National Security and Investment Bill

Lord Bates Excerpts

Committee stage
Tuesday 9th March 2021 Grand Committee

Amendment 20 withdrawn.

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

My Lords, we now come to the group beginning with Amendment 21.

Amendment 21

Moved by

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[Lord Grimstone of Boscobel (Con)]

My Lords, I welcome these amendments from my noble friend Lord Hodgson of Astley Abbotts, which concern the extraterritorial application of the call-in power. Amendment 21 seeks to ensure that where an entity is formed or recognised under the law of a country or territory outside the UK, it will be a qualifying entity only if it carries on activities in the UK but not where it supplies goods or services to persons in the UK, as the clause currently provides.

I am afraid that I was slightly unclear on the precise intent of Amendments 27 and 32 so, for the benefit of the Committee, I am interpreting them as seeking to remove the provision currently in Clause 7(6)(b): that an asset situated outside the UK or the territorial sea is a qualifying asset if it is used in connection with the supply of goods or services to persons in the UK. This would mean that an asset situated outside the UK or the territorial sea is a qualifying asset only if it is used in connection with certain activities carried on in the UK.

It is important that entities formed or recognised outside the UK which provide goods or services to persons in the UK are captured through the Bill as their acquisition may give rise to national security risks to the UK. The noble Lord, Lord Fox, asked for some examples, and I am happy to provide them. For example, a foreign-registered company that does not carry on activities in the UK may still provide essential goods or services to parts of our critical national infrastructure. If a hostile party were to acquire control over that supplier, it could use that control to degrade our infrastructure. To take another example, imagine an overseas supplier of machinery or compounds to a UK-based entity producing cutting-edge advanced materials for our military. Control over that supplier could provide a hostile party with an insight into certain military capabilities or a means to sabotage the work of the UK entity to harm our military. As my noble friend Lady Noakes recognised, this could have a severe effect on national security.

Similarly, it is important that land and moveable property assets situated outside the UK or the territorial sea and intellectual property assets used in connection with the supply of goods or services to persons in the UK are also captured as their acquisition can give rise to national security risks to the UK. For example, as I have said previously, the acquisition of a wind farm situated outside the UK and its territorial sea that provides critical energy supplies to UK industry and consumers may give rise to national security risks, even though it is not strictly used in connection with activities in the UK. If the noble Lord, Lord Clement-Jones, would like to hear this example a third time, he only has to lay a further amendment.

Of course, any extraterritorial use of the powers under this Bill should be proportionate as well as meeting the other tests in the Bill. That is why the Bill explicitly sets out a UK nexus requirement that means that the Secretary of State may intervene to assess an acquisition overseas only where it has a clear connection to the UK. Remedies may be imposed at the end of an assessment only if the Secretary of State reasonably considers that they are necessary and proportionate for the purpose of safeguarding the UK’s national security. As such, the extent of an acquisition’s connection to the UK will be a clear factor in that decision.

The Bill also explicitly limits the application of remedies to persons outside the UK to those who have a clear connection to the UK—for example, UK nationals or companies, or those who carry on business in the UK.

I am conscious that I may not have answered fully the questions from the noble Lord, Lord Grantchester. If I reflect, after looking at Hansard, that I have not, I may write to him. I understand, taking these amendments as a group, the desire to probe the Government in this area, but I hope that, with this explanation, my noble friend will feel able to withdraw his amendment.

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

I have received one request to speak after the Minister from the noble Lord, Lord Fox.

[Lord Fox (LD)]

I am probably being extremely stupid here, so please forgive me. In the first example of a foreign business supplying a critical operation in this country, I understand that that would be a problem were it taken over by a hostile nation. Let us imagine that a Belgian company, or perhaps a Canadian one, is being taken over by a company or a regime that we consider hostile. What is the Secretary of State’s next move in stopping it happening? I do not understand what the Secretary of State’s remit is over that Belgian or Canadian company, other than to suggest to the recipient of the supplies in this country that they have to change their supplier.

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Amendment 21 withdrawn.

[The Deputy Chairman of Committees (Lord Bates)]

We now come to the group beginning with Amendment 22.

