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.