National Security and Investment Bill (Sixth sitting)

Chi Onwurah Excerpts

Committee stage & Committee Debate: 6th sitting: House of Commons
Tuesday 1st December 2020 Public Bill Committees

[Dr Alan Whitehead (Southampton, Test) (Lab)]

Our amendment was genuinely intended to be helpful, to try to ensure that what we see as a loophole is closed. The Minister has indicated that, in his view, that loophole would be closed at the expense of uncertainty in company land, as it were—uncertainty for those companies that might be subject to this procedure.

The circumstances that would see this amendment put into action—I have outlined some possible circumstances—would be very rare; only circumstances in which things had changed very substantially, in terms of global interest in particular areas of our economy, or circumstances in which information that could have been supplied was not supplied, and not because there was an intention to be malicious or misleading, but because people did not get to the bottom of something first time around. In those circumstances, companies would perhaps anticipate that that change might happen, and certainly if there were substantial global changes in who was interested in what, then companies would also anticipate that to a considerable extent. I do not share the Minister’s view that the amendment would place companies in general in a state of uncertainty.

The additional assistance that the amendment would provide to make the process watertight should be taken seriously. However, I hear what the Minister has said and appreciate that a balance has to be achieved between different arrangements so that they are satisfactory both for national security and for company wellbeing and development—I am sorry that he has perhaps come down slightly further on one side than on the other in his appraisal of amendment 10. However, I appreciate what he has said and therefore beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 2 ordered to stand part of the Bill.

Clause 3

Statement about exercise of call-in power

[Chi Onwurah (Newcastle upon Tyne Central) (Lab)]

I beg to move amendment 1, in clause 3, page 3, line 1, leave out “may” and insert “shall”.

This amendment would make it obligatory for the Secretary of State to include certain matters in a statement about his/her exercise of the call-in power.

[The Chair]

With this it will be convenient to discuss the following:

Amendment 2, in clause 3, page 3, line 9, at end insert—

“(d) the Secretary of State’s definition of the scope of what constitutes national security.”

This amendment provides that a statement from the Secretary of State about the exercise of a call-in power may include his/her definition of national security.

Amendment 9, in clause 3, page 3, line 9, at end insert—

“(d) details of the resource allocated annually to reviews of national security assessments guiding call-in decisions, including specific headcount, skillsets and review caseload figures.”

This amendment provides that a statement from the Secretary of State about the exercise of a call-in power may include details of the resources allocated to reviews of national security assessments within BEIS.

[Chi Onwurah]

It is a pleasure to serve under your chairship once again, Sir Graham. Amendment 1 would make it obligatory for the Secretary of State to include certain matters in the statement about his or her exercise of the call-in power. As we have said on a number of occasions, the Bill gives major powers to the Secretary of State and marks a significant shift in the UK’s merger control process. It is worth emphasising that. It is important to make sure that that shift is done in a transparent and accountable way. The Bill is critical for our national economy and our national security. There is a great deal of uncertainty and there is no definition of national security, and I will come to that point later.

There is a great deal of latitude in the powers, but the Bill attempts to mitigate that by indicating that the Government may publish a statement setting out the scope of their call-in powers. That statement would include details of which sectors are especially under focus, details of trigger events, and details of factors that may be considered by the Secretary of State as part of an intervention. That transparency is welcome, as far as it goes, but we believe that it should go further. As Professor Martin said of the powers, in his expert evidence,

“there should be accountability and transparency mechanisms, so that there is assurance that they are being fairly and sparingly applied.”––[Official Report, National Security and Investment Public Bill Committee, 26 November 2020; c. 81, Q96.]

The Government consultation responses list some detail on the scope of call-in powers but not on a clear final statement of scope. There is no detail on sectors, trigger events and, critically, factors considered under national security. The statutory statement of policy intent—in its current draft version—is woefully lacking in detail. Amendments 1 and 2 are designed to ensure that greater clarity is given about the Secretary of State’s intent. In particular, amendment 2 includes a definition of national security.

There was a good deal of debate during the evidence sessions—I see the Minister nodding—about defining national security. Certainly, I found it a very good and informative debate, hearing from a wide range of experts with different levels of experience in different aspects of national security, from Sir Richard Dearlove to academics, and their views on the importance of and the concerns with defining national security.

Sir Richard Dearlove said that he would certainly see a definition of national security as

“advantageous, because it defines a clear area where you start and from which you can make judgments about the involvement of foreign firms being given space or activity in those areas. That is not a bad idea at all, actually.”––[Official Report, National Security and Investment Public Bill Committee, 24 November 2020; c. 25, Q31.]

David Offenbach said:

“National security is not defined in the Bill, which I actually approve of, because once it becomes too closely indicated, then it is not easy to decide what should be in it, or what should not be in it. I would like to see a definition that includes what Lord Heseltine said when Melrose took over GKN, that research and development should be a subject of importance; it should be included.”––[Official Report, National Security and Investment Public Bill Committee, 26 November 2020; c. 99, Q106.]

He also said:

“The only way to make sure that something does not slip through the net is to have a slightly wider definition. There is no definition of national security itself in the Bill, which is perhaps why strategic, research and development, innovation or other issues should be brought in. Then one can be quite sure one has not accidentally lost an asset where there are national security issues.”––[Official Report, National Security and Investment Public Bill Committee, 26 November 2020; c. 105, Q130.]

