National Security and Investment Bill

Lord Lansley Excerpts

Committee stage
Tuesday 9th March 2021 Grand Committee

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

My Lords, it is a great pleasure to follow the noble Baroness, Lady Noakes, and to agree with her. The point she made—that competition can be a security issue as well as a trust issue—was one I was going to make myself. I was thinking in particular of the concentration of media ownership and the impact that can have on national security.

As the Committee may have guessed, I am speaking in this group, respectfully but strongly, against the inclusion of any of these amendments in the Bill. If we included these amendments, we would be heading down the road of the Dangerous Dogs Act, generally acknowledged as one of the worst pieces of legislation passed through your Lordships' House. It penalised and gave a death sentence to dogs identified as belonging to certain breeds, which completely misidentified the problem, which was not canine genetics but human owners.

The idea that where giant multinational companies are based—those are the kind we will be talking about in many cases—can give any evidence of their loyalties is a great stretch. I was in the Chamber yesterday, speaking about the stance taken by HSBC in backing the Government in Beijing against the interests of the UK, the joint declaration, the rights of the people of Hong Kong and the rule of law.

I want to note concerns about Amendments 95 and 96, which identify a number of countries—Australia, Canada, New Zealand and the US—to be automatically excluded. That is a large assumption, and we can probably all think of case studies—maybe different ones—where individual owners of companies from those countries can be of great concern. It is not a measure of risk. I cannot help noticing certain characteristics shared by those countries that the proposer might like to consider and how the grouping of those countries might play in terms of the UK’s international reputation.

[Lord Lansley (Con)]

My Lords, when we discussed the second group, I said that when we are looking at the national security risk, the purposes of the Bill are to define the relevant entities and assets; the extent of control, which is significant for these purposes; and the nature of the acquirer of those entities and assets. I think the third is proving among the most difficult. This group seeks to define that person by reference to their nationality. This is a substantial change to the nature of the legislation, since the purpose of the legislation is to address national security risks; it is not to screen foreign investment in the United Kingdom. The analogies with other regimes—for example, with the European Union’s regulations—do not stretch far because they are concerned with foreign investment.

This group has strayed considerably beyond areas of national security and into the area of what is termed “open strategic autonomy”. I am not sure how open it will prove to be, but it is potentially protectionist by nature. It strikes me that we should really aim to focus on national security, which is the purpose of the Bill, and in the Bill’s broader economic aspects, we should continue to adhere to the principle of non-discrimination. If we include UK domestic actors in the potential definitions of acquirers who raise national security issues, we will be non-discriminatory in our effects, and it is important that we should aim at that. In practice, where national security is concerned, we know that not all foreigners are hostile, and not all those who are hostile are foreigners. So, I am afraid I am not persuaded.



There is also an issue here about authorised countries, which is linked to this but could be separated, although it is not for these purposes at the moment. The Committee on Foreign Investment in the United States has since last year, I think, had excepted states. Interestingly, they are Canada, Australia and the United Kingdom. The list does not include New Zealand for reasons no doubt well known to the United States Administration but not to me, so I am not entirely sure why my noble friend included New Zealand. The criteria appear to be related to the intelligence-sharing arrangements and the extent of defence integration between those countries’ industries and the United States.

Even where the United States’ excepted states are concerned, this is only temporary. There has to be a determination in the early part of next year of whether we have sufficient investment screening arrangements to give the United States assurance to maintain our excepted state position, which I think the Bill will allow us to do. That will be useful to United Kingdom investors into what are known as TID businesses in the United States—those dealing with sensitive technologies, infrastructure and data.

I say to my noble friend that I am not persuaded by this group of amendments, nor yet by the authorised country issue. I suspect the latter issue is one that it might be useful to come back to and think about under what circumstances we differentiate between people from countries that have comparable investment screening regimes in practice.

[The Deputy Chairman of Committees (Baroness Healy of Primrose Hill) (Lab)]

The noble Lord, Lord Bilimoria, has withdrawn so I call the next speaker, the noble Lord, Lord Leigh of Hurley.

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[Lord Lansley (Con)]

My Lords, I want to say a word on this group, because I am particularly interested in Amendment 29A, which would remove Clause 8(8). This is of interest, not least because of the question of how to define “material influence”, which we will come to later.

Listening to the noble Baroness, Lady Hayter, I understand what she has done; she is testing the question why material influence is there if it is one of the ways in which control of an entity can be established under Clause 8. Currently, it is not referenced in Clause 6(2)(a) as one of the cases by which that control leads to a notifiable acquisition.

