National Security and Investment Bill

Lord Bruce of Bennachie Excerpts

Committee stage
Tuesday 9th March 2021 Grand Committee

Moved by

[Lord Bruce of Bennachie]

31: Clause 8, page 6, line 38, at end insert—
“(10) For the purposes of this section, acquiring a right or interest in, or in relation to, an entity by way of security does not constitute obtaining control over the entity, and any such rights or interests held by way of security do not constitute any of the cases described in this section.”Member’s explanatory statement
This amendment seeks to ensure that transactions are only caught where the person gains actual control of a qualifying entity and would exempt securities or other situations where no effective control is obtained.

[Lord Bruce of Bennachie (LD) [V]]

My Lords, I speak to Amendments 31 and 33, which relate to the continuing debate on Clause 8 and Clause 9 on the control of assets. The effect of Amendment 31 would be to ensure that an event is triggered only where the person gains actual control of a qualifying entity, and it would exempt securities and other situations where no effective control is obtained.

The definition of “control” in Clause 8(1), as has already been said, is framed very widely. It refers to 25%, 50% and 75% shareholding or voting thresholds, which correspond to those applied in the context of the people with significant control regime. Clause 8 also includes provisions adapting the above scenarios to cater for entities that do not have a share capital, such as partnerships.

This should be read alongside Schedule 1, which I suspect the Minister might allude to, which provides for particular cases in which a person is to be treated, for the purposes of the Bill, as holding an interest or right. In particular, paragraph 7 of Schedule 1 states:

“Rights attached to shares held by way of security provided by a person are to be treated as held by that person … where apart from the right to exercise them for the purpose of preserving the value of the security, or of realising it, the rights are exercisable only in accordance with that person’s instructions, and … where the shares are held in connection with the granting of loans as part of normal business activities and apart from the right to exercise them for the purpose of preserving the value of the security, or of realising it, the rights are exercisable only in that person’s interests.”


However, this clarification does not fully account for the situation where a lender becomes the registered holder of shares in security, as is the case with the legal mortgage over shares under the law in England and Wales, or a shares pledge under the law of Scotland.

Where the shares in an entity are transferred in security to a lender, the lender may find first that they have gained control of the entity under scenario one, notwithstanding the fact that under the terms of the security actual control remains with the security provider, for example, through the voting rights being exercisable only in accordance with the security provider’s instructions, as envisaged by paragraph 7 in Schedule 1 and that secondly, they would have triggered the second limb of the notifiable acquisition test.

As paragraph 7 of Schedule 1 refers only to:

“Rights attached to shares held by way of security,”


arguably it covers only the rights attaching to shares and not the ownership of the shares themselves—in other words, the rights rather than the ownership. As a legal mortgage over shares is unusual in England and Wales, but a shares pledge is the only way to obtain fixed security over shares under Scots law, this issue disproportionately affects Scots law fixed security over shares; that is, fixed security over shares in Scottish companies. As I have said in previous interventions on this Bill, the importance of the financial services sector and therefore the law of Scotland requires this to be addressed.

Effectively, we are talking about a situation where, for example, a bank providing a loan to a business takes security over shares unrelated to that business. In that context, the bank neither seeks nor exercises control of the shares; similarly if a parent company for example gives security to its bank over the shares of a wholly-owned trading subsidiary. In this case, the parent company retains direct day-to-day control, which would pass to the bank only in the case of default. Yet, as drafted, there is a risk that taking a fixed security over Scottish shares could trigger the provision, which would be highly disadvantageous to the Scottish economy specifically.

Given that a notifiable acquisition that is completed without the approval of the Secretary of State is void, the Law Society of Scotland argues that paragraph 7 of Schedule 1 should be extended to cater for the situation where shares are held in security by a lender. Paragraph 7 should similarly be extended to carve out security over qualifying assets since the security could be read as giving the security holder rights equivalent to those set out in Section 9. It would be helpful to include an express carve-out that nothing here is triggered simply by the act of holding any asset in security.

The society recognises what the Government are trying to achieve and addresses the situation where the borrower defaults and the terms of the security usually dictate that the asset will be sold. The transaction will therefore form a trigger event in the same way as any other transfer. I guess in rare circumstances, the holder of the security—that is, the lender—might seek to appropriate the asset. However, such appropriation could be caught within the meaning of a trigger event and if it were determined that the lender in question was not a suitable person to acquire ownership and control of the entity, the society considers that it would be possible for the conditions attached to the transfer to stipulate that the new owner would be obliged to sell their shares. They would thus be compensated for the value of their shares and any national security risk would be avoided.

