National Security and Investment Bill

Lord Clement-Jones Excerpts

2nd reading & 2nd reading (Hansard) & 2nd reading (Hansard): House of Lords
Thursday 4th February 2021 Lords Chamber

[Lord Clement-Jones (LD) [V]]

I too thank the Minister for his comprehensive introduction. I declare an interest as a member of the advisory board of the corporate finance faculty of the ICAEW, whose members comprise business owners, advisers to business and investors.

I believe that there will be little argument during the Bill’s passage about the principle involved of protecting national security. There will, however, be considerable debate about its scope and practical operation. Foreign investment is crucial to UK businesses and the economy. On these Benches we accept that it is important to put in place legislation to protect against national security risks posed by such investment. But this is a major change from previous provisions under the Enterprise Act, and must be done in a way that is workable and does not deter productive investment.

The Government have argued that it is necessary to give the Secretary of State greater powers to scrutinise investment in the UK, considering the technological, economic and geopolitical changes that have taken place over the past 20 years. However, the scope of the Bill and of the Secretary of State’s powers risk being far too broad, while lacking any industrial strategy to frame them or any clear geopolitical focus. Indeed, there is no definition of what constitutes national security.

How too will the Bill fit within the integrated review? Ministers have made it clear that the Bill is about the protection of national security, not national interest—but where does national security end and economic or commercial security, or critical infrastructure, begin? Will there be overlap between regulators, such as between the ISU and the CMA?

There is also the retrospectivity, which goes back to November and could already be having a chilling effect on inward investment and causing uncertainty in the investment community, not least in pension funds. For such funds the investment environment is crucial, and as a university chair I am only too well aware of the concerns expressed by USS. As the largest private pension fund in the country, its concerns should be taken very seriously. Arguably even more importantly, as the Russell Group has pointed out, the Bill could have a potentially damaging impact on university/business collaborations.

Many of my noble friends will focus on these issues in today’s debate. The key elements needed to achieve the balance required of the new regime will be achieved by pre-empting and mitigating the inevitable risks for the market by setting out a clearly defined scope. The Government have engaged in a long—some would say leisurely—process of Green Paper and White Paper consultation leading up to this Bill over the past three and a half years, but there is still a great deal of uncertainty around how it will work in practice.

The current sectors, as set out in the consultation, are incredibly broad. For instance, in respect of AI, the development of which I am reasonably familiar with, the definition is so wide that it captures any company developing any kind of application involving machine learning or deep neural networks.

We look forward to seeing the outcome of the promised consultation during the passage of the Bill, but we need to considerably narrow the width of the sectors captured. This in itself would not resolve the fact that many, if not most, technologies have both civilian and security uses, which potentially opens every deal to challenge. Taking dual-use biotechnologies as an example, how do we manage national security concerns without stifling innovation?

We also need to question the low thresholds adopted for market share and turnover, and the generous time given to the Secretary of State to intervene—especially given the Secretary of State’s quasi-judicial powers.

We need to reduce uncertainty to a minimum. Even a mandatory notification system for transactions means instituting an open pre-consultation process with market participants. In particular, it is essential, as the ICAEW has emphasised throughout, that the investment security unit publishes meaningful market guidance notes akin to the practice notes published alongside, but not as part of, the takeover code.

The Bill includes the requirement for the ISU to publish an annual report, but formal guidance will be much more useful, and, as they say, it is an important way of dealing with asymmetry of information among the investment and advisory community. A particularly good example will be in respect of trigger events that involve securing influence or control over qualifying intangible assets, such as know-how and intellectual property. It is possible to gain access to intellectual property through means other than ownership, so the question is: how might those intangible assets be applied in ways that could prejudice our national security in some way? The new unit may initially assess that on a case-by-case basis, but it will need to quickly come to establish a basis of precedent for its decisions. Along with the corporate finance community, I believe that the requirement for market guidance notes should be incorporated in the Bill.

All this means properly resourcing the ISU, which will need to determine which of some 1,000 to 1,800 transactions are to be analysed: 70 to 95, it seems, although many think this an underestimate. This compares to just 12 acquisitions reviewed under the Enterprise Act’s national security provisions since 2002. Otherwise, this will result in a huge number of mandatory notifications, which will overwhelm the new unit. The bottom line is that we need to make sure that a proportionate and last-resort approach is applied to government scrutiny of, and intervention in, these transactions.

In addition, given the low turnover thresholds involved—I have noted the Commons debate—many of us are concerned about the impact on SMEs. The impact assessment suggests that “80% of transactions” in the scope of mandatory notification under the Bill would involve SMEs. However, the assessment failed to consider the costs faced by the acquired companies or the impact on funding for start-ups.

However much we try to circumscribe the Bill, it will not always be possible to reduce uncertainty and risk. It will depend on the culture of the ISU to a great extent as well, so, when considering the Bill, we should heed the warning of John Fingleton, former chief executive of the Office of Fair Trading, in his recent article in the Financial Times. We must not let this Bill become an investment killer; it needs to be very clearly targeted and proportionate. I look forward to the debate and the Minister’s reply.

National Security and Investment Bill

Lord Clement-Jones Excerpts

Committee stage & Lords Hansard
Tuesday 2nd March 2021 Grand Committee

We know quite a lot about what is sadly happening in Xinjiang, and that the Chinese Communist Party sees commercial influence as intricately linked to broader power. We should all remember what has happened to the relations between China and Australia since Australia demanded an investigation into the roots of the Covid crisis. The Chinese apparently talk about civil/military fusion. Butter dishes may not be of huge importance to intelligence, but they reflect the broader context of the intricate involvement of western economies with the Chinese economy.

[Lord Clement-Jones (LD)]

My Lords, I declare my interests as stated in the register. My noble friends Lord Fox and Lady Bowles have cogently outlined the purposes of Amendment 1 and the importance of having a framework of this kind for the Secretary of State when he is exercising his powers under the Bill.

I am taken by the fishing analogy which has been used in relation to the Bill. On these Benches, we support the trawling process and its purpose, but a large number of questions in consequence need answering about the extent of the net, the size of the mesh, and which species will be taken on board and which discarded, and how long that will take. We will come to those questions later in Committee. This amendment asks the broader question: what impact on the broader ecology is the trawling having? The Secretary of State cannot be oblivious to the impact on the investment ecology, as set out in the proposed new paragraphs, but must take account of the impact of what he or she is doing. I am sure that the Minister will want to give us assurances on many questions to do with the Bill as drafted. But we need certainty about this aspect and how the Secretary of State will exercise these considerable powers yet not thereby damage what we have in the UK—a thriving investment climate. As my noble friend Lord Fox has pointed out, it is not just the City but universities, trade associations and sectors such as space and biosciences that have raised concerns about the width of the Secretary of State’s powers.

Today, we have seen the outcome of the sector consultation, all 111 pages of it, which allays concerns somewhat, but I anticipate that many will still believe—as I do—that the net is being too widely drawn. This amendment is designed to constructively allay that concern. I hope that the Minister will recognise its merits. It is far from harmful, as the noble Baroness, Lady Noakes, suggested it was. She asked why we singled out these three elements: it is because, looking at the sectors, it is precisely those areas that we believe are most likely to be damaged if a net is drawn too wide. I am going to resist the temptation to pick up the points made by the noble Lord, Lord Robathan, because I am conscious we are not on Second Reading, but he has raised some interesting questions.

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

Lord Vaizey of Didcot. No? We will come back to him. I call the noble Lord, Lord Clement-Jones.

[Lord Clement-Jones (LD)]

My Lords, it is a pleasure to follow some of the early speeches in this group today. Noble Lords have already started to unpick some key elements in the Bill and have shown how much further explanation and guidance is needed. I will come on to Amendments 3, 4 and 8 in a minute, but, given the absence of the noble Lord, Lord Vaizey, I will speak first to Amendment 9.

As it stands, given the Bill’s very broad definitions of “trigger events”, “qualifying entities and assets” and “control” of entities and assets, businesses are not clear as to those transactions which require notification and those that do not. Although the Bill is retrospective, the Secretary of State will publish a Statement only after it comes into effect, so there will be little clarity for some time. Probably the word that will be most overworked during the passage of the Bill will be “certainty”, but that is exactly what we are all looking for as we proceed. The first person who used that phrase was my noble friend Lady Bowles, but I entirely agree that we must strive for that. If we are not careful, we will have significant overnotification of irrelevant transactions by businesses in order to avoid the risk of penalties for non-notification or subsequent call-in. As a former practising lawyer, I think I can testify to that.

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

My Lords, 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 that careful analysis, but I must admit that I am not wholly reassured as a result. I feel as though we have gone in a spiral of logic and I think we ended up where we began, in a cloud of uncertainty. In particular, I thought the Minister’s arguments on Amendment 9, that the statement was forward-looking not backward-looking, were very circular. It all depends on how the statement is constructed. It can be made both forward-looking and backward-looking simply in the way the Bill is amended. So the argument there was extremely circular.

I will read Hansard extremely carefully, but to me the question about the Secretary of State being unaware means that the Government have decided that the net is going to be extremely wide. We have assurances on the sifting process, but in the end everything falls in until it is thrown out. That, I think, is what worries quite a lot of us. The contemplation point may have some precedent, but the noble Lord, Lord Lansley, made the point that these transactions are not just mergers but intellectual property licences, know-how transfer, asset sales and a whole range of things. Is the merger regime fit for purpose for this broad range of transactions?

That is all I want to say at this stage. I thought the Minister valiantly tried to justify the current wording of the Bill, but I do not think he succeeded.

[Lord Grimstone of Boscobel (Con)]

The noble Lord, Lord Clement-Jones, and I have had the pleasure of debating these matters at a meeting prior to this Committee, and I must confess that I was probably the author of the fishing analogy, which I may live to regret. The point is that when you are dealing with matters of national security, and these matters are so important, it is perfectly appropriate to use a large net to put the fish in, but then it becomes very important that the way your screening unit works removes fish from that net as expeditiously and efficiently as possible.

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[Lord Hodgson of Astley Abbotts (Con)]

My Lords, this is the first time that I have spoken in this Committee, so I draw attention to my entry in the register of your Lordships’ House. I wish to speak to Amendments 41 and 44 in this group, which I have tabled with the support of the noble Lord, Lord Clement-Jones, for which I am extremely grateful. I am also grateful to the Law Society for its assistance.

The two amendments build on remarks made by my noble friend Lord Vaizey in moving Amendment 5. Amendments 41 and 44 are to Clause 13, which is entitled “Approval of notifiable acquisition”. I am afraid I have to argue that that title is, at best, ingenuous because, under the wording of the clause as presently drafted, there is no requirement for the Secretary of State to register his disapproval; instead, his silence is all that is needed. I argue that, from the point of view of providing certainty for investors, bankers and—last, but by no means least—companies, their management and employees, this is not good enough. Furthermore, this silence inhibits a proper degree of parliamentary scrutiny, making it more likely that cases can be slipped through under the radar. It will also prevent Parliament having the opportunity of examining how practice may be shifting as regards preserving the delicate balance that this Bill seeks to create and maintain between protecting national security and providing maximum safety for investors’ property rights.

We need the spotlight to be shone on those tricky areas so that decisions taken by the Secretary of State have to be justified openly and publicly. That is what Amendments 41 and 44 seek to achieve. Famously, TS Eliot wrote:

“This is the way the world ends

Not with a bang but a whimper.”

In this difficult policy area, a whimper is insufficient. I see no reason why in an open society the Secretary of State should not be under the maximum pressure to provide a clear, concise and public declaration of his decision and the reasons for it. Our society, together with our business and investment community, are entitled to no less, so I very much hope that the Government will be able to accept these two amendments.

[Lord Clement-Jones (LD)]

My Lords, it is very difficult to follow the noble Lords, Lord Vaizey and Lord Hodgson, especially after the quotation from the noble Lord, Lord Hodgson, of which I think we must be very mindful. I support both in their very similar endeavours, particularly the noble Lord, Lord Hodgson, in his Amendments 41 and 44, which I have signed.

The case has been very clearly made that automatic voidness creates excessive legal uncertainty for investors and lenders. The proposed wording would mean no automatic voidness but a power of the Secretary of State to impose it. A voidable power would give the Government power to declare a transaction or part of it void if it gave rise to national security concerns and ensure that workable steps can be taken to unwind the transaction to the extent considered necessary. While it is clearly important to apply significant sanctions when a transaction subject to the mandatory notification obligation is completed without first obtaining approval from the Secretary of State, such sanctions must also be workable in practice. Treating such a transaction as automatically void, as envisaged in Clause 13, will give rise to a host of practical difficulties and is simply not workable in practice.

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[Lord Hodgson of Astley Abbotts (Con)]

I put my name to this amendment, but somehow along the way I was left off the speakers’ list, so I am glad to have scraped back on again. My noble friend Lady McIntosh made the case for the amendment clearly and decisively, so I will merely sweep up and say that, at Second Reading, there was general agreement that we were seeking a balance between the fact that the country had to be protected from overseas powers gobbling up key companies in key sectors, yet at the same time keeping our economy open for inward investment, particularly in the tech sector, where we have such a worldwide reputation. We all agreed then, and agree this afternoon, that that is the difficult balance that we seek to strike.

Of course, once the Bill passes into law, Parliament’s opportunity to examine and, where necessary, recalibrate that balance will be limited, to say the least. When the noble Baroness, Lady Bennett of Manor Castle, talks about the dangers of the markets, I think she is headed in completely the wrong direction, with due respect. My concern about the Bill is about not markets but mission creep: that we will end up with the Bill doing nothing that was anticipated when it was first drafted.

Like my noble friend Lady Noakes, I have no doubt that the Minister and his officials will say they have a very clear idea of how the provision will be used, and there is no question of mission creep under the Bill. As we all know, Ministers, parties and policies change, and there are serious dangers if we do not accept some form of amendment such as this.

First, there is the issue of employment under paragraph (a). How easy is it to see a future Secretary of State, faced with some politically unhelpful headlines about unemployment following a potential takeover, being tempted to press the national security button to avoid some disobliging comments? Under paragraph (c), we should never underestimate the lobbying powers of big companies. Hell hath no fury like a big company that finds its market invaded by a smaller, nimbler competitor offering a better, cheaper product or service. The smaller competitor, perhaps growing faster than its internally generated funds can support, may need to find outside capital, and some of that outside capital may come from overseas—it is likely to. How convenient for the big company if it can lobby the Secretary of State to block funding for the growth of its successful smaller rival on the grounds of national security.

Those are just two examples where mission creep might occur; there are plenty of others. I hope the Government will understand that the purpose behind this amendment is to make sure that the Bill continues to do what it says on the tin.