Instead, taking subsection (8) out of Clause 8 and putting it into Clause 6(2)(a) would in effect be saying that a notifiable acquisition takes place when a person gains control of an entity. Clause 8 explains how you gain control of an entity. It can be by acquiring various voting shares, as defined, or by exercising material influence over the entity. That has been left out, so putting it into subsection (2)(a)—that is not precisely what we are proposing here, but I am speculating slightly—would be a much cleaner option. It would enable one to do what my noble friend Lord Leigh is proposing, which is to take the 15% out. The 15% is there only because there are conceivably circumstances in which a 15% or more voting share constitutes material influence. As the noble Baroness, Lady Hayter, said, we know that, because the Competition and Markets Authority has on occasion determined such things. It did so on BskyB v ITV, which concerned a 17.9% shareholding, and it did so in the case, which it none the less cleared, of RWE’s stake in E.ON at 16.67%.

We know that voting shares of between 15% and 25% can represent a material influence, but that is not the issue. The point is not about the voting share: 25% is, generally speaking, the voting share that gives rise to an issue of control, but about the need to say, “Material influence is what we are talking about, so why don’t we use that?” Why introduce this potentially rarely used 15% threshold instead?

My contribution is to ask Ministers if they will go away and look at whether it would be cleaner and simpler for Clause 6 to say simply, “A notifiable acquisition takes place when a person gains control of a qualifying entity of a specified description”, and Clause 8 goes on to explain what “control” means.

[Lord Fox (LD)]

Were my noble friend Lord Clement-Jones here he would pick up his fishing rod again and say that this is a question of mesh size. But, actually, the issues raised by your Lordships should tell the Government that there is work to be done on redrafting subsections in Clauses 6 and 8 to try to clarify. Whatever we come up with, we need clarity, because there seems to be some dissonance in how this is read and regarded.

The noble Baroness, Lady Hayter, asked the right question at the beginning of her speech, which was: what is the rationale behind the 15%? My noble friend Lady Bowles set out the sliding scale of different accountabilities and rights that come with different levels of ownership and said that there was some logical mismatch with the 15%. The Minister has taken refuge in the past in the policies of the other European Union countries, and the noble Lord, Lord Leigh, can happily put his mind at rest that France uses 25%, so clearly, if it is good enough for France, it will be good enough for the Minister.

On a more serious note, the issue of material control is interesting. We have seen so-called shareholder activists reversing into companies with far less shareholding than 15% and making material changes to the strategy of businesses. So what is material and what is a change? The point that my noble friend Lady Bowles brought up about the nature of the other shareholders cannot be left out.

Tracker funds tend not to be active in the way a long or a short fund tends to be, and clearly shares get loaned in situations of activity. All these add up to the mess which the noble Lord, Lord Lansley, described well: who is in control of the business, and what is material control? To some extent, the difference between 25% and 15% is less important than where the control lies. That is harder to enumerate, and difficult for the market to understand, but it is clear that the way this stands in the Bill will not work. I hope the Government can sit down with their lawyers and drafters and come up with something that we can look at next time which takes on board the good advice the Minister has received from your Lordships.

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If the Government do not accept this amendment, how will tech businesses that get into temporary cash problems and need an immediate solution—typically because they have good business propositions, but have overtraded or have a slow-paying customer—obtain the help that they need, in the timeframe in which they need it? I hope that the Minister takes this amendment in the spirit in which it is offered, which is to facilitate inward investment into sensible UK businesses.

[Lord Lansley (Con)]

My Lords, I am pleased to follow my noble friend Lord Leigh. I am sure he is being modest; I would think that tomorrow evening is all sold out. But I agree with him; nobody seems to know anything about the Bill, which is very surprising, given that we are approaching the point at which the trigger events will be in scope and have been for three months. Knowledge about the Bill is woefully deficient. This impels us to crack on, because we have to get this into law quickly, as the period when these trigger events have been taking place, when people do not realise that they are notifiable or that a call-in notice may be issued, is extending every day.

With that said, I will be quick. I forbear to comment on the other amendments and refer just to Amendment 25, which is in my name. It has the effect of adding

“(but are not limited to)”

to Clause 7(5) to find out why it is there. We have the statement under Clause 3, the purpose of which, among other things, is to set out what the qualifying assets are, so we know that. Clause 7(4)(c) tells us that qualifying assets include

“ideas, information or techniques which have industrial, commercial or other economic value”,

which is so broad as to be almost meaningless. It is all-encompassing. Then Clause 7(5) lists a lot of things, but I do not know whether it is exhaustive, as it says they are examples. What I want to know from the Minister is why we are including examples if the list is not exhaustive. If it is not an exhaustive list, why are we not saying

“(but are not limited to)”

to ensure that people realise that it is not an exhaustive list? That is often done in legislation and for good reasons. It is just a drafting practice.

Equally, however, why does this bit of the Bill not refer back to the statement under Clause 3? That would make life a lot simpler: qualifying assets are in these categories and, to see more, look to the statement. Frankly, we will not know until we finally see the statement produced—I know we have seen drafts—whether something is or is not a qualifying asset.

