National Security and Investment Bill

Lord Hodgson of Astley Abbotts Excerpts

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

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

My Lords, I add my congratulations to the noble Lord, Lord Woodley, on his distinguished if somewhat combative maiden speech.

I congratulate the Government on bringing forward the Bill. It raises some fundamental principles, standing as it does at the intersection between the needs of the nation on the one hand and the rights of the individual on the other. The fact that respect for individual property rights in this country stretches back for getting on for 400 years should not be underestimated as a factor in making the country an attractive investment destination, as my noble friend Lady Noakes pointed out, and it is one that we fiddle with at our peril.

I have a second reason to congratulate the Government. I chair the Secondary Legislation Scrutiny Committee of your Lordships’ House. Early last autumn, we scrutinised the two regulations that are referred to on page 4 of the excellent Library briefing on the Bill, one lowering the thresholds and the other extending the range of categories laid down in the Enterprise Act. Our committee was pretty concerned because we felt that important decisions like that ought to be in primary legislation and were not appropriate for secondary legislation. The Government response then was that primary legislation would come forward when time allowed, and I have to say that my committee was not entirely impressed with that reply. So it is good to see that the Government have acted promptly, and I congratulate my noble friend.

Having complimented him, I was at this point going to give him a mild kicking. I was going to say that it contrasted unfavourably with the slow response to the undertaking that he gave to the House last June about pre-pack legislation, but only half an hour or so ago, at 3.25 pm, a letter from his department pinged into my inbox—he no doubt thinking that I was going to raise this—and I now have to read the letter before I can let the kicking commence.

I go back to the Bill. Of course I understand the macro risks to our national security and I agree that we have to have adequate safeguards in place against them, but in my remarks I want to focus on what may be the practical implications if this Bill does not provide a clear, balanced and stable policy framework. In doing this, I draw the attention of the House to my career in private equity as an adviser, investor, director and chairman.

As the Government have removed the turnover test and extended the categories covered, the number of companies that fall within the provisions of the Bill has grown exponentially. Investing in early-stage companies is, as they say, a tough paper round. Out of 10 investments, probably at least half will fail, two or three will limp along, known in the trade as the living dead, and one, or if you are lucky, two will provide the reward to compensate for the money lost on the others. To get sufficiently attractive returns, the individual company will almost certainly have had to expand overseas. The UK market alone is not really large enough, and that brings the company to the attention of overseas investors and Governments.

Noble Lords can see where I am heading: just as the investors are about to reap their reward, the Government step in with a call-in notice. That is not just devastating to the investors, who the noble Lord, Lord Rooker, was slightly dismissive about; it will be a huge shock to the operations of the company itself. Markets being markets, as my noble friend Lord Leigh of Hurley pointed out, they will react as the new regime beds down and begin to price in the risk. Due diligence schedules will be amended to include a new inquiry as to whether the company operates in one of the designated sectors. As a result, those sectors, in which we in this country probably wish above all to encourage investment, may find it more expensive to obtain funding.

Much can be done to offset this if the Government can provide maximum certainty about what lies ahead—and I was glad to hear my noble friend’s remark that they understand this. As we go into Committee, I hope that we can discuss more about what constitutes national security, what constraints there are to be on the Government adding more sectors, the need to publish codes of practice on the Government’s detailed approach and to ensure that they are updated frequently in the light of experience and, last but not least, as many noble Lords have said, the need adequately to staff the investment security unit to meet the 30-day deadline—and with an estimated 30-plus references a week, that will be no easy task.

In my last minute I shall make two small points. In our discussion so far, we have tended to talk about successful companies, but there will be unsuccessful companies in the designated sectors which may find that a foreign investor is the only port in the storm. What is the policy response then? Is it to provide the necessary funding from the public purse under Clause 30, to let the company collapse and disappear or to allow the foreign takeover to go ahead?

Finally, in my last 30 seconds, the House should be aware that under this new regime we will be considering not just professional investors and managers but family businesses, men and women who after a lifetime of effort involving considerable sacrifice in building up a successful business now wish to reap their rewards. Under the provisions of the Bill, the Government could prevent the sale of such companies. Will Clause 13 provide compensation for a lifetime’s work in those circumstances?

National Security and Investment Bill

Lord Hodgson of Astley Abbotts Excerpts

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

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

Second time lucky. I am not aware that an amendment like this was tabled in the other place when the Bill was being considered. However, Amendment 5 and the subsequent amendments are fairly clear, in that they substitute the word “voidable” for “void”. The amendments are designed to ensure that transactions are not automatically voided if a company fails to comply with mandatory notification procedures. I hope to set out in my opening remarks why that should be the case.

As far as I am aware, the Government have tried to make it clear that they could retrospectively accept a notification, and therefore in effect ensure that a transaction was not voided, so this amendment seeks to realise what I think is the Government’s ambition. Amending the sanctions in this way would therefore be consistent with their position and would show that the power to unwind a transaction to make it void would be a last resort used only in the most exceptional of cases. I accept, of course, that it is important to have significant sanctions in place where a transaction subject to the mandatory notification obligation is completed without first obtaining approval from the Secretary of State, but such sanctions need to be workable in practice—they need to be credible. Treating such an error as to make a transaction automatically void—as currently envisaged in Clause 13—would in reality give rise to a host of practical difficulties that would make it unworkable in practice.