[Lord Clement-Jones (LD)]

My Lords, it was a pleasure to put my name to the amendment in the name of the noble Baroness, Lady McIntosh, because I think that I understand its intentions entirely. It is also a pleasure to follow the noble Baroness, Lady Noakes, and the noble Lord, Lord Hodgson, in their elucidation of what the amendment is about. I think the noble Baroness, Lady Bennett, has entirely misunderstood the essence of this amendment.

Earlier in Committee today we were trying to get some sort of definition of national security, and I think that the noble Lord, Lansley, in his inimitable way, managed to unpick that rather successfully. As far as national security is concerned, it is a mission impossible to try to carry everything in one bundle in a definition. This tries the other way on and, as the noble Lord, Lord Hodgson, said, it is designed to avoid mission creep. It is trying to make sure that the definition of national security is not used as a blanket term to cover damage to the economy and society. It has the huge benefit of simplicity; it tells us what is not in national security rather than what is in it. It clarifies that certain factors such as employment, reciprocal investment or trading opportunities, and protectionism will not be taken into account when assessing national security. If there was mission creep in the way that was described, it would undermine legal certainty and damage investor confidence in the way that we have heard from a number of noble Lords.

The Government have kept assuring us that this is not, in the words of the noble Lord, Lord Callanan, a national interest Bill but a national security Bill. That is exactly what this amendment is trying to ensure—that we do not have that all-encompassing national security definition used by lobbyists or others to try to bring things into the net. I have seen it happen in the United States. The CFIUS is absolutely that kind of spider-like operation that brings in all sorts of spurious transactions. I very much hope that we will keep this provision absolutely focused, and this amendment is a very good way of doing it.

[Baroness Hayter of Kentish Town (Lab)]

My Lords, we support the approach of this amendment. As we have all made clear, the new regime must focus on protecting national security. The clue is in the title of the Bill. The definition of national security has to take best advice from across the Government about the threats and behaviour of our adversaries.

While I hope the Government will monitor the impact of the Act on technological investment, innovation and SMEs—which I hope a different part of the Government is actively supporting—those interests, along with employment, investment and competition, cannot and should not trump national security, albeit that I hope that the Government would consider mitigating any detrimental domestic impact of placing security first if that were needed.

Clearly, concerns about any political pressure, rather than any disregard for the issues listed, give rise to this amendment. The tone and the purpose of it are ones that we share.

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[Lord Hodgson of Astley Abbotts (Con)]

My Lords, Amendment 7 shortens the period in which the Secretary of State may give a call-in notice following a trigger event, under the provisions of Clause 2, from five years to two years. I am grateful to the noble Lord, Lord Clement-Jones, for his support.

It was interesting that, when giving evidence to the Public Bill Committee in the other place, on 24 November, Michael Leiter—perhaps related to Felix Leiter—head of national security and the committee on foreign investment at Skadden, Arps, the major US law firm, described the Bill as

“a rather seismic shift in the UK’s approach to review of investment.”—[Official Report, Commons, National Security and Investment Public Bill Committee, 24/11/20; col. 46.]

He stressed the importance of clarity in what was proposed, given the criminal penalties that are now being introduced and that there is no interim period for familiarisation.

This amendment and all the others that I have tabled, two of which I have already spoken to, aim to test both the clarity and, importantly, the practicality of the proposals that the Bill contains. I stress that practicality because, there can be a danger, when Bills like this are in Committee, of focusing on legal terminology and overlooking the flesh and blood consequences of the decisions that Parliament is about to take. I hope that the Committee will forgive me if I spend a moment on two real-life examples, because they give useful background to this and my other amendments.

Members of the Committee may be aware that I am chairman of the Secondary Legislation Scrutiny Committee of the House. In December 2019, our committee was notified of the laying and simultaneous making of two statutory instruments: SI 2019/1490 and SI 2019/1515. The full title of SI 2019/1490 is the Public Interest Merger Reference (Gardner Aerospace Holdings Ltd. and Impcross Ltd.) (Pre-emptive Action) Order 2019. The full title of SI 2019/1515 is the Public Interest Merger Reference (Mettis Aerospace Ltd.) (Pre-emptive Action) Order 2019. These were the first referrals under the new regime with reduced thresholds, and this was the very first time that the Government used pre-emptive powers; that is to say that they were seeking to stop a takeover before any offer was made, rather than reacting to an offer once made. These two statutory instruments therefore give us a glance into the world that the Bill takes us into.

I shall say a couple of words about the protagonists. Gardner Aerospace, the predator and potential acquirer, is based in Derby. It was acquired by Chinese investors in 2017 for some £300 million and has since made a number of acquisitions in the aerospace sector. Mettis Aerospace, one of the targets, is based in Redditch and has sales of £86 million, which is above the old threshold. It is substantially profitable—it made about £9 million of profit before tax—and has some 500 employees. Its customer list reads like a who’s who of world aviation and its two leading customers are Airbus and Boeing.

Mettis’s roots can be traced back to the early days of British aviation. For those who like a historical note to our debates, it produced the framework that held in place the bouncing bombs under the Lancasters flown by Guy Gibson and the men of 617 Squadron in their successful raid on the Ruhr dams in the Second World War. A few years later the company produced the fan blades for Frank—later Sir Frank—Whittle’s first jet engine.

Mettis is owned 25% by the management and 70% by a private equity firm called Stirling Square Capital Partners. The fund through which the investment is being made is based in Luxembourg. Stirling is based in London but, judging by its list of partners, has a strong orientation towards continental Europe. The investment will almost certainly have been made on behalf of third-party investors who have pooled their funds for Stirling to manage. Such investors may very well come from all over the world and this is unlikely to be their only investment in the UK, so if they perceive the treatment of any one of their UK investments as being inequitable, there will inevitably be a ripple effect on their readiness to invest in the UK generally. Mettis made it clear to the Competition and Markets Authority and the Government that it had not put itself up for sale. Gardner’s approach had not been sought and was regarded as being what in the trade is known as a fishing expedition. The outcome was that Gardner pulled away on 27 February, following a heavily redacted CMA report published on 13 February.

The story of Impcross is quite different. It is a much smaller company based in Stroud, Gloucestershire, with a turnover of only £11.9 million, so it would not have been eligible under the old thresholds. It lost money in the year to 30 June 2019, but only a small amount—£350,000—and, significantly, it is controlled by one person. Its accounts reveal a person of significant control, or PSC, holding between 50% and 75% of its shares. That has been built up over a lifetime and it would not be unreasonable if that director now wished to realise the fruits of his efforts. If the state stepped in to prevent that—we cannot be certain exactly what happened—without offering any alternative solution, it seems a hard moral choice. Either way, it all took a lot longer to resolve and it was only on 10 September that Gardner withdrew.

In speaking to Amendments 41 and 45 a few minutes ago, I argued that it was not good enough that, under the provisions in Clause 13, all the Secretary of State had to do to void an acquisition was to say nothing. For Mettis, this was not a problem: the company was clear that the approach was not welcome. For Impcross, there were 10 months of uncertainty with the Secretary of State appearing to set up a sword of Damocles but apparently never having to cut the string. That cannot be the right way to provide certainty for investors in the UK tech sector.

I have one final point. In our debate a moment ago on Amendment 6, tabled by the noble Baroness, Lady McIntosh, the Committee expressed concerns about the degree of parliamentary scrutiny of developing practice in this sensitive area. The two cases I have referred to were authorised by a statutory instrument. Statutory instruments are not amendable, and it would seem vanishingly unlikely that either House of Parliament would seek to reject one—the nuclear option—so any scrutiny of future practice will be at a very high level, and even that scrutiny will be ex-post. Both the above SIs were made and laid on the same day, 6 December 2019, at a time when Parliament was in any case not sitting because of the general election. It would be worthwhile if the Minister could confirm whether in this brave new world of these pre-emptive actions, each would still be the subject of a separate SI, so affording at least some degree of parliamentary oversight.

I turn now to the details of Amendment 7. I have tabled it because giving the Secretary of State the ability to unpick a merger or takeover after five years is to ignore the real world. Acquisitions are made with a view that two plus two will make five and that overall, they will be profit-accretive. In the event, that promise is often not achieved, but that is the idea that people set out with and to do that, changes have to take place at various levels.

First, the acquiring company will want to ensure that the financial performance of the two companies are managed on the same basis so that one company’s financial reporting systems will disappear. Secondly, it is inevitable that in any acquisition, there is extreme nervousness among the staff of the two companies about winners and losers in the new configuration. That nervousness can be reduced by an exchange of staff between the two companies, so that they get to know each other. Thirdly, it is unlikely that it will be cost-effective to maintain two separate research and development facilities, so they will be merged as one. Fourthly, marketing and sales teams are likely to be combined to broaden and deepen product range and market reach. Finally, it may be concluded that the new entity would be more effective and profitable if it operated from a single site, so one facility will be closed and the site sold.

Within five years, all of these steps could have taken place and if they had, the companies would be indistinguishable. I appreciate absolutely that the Government need some power to reach back where a case may have been slipped past them, but I argue that two years should be sufficient. At the same time, there is at least a likelihood of there still being a unit that is sufficiently independent to resume an independent life.

Members of the Committee may remember their days in primary school and the magic of mixing paints. If one mixed blue and yellow paints together then, suddenly and miraculously, one had green paint. That is in effect what one does with the merger of two companies: you mix a blue and a yellow company, and the result is a green one. After some time, and certainly after five years, the two constituent parts will be indistinguishable. That of course is vital, considering the position of investors who may find that they still own an investment which they thought had sold five years previously. I would argue that a maximum of a two-year clawback will provide a better balance between the interests of all the parties in this delicate area. If my noble friend is not inclined to accept the amendment, will he tell the Committee how his officials will undertake the practical challenges of separating the green paint into its original blue and yellow parts? I beg to move.

[Lord Clement-Jones (LD)]

My Lords, I speak in strong support of Amendment 7, in the name of the noble Lord, Lord Hodgson. I am a former company secretary and legal adviser to a publicly listed company. I know from personal experience what it is like to wait for competition decisions, takeover panel decisions and for all the uncertainties of regulation external to the company as a result of its commercial activities.

Given that, I am entirely in sympathy as the noble Lord, Lord Hodgson, has set out what he calls the flesh-and-blood consequences of the two case studies that he put forward extremely graphically and well. Not least, he has hinted at some of the issues around statutory instruments and the level of scrutiny. There is little that I can add to what he has said about the undesirability of having a massive period of time within which a Secretary of State can act—up to five years. However, I would like to add to the practicality issues that the noble Lord has raised.

The longer a deal has been in place, the more difficult it will be to void or avoid—that is, unwind—a transaction. Unwinding a transaction after five years is a very long time in commercial terms. Thinking back to my own career, subsidiaries are sold, businesses are purchased and the commercial realities change over five years. It would be exceptionally difficult, even if it were possible, for a listed company involving public transactions to unwind those transactions.

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

My Lords, I support Amendment 14, tabled by the noble Baroness, Lady McIntosh, to which I added my name just too late. I also support the more detailed Amendment 94, tabled by my noble friends Lord Fox and Lord Clement-Jones, but as my noble friend Lord Fox has spoken at length and my noble friend Lord Clement-Jones follows me, I will leave them to expand on it, as has already been done. There is a connection, although I accept that there are distinct differences.

Amendment 14 and others that I have tabled reflect concerns that I raised at Second Reading, which have also been drawn to my attention by the Law Society of Scotland. Given the importance of financial services to Scotland and the contribution that Scottish financial services make to the UK economy, surely it is wise to ensure that relevant stakeholders are consulted in advance of any regulations. That is especially important given the importance of the professional services that underpin financial services and draw on different qualifications and traditions within Scotland.

The concerns that are being widely raised across many of the amendments to the Bill are directed not at its purpose, which is broadly supported, but at the possibility of it being applied too widely, with Ministers having too much discretion and with players in the market having inadequate information with which to make decisions and judgments. We are talking about people who have no particular intention to threaten national security but might inadvertently find themselves compromised in doing so.

I see Amendment 14 as trying to avoid unintended consequences or confusion that could prejudice investments made in good faith. As my noble friend Lord Fox has said, the Government can by regulation add new sectors to those designated as covered by the Bill. They can also expand on the definitions within the sectors. So surely it is appropriate that any such changes should be subjected to the same consultation as has been carried out to date with the 17 sectors so far designated. Why would you introduce new sectors or substantially modified ones and not apply the same level of consultation?

There remains a concern that investment transactions may be carried out in good faith, as I have said, without the intention or realisation of a national security dimension. It may therefore not be notified, as people may not feel there is a need to do so. However, if it is subsequently referred or called in and found by the Minister to be in breach, the transaction could be void, and we have had that debate already.

In the circumstance of, say, a land transaction, an area where the Law Society of Scotland has a particular concern, land being transferred could leave significant uncertainty in the air. Land issues have caused problems in Scotland in recent years. For example, landowners—lairds—often made land available for community use in the past, such as for a schoolhouse or cottage hospital. You may argue that that was generous— [Inaudible]— the community appreciated the benefit. Unfortunately, in those cases, formal conveyance did not always take place and, in more recent years, people who have acquired the title to the land have secured financial gain by putting charges on those who acquired the school, building, hospital or what have you and have made a nice little packet. You may say that that has nothing to do with national security, but it shows the problems when there is any confusion in the transfer of land.

Indeed, if I may briefly digress, the mountain from which my title is derived—Bennachie—for 60 years had people, smallholders, living on it on what was common land until, in a land grab, surrounding landowners simply seized that land and gave themselves the title, even though it had been held in common before, and evicted the squatters. We have had some controversial land decisions, but we are more concerned about legitimate transfers of land for environmental, recreational or financial purposes where because, for example, the landowner acquiring or disposing is not a UK citizen or is an institution that the Government may have suspicions about, it could lead to a problem.

Most people engaged in those transactions will look to professional services for appropriate advice. If those professional services have been part of the stakeholder consultation on any changes to the regulations or the detail of them, they will be able to provide transparency and legitimate advice to avoid those kinds of problems arising. That relieves the Minister of a problem and embarrassment and removes the possibility of otherwise legitimate investments being compromised or withheld because of a lack of clarity.

The conclusion I suggest to the Minister is that consulting with relevant stakeholder, when any legislation is being amended or introduced is to the mutual benefit of all players, including the Government and national security. We are talking about a relatively small number of clearly identifiable stakeholders, not a mass of agencies. The Government know who they are and they know who they are. It can be done quickly and efficiently, and the net result is that concerns that were raised would be headed off at the pass. They would not occur, so that we would not finish with legislation that leads to the threat of voiding contracts that in no way compromised national security, but somebody felt that they might have done. Sellers and buyers need clarity on the law; consulting relevant stakeholders will help to achieve this.