Amendment 22

Moved by

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[Baroness Bloomfield of Hinton Waldrist (Con)]

I thank my noble friends Lord Lansley and Lord Vaizey, and the noble Lord, Lord Clement-Jones, for these amendments. They seek to clarify and reduce the scope of the regime in relation to asset acquisitions. The Government expect that the majority of trigger events of national security interest will be traditional mergers and acquisitions, but the Secretary of State must also be able to intervene in the rare circumstances where acquisitions of individual assets, rather than entities, may raise national security risks. The Bill as drafted provides that land, tangible moveable property and intellectual property fall within scope of the regime as qualifying assets; this has a degree of extraterritorial application.

Amendments 22 and 28 seek to restrict the inclusion of land as a qualifying asset only to land located within one mile of a sensitive site, and to require the Government to create an online checking service to identify land that is regarded as sensitive. Amendment 23 seeks to exclude “business as usual” procurement, such as the purchasing of software licences or standard network equipment, from the definition of a qualifying asset. Amendment 38 aims to ensure that intellectual property licences that do not permanently transfer ownership of the IP to the licensee are not treated as an acquisition of control over that IP.

I will first turn to Amendments 22 and 28. In limited cases, the acquisition of land can give rise to national security concerns, in particular, but not limited to, proximity risks. The UK Government do not publish the location of the sites in the UK that they consider sensitive from a national security perspective. To do so would give rise to risks to national security: it would serve as a directory for hostile actors who wish to acquire land proximate to sensitive sites, as well as actors who wish to harm us in other ways. Acquisitions of land and other assets that do not pose a national security risk can be pursued with no expectation of being called in. Parties who are unsure or believe that the land in question may be proximate to a site where the Secretary of State is likely to have concerns can voluntarily notify and receive clearance if no national security risks arise.

Risks to national security can also arise from acquisitions of control over land more than one mile from a sensitive site. Indeed, the US regime under the Committee on Foreign Investment in the United States, to which my noble friend referred and to which the amendment alludes, includes a limit of more than one mile for some sites. For example, if we are concerned about a hostile party having a good line of sight to a sensitive site, a plot of land sitting atop a hill more than a mile away might still present an excellent view and the associated security risks. Although most land-based risks are expected to relate to proximity to sensitive sites, not all will. In particular, the Secretary of State will be entitled to take into account the intended use of the land, which may be divorced from any proximity concerns.

I will now turn to Amendment 23. Noble Lords are right to argue that, in most cases, there is unlikely to be a risk to national security from the acquisition of control over intellectual property that is generally and widely available on the commercial market, but such a scenario cannot be ruled out. As set out in the draft statement provided for in Clause 3, which was published alongside the Bill, the Secretary of State expects to intervene only very rarely in acquisitions of any assets. The draft statement lists intellectual property in relation to which the Secretary of State expects acquisitions to be more likely to give rise to national security risks, although this does not include intellectual property that is easily available.

Turning to the detail of the amendment, there is no generally recognised definition of an asset being

“generally and widely available on the commercial market”.

For example, it does not specify where or to whom the asset should be available. It may be that certain intellectual property is in general widely available but is not generally or widely available to certain parties. We may wish to ensure that those parties continue to struggle to access that intellectual property.

I now turn to Amendment 38. As currently drafted, an acquisition of control over intellectual property does not require the acquirer to gain ownership of that IP. This is because acquisitions of control over intellectual property, where the asset is being licensed on a non-permanent basis, can still give rise to national security concerns. Such an exemption could allow hostile parties to use licensing arrangements to avoid the regime, for example by leasing intellectual property for an arbitrarily long period of time rather than buying it.

Temporary access to sensitive intellectual property may, for example, also allow a hostile party to copy and transfer abroad parts of it. Of course, the licensor may have some level of control over the use of its intellectual property, and any assessment of a possible risk to national security would take this into account. However, in the same way that there is no guarantee that a party selling sensitive intellectual property would ensure that the sale does not give rise to national security risks, there is also no guarantee that a party licensing intellectual property would do so.

By way of conclusion, I appreciate that these amendments are motivated by a desire to limit how assets are covered by the regime without adversely affecting the Secretary of State’s ability to protect national security. They would effectively limit the scope, but they would also inadvertently expose our national security to additional risk, which I have confidence is not the aim of my noble friend. In answer to the question posed by the noble Lord, Lord Grantchester, about how many notifications we expect to arise from procurements, the number is expected to be very low, and we will indeed publish guidance on those procurements.

For these reasons, I hope that the noble Lord will withdraw his amendment.

[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?

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Again, I apologise for the complexity of some of these arguments. To conclude, for the reasons that I have outlined, the Government do not consider the amendments tabled by my noble friends necessary or appropriate. I gently ask that they be withdrawn.