I turn to Amendment 33, which has a similar purpose addressed to assets—namely, to ensure that transactions constitute a trigger event only where the person gains actual control of a qualifying entity and to exempt securities or other situations where no effective control is obtained. Where a lender holds as asset in security that lender may find that it has gained control of that asset, notwithstanding that under the terms of the security actual control remains with the security provider where they are in possession of the security. The second limb of the notifiable acquisition test may be triggered even when no effective control has passed.

Under Scots law, fixed security over incorporeal moveable property, which in English law is intangible property, can be achieved only be transferring the asset to the creditor. This includes, among other things, shares, insurance policies, contractual rights and intellectual property. For those assets where a real right of security can be treated without the transfer of ownership, such as land, a new real right is still being created in favour of the creditor. This right contains certain inherent negative controls—for example, a prohibition on sale—and certain positive controls: often the borrower must insure the property. I think we all know that this is common practice in mortgage arrangements and, as drafted, there is a risk that taking a fixed security over a Scottish asset could trigger this provision and this also would be highly disadvantageous to the Scottish economy.

Taking this into account, it would also be helpful to include an express carve-out, where nothing is triggered by the act of holding any asset. As stated in relation to the previous amendment, provision can be put in place to ensure that the Government’s interests are protected in the event of a default or the transfer of the assets, if triggered in the normal way. As already stated in the context of Amendment 31, such appropriation would be caught within the meaning of the trigger event. Conditions could attach to the transfer to stipulate that the new owner would be obliged to sell the asset; they would be compensated and national security risk avoided.

It appears that the Law Society of Scotland has identified practical issues for financial transactions under Scots law, which these amendments seek to address while fully recognising the Government’s national security objectives. It is a Scots law difference which could affect Scottish banks and Scottish mortgages but does not appear to have been considered in the Bill’s drafting. I hope that the Minister will be able to take this away and confirm whether the Bill needs to be changed in this way to ensure that the Scottish economy does not suffer what could be significant disadvantage as a result. I beg to move.

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

My Lords, I have tabled two amendments in this group, Amendments 34 and 35, which I shall now address. Again, they seek to provide clarity on the detailed operation of the Bill. As before, I am grateful for the support of the noble Lord, Lord Clement-Jones, and the Law Society.

Amendment 34 proposes a clarifying change to Clause 10(2)(b). It is argued that the existing wording of the clause means that any changes of ownership within the group of a company falling into one of the relevant sectors will require a notification. For example, an ultimate parent company might hold an interest in one such company through a wholly-owned subsidiary and, as a result of a decision to reorganise the group, it is decided that the parent should hold the interest directly. The holding company has the shares transferred to it. Any such holdings which are acquired after the commencement date, when the Bill becomes an Act, will have been through the security screening process, so there is surely no need for further consideration of what is essentially a paper transaction.

That leaves us with the question of how to deal with similar intragroup transfers where the initial investment was made before the commencement date. In such cases, of course, no screening will have taken place. Amendment 34 would require such changes to go through the standard notification and approval process.

Amendment 35 again seeks to provide clarity about how the Bill will operate in practice. Applying the current drafting of Clause 10 to a group which has multiple separate entities appears to require each of them to make a separate notification of a potential trigger event. That surely cannot be a sensible approach and, if followed, is likely greatly to increase the bureaucratic burden of form-filling and checking, and be a strain on the ISU. Amendment 35 establishes that, in the case of a corporate group, only one trigger event would arise and only one such notification would therefore be required.

--- Later in debate ---

[Lord Bruce of Bennachie (LD) [V]]

I thank the Minister for his response. Given the detail of the response to the other amendments, I might have hoped that the department would be able to give us a little more detail on Amendments 31 and 33, but I genuinely accept his offer to write. I thank the noble Baroness, Lady McIntosh, for her support and suggest that the Minister takes up her offer, on behalf of us both as well as the Law Society of Scotland, to meet to try to find a way through this, because there are clearly some practical concerns about the impact of the Bill as it stands.

These amendments do not seek to undermine the Bill in any way. The concern is that the Bill unintentionally undermines the good working of the legal and financial services sector in Scotland, and it is clear that the Bill needs to take that into account. I accept and appreciate the sincerity of the Minister’s offer, but I suggest that a meeting that includes the Law Society of Scotland would be a more practical way forward than just an exchange of letters. I beg leave to withdraw the amendment.

Amendment 31 withdrawn.