National Security and Investment Bill

Baroness Bowles of Berkhamsted Excerpts

Committee stage
Tuesday 9th March 2021 Grand Committee

[Lord Vaizey of Didcot (Con) [V]]

My Lords, Amendment 15 and other subsequent amendments seek to bring in an exemption from the mandatory filing requirement for acquisitions and investments by entities that are ultimately controlled by UK nationals or nationals from certain countries allied to the UK. It is important to stress that this is to exempt companies from the mandatory filing requirement, not from having to file at all.

The Bill currently provides that the mandatory filing requirement applies equally to all investors, despite the fact that the Government have acknowledged that UK investors are inherently less likely to give rise to national security concerns. A more targeted and proportionate approach, which would better reflect where national security risks are most likely to lie, would be to exempt from the mandatory filing requirement acquisitions and investments by UK nationals or entities that are ultimately controlled by UK nationals.

In addition, investors from countries which are closely allied to the UK, such as Australia, Canada, New Zealand and the US, plus any other country subsequently specified by the Secretary of State, should also be exempt from mandatory filing requirements for the reasons I have already stated. That is the thinking behind my Amendment 95, which is included in this group. To the extent that national security risks arise in relation to any such transaction, the Secretary of State would still retain the power to call in a qualifying transaction for review. As I say, the exemption would relate solely to the mandatory filing requirements.

Amending the Bill in this way would also better align the UK’s regime with those of other countries, such as the US and Australia, which I have already mentioned. I can understand why the Government may wish to appear agnostic when it comes to providing exemptions to UK nationals and friendly countries. While there is no doubt that, for example, investments from China in sensitive sectors would come under close scrutiny under the new regime—no one should pretend otherwise—it is important to bear in mind that only four of the 12 national security interventions under the existing regimes have involved Chinese investments.

It is important for me to acknowledge that the Government have intervened in eight transactions that involved investors from countries that have historically been allies, such as the US, Canada, Italy and Germany; they extracted undertakings from those investors to protect UK national security interests. A consistent theme in those interventions, in addition to the usual concerns about access to sensitive data, has been the Government’s interest in ensuring continuity of supply to critical services to government and to maintain strategic capabilities. Such concerns, I acknowledge, are effectively nationality-agnostic, because they go to ensuring that critical capabilities, skills and manufacturing are maintained in the UK and not moved abroad. As a result, it is likely that in particularly sensitive sectors we will see the Government calling in transactions involving investors from so-called friendly countries and imposing remedies under the new regime. The Government can, via regulation, exempt certain acquirers from notification requirements but no investors or classes of investor are currently exempt. Nevertheless, these interventions happened before the Bill was introduced, so I do not believe that they undermine my point—namely, that friendly countries and UK investors should be exempt from the mandatory filing requirement, which will not exist until the Bill is passed.

I looked at the evidence given to the Bill Committee in the other place and was particularly struck by two interventions from witnesses. One was from Dr Ashley Lenihan from the London School of Economics, who said that for the legislation to cover domestic investors would be “truly rare” in comparison to similar legislation in other countries and, importantly, that the inclusion of domestic investors will

“lead to a much larger volume of mandatory notifications than most other national security FDI regimes”.—[Official Report, Commons, National Security and Investment Bill Committee, 24/11/20; col. 33.]

This brings out the point that was a theme of our debate on our first day in Committee and at Second Reading, which is that the Government have wildly underestimated the number of notifications they expect to get. As I say, I think we are all united in wanting to see this legislation passed, but we all want to see it passed in a form that is workable, does not overwhelm the new unit that the Government are setting up and does not put off investors by placing too onerous burdens on them.

In addition, other evidence given to the Bill Committee in the other place in the same session included that of Michael Leiter, a lawyer from Skadden Arps, a US law firm. He said that including domestic investors “is probably not wise”. He went on:

“I think trying to take a slightly smaller bite of the apple and not including current UK businesses in the scheme would be well advised.”—[Official Report, Commons, National Security and Investment Bill Committee, 24/11/20; col. 42.]


So I pray in aid those two experts in making the point that this amendment in no way undermines the regime that the Government propose to bring in, but it does make it a slightly more practical approach as this legislation beds down. Indeed, Mr Leiter pointed out later that the Bill can still catch transactions in which the ultimate actor may be foreign, because the unit that the Government are setting up can still look at the ultimate parent or, indeed, at a follow-on transaction.

I understand why the Government may want the legislation to pass in its current form—to have a belt-and-braces approach and to avoid people trying to hide behind a UK investor or a friendly foreign investor—but in my view the Government will still have powers to call in such transactions if they believe that this is the case. I beg to move.