I also venture to suggest that the approach is inconsistent with other established regimes in other jurisdictions, such as Australia, the US and Canada, where a problematic transaction is not automatically void but the authorities are able to step in and issue unwinding orders for parts or all of a specific transaction. It would be far preferable to provide for a similar “voidable” power, giving the Government the power to declare such a transaction—or parts of it—void if it gave rise to national security concerns but not automatically making that the case. This would mean that the Government could consider the circumstances of each transaction and provide workable steps to take to unwind the transaction where that is considered necessary because of national security concerns.

Declaring a transaction void is effectively to treat it as if it never happened. However, the acquisition which has given rise to the exercise of the voiding may be part of a much wider transaction. For example, as part of the acquisition, the acquirer will have paid consideration to the sellers as well. Following the acquisition, the acquirer may have invested in the business, and third parties may have contracted in good faith with the acquirer in relation to the business. Declaring a transaction automatically void due to breach of the standstill obligation could result in a situation where several parties—many of whom may have had no culpability at all for the failure to notify—are left in limbo and may also suffer financial losses as a result. I submit again that the proposed approach seems unworkable in practice, which is implied in the Government’s own approach but not in the Bill.

Will the Minister also consider a situation where the parties to a transaction have selected a law other than English law as the governing law of the agreement? Is it possible that a foreign court would continue to treat a non-notified transaction as valid? Would that not lead to extraordinary uncertainty? While these provisions will have full force and effect in relation to acquisitions governed by English law, I do not see how they can apply if the transaction is governed by US or other law. I beg to move.

[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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The Bill goes against the instincts of many of us who value an open economy and welcome investment into the United Kingdom. Protectionism may well not be a motivation for our current Government, but who knows whether one day we might get a Government with quite different approaches and priorities? We need to make it as clear as possible in the Bill that the powers cannot be used to promote a policy of economic intervention unrelated to what we understand to be national security concerns. The wise electorate saved us from the prospect of a Government led by Mr Corbyn and Mr McDonnell in 2019, but we must never forget the danger that a Labour Government could well present with a statute such as this on the books, and I hope that the Minister will make very clear statements which will put beyond peradventure that the matters raised by my noble friend Lady McIntosh of Pickering could never be considered.

[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.

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Moved by

[Lord Hodgson of Astley Abbotts]

7: Clause 2, page 2, line 18, leave out “5” and insert “2”
Member’s explanatory statement
This amendment reduces the timeframe after a trigger event in which the Secretary of State can make a call-in notice from five years to two.

[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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[Baroness Bloomfield of Hinton Waldrist (Con)]

I thank my noble friend Lord Hodgson for his amendment, which intends to shorten the time limit for the Secretary of State to call in trigger events which have already taken place. The Bill as drafted allows the Secretary of State to call in trigger events up to five years after they have taken place. This ensures that the regime powers can be applied to completed trigger events which have given rise to, or which may give rise to, risks to national security but which have not been notified to the Secretary of State.

The length of five years is important to give the Secretary of State sufficient time to become aware of the trigger event and to make it difficult for the parties to keep the trigger event hidden. However, the proposed change from five years to two would make it easier for hostile actors to hide their acquisitions and effectively time-out the Secretary of State. It would increase the incentives to keep an acquisition quiet or inactive, as hostile actors would need to do so for only two years.

While not necessarily straightforward, this is clearly easier—both practically and financially—than keeping an acquisition hidden for a longer period. For example, if a hostile actor acquires an entity and intends to merge it with their existing operations, there are practical costs of not doing so within five years. They would not be able to merge IT, payroll, HR, et cetera, or take advantage of that entity and its assets. Likewise, if a hostile actor acquired an entity for its technology, that technology might well be obsolete in five years, so they would need to use their acquisition now to get the benefit.

In the Government’s view, five years strikes the right balance between creating a substantial disincentive for efforts to obfuscate and conceal relevant acquisitions while giving legitimate business certainty that they will not be called in after that period. Importantly, this approach puts us into line with our international partners. For example, in Germany a review may be initiated up to five years after the purchase agreement. It is in line with other countries, including France and Germany, and we believe that it is appropriate. Indeed, it is shorter than some partners, including the USA and Japan, which have no time limits. Further, a five-year reach-back period applies only to trigger events which have completed or which will complete after the introduction of the Bill, contrary to what some observers have suggested. That is to say that no acquisition which has been completed prior to 12 November 2020 may be called in under the Bill.

As helpfully noted by my noble friend Lord Lansley, in the Bill the five-year period is tempered by the requirement for the Secretary of State to call in a completed trigger event within six months of becoming aware of it. This further reduces the time limit for intervention and creates greater certainty for parties to a relevant acquisition. If there is doubt, parties should submit a voluntary notification to the Secretary of State. This will give them certainty on whether their trigger event will be called in.

Before I conclude, in response to my noble friend’s query relating to whether final orders can require the unwinding of acquisitions, that is very much within the scope of the power. The order, however, makes commands and may not deal with practical arrangements. How remedies are given effect will be for parties to finalise, subject to the requirements of the order.

My noble friend Lord Lansley asked about the nature of the acquirer. To clarify, the five-year backstop applies to the date on which the acquisition itself took place. Circumstances where the identity of the acquirer is not known until some time after the trigger event took place are precisely why the reach-back period might be important in certain cases. In circumstances where a notification was given and false or misleading information was given about the true identity of the acquirer, the Bill already provides that the Secretary of State can re-examine such cases.