[Lord Clement-Jones (LD)]

My Lords, there are distinct common factors in both these amendments. The proposers do not believe that the current way of approving regulations under Clause 6, purely the affirmative procedure, is satisfactory. That is because of the importance of the regulations under Clause 6. As we heard, they underpin the necessity for mandatory notification for certain types of transactions in 17 sectors and they can be changed. We heard, particularly from my noble friend Lord Fox, that the definitions of these sectors are highly complex.

My noble friend took the example of artificial intelligence, a technology I have taken considerable interest in. As he explained, machine learning technology permeates almost every single sector and every use for both consumers and businesses one can think of—fintech, edtech, regtech, you name it. Artificial intelligence permeates those, and the new description of the AI sector published in the government response today states:

“In narrowing the definition, the definition now provides further clarity for businesses and investors”.


However, the definition still covers:

“the identification of objects, people, and events; advanced robotics and cyber security.”

That is pretty broad.

The policy statement published today is also extremely helpful in emphasising the importance of Clause 6 regulations. The policy statement says:

“Under Clause 6, the Secretary of State has the power to make regulations to:… a) specify the description of a qualifying entity for the purpose of identifying a notifiable acquisition; …b) amend the circumstances in which a notifiable acquisition takes place … c) exempt acquirers with specified characteristics … d) make consequential amendments of other provisions of the Bill resulting from provisions set out in paragraphs (b) and (c).”—[Interruption.]


I hope that I am having some impact on the Minister, my Lords. The policy statement goes on to say:

“For the commencement of the regime, the Secretary of State intends to make regulations only to specify the sectors subject to mandatory notification.”


I underline “only” because you would have thought that was significant enough in itself. This is obviously a self-denying ordinance, but it is not a very large self-denying ordinance when you are dealing with the intricacies of those 17 sectors.

My noble friend Lord Fox has rightly quoted the Constitution Committee’s 2018 report The Legislative Process: Delegated Powers, which talked about the rubber-stamping of the Government’s secondary legislation. He also referred to my long life, and in my already long life I have been responsible for overturning a statutory instrument. The Blackpool casino was very much wanted by the citizens of Blackpool, so the SI for east Manchester was defeated by three votes in the House of Lords, and one of those votes was from the Archbishop of Canterbury—the former Archbishop of Canterbury, I am glad to say. It was I who put the Motion, and we passed it by three votes to deny the Government the right to build the casino in east Manchester. Unfortunately, the Government never came back with a proposal for Blackpool, and that is a sad piece of history. I do not know why they did not; it would have been a great place to build a casino.

However, that does show that, on a simple proposition, it is possible to have an effective debate. When you are dealing with 17 sectors and 111 pages of text, which are going to be the subject of this regulation, that illustrates that the form of affirmative resolution proposed in this Bill is not fit for purpose. This kind of super-affirmative procedure means that there would be a genuine debate on the regulations and the 17 sectors and their extent.

I have huge sympathy with the amendment of the noble Baroness, Lady McIntosh, because of course one wishes to see consultation among stakeholders. In an ideal world, one would like to see both that and the super-affirmative resolution. But, to be frank, consultation is not the same as, or a substitute for, proper parliamentary scrutiny. These are crucial regulations, and it is right that they are opened up for full debate in this way. I am probably going to embarrass the noble Lord, Lord Lansley, by saying that he said earlier we will have some debates about the sectors—well, not really, unless this amendment is accepted.

[Baroness Hayter of Kentish Town (Lab)]

My Lords, as we have just been hearing, these notifiable acquisition regulations are significant and require proper oversight, not just from both Houses of Parliament but also from experts involved, and with the opinions of those experts being made available to legislators. It will obviously be important to ensure that the stakeholders to be consulted are knowledgeable and, if I may say it, at the cutting edge of technology.

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[Baroness Hayter of Kentish Town (Lab)]

I forgot to declare at the beginning that I used to work for the Wellcome Trust. It was 20 years ago, but I think it should still be noted.

[Lord Clement-Jones (LD)]

My Lords, I thank the Minister for her response but I do not think that she has quite got to grips with the full concern about this. It is not so much that there has not been consultation about the current sectors; there has been an extensive consultation and the Government have come back with their views and have explicitly said that they may change them even further. Yet they are still going to return to Parliament with a pure affirmative process. It is not as if parliamentarians will be able to change it. The stakeholder discussion and consultation is going forward as she said, but there is no guarantee that when that set of regulations is passed there will be proper debate in the House, nor will there be thereafter if the sectors are changed and made more specific, less specific, added to—whatever. There is no guarantee that consultation will take place.

The Minister said that there are the right incentives. That is a bit thin. If that is the guarantee of government consultation, it is not very solid, and even then, Parliament is entitled to have a view about the width of those sectors in the light of changing circumstances. It might have different views about new risks emerging, to use the Minister’s phrase. Therefore, it would be entirely legitimate to have that debate if those regulations were revised. The Minister has not got the nub of the concern in all of this.

[Baroness Bloomfield of Hinton Waldrist (Con)]

I reiterate that we will continue to consult widely on important changes that merit further scrutiny. The Government care deeply that we get these definitions accurately put into the Bill before it receives Royal Assent.

National Security and Investment Bill

Lord Clement-Jones Excerpts

Committee stage
Tuesday 9th March 2021 Grand Committee

[Lord Clement-Jones (LD)]

My Lords, it is a pleasure to follow the noble Lord, Lord Leigh, on his amendments. I think he will cause quite a stir when he gives his annual lecture. I will speak first to Amendments 20 and 24. I refer to my interests in the register.

Amendments 20 and 24 take account of the fact that the Bill as drafted does not include any de minimis thresholds for qualifying entities and assets, in stark contrast to other leading foreign investment regimes. The point behind these amendments is to ensure that mandatory notification requirements involving businesses have a de minimis threshold. Not having one would be disproportionate, given the likely cost of making mandatory filings and the relatively low risk of any national security issue arising in the context of such transactions. It would also act as a significant disincentive to global investors and the start-up and early stage businesses that they fund, which may simply relocate to a jurisdiction that takes a more benign approach. As the noble Lord, Lord Leigh, said, this risks seriously dampening innovation in the UK, particularly in the continued development of the technology sector and start-ups, which rely heavily on venture capital investment.

Introducing value thresholds of £10 million annual turnover in the UK for qualifying entities and £10 million gross value for qualifying assets, subject to anti-avoidance provisions to prevent the circumvention of the Act, would ensure a much more proportionate approach. Value thresholds are also used in a number of other leading foreign investment regimes. For example, Australia and Canada use a tiered threshold system based on the identity of the investor and the nature of the business, and, in the case of Australia, the level of control acquired.

The noble Lord, Lord Leigh, also explained the other amendments that he and I put forward in this group, Amendments 52A, 55A, 64A and 67A, which would introduce another red tape busting proposal: a fast-track process for non-problematic transactions. The Bill currently envisages that the investment security unit will reach an initial decision as to whether to clear a notified transaction or to call it in for a detailed assessment within 30 working days of acceptance of the notification as complete. As the noble Lord explained, a significant number of transactions will fall within the scope of the mandatory notification requirements due to the target’s activities being in a specified sector—we have seen those in the document published last week—but which clearly do not raise national security concerns. To minimise the deterrent effect of the new regime on foreign investment into the UK, these amendments would introduce a fast-track procedure for such non-problematic transactions, enabling the acquirer to request a review period, as the noble Lord again explained, within a period of 10 workings days instead of 30, combined with reduced information requirements for the notification.

I have mentioned Australia and Canada; if the Minister would prefer it, I can refer in this case to a special accelerated procedure recently introduced in France for certain transactions. The use of a fast-track initial review procedure would not prevent the Secretary of State referring a transaction for in-depth assessment, as the noble Lord, Lord Leigh, cogently explained, if this was considered necessary and the timetable for such subsequent review would not be affected.

I very much hope that, as I said, these two red tape busting amendments will be very carefully considered by the Government. Otherwise, we seriously risk the Bill’s impact being disproportionate and having a chilling effect on investment.

[Lord Bilimoria (CB) [V]]

My Lords, I will speak to Amendments 20 and 24 in the name of the noble Lord, Lord Leigh. The CBI, of which I am president, supports the principle of the legislation in the Bill in protecting national security, which will always be top priority. However, the current drafting makes the practical application of the Bill difficult for business and could lead to additional burdens and complexity at a micro level and be an unintended deterrent to investment at a macro level.

With no set de minimis thresholds for transactions caught by the legislation, there is a risk that a high volume of notifications will inadvertently represent relatively low-risk activity caught by this maximalist approach from legal teams and counsel. On top of that is the extraterritorial nature of the provisions in the Bill. Many transactions involving target suppliers supplying goods and services outside the nation will be caught in the notification requirements. Given this backdrop of a maximalist approach, there is real concern in business that the Government’s capacity to process the projected number of notifications while the regulations are in their infancy will be a problem.

According to the CFIUS annual report, in the United States in 2019, 231 notices were filed for screening, with 113 resulting in investigation. The Government currently estimate, and I wonder whether the Minister can confirm, that there will be 1,800 annual notifications. However, there is concern that the true estimate could be up to 10,000. We should not have the unintended consequence, mentioned by the noble Lords, Lord Leigh and Lord Clement-Jones, of deterring foreign investment just when the UK needs to increase its attractiveness to it. We are just coming through the pandemic, we have had Brexit, and we are establishing ourselves as an independent trading nation—global Britain. We are the second or third largest recipient of inward investment in the world, and a magnet for it. We are a gateway to Europe when it comes to investment, and we need to continue to be so.

Amendments 20 and 24, in the name of the noble Lord, Lord Leigh,

“seek to introduce value thresholds for qualifying entities and assets (subject to anti-avoidance provisions to prevent the circumvention of the Act), which would bring the NSI regime in line with other leading foreign investment regimes that have de minimis financial thresholds for notification.”

Such thresholds provide a critical floor to the regime, ensuring that higher-value, higher-interest transactions, entities and assets are predominantly in focus. Of course the Government should consider national security threats of all sizes. However, in order to provide officials with sufficient breathing space to make a success of the predicted number of notifications, which I spoke about earlier, this threshold should be applied.

Importantly, this amendment would concurrently bring the planned regime in line with other leading foreign investment regimes, as we have heard from other speakers. International comparisons and their consequential impact on the UK’s attractiveness as a location for inward investment should be a continual focus for government when implementing this regime.

Before I come to what the noble Lord, Lord Clement-Jones, mentioned, I should say that the Bill represents a significant expansion of the UK’s FDI. Since the Enterprise Act intervention regime was introduced in 2002, nearly 20 years ago, there have been just 12 interventions on the basis of national security. It appears that this new regime will see a large increase in the government’s workload and, as the noble Lord said, a much stricter regime than those brought in by other countries, including the USA, Australia, Japan and many countries in Europe.

We must not jeopardise, at any cost, our attraction for inward investment. Of course, national security is important, but we have to be a magnet for inward investment and the Bill must not prevent that happening.

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

My Lords, in moving Amendment 21 I will speak also to Amendments 27 and 32.

The first two of those amendments would amend Clause 7, which is entitled “Qualifying entities and assets”. Amendment 32 is a consequential amendment to Clause 9. As has been the case with all the amendments I have tabled, they are designed to give greater clarity to the detail of the proposed regime and maintain the delicate balance between national security and investor rights, which we have all talked about at some length.

I add to noble Lords’ views that the level of knowledge about the provisions of this Bill is pretty low. Last week, I was in the north of England at a conference involving a number of senior professional firms. I do not think that they had hoisted in the reduction in thresholds. They still thought that it was a regime that would apply primarily to large companies. When I raised the point made by my noble friend Lord Lansley—that the regime began to come into force on 12 November last year—they looked fairly astonished.

Turning to the amendments, as before, I am grateful to the noble Lord, Lord Clement-Jones, for his support and to the Law Society for its help in drafting them. First, I will speak to Amendment 21. Under Clause 7(3), an overseas entity is a qualifying entity if, among other things, it

“carries on activities in the United Kingdom”.

It would be useful if we could have some guidance on the meaning of “qualifying entity” under the provisions of this Bill. There is a useful definition in the Bribery Act; it may be possible to bring that across to give clarity to this Bill as well.

Clause 7(3)(b) also provides that an overseas entity that supplies goods or services to persons in the United Kingdom would be a qualifying entity. Other major jurisdictions do not apply their national security laws to investments in foreign entities. The argument is that the Bill should only treat overseas entities that carry on activities in the United Kingdom as qualifying entities, rather than include entities that simply export to the United Kingdom. To achieve this, Clause 7(3)(b) should be removed.

Amendments 27 and 32 would replace Clause 7(6)(a) and (b) with new wording. The background to this is as follows. Clause 7(4)(c) and Clause 7(6)(b) together provide that non-tangible assets, such as ideas, information or techniques, are qualifying assets if used in connection with the supply of goods or services to persons in the United Kingdom. This provision could inadvertently cover UK businesses that buy, procure or use technological products or services supplied by third-party providers. Under this scenario, a UK company that buys in foreign artificial intelligence technology to help to deliver its business objectives could be covered, as could a UK company that uses foreign computer software in, for example, building and maintaining a database.

The situation I just described could be further complicated if a UK business plans to purchase another UK company covered by that scenario. Although it is a UK to UK transaction, under the nexus set out in Clause 7 these types of deals will be covered and caught under the new regime. Solicitors will have a duty to flag that up as a risk when advising corporate clients, which means that many more companies are likely to seek a voluntary judgment from the Secretary of State for reasons of certainty. This is likely to significantly increase the number of applications for a judgment made to the Secretary of State, and so is likely to slow down business. On the other hand, if a deal goes ahead and the ruling is made after it is completed, it could have significant consequences for the organisations in cost and outcomes.

This possible application of the regime to acquisitions by domestic acquirers is unusual compared to other jurisdictions where Governments have taken national security powers. Concerns relating to national security and domestic investments are likely to be able to be dealt with much more expeditiously under existing regulations—for example, confiscation proceedings under the Proceeds of Crime Act or the director disqualification regime. Amendments 27 and 32 would give effect to this simplification. I beg to move.