As I have referred to on a number of occasions, I think the loss of DeepMind to Google and of the Centre for Integrated Photonics to Huawei show that we can lose strategic assets through a lack of clarity about what might constitute a national security threat. Amendment 2

“provides that a statement from the Secretary of State about the exercise of a call-in power may”—

not “must”—

“include his/her definition of national security.”

We are trying very hard to reflect the advice from certain experts that too closely defining national security would limit the powers of the Secretary of State, would not allow it to evolve with the threats and would give indications that could in some respects be gamed, but at the same time we are trying to address the vacuum that no definition creates. That vacuum risks creating major uncertainty for businesses and arbitrary powers for politicians to intervene without appropriate scope for that intervention.

We discussed earlier the conflict of interests between the Department for Business, Energy and Industrial Strategy welcoming foreign investment and the national security interests perhaps saying that there should not be foreign investment. That is especially challenging in the light of the major increases in interventions expected—as we have heard, we expect to go from 12 interventions to 1,830.

We believe strongly that we owe our citizens and businesses clarity on what will guide this increased intervention, but it is also right for the Government to retain flexibility for action and not to have their hands tied with a precise, narrow definition of national security, as security risks change due to technological, economic and geopolitical changes. Indeed, that is why we have needed this legislation for some years now, and why Labour has been calling for it.

The amendment again seeks to make the Secretary of State’s life easier, by encouraging him—or her, in the future—to provide guidance on the factors that might form part of national security assessments. That would not tie the Government’s hands by ruling anything out; it simply asks them to guide businesses with clarity on the sort of factors that might matter, giving flexibility to the Government and clarity to our small and medium-sized enterprises in particular.

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[Stephen Kinnock (Aberavon) (Lab)]

Just to add to the argument that my hon. Friend is making in her very eloquent manner, this is also about having a smart approach to regulation, whereby we do not take a one-size-fits-all approach but recognise that there is a hierarchy of risks. By pointing out in the definition of national security what key factors make up that definition, we will point both the business community and the Secretary of State to that hierarchy of risks and make sure that there is additional screening, monitoring and assessment of those risks where they are considered to be higher because they contain the factors in the definition.

[Chi Onwurah]

I thank my hon. Friend for that intervention. As a past employee of a regulator, Ofcom, he really appeals to my sense of regulatory best practice in speaking as he does about the importance of smart regulation that is not tied to narrowly defined legalistic definitions of national security but allows, as he says, a hierarchy of assessment of the different interests. We all need to take responsibility for doing everything we can to ensure that kind of smart judgment can be made by small businesses. We encourage giving as much guidance as possible—I see the Minister nodding, so I hope that he will be receptive to the amendment.

Finally, amendment 9 would mandate Business, Energy and Industrial Strategy unit resourcing updates. I will speak briefly to amendment 9, because I know that other hon. Members wish to speak to it. This amendment provides that a statement from the Secretary of State about the exercise of call-in power may include details of the resources allocated to reviews of national security within BEIS.

The driving thought behind this, again, is to ensure that the Secretary of State’s life is made as easy as possible by consistently looking at the resources available to do this very complex and difficult job, particularly given that we are transitioning, as one witness put it, from a standing start to potentially thousands of notifications.

[Sam Tarry (Ilford South) (Lab)]

It is an honour to serve under your chairmanship so soon again, Sir Graham. Following on from the eloquent exposition of those last two amendments by my hon. Friend the Member for Newcastle upon Tyne Central, I would like to focus on amendment 9. The amendment is simple. It tries to help the Government help themselves.

Amendment 9 provides that a statement from the Secretary of State about the exercise of a call-in power may include details of the resources allocated through reviews of national security within BEIS. We know that this is a significant and large change that the Department will have to absorb. For that to be effective—in whatever state the Bill ends up passing through Parliament—there will clearly be a need for proper resource allocation and for Parliament to scrutinise that process.

The Bill transforms the UK’s merger control processes. It locates the merger control processes away from the Competition and Markets Authority, which is a new development. The CMA had a history of experience of overseeing those sorts of processes. At the moment, there is no such expertise in BEIS.

While massively expanding the scope of the intervention, as my hon. Friend the Member for Newcastle upon Tyne Central said, moving from only 12 national security interventions in 18 years to potentially over 1,800 is such a significant step change, so it will be important for Parliament to have the ability to monitor that. It is unprecedented. The Government have neither a precedent nor a plan—none has come forward with the notes to this Bill—to assure the House of how the shift will be managed. That is why we felt it was important to put forward this amendment.

I believe this amendment has support on both sides of the House. Crucially, hon. Members across the House have raised legitimate concerns about the capacity and capability that will be required to manage this major shift. My colleague from the Transport Committee, Greg Clark, said,

“It is an enormous challenge for the Department to set up a new unit, especially since the current regime…has dealt with a very small number of transactions each year.”—[Official Report, 17 November 2020; Vol. 684, c. 228.]

Similarly, James Wild said,

“It is crucial that the structures and resources are put in place to ensure that the timetables for review and assessment in the Bill are actually met.”—[Official Report, 17 November 2020; Vol. 684, c. 266.]

I think both of those points are extremely pertinent.