With reassurance provided for business, knowing that we are acting in line with allies, and for the reasons I have set out, I hope my noble friend will withdraw his amendment.

[Lord Hodgson of Astley Abbotts (Con)]

I am grateful to my noble friend for her reply. I do not think I heard whether future pre-emptive actions under the new regime will be the subject of a statutory instrument or will just happen from the Secretary of State’s desk. Perhaps, she could answer how this or the other House will know what is happening.

I am grateful to everybody who spoke on this. It is obviously a tricky area. I am grateful to the noble Lord, Lord Clement-Jones. Undesirable, uncertain and impractical—I could not have put it better myself. I am grateful to the noble Baroness, Lady Bowles, for drawing attention to the question of the difference between two years and five years, and what will happen in that three-year period other than causing uncertainty among investors. The noble Lord, Lord Fox, raised very practical points.

Let me meet my noble friend Lord Lansley some of the way. I do not think that this will happen very frequently, but, like the noble Baroness, Lady Bowles, I am not convinced that the three additional years are really needed. The point my noble friend makes, which has certainly eluded the Law Society, is the interplay between the six-month trigger and the five years. In the tech sector, these companies grow like Topsy: they are nothing now, and they will be quite big very quickly indeed. You could have a situation where some event, ex post, could have been described as a trigger event but was not picked up as such at the time. It is unfair for people to have that uncertainty lasting for five years. The Secretary of State could say, “I never became aware of that, so I have more time to start the unwinding process, as long as it isn’t within the five-year period.” I see my noble friend’s point, and I accept that it is a rare occasion, but I still think there is something to be teased out about how the different pieces fit together, particularly in sectors of the market where very fast growth occurs.

I would be grateful if the Minister could tell me about the statutory instruments and how publicity of pre-emptive actions is to be provided.

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

Does the Minister wish to respond?

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

The Minister is saying she will respond in writing. Is the noble Lord, Lord Hodgson, withdrawing his amendment?

[Lord Hodgson of Astley Abbotts (Con)]

The Minister is going to write, is she?

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

That was the indication.

[Lord Hodgson of Astley Abbotts (Con)]

Was it the fact or just the implication?

[Baroness Bloomfield of Hinton Waldrist (Con)]

No, I will respond to the noble Lord in writing.

[Lord Hodgson of Astley Abbotts (Con)]

Okay, that is fine. We need to go away and put my noble friend Lord Lansley in the blue corner and the Law Society in the red corner and see how we get on. In the mean- time, I beg leave to withdraw the amendment.

Amendment 7 withdrawn.

National Security and Investment Bill

Lord Hodgson of Astley Abbotts Excerpts

Committee stage
Tuesday 9th March 2021 Grand Committee

Moved by

[Lord Hodgson of Astley Abbotts]

21: Clause 7, page 5, line 14, leave out paragraph (b)
Member’s explanatory statement
This amendment ensures that only those entities that carry on activities in the UK are qualifying entities.

[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.

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[Lord Grimstone of Boscobel (Con)]

I thank the noble Lord, Lord Fox, for that question. I assure him that it is not stupid. I think the answer is in what I said towards the end of my speech. The Bill explicitly limits the application of remedies to persons outside the UK to those who have a clear connection with the UK, for example, UK nationals or companies, or those who carry on business in the UK. That provides the nexus back to the UK, which I think the noble Lord was searching for.

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

My Lords, I thank all noble Lords who have participated in this debate. I was extremely relieved to hear from the noble Lord, Lord Clement-Jones, that Amendment 26 was a rogue amendment. He and I had both put our names to it originally and I withdrew mine. When I found that he had left his there, I thought he had seen some angle and I was going to be blown apart and take a torpedo amidships. I am grateful to hear that it was a rogue amendment.

I am grateful to my noble friend the Minister for the examples. I am still reaching for the implications of the question asked by the noble Lord, Lord Fox. I am not yet convinced that the qualifying entity idea has been probed enough, given that it has proved effective in the Bribery Act and has a similar purpose there. I will read what he has to say, think about it and maybe bring this back for a further discussion. In the meantime, I beg leave to withdraw the amendment.

Amendment 21 withdrawn.

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Moved by

[Lord Hodgson of Astley Abbotts]

29: Clause 8, page 6, leave out lines 20 to 22 and insert “enable the person to secure or prevent the passage of any resolution in respect of any matter governing the affairs of the entity that is equivalent to a matter that can be passed by way of ordinary resolution or special resolution under the Companies Act 2006.”
Member’s explanatory statement
This amendment tightens the scope of the trigger event so that it does not capture minority investor veto rights that would not give rise to national security concerns.

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

My Lords, in moving Amendment 29, I shall speak also to Amendment 72. They take us back to some of the issues touched on in our earlier debate on the group beginning with Amendment 15A, and the way that control is exercised in companies and what it means. These two amendments are designed to tease out and provide clarity and protection for third-party investors, who may find that they have invested in a company that, in turn, has been caught up in the provisions of the Bill. I seek the Government’s explanation for how this will work.

Amendment 29 amends Clause 8, “Control of entities”. There is concern about the clause arising from the wide definition of control contained in subsection (6). The real background is as follows. Investments in unquoted companies are normally governed by an investment agreement. When all goes well and the investment performs as expected, the investment agreement remains in a drawer and is never looked at but, sadly, not all investments perform as hoped, and not all directors and managers behave impeccably. Investors need protection against egregious behaviour by company managements.