[Lord Clement-Jones (LD)]

My Lords, I start with an apology to the Minister. Amendment 26 in the previous group was a rogue and should have been deleted, because Amendment 27, introduced so well by the noble Lord, Lord Hodgson, superseded it. The PBO produced a much better format, so Amendment 26 was left like an orphan in a previous group, but it has been extremely helpful in getting a foretaste of the Minister’s arguments in this group, so I apologise to him, but there is nothing like hearing a good argument twice, and no doubt we will be all that wiser for it.

As the noble Lord, Lord Hodgson, has introduced the amendments so well, he has made it clear that they are intended to do two things: to ensure that qualifying assets are only assets used in connection with activities carried on in the UK, but not the supply of goods or services to persons in the UK; and, secondly, to prevent “in connection with” being interpreted in a way that treats all assets within the relevant supply chain as being within scope, even if owned and controlled by unconnected third parties, which may have no visibility of the activities of businesses further down the supply chain.

As drafted, the territorial scope of the Government’s call-in power is extremely broad, extending to non-UK entities that supply goods or services to persons in the UK, and assets situated outside the UK that are used in connection with activities carried on in the UK or the supply of goods or services to persons in the UK. This extraterritorial application is out of line with the approach taken in most other foreign investment regimes, which focus only on acquisitions of corporate entities registered in the relevant jurisdiction. It is also unnecessary. There are a number of other more appropriate ways to protect against a threat to the UK’s national security in connection with a transaction involving a non-UK registered company or assets that are not located in the UK, such as export/import controls, the network and information systems regime for critical infrastructure and other licensing requirements relating specifically to national security. From a practical perspective, it may also be difficult in many cases for an acquirer to analyse fully all aspects of the supply chain in order to self-assess the risk of a particular transaction being called in for review.

Furthermore, referring to supplies of goods or services captures all aspects of the supply chain, however minor. It is difficult for an acquirer of a business fully to analyse the supply chain, and including this as part of a mandatory regime with criminal sanctions is disproportionate. The proposed requirement for control by the person exercising the relevant activities is necessary to prevent “in connection with” being interpreted in a way that treats all assets in the relevant supply chain as being in scope, even if owned and controlled by unconnected third parties that may have no visibility of the activities of businesses further down the supply chain.

There are other more appropriate ways to protect against a threat to the UK’s national security in connection with a transaction involving a non-UK registered company or assets that are not located in the UK. As I said, most other foreign investment regimes have managed to crack that issue. I very much hope that the Government will think again.

[Baroness McIntosh of Pickering (Con) [V]]

My Lords, I am delighted to support this small group of amendments. I will speak in particular to Amendment 21 for the reasons my noble friend Lord Hodgson so eloquently and effectively set out.

I am very well aware of the concerns raised by the Law Society of England, as set out by my noble friend and the noble Lord, Lord Clement Jones, as to the extraterritorial aspects of the application of Clause 7(3) as drafted. It raises a number of practical problems as to how it will be applied. In the view of the Law Society of England, it is potentially inappropriate in its wording.

I am grateful to my noble friend for stepping up to the plate and tabling these amendments. I hope that my noble friend the Minister will look favourably on them, the reason being that, in the definition of qualifying entities and assets currently given under Clause 7(3), an overseas entity is a qualifying entity if, among other things, it “carries on activities” in the UK. The Law Society would very much like to see further guidance on the meaning of this term, as is the case under the Bribery Act and the Modern Slavery Act. It begs the question as to why the Government have not felt able or willing to bring forward such a definition as part of the Bill. My noble friend must understand that it will be up to the practitioners to apply this wording. The courts could have to interpret it as well.

Clause 7(3)(b) also provides that an overseas entity that

“supplies goods or services to persons in the United Kingdom”

would be a qualifying entity. For reasons of international comity, other major jurisdictions do not apply their national security laws to investments in foreign entities. In accordance with this, I support the Law Society’s conclusion that the Bill should treat only overseas entities that carry on activities in the UK as qualifying entities, rather than including entities that simply export to the UK.

In my view, Clause 7(3)(b) should be removed entirely or the wording proposed by my noble friend Lord Hodgson, which I prefer, adopted. I find the Bill unacceptable as it currently stands. I hope my noble friend the Minister will understand that we are not the ones who will have to apply this. Practitioners have raised these concerns with us for very legitimate reasons.

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

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

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

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

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

[Lord Clement-Jones (LD)]

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

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

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

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

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

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

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

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[Baroness Bloomfield of Hinton Waldrist (Con)]

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

[Lord Clement-Jones (LD)]

My Lords, I bow to my noble friend’s much superior knowledge on intellectual property issues. I entirely agree with her. That is a good reason for keeping provisions about intellectual property broadly speaking as they are. My noble friend pointed out to me that nowadays even Rolls-Royce engines are licensed as opposed to sold, because so much data is given off by their operation. That is proprietary in itself. So it is very difficult to distinguish between an outright sale and a licence in commercial life.

I wanted to come back because I did not think that the Minister was quite positive enough on Amendment 23 from the noble Lord, Lord Vaizey. I laughed out loud; that particular response was like an episode of “Yes Minister” because it tried to draw distinctions that were not particularly helpful in the circumstances. Somebody was being extremely clever when they put the paragraph together, but I do not think it pushes back the argument why that day-to-day type of software —that sort of absolutely bog-standard commercial licence equipment—should be captured in the definition of a qualifying asset. I will look very carefully at that very well-crafted paragraph again before Report.

[Baroness Bloomfield of Hinton Waldrist (Con)]

I am grateful for those comments. They will be noted.

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[Lord Lansley (Con)]

I shall refer only to Amendment 30, in my name, in this group. Earlier, we discussed the question of material influence. At this point in Clause 8, the fourth case to which we referred—the control of an entity—is, under subsections (8) and (9), effectively material influence. Looking at this, I could not understand why this bit of Clause 8 did not simply replicate Section 29 of the Enterprise Act, which is concerned with obtaining control by stages. I will not read the whole thing, but it is essentially about where a transaction or, in this case, a series of transactions—I will come back to that point—can be treated as occurring simultaneously, but which enables a person

“directly or indirectly to control or materially to influence the policy”

of the enterprise, or enables that

“person or group of persons to do so to a greater degree”.

We have here different language, and I would like the Minister to kindly explain how it works. I can see that it will be a person together with others, because of course it brings in holding an interest or a right by virtue of Schedule 1—working together with others—so that might be sufficient to say “directly or indirectly”. So, that might be covered by a common purpose, the connected arrangements and so on. But subsection (9), as it qualifies subsection (8), appears to suggest that if somebody already exercises a material influence over an entity, the fact that they increase their material influence by stages is not defined as control, unless it is one of the other cases set out in the clause. I think that is a gap. I think it ought to be included, and the clause ought to be constructed in a manner similar to the way in which the Enterprise Act enables control to be acquired by stages. I am not particularly asking for my drafting to be incorporated, but I invite Ministers to see whether it will be simpler to take out subsections (8) and (9) and insert something drawn from and similar to Section 29 of the Enterprise Act when we come back to this at Report.

[Lord Clement-Jones (LD)]

My Lords, it follows from the speeches of the noble Lord, Lord Hodgson, who introduced Amendments 29 and 72 so well, and the noble Lord, Lord Lansley, who has taken us very carefully through subsection (8), that Clause 8 is a strange beast. It is a mixture of the absolutely specific and then the rather vague in its different cases, which contrast extraordinarily. I have signed Amendment 29, in the name of the noble Lord, Lord Hodgson, which tries to deal with the vagueness in subsection (6) because the scope of that trigger event—the third case—is very broad and unclear, as he described.

It is not clear precisely what resolutions govern

“the affairs of the entity”

as set out in subsection (6). It could potentially capture typical minority investor veto rights or negative protections, which would not give rise to national security concerns. The amendment put forward by the noble Lord, Lord Hodgson, and supported by me, would narrow the scope, while ensuring that where a person can pass or block resolutions that cover matters akin to those covered by, say, ordinary and special resolutions under the Companies Act 2006, the ability to secure or prevent those resolutions would still be caught—even where the thresholds for passing those resolutions differ from the thresholds for passing ordinary and special resolutions under the Companies Act.

If shareholders of an overseas company can amend the company’s constitution, or wind up the company by passing a resolution with a threshold of 60% of the votes, any shareholder that increases their shareholding from less than 60% to 60% or more will be caught by the third case, if this amendment is accepted. At the moment, that subsection really repays some attention and I very much hope that the Minister will reply positively on this.

Amendment 72, also put forward by the noble Lord, Lord Hodgson, and explained clearly by him, would

“give investors certainty that any divestment or unwinding order will not render their contractual arrangements unenforceable”,

so they could contractually anticipate the consequences of an unwinding order. That is extremely important. If you cannot do that and everything is void, then you cannot make arrangements that stick after the voidness.

A long time ago when I knew some law, I think we talked about severable contracts. One would find that part of a contract was void but provisions that applied to circumstances in which the contract was void, or voided, would still subsist. It is important that those provisions continue after the voiding decision has been made and I very much hope that the Bill can be amended accordingly; otherwise, many companies trying to anticipate its impact will be absolutely confounded. They will have no way through what will be, in any event, a pretty difficult commercial situation.

[Baroness Noakes (Con)]

My Lords, I put my name down to speak in this group to support my noble friend Lord Lansley’s Amendment 97, which he has not spoken to. I shall speak to it in this group anyway in case he had no further intention of speaking to it when it comes up later as we go through the amendments on the Marshalled List.

Amendment 97 would remove former spouses from the list of connected persons who are defined in Schedule 1. I was fairly sure that this was a novel and unwelcome addition to the normal scope of connected persons found in legislation. In my view, it is not a common-sense interpretation of what a connected person is. For example, if I had had a brief marriage in my youth, Schedule 1 would continue to count my long-gone husband as a connected person of mine for ever, which is just not sensible. It also includes former cohabitees, so the possibilities of connected persons seem to be endless.

My view of the definition of connected persons was compatible with tax law, company law and even money laundering rules, but I discovered that this wider definition, extending to former spouses, is in the Insolvency Act 1986, which was a surprise to me. That definition was later picked up by the Pensions Regulator. The fact that precedents have somehow managed to find their way into the statute book or into regulations does not make it right, and I will support my noble friend Lord Lansley’s Amendment 97 if he chooses to propose it at some stage in the future.

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[Lord Clement-Jones (LD)]

My Lords, I am not going to speak for any length on Amendments 31 and 33. I just hope that the Minister has a battery of Scots lawyers advising on these amendments because it sounds as if they could be of huge significance and the issues under Scots law may well have been ignored in the drafting of the Bill. I am looking forward to hearing the Minister’s response, no doubt on advice.

I support, in particular, Amendments 34 and 35, tabled by the noble Lord, Lord Hodgson of Astley Abbotts, which he introduced so well. The common factor is that the existing wording of Clause 10(2) appears to catch intragroup investments where an ultimate parent company holds an interest indirectly through a wholly-owned subsidiary and decides to transfer the interest to itself so that it is held directly. Such transactions do not raise new or additional national risks as there is no change in the substantive control. For mandatory filings, as he also described, the initial acquisition will already have been notified and reviewed. Proposed Amendment 34 therefore makes sure that only those transactions where the initial investment took place before the commencement date are caught; they will thus not have been reviewed. Without this provision, each entity within a corporate group would need to make a separate notification for a single trigger event.

Amendment 35 deals with cases where corporate group companies comprise multiple, separate entities because Clause 10, as drafted, also appears to require each entity within the corporate group to make a separate notification for a single trigger event that takes place relating to the group.

These are well-crafted amendments and were well described by the noble Lord, Lord Hodgson, who, as he said, is supported by the Law Society. We have a Law Society group of amendments here relating to England, Wales and Scotland. I am sure that the Minister will have huge pleasure in responding on this group.

[Baroness Hayter of Kentish Town (Lab)]

My Lords, I have no new information to bring to the Committee. As we have heard, a number of transactions appear likely to be caught under the Bill which are probably outwith the intention of the authors of the Bill. I think the Minister has to explain why these provisions are in it, rather than noble Lords who tabled amendments having to explain why the provisions should be taken out. We look forward to his explanation of that and, perhaps, his reassurance to the Committee that the Bill is really fit for purpose across the whole of the UK, including for the Scottish legal system.

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

My Lords, this amendment seeks to ensure that research and development partnerships, such as those that are widely formed between companies and universities to create intellectual property and therefore qualifying assets, are not required to provide notification of the creation of these partnerships. If these partnerships lead to the creation of a qualifying asset, the trigger event should be determined to be the point of creation of the qualifying asset. It would minimise the notification burden on business and industry, and avoid discouraging these important relationships. This is the theme of many of my amendments.

To give your Lordships some background, UK companies are major funders of research and development at British universities across the world. They enter into hundreds, if not thousands, of research agreements every year. Those agreements can be a simple, straightforward funding of a PhD student or major multilateral projects valued at many millions of pounds. Business enterprise R&D represents something like two-thirds of the total, according to the latest figures from the Office for National Statistics. The biggest sectors for business enterprise R&D overlap significantly with the 17 sectors identified in the Bill. For example, computer programming is almost £2 billion, aerospace is almost £2 billion and software development is £1.5 billion.

This business investment, allied with our world-class universities, means that the UK is obviously at the forefront of many of these technologies, from quantum technology to artificial intelligence. The purpose of the research is, of course, to create new technology and new intellectual property that can be used by those British companies to grow British businesses, but at the beginning of any partnership the creation of intellectual property is simply an aspiration. It is certainly not guaranteed.

These projects risk being caught by the same minimal risk issue flagged in other debates on the Bill where companies seek pre-emptively to notify where there is a risk of a trigger event because there is a lack of clarity on this issue. All the amendment seeks to do is to postpone the need to consider notification until such time as the research has been successful, in effect by creating a qualifying asset.

[Lord Clement-Jones (LD)]

My Lords, I am very pleased to have put my name to all three amendments in this group. Rather like the noble Lord, Lord Lansley, I think that we have to find a way to deal with research and development partnerships in higher education. These are various alternative ways to do that, but whichever one is chosen we must find a constructive way. Having a debate and discussion at this stage is really important.

Although the Bill does not directly reference universities and a great deal depends on the Secretary of State and his statement saying how he will define and use the powers, given the width of the sectors it is clear that there is an intention to catch those partnerships entered into by universities. The Bill’s scope is so wide that it means universities could have to refer a significant proportion of their routine business collaborations for screening.

A key concern is that it is unclear which types of asset transaction should be referred for screening. The proposed definition of assets that should be referred to BEIS is very broad and could cover a significant proportion of what universities might consider run-of-the-mill engagement with businesses, including contract research, consultancy work and collaborative R&D. Elements of the Bill, while introducing measures to protect national security, could have unintended consequences for future investment in UK R&D and could cause BEIS to be overloaded with referrals from the university sector.