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, I am grateful to the noble Lord, Lord Vaizey, for introducing his amendments and explaining some issues that I agree with, such as whether the Government are trying to make a failsafe, will it catch too many people and whether there will be too much to do. Although I understand that there may be different levels of concern, depending on the relationship with the country of the acquirer, I do not fully support the amendments in this group.

Where there are already sensitive industries, especially related to defence, who owns them matters in the sense of whether they are fit and proper for that kind of industry. Those considerations can apply within the UK as well as outside so, at some point, they have to be looked at. The question is whether they should be within the same regime or left to other operations that, the Government have considered, do not necessarily pick up everything.

My experience suggests that, in most instances, companies already used to dealing with sensitive matters would already be alert to what might not be desirable, and that it would either not happen or not happen often, but that does not mean that there should be no way of acting when it does. Therefore, they should all be included within this generic framework.

The Bill will apply to more companies or interests than companies used to dealing with sensitive matters, as I have just called them. Quite a lot still looks speculative, so I wonder whether there is, or in due course might be, further subdivision where certain geographies and industries might have different thresholds, depending on how likely they are to be particularly sensitive.

There will certainly be instances where the ownership interests of Five Eyes countries or other allies are of less or maybe no concern, but that may not always be the case if the security of supply or knowledge base is threatened. There are examples in the defence industry where, following takeovers by US corporations, research has been closed down, leaving only certification, assembly or supply of parts as the UK activity. This has led to a serious loss of forward vision and an undermining of the knowledge base, as well as other issues, such as access to technology. Sometimes that might be accepted, but not always.

It is one thing to recognise that we do not—indeed cannot—stand alone on defence issues, but quite another to accept, always and without review, what might be serious diminution or removal of all active participation. Therefore, although I expect the results of reviews to be different for different categories of acquirer, I do not see how there can be any blanket exclusion at the initial filtering stage. I am very interested in how different thresholds may play a part in reducing the number of transactions that would have to be filtered.

[Baroness Noakes (Con)]

My Lords, my first instinct was to say that the amendments in the name of my noble friend Lord Vaizey are obviously correct. I am sure that the majority of cases that would threaten our national security will involve foreign actors and, like him, I am concerned about the volumes of notifiable transactions.

However, I think that there might be circumstances in which the powers in the Bill could appropriately be used in respect of wholly UK companies. In that respect, I agree with the noble Baroness, Lady Bowles of Berkhamsted. For example, large company A may have a monopoly or near monopoly in providing something critical to our security. Tiny company B may have developed a new technology, which not only achieves a better result in the light of emerging risks, but at a fraction of the price. If company A acquires control of company B, it can kill the new technology and keep its monopoly profits on its old products. Sometimes, large companies acquire smaller ones to avoid disruption to lucrative markets, rather than to exploit their innovations. I do not think it would apply often, but it is a good reason not to restrict the Secretary of State’s powers in the Bill.

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[Lord Leigh of Hurley (Con)]

My Lords, I will speak to Amendment 17, which is in my name. I thank the noble Baroness, Lady Hayter, for her comments in respect of her amendment, which might actually be a better amendment than mine but none the less would achieve much the same thing. She probably does it in a more elegant way, but the purpose of my amendment is to understand the logic here and to persuade my noble friend the Minister that he should revert to 25% throughout.

The mandatory notification obligation in Clause 6(2)(b), which the noble Baroness, Lady Hayter, wants to delete, is triggered as a result of acquiring over 15% of shareholding or voting rights. In paragraph 52 and elsewhere, the White Paper specifies 25% but forecasts 15% for notifiable acquisitions. Accordingly, it is not, and is not intended to be, consistent with Clause 8, as the noble Baroness said, but that leads us into problems. Let us try to walk through this. It is complicated.

As I read it, Clause 6 is there so that the Secretary of State is given a mandatory notification for them to consider whether a trigger event has happened. Let us look at what a trigger event is, then. For that, we have to rely on Clause 8 to see under what definitions a people has gained control. Clause 8 lists four situations, three of which are where the shareholding is 25% or more. That is fine, but that clearly does not apply in a 15% situation. So you have to rely on the fourth situation, which is set out in Clause 8(8), which bites because it is the scenario where there is the ability, alone or with others,

“materially to influence the policy of the entity.”