What form could such behaviours take? It could be a proposal to make an acquisition—not one involving national security issues—the size of which would put the original company at risk if it were to go wrong. It could be a decision to spend a large sum of capital on a scheme that is ill thought out and ill considered, potentially putting the entire venture at risk. It might be a decision by the management to award themselves large salary increases. It might be a decision to recruit to a senior position in the company someone who has a public reputation that is not impeccable or who is perhaps related to one of the existing management team. For obvious reasons, investors need special protection against such behaviours and, as a last resort, the power to block them. It is not clear whether the existence of such blocking powers could bring the company within the control of entities provisions of Clause 8.

These protections for investors have nothing to do with national security; they are concerned with corporate governance and behaviour. An inability to allow those protections will surely be a significant disincentive to third-party investors, so Amendment 29 provides clarity that such protections will not be caught by the Bill. The arguments I have just rehearsed lie behind Amendment 72, which amends Clause 26—“Final orders and final notifications”. It seeks to make it clear that any unwinding or divestment order made by the Secretary of State in no way undermines investor rights of the sort I have been describing. I beg to move.

[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.

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

[Inaudible.] I am always slightly nervous when I hear Ministers talk about creating bespoke regimes because it brings to mind the gaps we might inadvertently allow to appear. The length the Minister has had to take to try to explain the way Clause 8 will work—I thank him very much for doing so—indicates that we need to look again at its practical implications. In essence, we are trying to decide whether the shoe pinches and whether it pinches in an unhelpful way. I am not sure that the “substantially all” get-out clause will always work, because in some cases investors will have very substantial rights or protection that might affect substantially all the activities of the company. But that is something one needs to take advice on. I am extremely grateful to the Minister for the trouble and time he has taken to answer the debate. For the time being, I beg leave to withdraw the amendment.

Amendment 29 withdrawn.

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

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

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

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

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


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

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

As paragraph 7 of Schedule 1 refers only to:

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

I speak in support of Amendments 31 and 33. As I have the same brief, I do not intend to speak for long but I support all the arguments put forward by the noble Lord, Lord Bruce of Bennachie. I also state that I am a non-practising advocate of the Scottish Bar and a member of the Faculty of Advocates. If my noble friend the Minister is not minded to support the amendments, may I suggest that he meet the noble Lord, Lord Bruce, and me—if the noble Lord, as the author of the amendments, is agreeable—and, I hope, representatives from the Law Society of Scotland?

I honestly believe that this is a potential unintended consequence of the Bill, which could seriously disadvantage not just the Scottish legal profession but, more importantly, the financial service sector and financial investment sector in Scotland, which, as the noble Lord said, is sizeable in its contribution to the economy and employment. I endorse everything that he said and congratulate the Law Society of Scotland on bringing this to our attention. My understanding is that if the Bill is enacted as drafted, it could have grievous consequences for Scots law, Scottish practitioners and the financial sector. It behoves the Government to look favourably on the amendments. If not, I hope we can have the earliest possible meeting to discuss these matters in more depth.

National Security and Investment Bill

Lord Hodgson of Astley Abbotts Excerpts

Committee stage
Tuesday 16th March 2021 Lords Chamber

[Lord Hodgson of Astley Abbotts (Con)]

My Lords, as my noble friend Lady Noakes said, Amendment 67 deals with Clause 18 on the voluntary notification procedure. I entirely support what she has said and her amendment. Like her amendment, Amendment 67 is to deal with no man’s land, but it adds a further wrinkle to no man’s land beyond that which she covered in her remarks. I am grateful for the support from the noble Lords, Lord Clement-Jones and Lord Bilimoria, and I have been reliant on the expertise of the Law Society for the detailed drafting.

As I say, this amendment is concerned with voluntary notification procedures. The objective behind the establishment of voluntary notification procedures seems entirely praiseworthy in that it can speed up the investment or divestment process for those involved by seeking in advance a decision by the Government on whether the proposed action will be subject to a call-in notice. If the Secretary of State decides to issue a call-in notice, the clock starts running on the 30-day period for initial assessment.

So far so good, but the Bill as drafted is not clear —as my noble friend made clear—on the time the Secretary of State has in which to decide, following a voluntary notice, whether he or she should issue a call- in notice. The only guide we have is under Clause 18(5):

“As soon as reasonably practicable after receiving the voluntary notice, the Secretary of State must decide”


and so on. This does not give any clear idea of how elongated this process may be. In particular, the use of the word “practicable” is rather strange—practicable for whom and in what circumstances? The solution to this is to redraft the clause so that unless the Secretary of State responds to the voluntary notification, it is deemed to have been accepted. That triggers the 30 working day period, so gives an end date by which the company or the investor will achieve clarity.

Amendment 67 also aims to correct a procedural anomaly in the current drafting, which touches on a point that was the subject of a discussion between myself and my noble friend Lord Lansley on the first day in Committee. I think this point goes beyond where my noble friend’s amendment went. It is as follows: the Secretary of State has this 30 working day review period to decide whether to issue a call-in notice or notify the parties that no further action will be taken, but the drafting of Clause 18(9) appears to muddy that clarity when it says that the review period

“does not affect the operation of the time limits in subsections (2) and (4)”

of Clause 2. This was the point raised by my noble friend on our first day. This would appear to mean that the Secretary of State could fail to make a decision within the 30 working days but would still have up to six months from becoming aware of the trigger or five years from the date of the trigger to serve a call-in notice. The same difficulty applies to Clause 18(8)(b), which allows the Secretary of State to inform the parties after considering a voluntary notification that no further action will be taken. Again, it seems overridden by the provisions of Clause 2(2), with the six months or five-year period allowing for further reflection by the Secretary of State.