Up to 95% of Russell group research contracts grant external partners some form of intellectual property and could therefore be captured by the voluntary regime, given the current broad definition of assets. With uncertainty over definitions, universities will be forced to adopt a cautious approach and therefore will expect to refer a significant proportion of the partnerships that I have mentioned: their contract research, consultancy, and collaborative research projects, including those conducted with British businesses. This will add to lead-in times and create red tape for universities and businesses. That surely cannot be for the benefit of R&D in our universities.

As chair of the governing body of a research-intensive university, I can testify to the fact that protecting sensitive research from hostile foreign actors is now a priority for universities. Universities dedicate significant resource to complying with export control legislation and are now working to implement recommendations arising from last year’s guidance from Universities UK, Managing Risks in Internationalisation. As a result, enhanced due diligence processes have run in parallel to concerted efforts to secure R&D investment from domestic and international businesses. This includes due diligence on risk assessment, international research partnerships, policies and contractual agreements to protect intellectual property and dual-use technologies and export control legislation.

National Security and Investment Bill

Lord Clement-Jones Excerpts

Committee stage
Tuesday 16th March 2021 Lords Chamber

[Lord Clement-Jones (LD)]

The noble Baroness, Lady Noakes, and the noble Lord, Lord Hodgson, have demonstrated exactly why Committee is so important. The way they have teased out the real meaning of these time limits under Clauses 14 and 18 has been revelatory, if we can call it such.

I very much like the no man’s land metaphor used by the noble Lord, Lord Hodgson, but, under Clause 18(9), my noble friend Lady Bowles also talked about the piece of elastic that brings you back. It is almost as if this Bill was designed to be deliberately obscure. The reference back to Clause 2(2) and (4) has almost been sneaked in, so that the Secretary of State has the ultimate discretion.

As the noble Baroness, Lady Noakes, said on the one watchword we have throughout the Bill, we are trying to create an investment regime where there is a high degree of certainty, so that people know what the boundaries are. The time limit boundaries seem to be limitless if they apply to the Secretary of State. An ordinary investor will no doubt be absolutely under the cosh if they fail to meet any time limits that apply to them, but the Secretary of State seems to have absolute discretion.

I do not think I need to add anything further, except to say that we on these Benches strongly support Amendments 43 and 67. I have signed Amendment 67, but both the mandatory and voluntary notification procedures need curing in this respect. I very much hope that the Government will see their way to amending these clauses as we move to the next stage.

[Baroness Hayter of Kentish Town (Lab)]

My Lords, this sounds like a “me too” moment, because we also have tremendous sympathy with the amendments, especially after hearing the concerns of stakeholders in the research sector about the uncertainty around the time for notices to be decided by the Government. As we have heard, their concerns reflect others from business and investors.

Could the Minister explain why a default approval should not be included in the Bill if organisations have not heard back within a particular timeframe? She will probably know about the important process for clinical trials involving medical products prescribed in the Medicines for Human Use (Clinical Trials) Regulations. In that case, where no notice is given or where further information is requested within 60 days, the clinical trial is treated as authorised. I am not suggesting that these are two exact types of decision, but that default authorisation in legislation seems to be one we might look at. I am interested to know whether the Government have looked at a similar default approval to add here. Perhaps the Minister could say what sort of advice the Government have had on whether that would work here.

On Amendment 67, could the Minister indicate whether 30 days is right for such a process? It would be useful to know the Government’s thinking on the expected average turnaround time for a call-in notice.

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[Lord Naseby (Con) [V]]

My Lords, I am grateful to my noble friend Lord Hodgson for tabling the amendment because what is behind it is absolutely right, as a number of my noble friends have said in the debate. That is fine, particularly in a situation whereby we are hoping to set the environment in which new companies can be created. After the pandemic, we are highly likely to see a number of movements in that area that would not normally happen.

One area on which I have a slight query is the preference to be given to someone who has done it before, particularly if they are not a company but someone who is handling the matter. That gives an advantage over someone who has not done it before. Therefore, regarding the point made by the noble Baroness, Lady Bowles, about a time limit or distance limit in terms of time, there needs to be some stop on that. Otherwise, an unfair advantage is given to one party over another.

Another element that I worry about a little, which covers security matters as much as anything, is that some people out there are enormously creative in terms of manoeuvring and so on. Two things may seem similar but can be yards apart—miles sometimes. Not all that is written on the outside packet of a product or company represents what is happening underneath.

While I support the broad thrust of my noble friend Lord Hodgson, I have those reservations and shall listen carefully to my noble friend on the Front Bench.

[Lord Clement-Jones (LD)]

My Lords, the noble Baroness, Lady Noakes, has coined another phrase that will run through this Bill—notably, “practical impact”. It is interesting that among those of us who have taken part in the debates on the Bill many have a practical understanding of what its impact could be. We have been in walks of life that have brought us into the investment community—not least the Minister himself—and we see the potential for major issues arising under the legislation because of the way in which it is drafted. This group of slightly disconnected amendments illustrates that. The noble Baroness, Lady Hodgson, and my noble friend Lady Bowles forensically took us through the amendment and Amendments 67B and 67C. I shall come to the question on whether Clause 30 should stand part of the Bill in a moment.

However, the amendment is definitely the kind of red tape-busting amendment that we need. My noble friend Lady Bowles said that we needed provisions that actually met the needs of the investment community and were tailored to it. The amendment is a classic example of what could be done in terms of making sure that we do not have a situation in which companies have to make notification after notification. The inter- twining of the mandatory and the voluntary notification aspects provided for in the amendment is extremely important.

Then we come to Clauses 19 and 24, and Amendments 67B and 67C. The noble Lord, Lord Hodgson, also has a way of coining a phrase, such as “stop the clock” provisions, which again give the Government all the cards and the poor old investor could be stuck for some period of time. As the noble Lord pointed out, the extent of the powers in terms of the periods are already quite long—75 working days or 15 working weeks for a national security assessment, or 30 working days or six working weeks for the initial screening period. We are not talking about modest periods but, rather like the referee in a rugby match, the Government can stop the clock and there is no control over that, as far as I can see. Therefore, we on these Benches firmly support those amendments.

On Clause 30 stand part, I liked the phrase of the noble Baroness, Lady Noakes: “stuff these companies with public money”. If that was the case, it would be pretty egregious. Now that noble Lords have drawn our attention to it, we can see that the Explanatory Notes on Clause 30 are vanishingly small. There is virtually nothing in there: there is no control over what the Secretary of State does. He may have to give a report if it is over a mere £100 million—and what is £100 million but small change in the circumstances? The Secretary of State can make more or less any decision and then say, “We have made the decision, but we have plenty of cash that we can stuff into your pocket.” It is the opacity, the lack of reporting and any real control in Clause 30 to which the noble Lord, Lord Hodgson, has rightly drawn attention. This is another area where I hope the Minister has something to say that not only gives quite a lot of further assurance but undertakes to create greater control over the powers in that clause.

After a bit, one gets a feeling for a Bill, and this one seems overly weighted in favour of the Secretary of State. The Secretary of State is more or less footloose and fancy free, and it is the poor old investor who will have to bear all the consequences.

[Baroness Hayter of Kentish Town (Lab)]

The lead amendment, Amendment 48A, would introduce a streamlined form for mandatory notification, and Amendment 67B would make any time limit for an information notice not less than three working days. That seemed a sensible—I think the word used was “pragmatic”—proposal.

Turning to the interesting Clause 30, the Minister in the other place said,

“final orders, in exceptional cases … when we are administering taxpayers’ money—may bring about financial difficulty for the affected parties”,—[Official Report, Commons, National Security and Investment Bill, 8/2/20; col. 288.]

which is why Clause 30 allows the Secretary of State to give financial assistance to an entity through a loan guarantee or indemnity as a consequence of making a final order.

It would be interesting to know a little more about the whole of this, as we have heard, and when a potential recipient might know that they were even in line for such help. How early in the process would it be indicated—not the actual decision but that that was a possibility? Or is it like Father Christmas appearing at the end?

As we have heard, the figure of £100 million is interesting, and it is interesting that there is no regulation-making or guidance-providing requirement such that guidance on the use of the power might have to be, if not agreed by Parliament, at least provided and open for debate and scrutiny. Will such guidance exist and how many cases a year are envisaged involving £100 million? Who would make the decision and how, as has been asked, and will it be reported in a timely manner—or, indeed, at all?

If this is the Government’s desired outcome, it seems that Clause 30 does not provide for any financial assistance in the case of an interim order. Perhaps the Minister could outline the thinking behind that, given that an interim order could also impose major costs on a British start-up or prevent an acquirer investing in one if it was thought that that investment might increase the acquirer’s level of influence unduly and trigger the next stage. There could also be the loss of a business-critical investment. It would be useful to know the thinking behind making money available to cover one sort of loss but not another. I look forward to hearing more of the thinking behind how this would work in the Minister’s response.

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[Lord Grimstone of Boscobel (Con)]

I thank the noble Lord for that question. I will give him an additional example of where this power or type of power might be used. As I stressed earlier, it is not a general compensation power and will only be used in instances where the public interest, particularly national security interests, require it. As I also said earlier, any financial assistance would be subject to Treasury consent and would have to be shown to provide value for money. For example, if the Government provided a loan, it would normally have to be at market rates. The clause does allow the Secretary of State to bail out any business, either directly or surreptitiously, through soft loans.

Equally, the aim is not for this Bill to cause businesses financial distress, nor do we anticipate it doing so. The Secretary of State—this is the key point—may make a final order only if he “reasonably considers” that it is “necessary and proportionate” to address an identified national security risk.

Let me give an example. A case might arise whereby an asset has to be secured to prevent the national security risk of someone else getting hold of it. The Secretary of State might have imposed a final order that blocked a trigger event of a UK company that was working on unique or world-leading technology. If the company could not immediately find an alternative buyer, and if the collapse of the company could itself pose a national security risk, the Secretary of State could consider using this power. In such a situation, the Secretary of State may decide that he or she wishes to provide financial assistance to ensure that the company could continue operating until an alternative acceptable buyer was found. As such, this power will be used only in very tightly drawn circumstances where doing so is clearly in the national interest.

[Lord Clement-Jones (LD)]

My Lords, I know that the Minister is trying to be as helpful as possible by tying down the way Clause 30 will work. However, “tightly drawn” is not how I would describe its wording, so I assume he is really saying that it is the risk of judicial review hanging over the Secretary of State that keeps him honest in the circumstances. That is not a very good place to be when you are dealing with a Bill of this kind.

The other aspect is transparency. The noble Lord did not really explain the reason for the threshold of £100 million. He said it was for transactions—or compensation, if you like—and financial assistance under £100 million in aggregate would have to be reported for the annual review. However, if it was £99 million, say, that would not apply and it would not be subject to a separate report; it would just be aggregated along with all the financial assistance given over the course of the year. Why?

These powers are very wide; we need to know how they are being used and what direction the financial assistance is going in. Therefore, simply drawing a line at £100 million does not seem to be very satisfactory in the circumstances.

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[Baroness Bennett of Manor Castle (GP) [V]]

My Lords, the noble Baroness, Lady Noakes, outlined very clearly what this group is about. She may not be entirely surprised that I am coming from the opposite angle, although we can perhaps agree that this is a question of balancing public good—making decisions about national security—versus private profit and convenience. The financial and other implications that might arise from more time being taken over whether or not to progress are weighed against both the chance of missing something important and using significant public resources, making a fuller assessment unnecessary.

I am here, rather unusually, to defend the Bill against the amendments. Broadly, in this debate we have heard a great deal of uncertainty about how the Bill, once enacted, will work: how the details will play out in practice, how many firms will be involved and what resources will be required. I am not sure how five days was arrived at as a firm deadline, given that there is such uncertainty about the actual operation of the Bill. As it currently stands, deciding whether to accept a mandatory notification should take as long as it takes; it should not be subject to an arbitrary—a very short —deadline.

[Lord Clement-Jones (LD)]

My Lords, these amendments are very much of a piece with many of the amendments we have heard in Committee—all designed to create a much tighter and less discretionary regime. That is quite right in the case of these amendments, which one would have thought the Government would find extremely straightforward to accept.

Under Clause 14, the Bill currently envisages that the investment security unit will reach an initial decision as to whether to clear a notified transaction or to call it in for a detailed assessment within 30 working days of acceptance of the notification as complete. As the noble Baroness, Lady Noakes, said in her excellent introduction, there will be a significant number of transactions that fall within the scope of the mandatory notification requirements—they are set out in the impact assessment—due to the target’s activities being in a specified sector but which clearly do not raise national security concerns.

Timescales for decision-making are currently extremely unpredictable. Even before defined timescales for decision-making kick in, the Secretary of State has an initial period, as has been described, to decide whether a notification has been submitted in the correct form. The Secretary of State must make this decision as soon as reasonably practicable. That is a set of weasel words which suit the convenience of the Secretary of State, not the investor.

This lack of clear timescales creates uncertainty for investors, universities and businesses, making domestic and foreign investment in university spin-outs less attractive, while disincentivising industry partners from engaging in collaborative R&D. These are all the downsides of uncertainty, as we have heard throughout this Committee. In addition, the Secretary of State has 30 days in which to review the notice after acceptance. Especially in circumstances of fast-moving corporate finance transactions, 20 days, as proposed, seems much more proportionate. Similarly, under Clause 18, relating to the voluntary notification procedures, greater certainty would be achieved if these amendments, regarding when a voluntary notice is accepted and setting out how long the review period should be, were included.

The noble Baroness, Lady Noakes, made an extremely good point: these provisions, where the timescales say “as soon as practicable” or 30 days, will be adhered to, to the letter. They are not going to be done speedily. Civil servants are going to interpret them extremely conservatively, as my own profession—the legal profession —would, because the penalties of getting it wrong will be seen to be too high. People will not want to get it wrong, whether they are in the position of giving advice to the Secretary of State or advising investors. That is why we need very clear provisions in the Bill, and we are certainly not there yet.

[Lord Grantchester (Lab)]

I thank the noble Baroness, Lady Noakes, for her Amendment 49, to which I have added my name. It leads this group of probing amendments which focuses on one theme: how long will businesses and organisations have to wait in suspense for responses from the Government concerning the notification procedures? This theme stems in part from the fear that the Government will be swamped by notifications, with the CBI suggesting that the department could have to deal with up to 10,000 of them each year. Some discipline needs to be set up from the outset that will require the Government to keep up.