I do not see this as a controversial amendment. I think it is important to allow the Bill, once passed, to function effectively and with proper oversight. It also provides the appropriate scrutiny, ensuring that this critical part of our national and economic security functions effectively and efficiently. I am sure that in amendments to come we will debate where the balance should be between economic freedoms and our responsibility to safeguard our citizens. But clearly, on the simple idea put forward in this amendment, the Government will have to be transparent about the capability and capacity of BEIS on investment security, as many other countries around the world do.

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[Nadhim Zahawi]

I am grateful for the hon. Member’s contribution. Of course, no Government can tie the hands of future Governments, if that is his argument.

Moving on, I commend hon. Members for their interest in the process and function of the regime, made clear through amendment 9, which provides for additions to the statement about the exercise of the call-in power. It aims to ensure that the regime created by the Bill is properly resourced with the right numbers of skilled staff. The hon. Member for Ilford South was thoughtful in his concern about that. However, I would say to him and other Members that the purpose of the statement is to set out how the Secretary of State expects to exercise the power to give a call-in notice. It will provide information on the types of scenarios where the Secretary of State may consider there to be a national security risk. It would not be appropriate to add details about how the regime will be staffed.

Furthermore, internal arrangements on resource and skills are a matter for the Secretary of State and, of course, the permanent secretary at BEIS. I reassure hon. Members, however, that the Bill compels—this is the lever for Parliament, in my view—the Secretary of State to publish an annual report, which will provide information on the number of mandatory notices accepted and rejected, the number of voluntary notifications accepted and rejected, and the number of call-in notices and final orders made. That review is incredibly important in measuring performance. The exact details and requirements for the annual report are set out in clause 61. I will not go through all of them.

For the reasons I have set out, I am unable to accept the amendments and hope that Opposition Members feel able to withdraw them.

[Chi Onwurah]

I thank the Minister for his response. I particularly thank my hon. Friends for the points that they have raised. My hon. Friend the Member for Ilford South set out the importance of reporting on resourcing. I am disappointed that the Minister could not accept that amendment. He said that it was not appropriate to include details of resourcing and staffing. I point him in the direction of the Government’s misinformation unit, which was set up to grand acclaim in order to address that important issue. As the Minister for vaccines, he will have a strong interest in the effectiveness of misinformation, which could harm our wellbeing and future return to normality.

That unit was set up. Written parliamentary questions that I tabled revealed that it had no full-time staff or full-time equivalents, and we see a resultant lack of action on misinformation. I make that point to counter the Minister’s assertion that it is not important to have details on resourcing reported. On the contrary, our experience in Parliament and the civil service suggests that it is what is resourced that will get done, with the appropriate skill and care. With such a great number of cases, and such a great change in the scope of takeover and acquisition legislation that the Bill represents, reporting on resourcing is very important.

I also thank my hon. Friend the Member for Ilford South for such intriguing and at times amusing oratory on the importance of a single word in the right place.

[Nadhim Zahawi]

Southampton, Test.

[Chi Onwurah]

I am sorry. Southampton, Test.

[Dr Whitehead]

I quite like it.

[Chi Onwurah]

My hon. Friend intends to stay where he is. I thank him for his oratory on the importance of the single word “may”. Something has been lost in translation between ourselves and the Clerks, in that there was originally an intention to address the first “may” with regard to publishing the statement. The Minister says that we do not need that to become a “shall” because it will be published but rejects the notion of it becoming “shall” despite the fact that it will be published. I leave it to the Committee to decide on the holes in that logic.

I am sure that the Minister was not deliberately trying to misinterpret what we were saying, but we made it clear that we are not looking for a precise and narrow definition of national security; we are looking for broad indications or guidance. As my hon. Friend the Member for Aberavon said in citing how the US does it, we are looking for a sense of what is taken into consideration with regard to national security. I would only plead with the Minister to recognise the circumstances of so many small businesses, start-ups and investors in trying to understand what the Secretary of State will take into account. This is intended not to define it narrowly, but to give a sense of what will be taken into account as we move into this new regime that is so vastly different. Because these amendments are important and significant, I intend to press them.

Question put, That the amendment be made.

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[The Chair]

We must now deal formally with amendments 2 and 9, which can either be pressed to a Division or withdrawn.

[Chi Onwurah]

I would like to press amendment 2 but withdraw amendment 9. I would like to hear the Committee specifically on national security.

Amendment proposed: 2, in clause 3, page 3, line 9, at end insert—

“(d) the Secretary of State’s definition of the scope of what constitutes national security.”—(Chi Onwurah.)

This amendment provides that a statement from the Secretary of State about the exercise of a call-in power may include his/her definition of national security.

Question put, That the amendment be made.

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In our current climate, that certainty would allow the Bill to serve its purpose in safeguarding our national security while at the same time maintaining Britain as an attractive destination to invest in and to do business.

[Chi Onwurah]

I thank my hon. Friend the Member for Ilford South for moving the amendment. The Committee must support the aims of the amendment and the implementation of the requirement to publish guidance for potential acquirers and other interested parties separate from the policy intent statement. My hon. Friend set out the importance of avoiding uncertainty and of providing certainty for companies and businesses that might come into the scope of this Bill.

Now is perhaps the time to highlight a failing of the Bill and the impact statement, in that the focus is on the acquirers—those who will acquire companies or shares through transactions. The explanatory notes explain why that is the case: because a trigger event might take two or three separate transactions to complete, such as acquiring a 25% interest, so it has to be on the acquirers to make the notification. I understand that, but I think the impact statement dramatically underestimates—in fact, it does not make an estimate—the impact that will have on those being acquired.