Amendment 67 aims to cut through this Gordian knot by requiring the Secretary of State to make a decision on the voluntary notification by the end of the 30-working day period, and the absence of such a decision would be taken as approval. Objectively, that is to give clarity and certainty to investors, as we are trying to do throughout the Bill. Without an amendment such as this, the whole purpose and the advantages of the voluntary notification procedure could be undermined.

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

My Lords, I have added my name to the amendment in the name of the noble Baroness, Lady Noakes, and I support everything that she said. I also support what I might call the companion Amendment 67 from the noble Lord, Lord Hodgson, which has been signed by my noble friend Lord Clement-Jones. I also agree with what was said there.

I favour mechanisms to give certainty, and the way the Bill operates at the moment means that, absent a call-in or other response, a business is left in no man’s land—as the noble Baroness, Lady Noakes, called it. Indeed, the noble Lord, Lord Hodgson, pointed out that even if you escape from no man’s land, there is a piece of elastic that pings you back in again for up to five years.

I realise that with a new system the Government may not know how well it will operate, but many noble Lords have repeatedly expressed concern, and I am coming from the standpoint that it is totally unreasonable to push all the uncertainty on to industry.

We have operated without these measures for a long time—maybe for too long—but to switch to draconian uncertainty overnight does not seem fair. There needs to be a point at which no response is an all clear, even though that itself is unsatisfactory compared with the positive receipt of an all clear notice in your hand.

I have nothing else to add, but I support the amendments. The Government need to take notice and to make this whole process more workable for industry.

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Moved by

[Lord Hodgson of Astley Abbotts]

48A: Clause 14, page 8, line 37, at end insert “which may include a streamlined form to be used by a person who has previously submitted a notification under subsection (1) or section 18 (2)”.
Member’s explanatory statement
This amendment seeks to reduce the regulatory burden for persons who have submitted notifications on previous occasions.

[Lord Hodgson of Astley Abbotts (Con)]

My Lords, in moving Amendment 48A, I shall speak to Amendments 67B and 67C, and propose that Clause 30 should not stand part of the Bill.

On the first three amendments, I have been assisted by the Global Infrastructure Investor Association and its legal advisers, Ashurst. The association, as its name suggests, represents major investors who participate in multiple infrastructure projects around the world. The purpose behind these amendments, as with so much of our debate today and on the previous two days in Committee, is to provide clarity, certainty and speed. My noble friend Lady Noakes, the noble Lords, Lord Fox and Lord Clement-Jones, and the noble Baroness, Lady Bowles, all talked about the extraordinary impact of uncertainty and time on companies. Let me give a brief example.

A few years ago, I was a non-executive director of a public company that was the subject of what is known as a dawn raid. My chairman was rung at 8.30 am by the chairman of a major competitor to say that, overnight, it had purchased 28% of our share capital from our investors. It was immediately referred to the Competition and Markets Authority, because these were two quite large companies in the sector, and we had a collective, organisational nervous breakdown. This went on for three or four months. The predator spent the whole time trying to persuade the CMA that there was no reason why the purchase should not go ahead; meanwhile, we in the victim company were trying to preserve morale, keep business going and assure people that their jobs were safe. But there was a degree of uncertainty, because it was not our decision in the end. The Ministers on the Front Bench deal with this in a sort of “it’ll be all right on the night” way, but it is very difficult in the real world out there. I give that example having been through this extraordinarily difficult period myself, and seeing how it could arise if we do not get the wording, clarity and speed of the Bill right.

Amendment 48A is the first. It would insert a provision for a more streamlined procedure for those who may be making frequent applications under the provisions of the mandatory notification procedure in Clause 14. Subsection (4) of that clause gives the Secretary of State powers, by regulation, to decide the “form and content” of any mandatory notification. The background to Amendment 48A is that there are many low-risk investors in the UK who currently and regularly invest in sectors that could trigger a notification once the Act comes into force. It would reduce the bureaucratic load if, once an investor had made a notification, or maybe one or two notifications, such an investor could make streamlined notifications, allowing them to avoid submitting the same information repeatedly —always, of course, with a statement that there had been no change in their circumstances in the meantime.

In the debate a few days ago on the group beginning with Amendment 15, the noble Lord, Lord Callanan, talked about the proposal in Clause 6(5), which does not entirely break new ground. It provides for the Secretary of State to make exceptions

“by reference to the characteristics”

of the acquirer. All that Amendment 48A seeks to happen is to move that sensible clarification and proposal into this subsection for this group of investors.

Amendments 67B and 67C are linked and seek to clarify the position of the Secretary of State under the stop-the-clock provisions of the assessment period and to ensure that any such powers are not abused. This is an add-on to the point made by my noble friend Lady Noakes earlier about no man’s land; the stop-the-clock provisions can be used to extend the period.