Of course, we support the aims of the Bill to monitor, guarantee and protect our UK national security, so in this probing group I have not added my name to Amendments 53 or 65, in the name of the noble Baroness, Lady Noakes. This is not because I specifically disagree with her—quite the contrary. However, it can be appreciated that some notifications will take more time than others to review, with some of them likely to raise more concern—alarm, even—thus requiring more extensive considerations and checks. The length of the period is a maximum duration, not a target for delay and procrastination. It should be understood how financial takeovers can become incredibly complex, so it is entirely correct that complexity is reviewed sufficiently and deeply. However, perhaps the Minister could answer as to whether a full six weeks may be needed and whether a four-week period could be maintained.

Overall, it is understood that unnecessary delays can lengthen anxieties that legitimate investments may fall through and exclusivity terms expire, leading to research partnerships breaking down or, in worst-case scenarios, businesses running out of cash and finance facilities. This heightens the requirement for the new unit to be properly and adequately resourced. This could be enforced through transparency about the turnaround times for notifications. These amendments also pair up neatly with Clause 14 on mandatory notifications and Clause 18 on the voluntary notification procedure. As the wording in the Bill is consistent across both alternatives, are the two distinctive categories so similar in importance and workload to require symmetry in their determinations?

With these thoughts, I have added my name to Amendment 62 in the name of the noble Baroness, Lady Noakes, giving the Secretary of State five working days instead of the nebulous “reasonably practicable” length of time. What does “reasonably practicable” actually mean to a Government? It is vague for SMEs and an elastic piece of time for the department. The Law Society has raised concerns, especially on the voluntary notice procedure in Clause 18, as “practicable” implies that a degree of delay will be acceptable and is to be tolerated. How does the Minister react to that? Can he explain whether five working days could be practicable and, if not, why not?

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[Lord Bilimoria (CB) [V]]

My Lords, I speak to Amendments 89 and 92. Amendment 89 would require the Secretary of State to undertake a review of the impact of the Act on national security and foreign investment. Ensuring the success of this regime requires formal review. For balance, it is crucial that this review reflects both positive impacts on national security, as well as unintended consequences to foreign investment in the UK. As such, a specified periodic review by the Government would provide industry with reassurance that the regime is being formally monitored and that such consequences will be redressed, should they arise.

Concurrently, formal review would provide the Government with the opportunity to outline any positive impacts that the regime has had. Failure to formally review the regime will leave industry with little understanding of the feedback cycle for the regime. Business is committed to making a success of the regime but, concurrently, wants to know that the Government are willing to review its impact.

Amendment 92, on market guidance notes, would require that:

“Within six months of the passing of this Act, the Secretary of State must publish market guidance notes to provide information to assist with compliance of the Act”


and:

“The market guidance notes must be updated and re-published not more than every six months thereafter.”


This would ensure the success of this regime. It requires active engagement from BEIS and other government departments with industry. One critical function that the Government play here is the development and provision of detailed guidance for firms and the wider market to view and act on, ensuring compliance with the legislation. Timely provision and consequent updating of this guidance will allow firms to enter the process of notification with as much information and steer as possible, reducing the likelihood of unnecessary notification but, critically, capturing those transactions that rightly demand scrutiny. Failure to provide guidance, in partnership with key business organisations, could slow the process of notification or, importantly, lead to instances of failure to notify, where it is necessary to do so.

To conclude, the current drafting of the Bill makes its practical application difficult for business. It could lead to additional burden and complexity at a micro level and, potentially, an unintended deterrent to investment at a macro level. The CBI, of which I am president, has heard from a wide range of businesses with concerns about the Bill in its current form— from technology and digital to facilities management, pharmaceuticals, higher education, financial services and defence. As such, the Bill is of concern to a broad subsection of the business community. Although there is no doubt that national security is paramount and the first priority of any Government, we are the second-largest or third-largest recipient of inward investment in the world. Nothing in the Bill should jeopardise that, with Britain continuing to be a magnet for inward investment.

[Lord Clement-Jones (LD)]

My Lords, it is a pleasure to follow the noble Lord, Lord Bilimoria, particularly as I am speaking to the two amendments that he has spoken to, because he speaks with huge authority and considerable backing.

To start with Amendment 85, we on these Benches are very sympathetic to the cause of SMEs. Whether this is the best way of catering for the considerable issues that they will face under the Bill is a matter for debate. I would prefer to see the thresholds altered to accommodate the needs of small businesses, but the heart of Amendment 85 is certainly in the right place.

I turn to Amendment 89. As we have heard, throughout the course of the Bill’s passage concerns have been expressed about its impact and the culture of the ISU as it enforces the Bill’s provisions. As ever, my noble friend Lord Fox anticipated some of my arguments in the previous group. It is critical that a regular review is undertaken to ensure that the Act is achieving its aims proportionately while not unduly deterring foreign investment.

Other aspects of the Bill include the five-yearly review of the Secretary of State’s statement about the exercise of the call-in power under Clause 3 and, of course, the annual report that we have just been talking about, which is inadequate in many ways. It is currently envisaged in Clause 61 and, as we debated in the last group, it does not go nearly far enough. Neither provision makes any reference to the effectiveness of the overall scheme of the legislation, whether it is achieving its objectives and, indeed, whether its overall purpose is being achieved. As my noble friend said, two key questions need answering here—effectively, are we safe and is our investment climate healthy? Where in any of the Bill’s provisions is the provision for that to be considered?

Amendment 89 would require the Secretary of State to undertake a review of the Act and report to Parliament every three years. This would involve a cost-benefit analysis of the regime’s impact, as set out in proposed subsection(2)(c).

I support Amendment 92 in the name of the noble Lord, Lord Leigh, and have signed it. I am sure that the noble Lord would have introduced it with far greater panache than me. But the Minister—the noble Lord, Lord Callanan—said at Second Reading:

“Noble Lords are entirely reasonable to expect further high-quality guidance from government to help businesses and investors navigate the regime.”—[Official Report, 4/2/21; col. 2391.]


That is reassuring but, as was made very clear by David Petrie, the head of the Corporate Finance Faculty of the ICAEW—I declare an interest as a member of its advisory board—in the Public Bill Committee on behalf of the members of the ICAEW, and as the noble Lord, Lord Bilimoria, has confirmed, the most effective way of tackling asymmetry of information in the business, investment and advisory communities would be the periodic production by the ISU of meaningful market guidance notes, modelled around the practice statements that accompany the City Code on Takeovers and Mergers.

Market guidance notes would be an important way for the ISU to engage closely and on an ongoing basis with businesses, investors and professional advisers. They would signal a culture of professionalism and openness to investment in UK businesses. They would support a necessary communication and awareness campaign of the legislative requirements. By setting out in an accessible way and in consultation with business, professional and sector bodies why and how businesses may be affected, the ISU could ensure that consistent and accurate information reaches the population of businesses and their advisers. Of course, future updates could also be issued in this format.

Beyond raising awareness, issuing market guidance notes over time would help to inform market participants on what they could be doing to make sure that the process works with more certainty, speed, clarity and transparency—all these cultural things that we have been talking about throughout the Bill, things which financial markets and the wider UK economy need to see. There would be a positive impact on productivity as a result; they would help to ease potential resourcing pressures on the ISU by increasing the proportion of notifications being submitted correctly, with all relevant details included.

I hardly need to say that market guidance notes would not form part of the Act and accordingly would not be binding on the Secretary of State. They would be issued to provide informal but meaningful guidance to businesses, investors and professional advisers on matters such as the level of information required in a mandatory or voluntary notification, and they would also provide commentary on the ISU’s normal approach to various provisions of the Act and greatly assist market participants seeking to establish the extent to which the Act may apply in a particular case. The ISU can also use them to share insights into trends where this would benefit the process. They would be amended periodically, or withdrawn as necessary, without the need for legislation—so extremely flexible. Each note could indicate the date on which it was issued, and so on.

There are other details that I could provide. There is great enthusiasm for this instrument, and I very much hope that the Bill will provide specifically for these. It would be an extremely useful indicator of the way in which the ISU proposes to operate.

[Lord Callanan (Con)]

I am grateful to the noble Lords, Lord Grantchester, Lord Leigh and Lord Clement-Jones, for their amendments in relation to equity stakes of affected parties, small and medium-sized enterprises, an impact review of the regime, and market guidance.

I first turn to Amendment 84, tabled by the noble Lord, Lord Grantchester. This amendment seeks to require the Secretary of State to analyse the financial support provided by government, as part of Covid-19 support, to sectors considered more likely to give rise to national security risks. It then seeks to require him to consider converting loans and grants to equity stakes when there is a clear economic and national security rationale for doing so.

There is no doubt that the impact of Covid-19 on businesses and livelihoods of people across the country has been truly terrible, and I have a massive amount of sympathy for those affected. I can assure noble Lords that the Government are committed to supporting all UK businesses through the Covid period. The Government continue to provide extensive support to businesses to survive the pandemic, so far totalling over £280 billion, including through furlough, the Self-employment Income Support Scheme and business grants. However, I do not think that converting loans into equity stakes necessarily represents the best use of public money. As noble Lords will be aware, Clause 30 provides for the Secretary of State to give financial assistance to, or in relation to, entities in consequence of the making of a final order. However, it is expected that this will be used only in exceptional circumstances. What the noble Lord is proposing would be much wider than this and, while I am sure that it is very well intentioned, is very much a substantive diversion from the main purpose of the Bill.

I turn to Amendment 85, which would require the Secretary of State to create a small and medium enterprise engagement unit within three months of this Bill being passed. This unit would take particular actions in relation to SMEs and their interaction with the regime. I note that this amendment bears a strong similarity to an amendment proposed during Report in the other place, and it will not surprise noble Lords that my views on the subject are closely aligned with those of Nadhim Zahawi, my fellow Minister. The Government strongly support SMEs and so have sought to provide a clear and easy regime for businesses of all sizes to interact with. The Government have been happy to provide support to businesses both large and small through the contact address available on GOV.UK and discussions with BEIS officials. The Government have published fact sheets on GOV.UK which make clear what the measures in the proposed legislation are and, importantly, to whom they apply.

We are also creating a digital portal and a simple notification process to allow all businesses to interact with the regime without the need for extensive support from law firms. Furthermore, there is no fee for filing a notification, unlike many of the regimes operated by our allies. Consequently, we have no reason to believe that this regime will disproportionately affect SMEs or that this new clause is necessary.

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

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

[Lord Clement-Jones (LD)]

My Lords, I should thank the Minister for his response; I am not sure I really want to. I found it rather extraordinary, particularly to Amendment 89. We have a Bill on foot with a purpose in mind but, when it comes to reviewing it, we are told that it is far too sensitive and we cannot possibly review whether it has met its objectives. We can keep it under review—within the department in some shape or form, I assume—but we cannot possibly undertake a periodic review of any kind. Even a normal post-legislative review process would expect to see whether an Act of Parliament was meeting its objectives. The Minister cannot even say whether that will take place at any stage.

This really adds to one’s concerns about this Bill in so many ways. It is a rather furtive creature that, if we are not careful, will be hiding in the dark for quite a long time and will not get reviewed. There is no way of seeing whether it is achieving its purpose other than the kind of review the Minister was talking about, which is purely internal to government and part of the government department’s overview. This is not particularly reassuring.

On Amendment 92, the Minister talked about just making statements about the call-in power or having the annual report. I said a set of market guidance notes would do; I did not adumbrate about six points that a set of market guidance notes could set out. They are far more extensive and market friendly than anything that is going to be caught by the call-in power statement or the annual report. We are talking about real guidance to business so that it knows what to expect and the parameters within which the Secretary of State is operating—particularly when it comes to guidance about the kinds of sector that will be caught and the current issues that the Secretary of State believes would give rise to a call-in notice and other aspects dealt with by the ISU. The idea that five years is a reasonable time to adjust a call-in power statement is laughable in the commercial world. The Takeover Panel updates its notes on a regular basis, and that is exactly what the ISU should do with market guidance.

[Lord Callanan (Con)]

I am not sure there were any questions for me there; the noble Lord has made some observations. I understand that he was unhappy with my replies, but I am afraid I cannot agree that the Bill is “furtive” or “hiding in the dark” at all. We are committed to transparency as much as possible. He says he has six additional points on market guidance notes. If he wants to send them to me, I will happily have a look at them and see what we can do. We said a maximum of five years, but of course the Secretary of State has the ability to do earlier reviews if necessary. That is a maximum date, and we could bring that forward. I take on board his points and am sorry if he is disappointed by my replies.

National Security and Investment Bill

Lord Clement-Jones Excerpts

Report stage
Thursday 15th April 2021 Lords Chamber

[Lord Hodgson of Astley Abbotts (Con)]

My Lords, since this is the first time I have spoken at this stage of the Bill, I add my thanks to those of my noble friend Lord Lansley to the members of the ministerial team and the Bill team for the time they have given and the meetings we have had to clarify and sort out the delicate balance we are all trying to achieve and the changes being made, which are part of the amendments in this group.

I will focus my remarks on Amendment 8, which returns to whether minority investor veto rights automatically bring the investment in question into the provisions of the Bill. It was an issue I addressed in Amendment 29 in its previous incarnation, along with Amendment 72. I found the Government’s arguments about Amendment 72 entirely convincing, so I have not retabled it, but I am not able to say the same about the response I received to Amendment 29, so I have retabled it and have discussed it with the Law Society, which seems similarly confused.

This is important because if we do not get clarity on this issue, there are at least two possible consequences: a potentially large increase in the number of voluntary notifications required, so further straining the system which the department is setting up, and/or a deterrent effect on people’s readiness to invest in the defined sectors of our economy.

I explained in Committee that a private equity investment essentially has two parts. There is the purchase of the shares, which will take place under the standard provisions of the Companies Act, and that is where the control of the entity lies. In parallel, it will be supplemented by a specially drafted, custom-made investment agreement. This is an agreement which both parties—the investee company and the investor—hope will be put into a drawer and never looked at again but, life being what it is, disagreements take place and the agreement is therefore essentially a protective device for the investor against malfeasance or bad performance by the managers of the company. The Minister needs to understand that it is essentially an agreement about corporate governance, not corporate law, which is how the company is controlled. That investment agreement is likely to require the investor’s consent to a number of major issues, such as approval of the budget, major capital expenditure proposals and so on.