By that, I think particularly of small start-ups—our small, innovative new ventures and new enterprises, perhaps spun out from universities or other institutions. As they seek finance to grow and to thrive and to make further discoveries and innovations, they will have to give a lot of consideration to the provisions in the Bill. To be frank, as all of us who have worked in small businesses know, time is at a premium, as is access to legal advice. Small start-ups need this kind of guidance easily and readily available. I fail to understand why the Minister would not want the Department to provide this guidance specifically to companies, separate from the policy intent statement. I support my hon. Friend’s amendment.

[Nadhim Zahawi]

Amendment 11 would require the Secretary of State to publish guidance in relation to the Bill and regulations made under it within six months of Royal Assent. The hon. Member for Ilford South raised an important issue and I welcome the opportunity to discuss the Government’s plan for communicating the application of the proposed new regime, including the requirements that would or might be imposed on persons. It is important that appropriate steps are taken to make such persons aware of the requirements that would or might be placed on them. I have used “persons” here deliberately as it is the correct term, but I wish to make it clear that that includes acquirers.

First, the Government have published factsheets on the digital platform .gov that make clear what the measures in the proposed legislation are and who they apply to. The factsheet “Process for Business” sets out step by step what steps persons must or may need to take to ensure compliance with the regime. Secondly, we have set up the email address [e-mail] specifically for the purpose of providing advice on what may be in scope of the NSI regime for persons to contact to ensure that they properly understand the proposed regime. Of course, the Government believe that the Bill does not require any adjustment but should adjustments happen as it passes the scrutiny of this House and the other place, then any adjustments that affect persons would be reflected in the factsheets.

Thirdly, the Government have published and will continue to publish guidance alongside key documents in the Bill. Hon. Members will, for example, be able to review the information likely to be required for notifications online, as well as draft guidance. It is our intention to complete similar such guidance wherever it would be beneficial to parties. I hope that that provides sufficient reassurance for the hon. Member for Ilford, South and the shadow Minister that the Government are thinking carefully, and will continue to think carefully, about how to ensure that all parties who need to understand the measure are able to. For the reasons that I have set out, I cannot accept the amendment and I hope that the hon. Member for Ilford, South will withdraw it.

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[Nadhim Zahawi]

I hope that hon. Members will recognise that the Government are committed to providing as much clarity and predictability as possible for business on the use of the new investment screening regime provided for in the Bill. Clause 3 is the third clause related to the call-in power, and concerns the statement of policy intent. Colleagues will remember that clause 1 requires that, prior to the use of the call-in power provided for in that clause, the Secretary of State must publish and not withdraw a statement that sets out how they expect to use the call-in power.

The Secretary of State was pleased to publish a draft of that statement alongside the Bill to enable hon. Members, businesses and, indeed, the general public to review the approach he expects to take. As hon. Members will no doubt have seen, the draft statement contains details of what the Secretary of State is likely to be interested in when it comes to national security risks. It includes certain sectors of the economy and the types of entities, assets and acquisitions that may raise concerns.

Although it is crucial for investors to have confidence that there is as much transparency in the regime as possible, there is self-evidently a limit to how much the Government can disclose in that regard given that the regime deals explicitly with national security matters. Nevertheless, the draft statement goes into some detail about the factors that the Secretary of State expects to take into account when making a decision on whether to call in a trigger event. The statement will also be required to be reviewed at least every five years to reflect the changing national security landscape, although in practice it may be reviewed and updated more frequently.

Taken together, I hope that hon. Members will agree that the requirement for the Secretary of State to publish a statement of policy intent prior to use of the call-in power and the requirement to review it regularly provide a good level of transparency and guidance to businesses, while not disclosing our national security vulnerabilities, which of course hostile actors would be grateful to receive. The statement will provide valuable information for businesses and investors and help them, we believe, to determine whether they should submit a notification about their trigger event. I hope that hon. Members feel that I have sufficiently explained and justified the clause and its place in the Bill.

[Chi Onwurah]

Clause 3 is critical, as it sets out the context in which the Secretary of State will exercise the important power to call in transactions. We have sought in our amendments to improve it. I accept the Minister’s response to and rejection of our amendments, and his belief that the clause provides for the guidance and clarity that businesses need. I would just say to him that it was the clear conclusion of just about every witness in the evidence sessions that greater clarity and understanding were required, and that to make this change was an immense mountain to climb.

In some respects, the Government could not give too much support and guidance, within the bounds of national security, to the many companies and persons who will be caught up in the measures. Having said that, given that it is an essential part of the Bill, which we support, we accept that the clause stand part.

Question put and agreed to.

Clause 3 accordingly ordered to stand part of the Bill.

Clause 4

Consultation and parliamentary procedure

Question proposed, That the clause stand part of the Bill.

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[Nadhim Zahawi]

I turn now to clauses 5 and 10, alongside schedule 1, which set out much of the detail on the circumstances covered by the Bill. Clause 5 begins to set the scope of what may be called in by the Secretary of State by providing the overarching definitions of “trigger event” and “acquirer”. The Government are clear that these new powers should be sufficiently broad to cover potential risks to national security. Clause 5 sets out that the new regime is focused on the acquisition of control over both qualifying entities and assets. These acquisitions are collectively known as trigger events. I do not intend now to explore what does and does not qualify as an asset or entity. Instead, I would direct hon. Members to clause 7, which provides such definitions.