The two amendments relate to Clause 19, which concerns the power to require information, and Clause 24, which concerns the effect of the information notice and attendance notice. It is understandable that the Government may well need, and should be able to seek, further and better particulars for any transaction, but the extent of the power needs to be considered against two factors: first, the context of a regime where the basic assessment period is 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 process; and, secondly, that this statutory period can be extended by the Secretary of State using the stop-the-clock power. Under this power, the Secretary of State can require further information and must set a time limit by which it must be provided. Without being too cynical, it is perfectly possible for a Secretary of State with a tricky, controversial decision to make frequent requests for more information, stopping the clock on each occasion by imposing an unreasonably short time for the supply of the information. The process by which he or she pushes the pea around the plate could, eventually and ultimately, frustrate the transaction, without the Secretary of State ever having to take a decision at all.

Amendments 67B and 67C attempt to deal with this by a twin-track approach. Amendment 67B proposes that any information notice served under Clause 19 must allow a reasonable period of time for response, which must, in any case, be not less than three days. Without this safeguard, as I have said, the Secretary of State could repeatedly ask for more information, each time stopping the clock almost immediately. In parallel, Amendment 67C amends Clause 24, so that the stop-the-clock powers are discretionary and not automatic. Therefore, if complex questions take longer to answer, the Secretary of State does not have to stop the clock. Such an approach would mirror that followed by Section 34ZB of the Enterprise Act, in granting extensions to the statutory time limits to which the Competition and Markets Authority is subject for merger control purposes.

The final proposal in this group is that Clause 30 should not stand part of the Bill. I had thought about degrouping this, but decided that we have enough groups and should crack on. Clause 30 is entitled “Financial assistance”. Its wording can best be described as wide, and the Explanatory Notes are not much more helpful. In principle, there is nothing wrong with the Secretary of State having the power to compensate for the consequences of him or her making a final order under Clause 26. This is a probing amendment to ask my noble friend to provide what I might describe as a stream-of-consciousness description of how these powers are likely to be used.

For example, how is any compensation process to be initiated? Will it be at the request of the party which is the subject of a Clause 26 order or an offer by the Secretary of State? Is there an official or a body that will consider and assess such requests or will the decision flow from the Secretary of State’s desk? It may be that the expert person referred to by my noble friend Lord Lansley has a role to play here. What factors will be taken into account? Who decides the quantum of any compensation? Lastly but most important, how long is any process expected to take to complete?

If the subject of a Clause 26 order is a small, fast-growing company in urgent need of additional finance in the form of working capital to fund its expansion and the investment is suddenly blocked, any long delay may well prove terminal for the company as a whole. What about smaller companies where a single individual has spent a lifetime building up the business? Now he or she wishes to retire to enjoy the benefits of years of toil. Such a sale is then blocked on grounds of national security. What compensation or redress is available? It would be helpful if my noble friend could explain how this will work. In the meantime, I beg to move.

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[The Deputy Chairman of Committees (Lord McNicol of West Kilbride) (Lab)]

As there are no further speakers, I call the noble Lord, Lord Hodgson of Astley Abbotts.

[Lord Hodgson of Astley Abbotts (Con)]

My Lords, I thank all those who have spoken in the debate, as we struggle—that is the only word—to find the balance between national security and investor rights, and do so against a background of what is practical and realistic in the marketplace. I thank my noble friend the Minister for his extensive reply and tell him that I did not have a happy ending: we got taken over after four months, but never mind.

He has made a valiant effort. The noble Lord, Lord Clement-Jones, used the rugby match “stop the clock” analogy; I will use a cricketing analogy. I think the Minister’s officials have written him a speech that is a series of forward defensive prods, and it is rather like watching Geoffrey Boycott nought not out at lunch—but he has made a hugely valiant effort along the way.

On Amendment 48A, he says that we are completely aligned because the regulations provide for a streamlined procedure. Of course they do, but it will never happen because, unless something is written there, people will say, “Why go there, Minister? Why not just have the same old procedure we have always had?”

On Amendments 67B and 67C, I am not quite sure what appropriate incentives the Secretary of State had in mind to work the system appropriately. To be candid, it is unrealistic to say that judicial review is a possibility when you are working to the timetable these sorts of things will have to work to: it is not in touch with the reality of the marketplace.

On Clause 31, other noble Lords have made the relevant points. My noble friend the Minister made a determined effort to explain, but the loopholes and opportunities for difficulties with this are great. His example was that, if a firm’s takeover were to be blocked, help might have to be given until another buyer could be found. He knows better than any of us that, once a firm is known to be in trouble, any other offers will be very low indeed; the differential between someone selling on the uptick and when they know that the firm is a wounded bird will be very great indeed.

There is a big question to be answered about that, which he is much more familiar with than I am, of trying to meld together the realities of the marketplace with the needs of national security. We have not yet got the balance right. We have been advised by a number of leading law firms, and a number of Members of the Committee have practical experience. I cannot believe that we are wrong in everything that we are saying and that all the law firms are wrong. I cannot believe that some of the things that have been put forward are not worthy of much closer and further assessment. We are now in the territory of, “Are they fit for purpose?” “Oh yes, they are”, “Oh no they’re not”. I want the opportunity to go away, talk to the people who advised us, see what the Minister and his officials say, and then decide whether we should come back to these and other amendments at the next stage of the Bill.

In the meantime, I thank the Minister for the long speech that he made, and all other noble Lords who have spoken, and I beg leave to withdraw the amendment.

Amendment 48A withdrawn.

National Security and Investment Bill

Lord Hodgson of Astley Abbotts 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.

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[The Deputy Speaker (Lord Faulkner of Worcester) (Lab)]

The noble Baroness, Lady McIntosh of Pickering, has withdrawn from the debate, so I call the noble Lord, Lord Hodgson of Astley Abbotts.