Therefore, if an investor goes from, say, 14% to 20%, a lot of work has to be undertaken to see whether that person can materially influence the policy. If the threshold was 25%, there would be no need to do this. So given that it is most unlikely that a sub-25% shareholder can materially alter the policy—more importantly, this will be hard to determine in practice, as the noble Baroness, Lady Hayter, said—are we not creating an unnecessary problem for ourselves? What does “materially influence the policy” mean anyway? Which policy? All policies? Dividend policy? Maybe. Hiring and firing policy? Most unlikely. Again, this will lead to consternation and commercial agreements on shareholders’ rights having to be implemented, which will be hard to negotiate because, when you enter this sort of area, there will be uncertainty over whether you can materially alter policy.

In my plea for certainty and clarity, can we make it 25% throughout? The risk of a 15% shareholder throwing their weight around to demand that action be taken to change a policy that would be against our national interest is somewhat remote. I suggest that, with a 15% threshold, there will be significantly more cases to consider, the overwhelming majority of which will not have national security implications. The current filing threshold of 15% is significantly below the thresholds used in a number of other major foreign direct investment regimes. France’s is 25%, which the amendment proposes, and Canada’s is 33.3%. I note that my noble friend Lord Vaizey is not due to speak on this group, unfortunately, but if he did I am sure that he would continue to encourage the Minister to look to Canada rather than France, which is perhaps a natural progression.

I am aware that some countries have a 15% threshold, but they are not jurisdictions seen as international business headquarters or centres of international business in the same way as we are, and we have to remember that there is a difference. Considering the volume of transactions, it will even, I suggest, lead to transactions that pose a national risk being overlooked because of the volume generated by this very low, 15% threshold.

While we are on this clause, can the Minister help me with Clause 6(3), which is relevant to the clause we are debating? It states:

“But a notifiable acquisition does not take place if complying with the requirement to give a mandatory notice under section 14(1) in relation to the gaining of control, or the acquisition of the right or interest, would be impossible for the person within subsection (2).”


What does “would be impossible” mean? I have asked around, and no one I have asked can be sure. Is this when a public company’s shareholder trips over 15%? What does “complying … would be impossible” mean? Could we all argue that it is impossible, give all sorts of reasons unspecified and that is the end of it? If much, much better brains than mine cannot understand the clause, it must need amending. I cannot amend it because I do not know what it is trying to achieve, but it cannot be good law to have clauses which are not immediately intelligible to, if not the layman, then the reasonably well-informed reader.

The whole of Clause 6 is difficult. It talks about regulations we have not seen and then gives power for those regulations to be amended at will under subsection (5). I think subsection (5) is where a white list is introduced in the regulations, but it, and subsection (6) allow carte blanche and, accordingly, more uncertainty. Can the Minister commit to look at Clause 6 again, specifically with the amendment I have tabled and with the amendment that he can see I will perhaps have to table on Report? Amendment 94, tabled by the noble Lord, Lord Fox, which we discussed the other day, would have helped. Can the Minister give some assurances that parliamentary scrutiny will be given to these regulations?

Amendment 17 looks to strike a more proportionate balance between protecting national security and reducing unnecessary burdens on investors. We want to be seen as an investment-friendly country.

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, I thank noble Lords for introducing their amendments and exploring the reasoning behind them, which I have found helpful. I put my name down to speak to Amendment 17, which was signed by my noble friend Lord Clement-Jones, for whom I am broadly substituting because he is regrettably unavailable until later today. Like the noble Baroness, Lady Hayter, I was wondering why the Government chose 15% as the threshold above which a notification would become mandatory.

On the previous group, I wondered whether we could have different thresholds for different reasons. That would not be without precedent. For example, Australia has different percentage thresholds for lesser and more sensitive assets and different business value thresholds depending on the country of the acquirer. However, here we have 15%, which might be a number above which you fear an activist shareholder, but why?

In the UK, shareholders get some additional rights at 5%: they can go to court to prevent the conversion of a public company to a private company; they can call a general meeting; they can require the circulation of a written resolution to shareholders in a private company; or they can require the passing of a resolution at an annual general meeting of a public company. At 10%, you can call a poll vote on a resolution. At more than 10%, in a private company, you can prevent a meeting being held at short notice. At 15%, you can apply to the court to cancel a variation of class rights, provided that the shareholders have not consented to or voted in favour of the variation. Getting to 25% is significant, because it gives the right to prevent the passing of a special resolution, which could affect various articles and other things. I cannot see that preventing a change in class rights, assuming that a court would agree, is significant. I am slightly bemused about where that 15% number was plucked from.

We get to the point about whether fear of an activist shareholder is what this is all about. We hear of the insistence on having a director, when there is a certain quantity of shares, but they have to be able to control all the other directors, which does not always happen. It brings to the fore a thought about who owns the other shares, which would have to be taken into account in any assessments. Conditions might then be put on a company in respect of what happens to other shareholders to allow a transaction to pass.