Following on logically, the person gaining such control is the acquirer, and to address a query raised on Second Reading by my right hon. Friend the Member for Chingford and Woodford Green (Sir Iain Duncan Smith), I should make clear that “person” includes both a body and an individual. Subsequent clauses explain the specific ways that control can be acquired for the purpose of the Bill, but this is a necessary clause to set the broad parameters of the regime. The trigger events within scope of the call-in power are defined in clauses 8 and 9 as acquisitions of control over qualifying entities and assets, but the Government consider that the Bill must supplement that by providing for interests or rights to be treated as held or acquired, and therefore for control to be acquired in certain circumstances, such as acquisitions involving indirect holdings or connected persons.

That is why clause 10, in combination with schedule 1, sets out various ways in which rights or interests are to be treated for the purposes of the Bill as being held or acquired, including, for example, joint arrangements with other parties. These edge cases are critical to ensuring that determined hostile actors cannot deliberately structure acquisitions in certain ways to avoid being covered by the regime. While many trigger events may be straightforward, direct acquisitions by a party without any connection to other persons involved in the target entity or asset, there may be broader factors that need to be taken into account when considering how control over an entity or asset may be held.

It may be that the ability to control the entity or asset is acquired, for example, as a result of arrangements between the acquirer and other shareholders or their relationship to other shareholders. The approach taken in schedule 1 broadly mirrors the concept of holding an interest in a company, already familiar in UK company law through the persons with significant control register, introduced in 2016.

Taking each in turn, paragraph 1 of schedule 1 defines joint interests, whereby two or more people holding an interest or right jointly are each treated as holding it. That means that any joint holdings of the acquirer will be taken into account when assessing whether control has been acquired over a qualifying entity or asset.

Paragraph 2 defines joint arrangements so that parties who arrange to exercise their rights jointly in a predetermined way—for example, to always vote together in a particular way—are each treated as holding the combined rights and interests of all the parties involved in such an arrangement. That is important to prevent hostile actors from being able to co-ordinate the acquisition and exercise of rights that might otherwise fall below the threshold of a trigger event.

Paragraph 3 defines indirect holdings, whereby a person holds an interest or right indirectly through a chain of entities, where each entity in the chain has a majority stake in the entity below it, the last of which holds the interest or right. We know that determined hostile actors are likely to seek to obscure their acquisitions through complex corporate structures, so it is vital that the Secretary of State can intervene in such circumstances.

Paragraph 4 simply stipulates that interests held by nominees for another are to be treated as held by the other, rather than the nominee. Paragraph 5 defines the circumstances in which rights are to be treated as held by a person who controls their exercise; this would cover, for example, instances where a person acquired a stake in an entity, but it was evident that they had an arrangement with a third party about how to exercise the rights that came with that stake.

Paragraphs 6 and 7 provide for the circumstances in which rights that are exercisable only in certain circumstances and rights attached to shares held by way of security are respectively to be treated as held, and mirror corresponding provisions in schedule 1A to the Companies Act 2006.

Paragraphs 8 to 10 define connected persons; as set out, connected persons are each to be treated as holding the combined rights or interests of both or all of them. That would cover, for example, shares in a company separately by a husband and wife or a brother and sister. Finally, paragraph 11 sets out that two or more persons sharing a common purpose are to be treated as holding the combined interests or rights for both or all. That would include two or more persons who co-ordinate their influence in relation to an entity or an asset, similar to joint arrangements. This will ensure that the Secretary of State is able to assess the impact of co-ordinated acquisitions.

Taken together, the concepts detailed in schedule 1 are a crucial part of ensuring that the new regime is flexible enough to deal with the complex reality of some acquisitions of control over entities and assets. Without these provisions, hostile actors could seek to take advantage of the gaps by structuring acquisitions in a way that would be out of scope of the regime, despite the very real risks that that might present. I trust that colleagues on both sides of the Committee want to ensure that the regime covers such cases suitably.

[Chi Onwurah]

I thank the Minister for his comments on clauses 5 and 10 and schedule 1, which are quite technical provisions designed to allow for the different ways in which control may be acquired over a qualifying entity or asset or a trigger event may occur. I shall not repeat what the Minister so ably set out, but simply say that we recognise the need to set out ways to mitigate the impact of hostile actors, as he put it, going to complex lengths to hide their interest in a qualifying asset or entity. However, having the powers and these definitions is not the same as actually using them. There have been several instances in which hostile actors have behaved in entirely transparent ways that we have not identified and prevented. While these provisions are necessary, we need to see the ways in which the Secretary of State will actively identify evolving risks even as they hide behind complex financial organisations.

[Dr Whitehead]

Will the Minister expand on some of the provisions in schedule 1, particularly as they relate to what might be a UK version of the case that I mentioned earlier concerning the US company that Dr Lenihan mentioned in his evidence? A company that had gone bankrupt had its assets, patents and employees bought up by what might have been conceived to be a hostile company in the US, in this case Huawei. If we imagine that happening in the UK, some questions arise about how schedule 1 is worded.

That sort of action might happen in a number of ways. It could be that a potentially hostile company buys up a failed, bankrupt company with the intention of making that company work again but so that it has control of its activities thereafter. Alternatively, the hostile company or organisation might want to buy up elements of the company not to make it work but to make off with the things that it wanted and then push the company further into liquidation. The company would not work but its assets and intellectual property would have passed into the hands of the other organisation.