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I have been as brief as possible. I look forward to the critique of the amendment in forthcoming remarks and to the Minister briefly explaining the Government’s position.

[Lord Lansley (Con)]

My Lords, I am pleased to have the chance to speak briefly to Amendment 38. This group is linked, in so far as we are all addressing issues relating to limitations on the interpretation of the “qualifying asset” in Clause 7. Amendment 38 in my name is particularly directed towards the issue of such assets in Clause 7(4)(c)—ideas and related intangible assets—where they are licensed. In particular, Amendment 38 seeks to regard such assets, which are licensed on a non-permanent basis, and where ownership of the asset is not transferred to somebody else in any permanent or substantive form, as not being controlled. This relates to the set of exceptions in Clause 11, which sets out those circumstances in which assets are not to be regarded as controlled.

We need to do that because Clause 9, “Control of assets”, is very widely drawn—deliberately, I am sure, and probably rightly so. It says that control of a qualifying asset can result in the person being able to use the asset. Of course, if an asset is licensed to somebody for their use, they could be said to be controlling it. But anybody licensing it to them will be doing so with restrictions and provisions. To that extent, they are not controlling it; the person who has licensed it to them is controlling it. So we have an issue not only of definitions but of scope.

The definition of control should not extend to where somebody had something licensed with restrictions imposed upon it. The definition of using the assets is probably, in that sense, too wide to be applied in this case to those kinds of innovative assets. To whom is this important? It is very important to those whose job it is to bring forward innovation and to license their intellectual property, and to do so in circumstances where they continue to control its use and exploitation. We do not want the routine use and exploitation of assets or intellectual property to be seriously impeded every time it is licensed or for this to be regarded as potentially the control of a qualifying asset and hence notifiable. Amendment 38 gives us an opportunity to set proper limitations on the use of licensing for assets on a temporary basis.

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

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

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

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

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

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[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.

[Lord Clement-Jones (LD)]

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

It is not clear precisely what resolutions govern

“the affairs of the entity”

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

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

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

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

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

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

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

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

[Lord Lansley (Con)]

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

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

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

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

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

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

[Lord Grimstone of Boscobel (Con)]

I thank my noble friend very much for those comments. I will reflect on them and communicate with him.

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Moved by

[Lord Lansley (Con)]

36: Clause 11, page 7, line 20, at end insert—
“( ) For the purposes of this Act a person is not to be regarded as gaining control of a qualifying asset to the extent that the use of a qualifying asset is conducted wholly within the activity of a United Kingdom-based higher education or research institution.”Member’s explanatory statement
This amendment would provide a “safe harbour” in relation to assets wholly controlled within UK higher education and research institutes.

[Lord Lansley (Con)]

My Lords, we come to a group that contains just one amendment in my name, Amendment 36, which touches on the issue of higher education. We will, at a later stage, deal with the question of the time taken to review notifications. That is a pretty central issue for higher education, but I do not propose to talk about that in this group.

Judging from the earlier discussion between the Minister and the noble Baroness, Lady Hayter, about the meeting to discuss research and higher education interests, I am sure that this is well known to Ministers. The purpose of Amendment 36 is to create a safe harbour for activity undertaken by and maintained within British universities and research institutes. I can perfectly well see the objection to a safe harbour for this activity. It was well illustrated by a report published by my noble friend Lord Johnson of Marylebone and looking at the extent to which there were, in his instance, Chinese interests in university research in this country. Something like 30% of all principal research activity in higher education has Chinese interest somewhere in it.

The point is this: Clause 9, which we have just agreed, extends as structured to the right to use qualifying assets. The breadth of qualifying assets, when one considers them alongside the right to use them, brings in the Lambert report principles, which universities use for research activity. They extend the right to use to their financial, or mostly industrial, sponsors, so a large number of research activities in universities might be the subject of notifications.

I will shorten this debate by saying that, if one does not go down the route of a safe harbour for universities, we need a very positive approach to Amendment 88, in the name of the noble Baroness, Lady Hayter, which says that universities need specific, detailed guidance about the circumstances in which they need to make notifications. Otherwise, the number of notifications will be very large and there will be a substantial diversion of activity of the investment security unit away from areas where the risks are greatest to volume activity, where risks are lower.

I know that universities have plenty of experience—I will come on to in the next group of amendments—of working with the Export Control Joint Unit. If they have a similar relationship with and understanding of the requirements when notification is appropriate and when they can avoid voluntary notifications in large numbers, higher education will be able to live with this regime far better than they fear at the moment.

I move Amendment 36, but I encourage the Minister to respond positively to Amendment 88.

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

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

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

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

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

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

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

[Lord Lansley (Con)]

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

Amendment 36 withdrawn.