As the noble Lord, Lord Leigh, explained, this makes something more complicated for reasons that do not yet seem clear. There are surely other inherent safeguards that would do the job. From that point of view, I support Amendment 17 signed by my noble friend but, as has been explained, there are other ways in which it could be achieved.

[Baroness Noakes (Con)]

My Lords, the effect of amendments in this group may be to restrict the Government’s ability of to act where de facto control is the result of an acquisition. We should not underestimate the ingenuity that could be deployed to achieve de facto control or make it easier for people to escape the Bill where there are substantive concerns. For that reason, I do not believe that we should tie the Government’s hands in this way.

I put my name down to speak on this group, in particular on my noble friend Lord Leigh of Hurley’s Amendment 17, which increases the voting rights threshold for notification from 15% to 25%, and I support the probing Amendment 15A in the name of the noble Baroness, Lady Hayter, which removes the reference to the voting rights test.

While a shareholding needs to be 25% to be certain of stopping a special resolution—the noble Baroness, Lady Bowles of Berkhamsted, referred to that a moment ago—in practical terms that assumes that all other voting rights would be exercised and in the opposite direction. The de facto ability to stop a special resolution kicks in at much lower levels. I am interested to hear what the Minister says about the rationale for 15%.

For many years, I was a director of the Reuters Founders Share Company, which was set up to hold a form of golden share in Reuters to protect the independence and integrity of the Reuters news service and to prevent it falling under the control of any faction. There is a long history to that, which I will not go into. The trigger point for the ability to use the golden share was set at 15%, for the very reasons I have just given. It is the level at which the influence of a shareholding bloc can be significant. In the history of Reuters Founders Share Company, deployment of the 15% was needed on one occasion. For that reason, I am inclined to support the Bill’s cautious approach in this area.

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[Lord Lansley (Con)]

My Lords, I am pleased to have the chance to speak briefly to Amendment 38. This group is linked, in so far as we are all addressing issues relating to limitations on the interpretation of the “qualifying asset” in Clause 7. Amendment 38 in my name is particularly directed towards the issue of such assets in Clause 7(4)(c)—ideas and related intangible assets—where they are licensed. In particular, Amendment 38 seeks to regard such assets, which are licensed on a non-permanent basis, and where ownership of the asset is not transferred to somebody else in any permanent or substantive form, as not being controlled. This relates to the set of exceptions in Clause 11, which sets out those circumstances in which assets are not to be regarded as controlled.

We need to do that because Clause 9, “Control of assets”, is very widely drawn—deliberately, I am sure, and probably rightly so. It says that control of a qualifying asset can result in the person being able to use the asset. Of course, if an asset is licensed to somebody for their use, they could be said to be controlling it. But anybody licensing it to them will be doing so with restrictions and provisions. To that extent, they are not controlling it; the person who has licensed it to them is controlling it. So we have an issue not only of definitions but of scope.

The definition of control should not extend to where somebody had something licensed with restrictions imposed upon it. The definition of using the assets is probably, in that sense, too wide to be applied in this case to those kinds of innovative assets. To whom is this important? It is very important to those whose job it is to bring forward innovation and to license their intellectual property, and to do so in circumstances where they continue to control its use and exploitation. We do not want the routine use and exploitation of assets or intellectual property to be seriously impeded every time it is licensed or for this to be regarded as potentially the control of a qualifying asset and hence notifiable. Amendment 38 gives us an opportunity to set proper limitations on the use of licensing for assets on a temporary basis.

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, my reason for speaking in this group relates to licences. I generally support the thrust of Amendment 23, if there can be appropriate definitions, but I was not quite sure whether I agreed with Amendment 38. I disagreed with the explanatory statement of the noble Lord, Lord Lansley, because whether or not the licenser maintains control depends on quite a lot of things.

An IP licenser may be able to impose conditions when a licence is first granted, but what happens after that and how much control there is over future events is up to whatever is agreed in the licence. If the price and conditions are right, it could be a fully assignable licence; it could be assignable with or without consent of the IP owner; it could be exclusive, so that the IP owner no longer has any rights to use it themselves or to license others; or it could be a sole licence that also effectively restricts supply under the IP. A licence can therefore be for something that is relevant to national security and have both ownership and security of supply implications.

In paragraph (c) of Amendment 38—the substantive economic ownership point—I am sure the noble Lord, Lord Lansley, is trying to exclude the exclusive licences that are assignable because, as he would say, economic control had been obtained. I am not sure whether that is the right way to define it, but I understand the sense of what he is trying to do. However, I wonder whether that also captures what could be restriction of supply issues. Those can also happen through licences that would not necessarily mean economic control.