[Lord Hodgson of Astley Abbotts (Con)]

My Lords, I have put my name to Amendments 11 and 12, tabled by my noble friend Lady Noakes, which concern mandatory notifications, as she made clear. However, I am equally enthusiastic about Amendment 13, tabled by my noble friend Lord Lansley—even though I have not put my name to it—which addresses voluntary issues as well.

I will add a couple of points in support of these two approaches. As my noble friend made clear on Amendments 11 and 12, the use of the phrase “practicable” or “reasonably practicable”—it is not clear why we have one in one place and one in another—has come in for some pretty widespread criticism. As we have discussed before and heard from various legal advisers, the word “possible” would be a big improvement on “practicable”.

Mandatory notifications will be at the sharp end of the Bill and can be expected in many cases to be controversial. There will be a temptation for a Secretary of State, faced with a controversial decision, to try to delay it. It is common ground that, while we need to take appropriate steps to protect our national security interests, it is also in our national economic interest to encourage as much investment as possible in the chosen 17 sectors which will collectively have a significant impact on our economic future.

With great respect, I understand what the noble Baroness, Lady Bennett of Manor Castle, is trying to say, but the reality is that this is a balance; if we are in a competitive market around the world for investment and are unable to balance it properly, people will go elsewhere. It is as simple as that. Her idea of having an open-ended arrangement for the Secretary of State to make up his or her mind is a recipe for an outflow of investment which might otherwise come here to support this country, with its worldwide reputation in tech and other sectors.

On my noble friend Lord Lansley’s amendment on voluntary notifications, we have been around this course many times before; there will be a substantial flow and the new unit at BEIS may find it difficult to cope. In Committee, we discussed a number of amendments to try to help the Government with this and focus the new regime on the really significant cases. Amendments by various Members of your Lordships’ House, including me, proposed inter alia to exclude intra-group investments, to require only one trigger event for each group of companies and to limit notifications to assets used in connection with activities carried on in the UK—in other words, to limit the extraterritoriality of this Bill’s provisions.

The Government declined to accept any of these, arguing that they needed the widest possible strategic view to prevent evasive tactics by unwelcome purchasers. I must accept the force of that argument, but it means the Government must live with the consequences of those decisions. To provide an appropriate level of certainty for investors, we simply cannot risk a situation where, if a flood of voluntary notifications occurs, the Government could decline to start the 30-day clock.

In his concluding remarks, my noble friend may refer to Amendment 27, which the Government have tabled, about the contents of the annual report. If it is accepted by the House, as I expect it will be, it will include details of the number of days taken to give a decision, or the time taken to reach a voluntary notification. I do not want to add to the points the noble Lord, Lord Clement-Jones, made, but I have to say to my noble friend that it is really shutting the stable door after the horse has bolted to be told, a year later, that we have not been able to hit the targets or that they are being missed widely. There is nothing wrong with that, but we are trying to create a balanced regime that hits the ground running, and to learn, a year later, that “the system is overwhelmed”, which a number of us in this Chamber feel is likely to happen, is simply not an adequate answer.

[Lord Fox (LD)]

My Lords, the noble Lord, Lord Hodgson, set out his view of a balance, and I will set out another dichotomy—between thoroughness and timeliness. I do not think any of us in the Chamber are asking for this process to be less thorough. I think we are all saying we want a thorough process. But that thoroughness cannot be at the expense of timeliness, which is what these amendments are seeking to establish.

I do not think it is the Government’s intention to sow the market with uncertainty; I am absolutely sure that is not the intention of the Bill or this element of it. However, we all know that once things get written into law, they move into a departmental process and there is a unit dealing with this, unless there are specific guidelines on achieving timeliness, things will drag and take time. Departmental clocks can run at a different speed to business clocks. We should be clear that that will cost jobs and opportunities, because the longer a transaction takes, the longer it is in play, the fewer opportunities those companies have and the more threat there is for them. This is particularly clear in sales out of distress and in businesses that are already in play. Once they are in play, they become victims of exploitation, and the longer this department maintains a business in play through this process, the more danger those businesses are in.

The Government’s “intent” has come up many times in speeches, and that is an important element here. The way this Bill is currently drafted does not reveal an intent for rapid resolution. It does not reveal an understanding of the importance of timeliness, and that is what these amendments seek to establish.

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[Baroness Noakes (Con)]

My Lords, I shall move the amendment and speak to Amendments 16 and 17 in my name. I thank my noble friend Lord Hodgson of Astley Abbotts and the noble Lord, Lord Fox, for adding their names. I have also added my name to Amendment 18 in the group, in the name of my noble friend Lord Hodgson of Astley Abbots.

My amendments are probing amendments, following the interesting stand part debate that we held in Committee on Clause 30, which gives the Government extraordinarily wide powers to give financial assistance. The Minister’s response in Committee raised as many questions as he answered and we have therefore tabled amendments to gain further enlightenment.

There is no constraint on the ability to provide financial assistance in the Bill, other than that it can be only

“in consequence of the making of a final order”.

My noble friend the Minister sought to reassure us that this was

“not a general compensation scheme”

and would be used only in exceptional cases. The Minister said the power

“will only be used in instances where the public interest, particularly national security interests, require it”.

Later, he said that

“the nature of national security makes it very hard to predict where some of these issues might arise. However, where they do and where national security is an issue, it is important that the power is there”.—[Official Report, 16/3/21; cols. 223-26.]