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[Nadhim Zahawi]

My hon. Friend the Member for Wyre Forest addressed the issue of the administrator’s acting on behalf of the creditors. The important point to focus on—I will happily write to the hon. Member for Southampton, Test after the sitting—is that ultimately, it is the acquirer. If a malign actor were come to acquire those assets, and it is notifiable as part of the 17 sectors, then the transaction is made void. That is the remedy, effectively, because the acquirer would have to come forward and make representations to the investment unit about why they are acquiring and get clearance.

[Chi Onwurah]

I thank my hon. Friend the Member for Southampton, Test for the points that he is making. I wish to put to him, and effectively the Minister as well, an example which was raised yesterday in debate on the Telecommunications (Security) Bill, with which I am intimately familiar as the collaboration is between Nortel, an equipment vendor for whom I worked in the past, and Huawei, on a project to develop new technology. When two entities come together and collaborate, which I do not think will meet any of the trigger events described here, but instead create something which has IP in it which is of value, how does that come under the provisions of the clauses and the schedule?

[The Chair]

I have let everyone speak. I do not know whether there are any more answers that the Minister wants to offer.

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There is also an added element of urgency: the covid crisis will leave many British businesses distressed and vulnerable. They will be vulnerable to more hostile foreign takeovers, including those backed by state-owned enterprises and state-backed investment vehicles. When we talk about China, there is, of course, no difference between business and the state—business is the state. The Chinese Communist party has a membership of 90 million people. It is absolutely clear that any time a business takes a decision, regardless of whether it is ostensibly or nominally in the private sector, it is the CCP that makes the call. We are dealing with a situation in which our business community—distressed, vulnerable and potentially with huge cash-flow issues—is going to be susceptible to those kinds of hostile foreign takeovers.

[Chi Onwurah]

My hon. Friend is making an excellent point. In addition to the critical issue of the state of many small businesses after covid, there is Brexit. The low value of the pound means that our distressed assets will be cheaper on the global market.

[Stephen Kinnock]

My hon. Friend makes a crucial point. As we have constantly said, this is about risk and the hierarchy of risks we face. Risk is always sensitive to what is happening in terms of the global economic outlook. As she rightly points out, Brexit and leaving the transition period will be a seismic event for our country. It will have a massive impact on our currency and the strength of the pound. Combining that with the covid situation means that we have to be careful. We have to be vigilant and ensure that we defend our national interest. That is why it is important that our mindset involves taking a holistic view of our national interest, particularly in the turbulent times in which we find ourselves. This is fundamentally about saying that our national security is not for sale. Our national security does not have a price tag, and it has to be the primary consideration.

With those contextual comments in mind, I move on to amendment 6, which considers a particular aspect of our economy. It focuses on the asset side of the ledger in terms of this Bill—namely, critical national infrastructure. Our amendment would require the Secretary of State to have regard to the protection of critical national infrastructure when making notifiable acquisition regulations. Going back to China, it is remarkable how much of our critical national infrastructure is in the hands of Chinese enterprises or state-backed investment vehicles. This is happening now, right under our noses, and needs to be taken into account in discussing this amendment.

In essence, our amendment offers a way to ensure that critical national infrastructure is given particular and extra consideration in the national security and investment assessments within the regime. Given that the Bill fails to define national security, it does not, by definition, reference critical national infrastructure.

To drill down further, the Government’s consultation on the Bill lists the 17 sectors that might come under the regime’s mandatory notification process, but it does not explicitly list the UK’s critical national infrastructure. In fact, there is not a direct overlap. Five sectors are not included in the 17 that are in the consultation, but they are in our critical national infrastructure. The 17 range from advanced materials, advanced robotics, artificial intelligence, civil nuclear, communications, computing hardware, critical suppliers to Government, critical suppliers to the emergency services, cryptographic authentication, data infrastructure, data infrastructure, defence, energy, engineering biology, military and dual use, quantum technology, satellite and space technologies, to transport. However, the Centre for the Protection of National Infrastructure defines 13 areas as critical national infrastructure, including several sectors that are not included in the 17: food, Government more broadly––not just critical suppliers––health, space and water.

If we look at the impact of the pandemic and think about what critical national infrastructure means, we see that the 17 sectors are already out of date. Given our experience with covid and the concerns about food supply, that is clearly an issue we need to examine closely. Water is crucial to our wellbeing as a nation, yet it is not included in the 17. Our amendment argues that critical national infrastructure should be taken as an asset class. If defined as an asset class, the landscape moves and the definitions of sectors move, but there is clarity about critical national infrastructure always being within the scope of the Bill.

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That is the approach of a Government intent on getting the right balance, both now and in future, between protecting our national security and keeping the UK a premier investment destination. I hope that sentiment is shared on both sides of the Committee.

[Chi Onwurah]

I will be brief because I know that we have to make progress, but I will say a few words on clause 6, which is in some ways the heart of the Bill, defining as it does what a “notifiable acquisition” is.