When I describe it like this, it can be seen that these are protective provisions, not proactive initiating ones, but although they are protective, they are extensive, and this is where the use of the words “substantially all” in Clause 8(7) becomes significant. If that is the case, the Bill appears to bring within its ambit a range of private equity investments where the new investor has taken a minority position. It might be assumed that the new investor will be taking a minority position for malfeasance reasons, but there are a large number of reasons why private equity houses do not wish to buy 100% of a company. It may be that the existing management will not sell more than 50%. It may be that the new investor wishes the continuing management to have a real incentive to do well, and therefore likes it to have a larger stake. Last but not least, it may be that the investor has a maximum size of investment he can make and that determines the percentage that the investor can hold. So if you have an investor who can put up only £40 million and the company is worth £100 million, it can take only 40% because that is how the maths work out.

The new investors who are in a minority position need additional protections, and if they can obtain those protections only after making a notification then there are these consequences of more voluntary notifications and some diminution in the attractiveness of the sectors covered by the Bill. That does not seem a desirable outcome.

I have said that significant changes to a company’s status come about not from the investment agreement, but as a result of passages of ordinary or extraordinary resolutions under the Companies Act. Amendment 28 is therefore designed to remove some of the wording of Clause 8(6), which is untried, untested and, at least in the view of a number of law firms, open to interpretation, and replace it with company law provisions with which everyone is familiar.

When winding up the debate on this amendment on 9 March, the Minister said, “I believe that his”—that is my—

“intent is very much to seek to exclude acquisitions of minority veto rights from constituting trigger events.”

So far, so good. He then went on to say:

“However, the Government consider that the Bill already achieves this goal to some extent”—[Official Report, 9/3/21; col. GC 637-38.]


because of the provisions of subsection (7). That is the heart of the matter. The concern of the Law Society and others is that the Bill creates uncertainty where no uncertainty need exist. That uncertainty can easily be dispelled if we use familiar company law concepts.

To summarise, I argue that if no change is made to guard against these uncertainties, legal advisers to private equity investors can be expected to take a belt-and-braces approach and suggest that on all occasions a voluntary notification should be made. When he comes to reply, I invite the Minister either to say that the Government believe that minority investor rights are not covered by the Bill so that we are all clear about that or, if he cannot say that, to please agree to take a further look at it to try to create certainty and dispel uncertainty, and therefore further ensure that we get the right balance between personal property rights and the nation’s security.

[Lord Clement-Jones (LD)]

My Lords, I shall speak to the Government’s amendment and to Amendment 8 in the name of the noble Lord, Lord Hodgson, but, as regards Amendment 2, the questions raised by the noble Lord, Lord Lansley, are valid and it is rather inexplicable that that subsection of Clause 8 is not included in Clause 6.

When we debated the thresholds for the trigger for mandatory notification, the noble Lord, Lord Leigh—I am sure he will get many tributes today for having pushed the envelope and succeeded in having the Government agree with him—raised issues about 15% versus 25%. The principal arguments were that keeping it at 15% would result in a huge number of notifications, the vast majority of which would not give rise to national security concerns, which would place a significant administrative burden on the new investment screening unit, and that that the current filing threshold of 15%, as set out in the Bill, is significantly below the threshold used in a number of other major foreign direct investment regimes such as France, which requires 25%, Australia which requires 20% and Canada which requires 33.3%. I am delighted that the mandatory notification threshold has been increased to 25%, which was the threshold set out originally in the White Paper. I think the Government’s reversion to their original intent is very much to be welcomed.

As regards Amendment 8, tabled by the noble Lord, Lord Hodgson, not having practised company law for many years now, I can only admire his forensic ability in setting out exactly why we need greater clarity under that provision. He has illustrated that the current language does not provide that level of clarity. In his words, it does not dispel uncertainty, but the language in his Amendment 8 certainly would. I believe it is only in the Government’s and the ISU’s interest to acknowledge that, and I very much hope the Government will accede to his request to provide clarity, either by accepting his amendment or by giving assurance that they will look at it further and take that forward at Third Reading.

[Baroness Neville-Rolfe (Con)]

My Lords, I rise to speak for the first time on this Bill. I declare my interests in the register as a director and former director of a number of companies, although none is obviously affected. I have not spoken until today because I support this Bill, and it has been making good progress without any help from me and with the forensic assistance of my noble friends Lord Lansley, Lord Hodgson of Astley Abbotts, Lady Noakes, Lord Leigh and others right across the House.

There has been a succession of regrettable takeovers of UK jewels in recent years without proper scrutiny by the authorities. The SoftBank raid was the most egregious, yet it was welcomed by the then Chancellor. ARM—my favourite firm when I was Intellectual Property Minister, if I may now say so—was the world’s leading chip maker, headquartered relatively modestly in Cambridge and run by the talented Warren East, who must look back with pleasure to that time. Allowing its subsequent takeover was a serious mistake for UK interests.

This Bill is concerned primarily with security, so I suspect it would not have caught another controversial deal, that of Kraft/Cadbury, though it would have been useful had that too been caught. That example highlighted the fact that it is not only jobs but both R&D spend and cultural support that tend to go with the head office of a company or group.

Decades of such highly leveraged deals have contributed to damage in this respect. Think of aerospace pioneer Cobham and satellite service provider Inmarsat. As an aside, how lucky those of us who have benefited from its vaccine are that AstraZeneca held out against Pfizer a few years ago. We ought to have powers to prevent such a proposal if it arose again and was not in the UK interest. The powers in this overdue Bill should, among other things, slow the sale to overseas interests of companies engaged in tech and biotech, as well as emerging forms of AI and intellectual property.

My concern today is not with the Bill but with government Amendment 3 and its associated provisions, which, as we have heard, raise the threshold, from 15% to 25%, at which investors are required to notify the Government of their deals. I know this is done for apparently good reasons, summarised by the noble Lord, Lord Clement-Jones—notably to avoid needless blockages and queues of deals awaiting approval in the new unit at the Department for Business, Energy and Industrial Strategy, my old department—but I believe it is the wrong call. No doubt the ARM deal would have been caught by the new rules anyway, but less radical deals might not. I believe that it would be better to invest more in administration at the business department, to keep the threshold as it is and to improve the incentives to discipline and speed in processing of applications.

This is such an important matter for our future that we should not skimp on the new unit, which should be staffed by top people with the ability to work at speed. My noble friend Lady Noakes and others have rightly expressed concerns on this score, which I will support later. It would be a tragedy if this new Act were undermined by administrative inadequacy.

If we are to flourish in this more competitive and dangerous world, we need to prevent British science, technology and intellectual property leaving these shores without anyone noticing or reviewing it. We need thorough scrutiny of the deals identified in this Bill, so, for me, Amendment 3 goes too far and I would find it difficult to support the Government if the House chose to divide.

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[Lord Lansley (Con)]

My Lords, I am very glad to support my noble friend Lady Noakes in her Amendments 11 and 12. I am grateful to her and the noble Lord, Lord Fox, for adding their names to Amendment 13.

My noble friend explained Amendments 11 and 12 extremely well. Let me say why separately there is an additional amendment in relation to the voluntary notification separate from mandatory notification. It is precisely because our expectation must be that there will be a significant number of voluntary notifications, particularly in the early days as people involved in various sectors begin to understand how this regime is to act and under what circumstances they should make a notification. Our expectation would also be that, partly for precisely that reason and in the early days, there will be a significant number of voluntary notifications that do not lead to further action on the part of the Government because there is not a national security risk involved and they do not need to review it any further— that is, they do not need to take it through the call-in notice for an assessment.

For many of these transactions, because of the level of uncertainty associated with this—of course, these might be transactions where the seller brings them forward to the Secretary of State to understand under what circumstances they contemplate an acquisition, and whether they should proceed and how rapidly—there are a lot of reasons why this should happen quickly. In looking at Clause 18, about the voluntary notification procedure, our problem was that the review period had “30 working days” applied to it, but that period, as is the case with the mandatory one, follows two indeterminate periods. First, there is the period of time between a notification being made to the Secretary of State and the Secretary of State deciding whether to accept or reject it and, subsequently, the Secretary of State, after a period of time—this might be very short; I hope it would be very short—notifying each relevant person. The 30 working days, therefore, could be added to by two other periods.

The purpose of Amendment 13, therefore, is straight- forward. It is to say, “Let’s try to make sure that this is no longer than it needs to be, and that the pressure inside the Investment Security Unit is for what are essentially the bureaucratic processes”—in effect, saying, “We have received a notice. Is it compliant or not?”, then, “Okay, we have accepted the notice. Have we notified all the relevant persons?” Those things happen very quickly because the important thing is that the 30 working days are devoted as far as possible to the review period to get the decision right as to whether this potential trigger event should be called in or not. That is the crucial thing. All the time should be devoted to that review. Amendment 13 says that the 30 days start at the point at which a seller or an acquirer gives a notice to the Secretary of State. I hope that that is helpful.

I noted—no doubt we have a similar view—that the bureaucratic processes should be as short as possible, but the Government, as my noble friend Lady Noakes noted, have put forward their own amendments in a later group. The one that is relevant here is Amendment 27, which would tell us how long the period is between the receipt of a notice and the decision to accept or reject it, and tell us to report that in the annual report. Frankly, that is useful, but we would rather that the pressure was built into the statutory arrangements rather than simply through the question of what is in the annual report by way of performance against that.

[Lord Clement-Jones (LD)]

My Lords, in speaking to these three amendments, I am extremely fortunate to follow the noble Baroness, Lady Noakes, and the noble Lord, Lord Lansley. I do not think anyone could have explained more succinctly how these different timescales work for both the mandatory and the voluntary notification, so I will not go through it again. I really appreciate the persistence of both noble Lords, and the noble Lord, Lord Hodgson, in teasing out the real consequences of these very indeterminate timescales, which may differ between the voluntary and the mandatory notification procedures but create uncertainty in both cases. As the noble Lord, Lord Lansley, said in Committee,

“we want to ensure that the greatest possible certainty and the least possible delay intrudes into these processes for investors.”—[Official Report, 16/3/21; col. 229.]

That has been our common theme throughout this Bill.

We have heard some graphic phrases throughout, such as the noble Lord, Lord Hodgson, decrying both the “no man’s land” that we must not and do not want to fall into and the powers to “stop the clock”. We also heard the noble Lord, Lord Grimstone, try to reassure the Committee that the Secretary of State has

“no desire to push his peas around the plate”,—[Official Report, 16/3/21; col. 222.]

another phrase introduced by the noble Lord, Lord Hodgson; he will probably write a book at some stage with all these phrases included. However, that is not the same as the assurance and certainty contained in statute.

The noble Lord, Lord Callanan, said in Committee that

“the process of initially determining whether a valid and complete notice has been submitted is separate from fuller screening”.

We understand that, but there should be clear time limits in that case. He tried to give us a reassurance:

“I mention ‘maximum’ again because that is exactly what these deadlines represent. In many cases, we expect the Secretary of State to be able to review and clear notifications much more quickly.”—[Official Report, 16/3/21; col. 235.]


Businesses need certainty on whether to proceed with a transaction. A delay in the Secretary of State making a decision outside the time limits—because they can—would cause uncertainty over the validity of the transaction. This lack of a clear timescale could create uncertainty for investors, universities and businesses, making domestic and foreign investment less attractive and disincentivising industry in the process.

I heard what the noble Baroness, Lady Noakes, and the noble Lord, Lord Lansley, said about the later amendments on what should be contained in the annual report; I entirely agree that more transparency is very desirable, but that is not the same as specifying exactly what the timescales will be.

There is also the question of what I think the noble Lord, Lord Lansley, called the “bureaucratic processes”. There is not yet a great deal of reassurance on that basis. We do not know how the regime will operate. Throughout this, especially on these timescales, the impression is that all the cards are in the Government’s hands, not the hands of the potential investor. That could be a real deterrent. I hope the Government will respond to the very consistent view throughout the passage of this Bill that there needs to be a considerable tightening up in this direction.

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The hard fact is that if this example were to work through in the way I have described, the owners would have lost £3 million as the direct result of the state interfering with their property rights. The probing question posed by my Amendment 18 is whether it is intended that Clause 30 will provide a means to ride to the rescue of individuals who have suffered economic harm or loss as the result of actions taken under this Bill. If Clause 30 is not so designed, what assessment have the Government made of the detrimental impact on investment, particularly early-stage investment, in these 17 critical sectors?

[Lord Clement-Jones (LD)]

My Lords, I am again very fortunate in following the noble Baroness, Lady Noakes, and the noble Lord, Lord Hodgson. I have signed Amendment 18 and my noble friend Lord Fox has signed Amendments 15 and 16. I entirely endorse what the noble Baroness and the noble Lord said about the lack of clarity and the important implications of this clause.

In our clause stand part debate in Committee, the Minister, the noble Lord, Lord Grimstone, described the clause as “tightly drawn”. Today, he has talked about strong checks on the power, but I would have thought that it is now abundantly clear from the debates we have had, not only on the previous group of amendments but particularly on this group, that there is insufficient clarity about the operation of the clause. The noble Baroness, Lady Noakes, described the clause as extraordinarily wide, in particular in terms of transparency, the reporting requirement, an inadequate and arbitrary cut-off point, the nature of affected parties who could be compensated, the lack of alternatives to compensation, as mentioned by my noble friend Lord Fox, such as taking an equity stake, and the lack of a specific reference to public interest and national security in the clause. It seems we have to rely on the threat of judicial review rather than the wording of the Bill to ensure that the Secretary of State reasonably considers that the compensation is “necessary and proportionate”.

The Minister assured us that the power would be used only “responsibly and respectively”—I am not quite sure what “respectively” means in that context—but that the circumstances were hard to predict. Nothing that has been said so far today has dispelled the opacity, which I know the noble Lord intended to do. It is still extremely cloudy, and that was illustrated by both who have spoken. All this argues for a much tighter framework, such as suggested and probed by these amendments. I hope that the Minister will either take that on board or give pretty clear, detailed assurances about the workings of the clause or, probably even better, separate guidance. I understand from the Minister that that will not be provided, which seems highly regrettable. I hope that the Minister can give much greater detail about the operation of this clause, as required by these amendments.

[Lord Fox (LD)]

My Lords, I am grateful that the noble Lord, Lord Grantchester, is arriving back in his place, as I am not intending to speak for very long, so he had better get there swiftly.

This seems to be the other half of the amendments that went with the previous debate, and the group, with the exception of the noble Lord, is mutually exclusive, but it is still around subsidy payment money and what it is. The central question about Clause 30 is: what was in the Government’s mind when it was drafted? What is it for? The longer the Minister refuses to be specific in answering that question, the more I am drawn to the supposition that the Government do not know what it is for and that it has been put there as an insurance measure, just in case. Frankly, that is typical of the way this Bill has been written. It has been written as widely as possible to give the department as much leeway as possible in the event of stuff happening, stuff which is as yet undefined or is perhaps undefinable. That is not a good example of what Governments should be bringing to your Lordships’ House for approval.