I was puzzled by this. Is national security a necessary condition for the use of the power or not? Our horrible hybrid working practices mean it is not easy to pursue questions in Committee when the Minister gives answers, so I tabled Amendment 15 to explore this further.

Amendment 15 adds to Clause 30(1) the words “if he or she”—that is, the Secretary of State—

“considers that there is a risk to national security”,

so that the financial assistance power could be used only if it were necessary on national security grounds. There could easily be other grounds for giving financial assistance—for example, if we had an industrial strategy, which I am definitely not advocating. I do not believe it would be appropriate to allow considerations broader than national security to underpin financial assistance under this Bill. If my noble friend the Minister thinks anything beyond national security could be involved, I suggest he needs to explain to the House what those circumstances could possibly be.

Amendment 16 takes out some words from Clause 30(2) so that financial assistance can be provided only by way of loans, guarantees or indemnities. The current wording allows practically anything under the sun and certainly allows grants and soft money. My noble friend the Minister will know that I am deeply sceptical about giving a Government powers to throw taxpayers’ money around. Powers such as these, drafted with good intent, can end up being used as cover for politically expedient expenditure. The best way to stop that happening is not to have the power in statute, as it is too much of a temptation and, even if I trust the current Government to act responsibly, which of course I do, I would not trust Governments of a different party—if we were unlucky enough to experience that again.

Lastly, Amendment 17 says that financial assistance has to be provided on arm’s-length terms. I should probably have drafted this in terms only of loans, guarantees or indemnities, as I do not think that subsidies or grants—which I am sure my noble friend the Minister will tell me he needs the power to provide—can ever be on arm’s-length terms. I was prompted to table this by what my noble friend the Minister said in Committee:

“For example, if the Government provided a loan, it would normally have to be at market rates.”—[Official Report, 16/3/21; col. 224.]


I hate weasel words such as “normally” almost as much as I hate throwing taxpayers’ money around in non-commercial transactions. I therefore ask my noble friend the Minister to say a little more about the boundary between commercial and non-commercial terms for assistance given under Clause 30. What will drive the use of market rates and, I hope, market terms and conditions? What criteria would be used for abandoning arm’s-length terms?

I would have preferred not to have this broad and undefined power sitting on the statute book, because it implies an intent to provide financial assistance. The Government could have relied on the Appropriation Act for genuinely exceptional circumstances. However, if the Government are set upon having the power, Parliament is entitled to some better explanations than we got in Committee of its potential use. I beg to move.

[Lord Hodgson of Astley Abbotts (Con)]

My Lords, once again I have the pleasure of flying in the slipstream of my noble friend Lady Noakes. Before I turn to my own Amendment 18, I will say that I entirely support the remarks she made about Amendments 15, 16 and 17, to which I have added my name.

Amendment 18, like my noble friend’s, is a probing amendment and seeks to discern the possible financial impact of this Bill on the small battalions. I hope the House will forgive me if I become a little granular and practical about how this clause might work. It can far too easily be assumed that this Bill will impact only on big companies. That is not the case. It has not been the case in the past and certainly will not be the case in future, with the big increase in the number of sectors of the economy falling within the provisions of the statute.

I would like to take the House back to our first day in Committee, when I raised the case of Impcross Ltd. Impcross had been the subject of a reference under the old regime. It was statutory instrument 2019/1490. I am not—repeat, not—going to ask my noble friend to comment on the details of the Impcross case. It would be utterly improper for me to ask, and probably even more improper for him to answer. But I want to use the Impcross case as an example of how drastic an impact the provisions of this Bill could have on smaller companies and their owners.

Impcross is based in Stroud and machines parts for the aerospace industry. Its annual turnover is just shy of £12 million, so it is not a large company but a small one, and one that in the year to 30 June 2019—according to the records at Companies House—made a small operating loss. Significantly, it has a person with significant control. In this case, the accounts reveal that a particular individual owns between 50% and 75% of the company. If you look back through the records, you can see that the individual appears to have been at the company for many years, so it is not fanciful to believe that the company is the result of a lifetime’s work and effort and, further, that perhaps the particular individual is now considering his future options, which might involve selling up the company and enjoying the fruits of his labours.

One exceptionally important and helpful aspect of the Bill the Government have brought forward is the establishment of timeframes, which we have already talked about today. We are a bit nervous about how good the timeframes are—we think they may be a bit too flexible for our wishes—but nevertheless there are some there. The Impcross case was referred in early December 2019. It was not until 10 September 2020, nine months later, that Gardner Aerospace, the Chinese-owned potential buyer, withdrew. That cannot have been an easy nine months for all involved, but it serves to underline—if I may say so to my noble friend on the Front Bench—the real importance of sticking to the fixed timetables. Otherwise, the company in the gun sights has a very uncomfortable time indeed.

This does not deal with any potential economic consequences. Let us take the example a little further. If companies are in interesting sectors, they are often sold on a multiple of turnover. Let us say it is two and a half times turnover, which would mean Impcross was worth £30 million. Let us suppose that was the figure that Gardner Aerospace offered, but that when it was refused permission to complete the transaction the next best offer was £27 million, a reduction of 10%; it could well be more. My noble friend the Minister, who has enormous and extensive experience of the City, knows that once an offer has failed to complete, there is always a concern among other buyers that there is something they have not spotted and that there is something wrong that they will need to look at more carefully.