I regret that despite the Minister’s repeated assurances, I am not entirely convinced that he has come to the Committee ready to make changes in response to our very constructive proposals. He has repeated on a number of occasions that the Bill is the best and most proportionate means, despite our constructive suggestions to the contrary. I remind him that—as we see in this clause in particular—the Bill gives significant powers to the Secretary of State, and particularly significant additional powers on delegated legislation. It is possible that not every clause is as perfect as it could be or as he seems to think it is. In particular, the amendment set out by my hon. Friend the Member for Aberavon was a really important contribution to bringing critical national infrastructure directly and clearly into the remit of the Bill. If the Minister is so opposed to including them directly, what elements of critical national infrastructure does he think do not form part of our national security?

My hon. Friend the Member for Southampton, Test made an excellent point with the example of our nuclear capability. Only five years ago, the then Prime Minister and Chancellor of the Exchequer were happy to hand not only the financing but the technological development, innovation and reputational consequences to China. Does the Minister agree that if we had had this Bill 10 years ago, as we wished, having critical national infrastructure in it would have made that impossible?

There is also the case of Huawei. When that was debated last night, it was clear that if we had been writing this Bill five or 10 years ago, I doubt whether the then Government would have included telecommunications, given their lack of interest in many acquisitions and procurements in that area. We now see the impact of having a high-risk vendor in our 5G and fibre network on our national security. We will not oppose clause stand part but we hope to encourage the Minister to accept our most constructive and supportive amendments.

[The Chair]

Before I put the question formally, for the benefit of Members––particularly new Members who have not been able to be here as much in the last year as would otherwise have been the case––let me say that a good way of thinking of the rules of order in Committee is to think of them as being pretty much the same as in the Chamber. Similarly, above and below the bar applies in Committee as well as in the Chamber.

Question put and agreed to.

Clause 6 accordingly ordered to stand part of the Bill.

Clause 7

Qualifying entities and assets

Question proposed, That the clause stand part of the Bill.

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[Nadhim Zahawi]

This group of amendments would provide for certain cases to count as a person gaining control of a qualifying entity. The amendments are to clause 8, which defines the circumstances in which a person gains control of a qualifying entity for the purpose of the Bill.

Amendment 7 would ensure, as the hon. Member for Aberavon mentioned, that any acquisition involving state-owned entities or investors originating in a country of risk to UK national security and creating a change of influence would count as a person gaining control of a qualifying entity for the purposes of the Bill. I welcome the hon. Gentleman’s intention to ensure that national security is comprehensively protected. I reassure him that the Bill provides no carve-out or special treatment for state-owned entities or overseas investors where they acquire control of a qualifying entity or asset. They will be subject to the mandatory notification requirements in the same way as any other acquirer, and the Secretary of State will have the power to scrutinise any acquisition of control by such parties where the legal test for call-in is met. That includes the acquisition of material influence over the policy of the entity.

However, the Government have been clear that the regime is nationally agnostic, and that each acquisition will be considered on a case-by-case basis. The draft statement of policy published alongside the Bill simply states that the regime will not

“regard state-owned entities, sovereign wealth funds—or other entities affiliated with foreign states—as being inherently more likely to pose a national security risk.”

I strongly believe that this is the right approach. We must recognise that many such organisations have full operational independence in pursuing long-term investment strategies with the objective of economic return, raising no national security risks.

Moreover, the clause already sets out the circumstances that constitute control of an entity based on levels of shareholding and voting rights and material influence. Amendments such as this could, for example, capture increases of equity stakes at any level, even though many could not realistically be expected to give rise to a national security risk. Developing a list of countries of risk would likely be a moving feast that would quickly become out of date in response to changing geopolitics and would most likely harm Britain’s diplomatic relations and place in the world, giving rise to a chilling effect on investment in these shores.

Amendment 8 would create a new case of a person gaining control of a qualifying entity for “changes to material influence” in industries critical to the UK’s capability and capacity to maintain national security, including economic security. Once more, I welcome the emerging cross-party consensus that the Bill must capture more subjective acquisitions of control, rather than solely levels of shares and voting rights. I reassure the hon. Gentleman that acquisitions of material influence over the policy of an entity are very much in the scope of the Bill. That applies within the 17 sectors but also to the wider economy. Parties can notify the Secretary of State of a trigger event concerning the acquisition of a material influence, and he will have the power to proactively call in such a case if the legal test is met.

I should clarify that material influence is not a scale. It is the lowest level of control that can be acquired over a qualifying entity, which captures acquisitions of smaller stakes or other rights or interests in entities, such as board representation rights. As such, it is not immediately clear to me what circumstances such an amendment would bring into the scope of the Bill, given that it would capture changes to material influence. None the less, I admire the ingenuity of the hon. Gentleman’s seeking, at least in part, to define national security through the amendment and its explicit reference to economic security. As he will know, the Bill does not define national security, and, as I said on Second Reading, I think that is a real strength, not a weakness.

[Chi Onwurah]

The Minister says that this Bill is not country specific. I know he does not want to define national security in the Bill, but does he think that our national security can be country specific?

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[Nadhim Zahawi]

Clause 8 sets out for the purpose of the Bill the circumstances in which a person gains control of a qualifying entity as defined in clause 7. More specifically, the clause sets out the four ways in which control can be gained.

The first two cases are where certain shareholdings or voting rights are acquired. The clause stipulates that acquisitions increasing a person’s holding in a qualifying entity above 25%, 50%, 75% or more all constitute trigger events. The thresholds have been chosen because of their significance under UK company law.