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

I have received requests to speak after the Minister, from the noble Lords, Lord Lansley and Lord Fox. I first call the noble Lord, Lord Lansley.

[Lord Lansley (Con)]

My Lords, first, I express my warm thanks to my noble friend Lady Noakes, who happily introduced Amendment 97 far better than I would have. I had neglected to notice that we had reached Schedule 1, since we had not even reached the clause that introduced it. Not noticing that was entirely my fault.

If I may, I will go away and read what my noble friend said about Amendment 98, because it is purely a matter of trying to get the drafting right. He may well be correct on that.

On the other two amendments, I kindly ask my noble friend to reflect. The issue about former spouses reflects what is said in Section 127 of the Enterprise Act 2002, but this includes cohabitees, who are not in Section 127, which was subsequently amended to include civil partners. “Associated persons” has turned into “connected persons” and has broadened in ways that nobody told us was a policy.

My other point about the Enterprise Act is that I do not understand what my noble friend is saying. Earlier, he told us that the Government would not issue new guidance about material influence, because the CMA has issued guidance. I have read the CMA’s guidance and it clearly includes reference to obtaining control by stages. Obtaining control by stages, in Section 29 of the Enterprise Act 2002, includes a reference to that

“person or group of persons … materially to influence the policy of … the enterprise … to a greater degree”.

I have not invented this; it is in the Enterprise Act 2002 now. If my noble friend proposes to use the CMA’s guidance and says that everybody is happy that we are using an established understanding of what material influence is, I suggest we go away and look at whether we can use the language and guidance of the Enterprise Act to make it consistent with the practice that people have understood for the best part of 20 years.

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[Lord Grimstone of Boscobel (Con)]

My Lords, with thanks to all noble Lords who have spoken with such knowledge and eloquence on the amendments tabled, I will begin by speaking to Amendments 31 and 33 in the names of the noble Lord, Lord Bruce of Bennachie, and my noble friend Lady McIntosh of Pickering. The noble Lord, supported by my noble friend, clearly raises important questions on the juxtaposition of Scottish law with the powers that we are looking at in this group.

I am grateful to the Law Society of Scotland for having supported this and, if I may, rather than attempting to deal with these points on the hoof I will take them away. I commit to being in communication with noble Lords as to what needs to be done, if anything, in relation to them. More generally, perhaps putting the important Scottish points on one side for the moment, I completely agree with the noble Baroness, Lady Hayter, that the Bill has to work for every part of the United Kingdom.

These amendments concern Clauses 8 and 9 and the circumstances where acquisitions of control of entities and assets take place for the purposes of the Bill. They seek, I believe, to ensure that rights or interests in, or in relation to, entities and assets held by way of security are exempt from the regime, on the understandable basis that lending and debt arrangements do not give rise to control. Let me agree right away with the thrust of the concern expressed by the noble Lord and my noble friend. The Government do not consider that the provision of loans and finance is automatically a national security issue. Indeed, it is part of a healthy business ecosystem which enables businesses to flourish and grow in this country. Lenders need confidence that they can see a return on ordinary debt arrangements to provide that service, which is of course vital to the proper functioning of the economy. But we must recognise that there are, in a small number of cases, national security risks that can be posed through debt. I will come to this in a moment.

Access to finance is crucial for so many businesses and, to grow and succeed, they will often take out loans secured against the very businesses and assets they have fought so hard to build. That is why the Bill allows the Secretary of State to scrutinise acquisitions of control that take place when lenders exercise their rights over the collateral. The important point is that it is not where the lenders have hypothetical rights but where they exercise their rights over the collateral. This approach is needed because it will prevent hostile actors artificially structuring acquisitions in the form of loans which, following a swift and convenient default—let us put it that way—might otherwise allow them to evade scrutiny. This is a proportionate approach, and one that I am confident will keep finance flowing into UK companies and infrastructure while ensuring that our national security can be protected.

Amendments 34 and 35 in the name of my noble friend Lord Hodgson relate to Clause 10, which, 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 held or acquired. These include indirect holdings whereby, for example, a person holds an interest or right indirectly if that person has a majority stake in an entity that is part of a chain of entities, each of which holds a majority stake in the entity immediately below it, the last company in the chain of which holds the interest or right. That example is relevant because Amendment 34 seeks to ensure that intragroup investments are not covered by Clause 10 and, as a result, Schedule 1 as well.