The whole matter of licences is quite interesting, but they can be unique—I used to do them for a living, so I should know. We therefore have to be careful about clarifying, perhaps in a more substantive way, the things that one wants to exclude from review. I think it is necessary to exclude some, because I am absolutely certain that you would get an even bigger deluge if you did not. It may be that things that count as ordinary licences, where there are many licensees—rather like in the other amendment—and no security of supply issues, can be treated the same as any product for sale. However, wherever there is a sole or exclusive licence in particular, it would be necessary just to have a look to make sure there was nothing that you might want to do something about. There could quite possibly be something if it was in a relevant technology area. However, the noble Lord, Lord Lansley, has drawn an interesting point to our attention.

[Lord Clement-Jones (LD)]

My Lords, as has been mentioned, the amendments in this group have a common factor very much along the lines of what the noble Lord, Lord Hodgson, said: that it is really important to look at the nature of qualifying entities and assets under Clause 7 with a keen eye. I think that the debate will continue beyond Committee.

One has to make choices here where one thinks it is appropriate to go for a change. I would give this a score of one out of three. I put my name to Amendment 23 in the name of the noble Lord, Lord Vaizey, because the argument there is very straightforward. As he said, it is about “business as usual” procurement and the purchasing of things such as software licences and standard equipment, so that, even if it might technically be caught by the sectors, it is not captured in the definition of a qualifying asset. This is so that, again, we do not have a vast quantity of referral requirements for what are essentially day-to-day transactions, which could be a massive burden on business. The noble Lord made the argument extremely well there.

I am much more nervous about the proposition of taking land out of this, particularly when it comes to reversing the requirement: that is, you publish the sensitive sites and then say whether the transaction is caught because it is next door to that site. The way in which the qualifying entities and assets clause is currently set out, with sensitive sites not being published, is probably a rather safer way of dealing with national security, but that is a purely personal view. I hope that we keep things that way round.

It was a great pleasure to hear what my noble friend Lady Bowles had to say about the third proposition, given her experience and expertise in the whole area of intellectual property. That was exactly my reaction: that licences are animals that can vary in many different ways. As she said, they can be exclusive or non-exclusive, long-term or short-term. I agree that they are not as easy to define as an asset transfer, such as an assignment of copyright or other forms of intellectual property. Nevertheless, in substance, they can mean the transfer for quite a period of time—indeed, the wholesale transfer of knowhow—just as much as an assignment can. One therefore needs to be somewhat wary.

Then you start getting into paragraph (c), as proposed by Amendment 38, which says that

“substantive economic ownership of the asset has not been transferred”.

That is virtually impossible to define for this particular purpose. I am wholly sympathetic to the idea of screening and filtering in a way that cuts back red tape, but at the same time one must recognise that intellectual property is one of the most sensitive aspects that needs to be caught by this Bill. That is the future. Intangible assets are the real Crown jewels of national economies. We must be very careful about that.

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[The Deputy Chairman of Committees (Lord Bates) (Con)]

I have received requests to speak after the Minister from the noble Baroness, Lady Bowles of Berkhamsted, and the noble Lord, Lord Clement-Jones. I will call the noble Baroness first.

[Baroness Bowles of Berkhamsted (LD) [V]]

I have one comment and one question. My comment is that I understand everything the Minister said and I broadly agree, but I think the Government underestimate the amount of licensing they might find has to be reported, because licensing is the new sale. That is the way everything is going: there is no outright purchase of anything any more; everything is licensed, whether the programmes you use on your computer or anything else. Indeed, accounting standards even drive towards that kind of model because in some instances it becomes increasingly difficult to fit true sales into the new IFRS. I cite IFRS 15 as an example.

I meant to ask my question, but I spoke a bit too spontaneously to remember it. I am interested in follow-on activities. If, for example, you have a clearance on an investment into, say, some university research but that also encompasses a right to have a licence, would that licence to the same organisation automatically be cleared if the investment has been cleared or would you have to go round the loop again? You could apply the same to any assignment of a licence: if it is assigned to an essentially similar kind of business and a previous notification has not resulted in a clearing, can you be confident that you do not have to notify again on the basis of such a previous clearance?

[Baroness Bloomfield of Hinton Waldrist (Con)]

The noble Baroness makes some very good points—I am conscious of her much greater knowledge of this area than I have—particularly the point she makes about licensing being the new sale. I am pretty confident that we have taken these points into consideration. On her specific point about whether investments would be cleared, the true answer is that every notification would be counted separately.