Under the Companies Act 2006, a number of key decisions relating to shareholders’ rights in relation to the decision making of a company require a special resolution. Special resolutions require a majority of 75% of votes to be passed. This means that a holding of more than 25% allows one person to, by themselves, block a special resolution. Similarly, a holding of 75% or more allows one person to, by themselves, pass a special resolution.

Under the Companies Act, ordinary resolutions, which apply to more routine shareholder decisions, require a simple majority. This means that a holding of more than 50% allows one person to, by themselves, make decisions affecting the governance of a company.

The Government believe these thresholds represent reasonable proxies for various levels of control over entities. The clause deliberately includes references to both shares and votes to prevent the artificial construction of acquisitions to avoid meeting one of these thresholds—for example, a 40% stake with 51% of voting rights. In most cases, ordinary shares carry the equivalent amount of voting rights: one vote per share.

Recognising that the regime also concerns entities other than companies established under the Companies Act, the third case explicitly extends the same principles on voting rights enabling the passage of a resolution to other entities. That means that any acquisition of voting rights that allows a person to secure or prevent the passage of any resolution governing the affairs of the entity is a trigger event. This is important because other types of entities are not subject to the Companies Act and may have different thresholds for the passing of resolutions.

Finally, the fourth case that constitutes control of an entity is the acquisition of material influence over its policy. This reflects that no single shares or votes threshold is appropriate in every case.

Material influence is an existing concept under the Enterprise Act 2002, which denotes the lowest level of control that might give rise to a relevant merger situation that may be considered for competition or public interest reasons. Material influence captures acquisitions of smaller stakes or other rights or interests in entities, such as board representation and rights, which nonetheless enable a person materially to influence the policy of the entity.

Other factors, such as the status and expertise of the acquirer or a relationship of financial dependence, may be relevant. Clearly, determining whether material influence has been or is to be acquired will require an assessment of all the circumstances of the case by the Secretary of State. It is not possible, therefore, to provide any hard and fast rules that will be applicable in all cases.

The Competition and Markets Authority has published guidance about what it considers to constitute a material influence. The Secretary of State intends to apply that in so far as is possible in the context of this new regime, for the purposes of determining whether control has been or is to be gained over a qualifying entity.

For the avoidance of doubt, the Government have no plans to publish their own separate guidance on material influence. Collectively, these four cases represent the ways in which control of entities can be acquired for the purpose of the Bill. It is vital that they stand part of the Bill so that the Secretary of State may scrutinise acquisitions of control over entities in whatever form that takes. I hope that hon. Members will agree that this approach has been carefully considered to reflect the complexity of the make-up of modern entities.

[Chi Onwurah]

As we are over time, I shall not detain the Committee long, but I want to say a few words on this important clause. Our debate has again highlighted the Minister’s apparent determination and conviction that the Bill cannot be improved on, even as we all acknowledge––and as the Telecommunications (Security) Bill makes absolutely clear––that the Government’s record on national security in this context can very much be improved on. I noted his celebration of the innovators and entrepreneurs, and his concerns about the chilling effect on them of bringing debt holders into the Bill’s remit as proposed in the amendment of my hon. Friend the Member for Ilford South.

The entrepreneurs and innovators seeking investment, particularly foreign investment, are unfortunately to have no such protection from the Minister. We want a consistent and robust approach, given the breadth of powers that the Bill gives to the Secretary of State. I was concerned that, even with the wise intervention of the hon. Member for Wyre Forest, the Minister did not make a proposal to take these constructive amendments away to consider and perhaps return with Government amendments that reflect them later in the Bill’s passage. We will not oppose stand part, but I hope that the Minister will continue to consider our suggestions for the improvement of this and other clauses.

Question put and agreed to.

Clause 8 accordingly ordered to stand part of the Bill.

Clause 9

Control of assets

Question proposed, That the clause stand part of the Bill.

[Nadhim Zahawi]

Clause 9 sets out, for the purposes of the Bill, the circumstances in which a person gains control of a qualifying asset, as defined in clause 7. A person gains control of a qualifying asset where they acquire a right or interest in, or in relation to, the asset, and as a result they can do at least one of the following.

First, they can use the asset or use it to a greater extent than prior to the acquisition. This would allow the Secretary of State to intervene, for instance, when an individual purchases a sensitive site and can therefore access and use the site. Secondly, they can direct or control how the asset is used, or direct or control its use to a greater extent than prior to the acquisition. This second mechanism by which a person can gain control over a qualifying asset is particularly important as it brings into the scope of the regime those who may not have complete control over the asset, but who can nevertheless still direct or control its operation. Without that, there would be a control loophole that hostile actors may seek to exploit.

It is worth noting the relationship between this clause and clause 11, which provides an exception for control of assets in circumstances where the acquisition is made for purposes wholly or mainly outside the individual’s trade, business or craft. That is intended to put acquisitions such as consumer purchases firmly out of scope of this regime. I reassure hon. Members that the Secretary of State does not routinely expect to call in trigger events relating to assets. However, I hope that the Committee will agree that it is nevertheless important for the Secretary of State to retain this power to guard against hostile actors who seek to acquire control over sensitive assets as an alternative to acquiring the business which owns them.

Question put and agreed to.

Clause 9 accordingly ordered to stand part of the Bill.

Clause 10 ordered to stand part of the Bill.

Schedule 1 agreed to.

Ordered, That further consideration be now adjourned. ––(Michael Tomlinson.)