My interpretation is that my noble friend wishes to prevent internal reorganisations within the same corporate chain of entities from resulting in trigger events by virtue of Schedule 1. I confirm to the Committee that, in the vast majority of cases, that will not have an impact but, depending on the facts of the case, internal reorganisations may be in scope of the Bill. That is because there may be rare cases in which internal reorganisations pose national security risks. That may be true even if the ultimate beneficial owner is the same before and after the trigger event: for example, if there are concerns about changes to the level of control acquired by other links in the chain as a result of the internal reorganisation.

Clause 10(2)(b), which the amendment seeks to amend, is therefore important, because it makes it clear that in circumstances where a person is already treated as holding an interest or right, when something happens that would be regarded as the acquisition of that interest or right by the same person, then it is treated as such.

This means, for example, that an ultimate beneficial owner at the top of a corporate chain transferring existing majority holdings held by entities lower down in the chain to those above them could be a trigger event if it can be regarded as an acquisition by virtue of Schedule 1.

Amendment 35 would insert a new subsection into Clause 10 to provide that only one trigger event arises where more than one person is treated as acquiring an interest or right due to the provisions of Schedule 1. I can clearly see that my noble friend is seeking to help the Government by looking to ensure that the investment security unit is not deluged by duplicate notifications by corporate chains each time a new acquisition is made by an entity towards the bottom of the chain.

I can assure him that we are carefully designing the notification process and forms so that, wherever possible in situations such as these, a single notification providing all the details of the entities in the same corporate structure can be considered together. That is different from his amendment, which would seek to provide in the Bill that only one trigger event takes place. I am afraid that the Government consider that this would introduce ambiguity into the Bill, as it would not make it clear which trigger event is the one which takes place, and which should be discounted.

Hostile actors could try to exploit such a provision to avoid scrutiny by using shell companies at the bottom of long and complex corporate chains to acquire sensitive entities and assets. If only one trigger event is considered to take place by virtue of Schedule 1, the entity immediately above it in the chain could notify the acquisition, while not necessarily disclosing the control acquired by more troubling persons higher up the chain. In these circumstances, the amendment would mean that these could not be treated as separate trigger events, whereas surely they should be.

With the arguments I have outlined and my undertaking to write to the noble Lord, Lord Bruce, and my noble friend Lady McIntosh about the important Scottish matters they raised, I ask that the noble Lord agrees to withdraw the amendment.

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

I have received one request to speak after the Minister, from the noble Lord, Lord Clement-Jones.

[Lord Clement-Jones (LD)]

My Lords, I thank the Minister for his response. No doubt the noble Lord, Lord Hodgson, and my noble friend Lord Bruce will respond very positively to the Minister’s offer on Amendments 31 and 33.

I must say that on Amendments 34 and 35 the Government are really tying themselves in knots in the way that the mesh—to come back to the Minister’s splendid fishing analogy—is woven in this Bill. This is catching minnows—it is catching transactions such as these intragroup transactions. I will read very carefully what the Minister has to say, but, given the number of fish caught by this that will have to be continuously thrown back in the sea after a period—as we have discussed, one that could be unduly protracted—this really is a catch-all Bill the longer we talk about and debate it. I do not think any of us is particularly comfortable with that in this Committee; we have to find a way of making it more proportionate. That will be the key task of the House as the Bill goes forward.

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[Baroness Bloomfield of Hinton Waldrist (Con)]

Let us try to get this done in five minutes.

I thank the noble Baroness, Lady Hayter, and my noble friends Lord Lansley and Lord Vaizey for tabling these amendments. I will begin with Amendments 36 and 88, which concern the Bill’s effect on higher education. Amendment 36 seeks to exempt from the regime the use of qualifying assets where that use is conducted wholly within the activity of a UK-based higher education or research institution. Amendment 88 seeks to introduce guidance to explain some of the Bill’s provisions in relation to higher education.

First, I intend to provide some general assurance to the Committee about the asset powers under the Bill. There are no asset transactions that must be notified to the Secretary of State as assets are not subject to the mandatory notifiable acquisitions regime. To quote the statement published on introduction, interventions in asset transactions by the Secretary of State are expected only in

“the headline sectors in which national security risks are more likely to arise than in the wider economy”.

The draft statement states more broadly:

“The Secretary of State expects to intervene very rarely in asset transactions.”


