in the Bill, because this is not about whether the costs of civil proceedings are justified by the likely outcome, or even how those costs should be divided among the parties.
My reading is that subsection (2) is there to prevent a future Secretary of State—obviously, no one in the present Government would ever do this—from imposing extremely onerous requirements on a business, when it was perfectly possible for the Secretary of State to do due diligence and do the checks he needed to do without that information’s being provided.
I have not heard anything from the hon. Gentleman that would explain why he wants that protection to be taken out. He has said a lot about Chinese students, who may or may not collectively be working against our national interest, but this clause does not protect against that. What does the hon. Gentleman have against the idea that the Secretary of State is not allowed to put unreasonable and onerous demands on businesses when there is no clear benefit to national security of those demands’ being made?
Dr Whitehead
I hope that the hon. Gentleman will bear with me a few moments longer. Having unpacked “proportionality” in legal rather than colloquial terms, I want to put it back into the clause and see how it works, as far as the concerns of the Secretary of State go.
Indeed, the hon. Member for Glenrothes has questioned what we want to do on this clause in terms of the colloquial understanding of “proportionality”. I have mentioned how “proportionality” has come into the legal arena, specifically in terms of costs. Nevertheless, “proportionality” is now loose in the legal arena, so there is an interesting area of debate about it in general in the legal arena. That is not necessarily solely attached to the question of costs and civil litigation.
The problem is that there is virtually nothing to define that wider issue of proportionality in case law at the moment. Placing that word back into this particular clause suggests to us that the Secretary of State is restricted considerably on how that information may be gathered. The hon. Member for Glenrothes talked about research projects and various other things listed to us by our expert witnesses. I emphasise that I do not want to undermine those research projects or the presence of Chinese students. All I want to underline from that is that, on occasions, the process of getting hold of information and requiring people to give evidence can be convoluted. Indeed, it may require seeking information by going down paths that are not immediately apparent. As I say, it is not a question of someone turning up with a ring binder of things that can be perused.
In this clause, it appears that the Secretary of State may well have denied him or herself the ability to get hold of information, because it states that it has to be
“proportionate to the use to which the information is to be put in the carrying out of the Secretary of State’s functions under this Act.”
But he or she will not know about that information until it has been obtained. If there are difficulties in getting hold of the information, he or she will never know whether it is useful for carrying out his or her functions, because there is already a limit on getting the information in the first place.
I have brought the rather wobbly legal status of proportionality into the debate because it is potentially actionable through an obfuscation or refusal to put information forward by those actors. An actor who was required to give information could say, “It appears to me, your honour, that this request for information is not proportionate.” Of course, the Secretary of State may have a different point of view about what is proportionate from the person who is required to give the information.
There is also a vagueness in the application of the term “proportionate”. Although we think we know what it means in common language, that is not the case in the courts. That could be an additional issue that affects the Secretary of State’s ability to get the required information to make a judgment, over and above the fact that he or she may not know that until the information has been collected. So there are two procedural problems in the clause.
The hon. Member for Glenrothes said to me, to put it bluntly, “What exactly are you driving at? Perhaps it is not a good idea to appear to enable the Secretary of State to act disproportionately.” Of course, that is not what we are saying. We know that the Bill is more or less a giant amendment to the Enterprise Act 2002. Indeed, if hon. Members look at the back of the Bill, they will see that that is the only Act amended by it. Several amendments are made to the 2002 Act, but that is it—it is still sited within that Act. That Act was drawn up before the civil litigation changes to proportionality were put in place. The test set out in that Act, which is not amended by the Bill, is one of reasonableness, which is well understood, widely commented on and pretty clear.
If hon. Members consult the 2002 Act, they will see in clause 55 that the Secretary of State, in terms of enforcement, shall take such action
“as he considers to be reasonable and practicable to remedy”.
Therefore, we are not saying that the Secretary of State by acting disproportionately should act unreasonably. We are suggesting that the test that should be carried out is one of reasonableness, and should be in this particular clause. As the Enterprise Act already does, that would indeed prevent the Secretary of State going on fishing expeditions and undertaking actions that are wholly disproportionate because they would be unreasonable in terms of the definition of the Act. Our suggestion is to stick by that definition, which would be good enough to restrict the Secretary of State under the different circumstance that we are in today, in terms of seeking information. At the same time, it would give the Secretary of State the ability to take a path—I have said it is often a convoluted one—to obtain information that can be judged and used for the purpose of this Bill. I hope that the Minister will be favourably inclined towards that slight, but constrained, addition to his powers under this legislation.