The questions that have been asked very clearly by the previous speakers are important. If the Minister wants to prove that there is some guiding force behind Clause 30, and not just “We’ll put it in just in case we need it”, which is what it looks like to me, I look forward to hearing his comments.

In speaking to the previous group, the Minister implied that the fact that the Treasury would have a hand on the tiller should give us comfort. If the only comfort we have is that the Treasury will be looking over your shoulder, it does not sound very comfortable. The department should know what this money is for, why it is there and what it is going to be used for. We should not have to rely on the good offices of Her Majesty’s Treasury.

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[Lord Lansley (Con)]

I can be brief. I acknowledge with thanks that the Minister has brought forward government amendments that respond both to my Amendment 81 in Committee, about the number of orders varied or revoked and, in part, to what the noble Lord, Lord Grantchester, had to say on Amendment 80 in Committee, including on the time taken to decide whether to accept or reject mandatory and voluntary notifications. I will not rehearse what my noble friend Lady Noakes had to say. Knowing more about the time taken, in addition to what is already intended to be in the annual report, will certainly give us reassurance about these administrative processes, which I think will be very important—especially at the outset, bearing in mind that we start with already potentially five months’ worth of relevant transactions that are within the scope of the regime but the legislation has not yet entered into force. Operating rapidly in relation to all those potential notifiable transactions will be really important, even in the first annual report.

[Lord Clement-Jones (LD)]

My Lords, I shall speak to the amendments tabled by the Minister, and I thank him for doing so. I shall also speak to those tabled by the noble Baroness, Lady Noakes, and Amendment 34, tabled by the noble Lord, Lord Grantchester, which I have signed and strongly support. The noble Lord, Lord Lansley, has highlighted the extra importance of transparency in the annual report in these circumstances where we already no doubt have a backlog of potential action.

I thank the Minister for responding to concerns in Committee and in the meantime and for taking us towards greater transparency. While the noble Baroness did not use the expression “half a loaf”, since it is perhaps three-quarters of a loaf, it goes some way towards giving us a greater understanding of how effective the regime is, particularly given the Government’s desire to keep these rather uncertain timescales that we were talking about in Committee.

In Committee, I hoped to persuade the Government to undertake a regular review of whether the Act was achieving its aims. It seems good practice to make sure that we have the right balance between the investment climate and national security concerns. The Government were unpersuaded by that, but I hope they will take on board the contents of the amendment by the noble Lord, Lord Grantchester, particularly new paragraph (p),

“the impact on levels of foreign investment in the United Kingdom brought about under this Act”,

which would be inserted as a requirement in the annual report. Currently, the annual report does not go far enough. Surely, seen in the round, one of the most important factors is the impact of the Bill on foreign investment. Is this not a key indicator that should be included in any annual report? How can we judge how the balance of the Bill’s requirements are working? Is foreign direct investment not sufficiently important to be included in the annual report? I hope that the Minister can perhaps explain, if there is no explicit reference to it, why not, and if not, whether there will be a description of how the regime is operating.

Other aspects of the amendment from the noble Lord, Lord Grantchester, are extremely important. The noble Baroness, Lady Noakes, mentioned the average staff resource allocated to the operation of reviews and so on. That resource aspect is going to be very important so that we can see transparently what resource is being devoted. Then there is the whole aspect of SMEs, which potentially could be impacted very heavily. The noble Baroness, Lady Neville-Rolfe, talked about this. I think that is a very important aspect too.

The way that the regime in the Bill impacts is extremely important. The Minister has given us some transparency, but I very much hope that he will accede to further requirements that could be included in the annual report really without very much difficulty.

[Lord Grantchester (Lab)]

I welcome the lead amendment in this group from the Government, providing greater clarity to the Clause 53 procedure for service. However, the bulk of the amendments in this group concern Clause 61, on the annual report. I thank all noble Lords who have contributed to this debate.

In commerce, I have always championed annual reports as a strategic publicity document for an organisation, displaying how it is performing, how effective it has been, what results and achievements it has attained and what wider societal responsibilities it has performed. It can be far more than a dry, lumpy statutory document that has to be produced and is a chore to be complied with. I am sure it should be the same for government departments and public agencies.

I am grateful, therefore, for the dialogue since Committee with the Minister and his team regarding this issue. I am very glad that the Government have looked again at Clause 61 and at the material that could be provided in the annual report of this new unit and its operation. I am grateful to the noble Baroness, Lady Noakes, for looking at this and extending the information to be provided to cover both mandatory notifications as well as voluntary notices.

The noble Baroness has also added many more aspects that would provide greater visibility for the activities of the ISU. It is important that the Government are transparent about these areas so businesses can see the impact on their activities and compare experiences. Parliament and the public can monitor the work of the unit and determine the value to national security activities and how far legitimate businesses are being affected. These amendments were all supported by the UK BioIndustry Association. I thank it for the briefings it has sent throughout the Bill.

However, we still believe that there is more that the Government could do to assist the understanding of this new regime. I thank the noble Lord, Lord Clement-Jones, for adding his name to my Amendment 34. Greater transparency could still be given on the resources allocated to the new unit, the extent to which small and medium-sized enterprises are called in under the regime and the Bill’s impact on foreign investment. This is about requiring greater accountability from the department on the unit’s service standards.

The business community still remains somewhat nervous concerning the impacts on it as a result of the Bill. Throughout its passage, we have sought to champion clarity and support for SMEs and innovative start-ups, which are the engine of growth in the economy, create many new jobs and enhance prosperity. We are keen to foster a business environment in which SMEs can thrive.

It would be beneficial for the Government to report on the unit’s work with SMEs in the annual report. This can only be helpful in providing detail and reassurances to SMEs on the operation of the unit and its impacts on them. I would be very grateful if the Minister could provide reassurances that his department will embrace the annual report in a positive manner and provide as wide a range of information as possible.

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[Lord Lansley (Con)]

I am very glad to support Amendment 35 in the name of the noble Lord, Lord Grantchester, so ably moved by the noble Lord, Lord Rooker. It follows a debate in Committee led by the noble Baroness, Lady Hayter, which I thought drew out some of the issues for the higher education and research sector very well.

I am really pleased that our noble friends on the Front Bench have responded that they will provide guidance. I was originally looking for what amounted virtually to a safe harbour for higher education and research institutions, which I accept may be a stretch too far, but there is a substantial range of transactions that the higher education sector is concerned may be within scope.

When one looks at the consultation on the scope of the regime and the range of assets that are in scope, one sees that its concern about it is entirely justifiable. What it really comes down to is understanding through guidance and the sort of scenarios that the noble Lord, Lord Rooker, was referring to, how this is actually going to work. One of the central issues is that this is a regime about ownership and control, not about use. I am sorry; I have not given my noble friend notice of this question so if he wants to write to me about it subsequently I will completely understand, but I will take one example, which is non-exclusive licensing.

There are instances, and I think they are reasonably frequent, where the licensing process will allow people the use of an asset but will not allow them control of it, which remains within the higher education institution. It would be really helpful if the Minister were able to say, “Yes, the guidance will cover that and our expectation is that non-exclusive licencing would not be within the likely call-in”, not least because if the assets were to be used outside the United Kingdom and by particular persons outside it then, coming back to my earlier point, the export licensing regime would catch that use. The two regimes, working alongside each other, would work in harmony in that sense but would focus on the control and ownership of the technology in question rather than trying to capture all its potential uses.

With that said and with that question asked, I am glad that the Minister was able to give us some guidance —I should not say “guidance about the guidance”—or some expectation of the use of the guidance in the way that we wanted that to happen. I am very glad to support Amendment 35 but hope that, in reiterating that expectation, the Minister will allow this to be withdrawn.

[Lord Clement-Jones (LD)]

My Lords, it is a pleasure to speak on this group of amendments because of the progress that has been made. It is also a pleasure to follow the noble Lord, Lord Rooker, in his new Front-Bench incarnation. Long may it last.

On Amendment 35, I declare an interest as chair of the governing body of Queen Mary University. As I said in Committee, although the Bill does not directly reference universities, given the width of the sectors included in the scope of the Bill, it is clear that there is an intention to capture partnership entered into by universities. Elements of the Bill, while introducing measures to protect national security, could have unintended consequences for future investment in UK R&D and could cause BEIS to be overloaded with references from the university sector. That would add to lead-in times and create red tape for both universities and businesses, and that would not be to the benefit of R&D in our universities. I am delighted that the Government have now accepted the case that there is a need for specific guidance for higher education when the trawler of the noble Lords, Lord Grimstone and Lord Callanan, goes by. It is really about the specificity that the noble Lord, Lord Lansley, mentioned; the nature of the guidance needs to be specific.

In Committee the noble Baroness, Lady Bloomfield, assured us 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”.

I hope that kind of thing is going to be spelled out. Similarly, the noble Baroness pointed to the three levels of risk set out in the draft statement on the Secretary of State’s call-in power. She said:

“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.”


Again, I very much hope that that is spelled out in the guidance. The summary certainly looks quite promising in terms of talking about the scenarios that are going to be outlined. She concluded:

“The Government very much appreciate the Russell group’s ideas on inclusion for guidance”,—[Official Report, 9/3/21; cols. 657-58GC.]


and I very much hope that they will continue to listen. I see that the Russell group is represented on the expert group, and I think that is extremely helpful.

I think we can be much more confident that the Government will turn that appreciation into tangible guidance, but I hope that the Minister will—in the way that the noble Lord, Lord Rooker, mentioned—give further comfort on the nature of the consultation, the timing and with whom it will take place, in respect of that particular set of guidance.

Turning to Amendment 36, I am delighted to follow the noble Lord, Lord Leigh. I declare an interest as a member of the advisory board of the corporate finance faculty of the ICAEW. Of course, it follows that the noble Lord, Lord Leigh, and I have been very carefully following the correspondence between the noble Lord, Lord Callanan, and David Petrie of the ICAEW. Again, I am delighted that the Minister has accepted that the statement about the exercise of the call-in power will not be sufficient for the investment community and that the annual report—and, indeed, the fact sheets mentioned in Committee—is not the best vehicle and that the Government have now committed to issuing market guidance.

But the market guidance notes really must do what they say on the tin. The noble Lord, Lord Leigh, had a slightly veiled criticism of how detailed these were going to be in terms of their use to those who are transacting. This has rather different wording from that applied to higher education. It seems to me that the wording is much more helpful when it talks about scenarios in higher education; this talks about drawing on analysis of patterns or trends in notifications received by the investment security unit. It is all about the notifications; it is not an end-to-end analysis of the trends as regards the Secretary of State’s decisions, call-in and so on. There is a great deal more that could be covered. I welcome the flexibility shown by the noble Lord, Lord Callanan, in his letters to the ICAEW, offering to make progress on developing guidance notes. I very much hope that will happen now that the ICAEW is part of that expert group.

I think it might be helpful to put on record significant detailed additions that could be put into the guidance notes. In addition to some of the points made by the noble Lord, Lord Leigh, I suggest that it would be useful to have contained in the market guidance notes details about at what stage in a transaction advisers or companies should contact the ISU, and how sellers seeking to retain control of the process might manage that element of the transaction—although, of course, we know that most of the emphasis is on the acquirer notifying the unit. It might also be useful to have advice for investors on the provisions that could be exercised and the circumstances in which the Secretary of State has declared deals as null and void, and commentary that recognises the need for maintaining competitive tension in an investment or sales process in order to obtain optimum terms from investors or acquirers, in terms of enabling a limited number of final bidders in a trade auction process. These are the sorts of the things that could be envisaged. It could also include advice about mechanisms to prevent bidders submitting vexatious or deliberately incomplete notifications, and advice designed to avoid frequent requests to investors and/or acquirers for additional information.

A market guidance note might be useful when it becomes clear that the Secretary of State is unwilling to permit investment and control in particular subsectors that have been identified. Additionally, I think that the ICAEW has mentioned that a market guidance note specifically for private equity investors would be useful. Of course, publishing these market guidance notes in a timely and regular fashion as circumstances change is really important. Again, on the question of the consultation, I very much hope that the Minister will say who will be consulted and when such market guidance notes might be available—that would be good.

--- Later in debate ---

[Lord Clement-Jones (LD)]

Noble Lords will be relieved to hear that I have very little to add to what my noble friend has just said. The basic fact is that everything we have discussed in the course of our consideration of the Bill could be changed by regulation. If noble Lords do not believe me, they can look at Policy Statements Regarding Statutory Instruments Required for the Commencement of the NSI Regime, as updated on 2 March 2021. There are eight extensive areas—my noble friend mentioned a few of them—for changing the sectors covered. If that is not a massive change, I do not know what is. Changing the trigger thresholds, which we have been debating today, would effectively change the entire mandatory regime. These changes could all radically change the nature of the Bill. Whether or not noble Lords accept the scenarios put forward by my noble friend, that should be a real wake-up call. No primary legislation should be subject to the possibility of change as broad as that. So I support my noble friend’s amendment, and I very much hope the Minister will rethink the attitude taken by the Government in Committee to this self-same amendment. The super-affirmative process is a good one; it gives proper deliberation to changes and it is far more democratically accountable.

[Lord Grantchester (Lab)]

I am grateful to the noble Lords, Lord Fox and Lord Clement-Jones, for the amendment, which proposes a super-affirmative process for regulations under subsection (1) of Clause 6, “Notifiable acquisitions”. This was debated at length in Committee, and we certainly agree that parliamentary scrutiny of regulations is not always as meaningful as it might be. We can feel sympathy with the view that notifiable acquisition regulations are highly significant and require proper oversight, not merely by both Houses of Parliament but also by many experts who might become involved.

The opinions of those experts could be sought and made available to Parliament and deliberated on. The importance of consultations with stakeholders who are knowledgeable and familiar with the situation at the leading edge is also recognised. However, the Delegated Powers and Regulatory Reform Committee did not call for the super-affirmative procedure to be adopted for these regulations under the Bill. Indeed, in its report of 22 February it said that

“there is nothing in the Bill to which we would wish to draw the attention of the House.”

It would be unusual to take a view contrary to the considered opinion of that well-respected committee of your Lordships’ House.

We remain somewhat sceptical about how the super-affirmative procedure would work in practice, over and above the normal affirmative procedure, in this case, even if custom and practice deemed the process less than ideal in all circumstances. We feel that experience needs to be gained first before undertaking this extra affirmative process. I hope this confirmation of what the noble Lord, Lord Fox, may have heard about our view on his amendment may not greatly startle him.