In relation to higher education, I assure the Committee that we do not generally expect the acquisition of qualifying assets for exclusive use by UK-based research or higher education institutions to give rise to national security concerns.

Indeed, to go further, the use of assets where there is no acquisition of a right or interest resulting in control over a qualifying asset would not even constitute a trigger event, although my understanding is that Amendment 36 seeks to go wider than this. We do, however, expect national security risks to arise in the higher education and research sectors sometimes. For example, hostile actors could seek to set up a UK-based research organisation and acquire sensitive assets through this vehicle, or enter into some form of agreement with one and gain control over sensitive assets that way. Exempting such acquisitions from the regime would therefore create a notable gap in the Secretary of State’s ability to safeguard national security.

Turning to the likelihood of the Secretary of State calling in acquisitions related to contract research, consultancy work and collaborative research and development, and the request for guidance, I point the noble Baroness to the three levels of risk set out in the draft statement. The intention of the statement is to provide guidance on the expected use of the call-in power by the Secretary of State. The three levels of risk in the statement give a hierarchy of how likely the Secretary of State is to call in an acquisition. The most likely areas of concern are “core areas”, “core activities” and “the wider economy”. Acquisitions in “core areas” are likely to be of most interest to the Secretary of State. “Core activities” are likely to fall within the “core areas” but may also fall outside them. This covers the sectors proposed to be set out in regulations under Clause 6. The Government have consulted on the definitions of the sectors to be covered by Clause 6 and published their response at the beginning of this Committee. “The wider economy” concerns everything else. The Secretary of State considers these areas unlikely to pose risks to national security. Therefore, they are unlikely to be called in under the NSI regime. I am confident that higher education and research institutions will be able to assess their activities and decide in which of these three areas of risk they fall.

I want to take a moment to assure the Committee that BEIS consulted Universities UK, the University Alliance and the Russell group on the national security and investment White Paper, published on 24 July 2018. They were very helpful. Of course, since the introduction of the Bill, as my noble friend Lord Lansley noted, BEIS has continued to engage with a number of research and academic institutions, including the Russell group. The Government very much appreciate the Russell group’s ideas on inclusion for guidance.

Turning to strategic security partnerships and domestic partners, the Bill deals only with acquisitions of control over qualifying entities and assets; it does not regulate these strategic security partnerships specifically. Any acquisitions of control made by such a partnership will be subject to the Bill in the same way as any other qualifying acquisition—namely, the Secretary of State’s likely interest in them is illustrated in the draft statement under Clause 3.

I now turn to Amendment 40 in the names of my noble friend Lord Vaizey and the noble Lord, Lord Clement-Jones. This amendment concerns Clause 12, which provides supplementary provisions about trigger events, including details about when they take place. The amendment seeks to make it clear that, in relation to the creation or potential creation of a new qualifying asset, a trigger event can take place only upon the creation of that asset.

The Government also consider that acquisitions of control over qualifying assets can take place only from the point of their creation, whether in tangible or intangible form. I reassure the noble Lords that the Bill as drafted provides for that. They will, however, be aware that the Secretary of State’s call-in power applies both to trigger events which have taken place and to those which are “in progress or contemplation”. The point at which a trigger event is in progress or contemplation will clearly depend on the facts of the case, but it could include circumstances where research and development partnerships are agreed, and it is abundantly clear what assets are to be developed and what control the funder will be acquiring over them.

We think that this is the right approach, as the primary focus of this regime is acquisitions of control over existing entities and assets. We cannot hope to know the future and how technology and national security risks might develop in every circumstance, so it is right that control of new assets can occur only once they have been created.

With the arguments I have outlined against the amendments in this group, I ask that noble Lords agree not to press them.

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

Before I call the noble Lord, Lord Lansley, to respond, I need to make the Committee aware of the Procedure Committee’s guidance about five hours of sitting, which expired five minutes ago. I do not want to put pressure on the noble Lord to respond on a very detailed debate, but if his response is brief we can probably include it. If not, it might be that the Whip needs to consider moving an adjournment.

[Lord Lansley (Con)]

My Lords, I can be brief. I do not think my noble friend really replied to Amendment 88, so I think that we will return to this on Report. I beg leave to withdraw the amendment.

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Amendment 37 agreed.

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

That concludes the Committee’s work this afternoon. I remind Members to sanitise their desks and chairs before leaving the Room. I thank very much the broadcasting team and the support team for their assistance.

Committee adjourned at 7.37 pm.