National Security and Investment Bill (Sixth sitting)

Mark Garnier Excerpts

Committee stage & Committee Debate: 6th sitting: House of Commons
Tuesday 1st December 2020 Public Bill Committees

[Sam Tarry]

I beg to move amendment 11, in clause 3, page 3, line 16, at end insert—

“(7) The Secretary of State must publish guidance for potential acquirers and other interested parties separate from the policy intent statement.

(8) Guidance under subsection (7) must cover—

(a) best practice for complying with the requirements on acquirers imposed by this Act and regulations;

(b) the enforcement of the requirements; and

(c) circumstances where the requirements do not apply.

(9) Guidance under subsection (7) must be published within six months of this Act receiving Royal Assent.”

This amendment would require the Secretary of State to provide clear guidance to potential acquirers and other interested parties.

Again, this is, in our view, a fairly simple amendment. It is important because it is about ensuring that we are an attractive destination for business. A number of witnesses were very clear that many businesses need an early warning. The amendment would require the Secretary of State to provide clear guidance to potential acquirers and other interested parties, so that people are not put off from investing or getting involved in the British economy because of red tape that they might fear being tied up in. The amendment is about providing that clear guidance to companies.

If the Government went even further and published guidance that created regulatory sandboxes and clear engagement guidelines for innovative small and medium-sized enterprises, which could benefit from efficient regulatory engagement to pursue investment transactions just as, for example, the Financial Conduct Authority has done for the UK’s world-leading FinTech sector, we could turn this into an opportunity to encourage the right types of companies from our allies around the world to invest in Britain.

One of the things we fear is the introduction of significant uncertainty. We know that hard work is going on to finalise a trade deal. Businesses have for so long felt that their big problem, in deciding about long and medium-term investment, is uncertainty. The amendment is about tackling straightaway any fears of uncertainty among businesses, particularly innovative SMEs, which will not have the resources to spend on figuring out the lengthy processes and, potentially, the accompanying guidance that could be put in place once the Bill passes. The amendment would require the Government to try to reduce that uncertainty.

[Mark Garnier (Wyre Forest) (Con)]

I have a lot of sympathy for what the hon. Member says, because clearly the more clarity a potential investor has when investing in the UK, the better. The only problem is that if the Government are in a position to provide guidance in the first place, they are in a position to subsequently update it. Governments of different colours could change the guidance without necessarily having to refer back to Parliament. Does the amendment therefore not perversely create greater potential uncertainty, by enabling Governments to change their guidance willy-nilly, without scrutiny?

[Sam Tarry]

The hon. Gentleman makes a valid point, but it was not really borne out in the evidence that we heard from the witnesses. They were clear, even while having different approaches, that more guidance accompanying this, and providing it early, would provide that certainty. We heard a range of approaches and opinions, and that advice should clearly be listened to. Dr Lenihan said:

“The Bill provides for a lot of regulatory guidance, which needs to come forward in a clear and very easily comprehensible and understandable manner.”––[Official Report, National Security and Investment Public Bill Committee, 24 November 2020; c. 38, Q42.]

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The question is: who actually holds the rights in those circumstances? Is it the person or company that has gone bust? Are they held to hold the rights even though an administrator is acting, as we would ordinarily understand, in place of the company in, for example, trying to get the best price for the company on behalf of the creditors, and therefore has certain rights to act in place of the company, including allowing that company to trade for the time being? Is it the person who has gone bust who has the rights, or is it the company that may have taken over the rights but has dissolved the company, so that the company no longer exists, but the creditors or administrators do not have the rights either because the company is finally in liquidation and the other company has meanwhile made off with the assets? Does the Minister consider that the wording and arrangements in the schedule are sufficient to take account of those sorts of circumstances?

[Mark Garnier]

I think the answer to the hon. Gentleman’s question under insolvency law is that the rights belong ultimately to the creditors and shareholders of the company that has been wound up, which is pretty bog standard insolvency law.

[Dr Whitehead]

Yes, indeed, that is right, but what seems to be the case under the schedule is that the creditors and shareholders of that company would expect their rights and their ownership the remaining assets of the company to be protected and acted on by the administrators of the company, who, according to the schedule, do not have access to and ownership of those rights. Even though what the hon. Member says is absolutely right in terms of the ultimate interests of the shareholders and creditors, what agency do those shareholders and creditors have to do anything relating to rights under the Bill? Should those shareholders and creditors, for example, be held liable under the Bill for reporting what those rights are?

[Mark Garnier]

The administrators are employed to work on behalf of the creditors and shareholders, so they are serving their interests. It strikes me as relatively obvious that the rights over that intellectual property and those things that are relevant in this schedule still, either directly or indirectly through the administrators, lie with the creditors and shareholders.

[Dr Whitehead]

But if the IP, the patents and various other things have been made off with by another company, and the administrators have presumably agreed to that, although they never hold the rights, where are the shareholders and creditors’ duties and rights at that point? Indeed, what is the remedy as far as the Government are concerned in those circumstances?

I can honestly say I am fairly confused about this, so I do not have the full answer to the hon. Member’s concerns. I am raising this more because I am not sure whether the wording in the schedule is fully adequate for those circumstances. I would be grateful if the Minister gave me some assurance, took some of the clouds from my mind about this, or alternatively said, “Well, we’re going to have a look at this to see whether there is a bit of a problem that we might have to fix.”

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[Matt Western]

As always, my hon. Friend makes important points. To amplify those, if we had been sitting down and writing this Bill 10 years ago, which would have been a pretty good thing to have done, with hindsight––

[Mark Garnier]

When you were last in government?

[Matt Western]

I think I chose my time horizon pretty well. Had we been doing so, we may not have been considering these 17 categories, traffic light systems, underground systems, public transport or railway infrastructure in a way that we have to nowadays because we understand just how interconnected things are. We understand what the threats and risks are from these sorts of investments from possibly rogue organisations, states or businesses.

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[Stephen Flynn]

I will be brief, as our amendment 14 is incredibly similar to the amendment moved by the hon. Member for Ilford South—not the hon. Member for Southampton, Test; I know that much. In any case, it is indeed very similar; I would just add that we must be clear about the fact that power does not just lie in ownership and investment, but also in debt and, indeed, in suppliers too. If we are standing blind to that, then I am not quite sure where we are at, particularly in terms of national security. Surely, it is an issue that we should be giving cognisance to, and the amendment certainly seems like a constructive proposal for the Minister to take forward.

I also have a fear that, as we approach anything to do with national security and investment, the bad guys, as they are often portrayed—and rightly so—will look for ways to get around things. If there is potentially a way to get around things, particularly by buying up debt or buying up the supply chain into an organisation, then I have absolutely no doubt they will do that. As we know, they will seek to exploit every opportunity available to them to wreak the damage they want to cause. We need to be mindful of that.

[Mark Garnier]

I am very sympathetic to the amendment tabled by the hon. Member for Ilford South. He refers to the Parliamentary Commission on Banking Standards, on which I sat. There is no question whatever that the bondholders of banks have a huge amount of influence on a bank—more so than the equity holders. I am worried about a couple of things with the amendment. The first is that it is very difficult to define what level of debt ownership constitutes control, because technically there is no control in law. It is possible to have an influence, but we cannot define what control is.

The second point is that tradeable debt, as in bond market debt, is something that is usually stuck to quite a sophisticated company. Most companies will have bank debt. Of course, if we start talking about bank debt, we introduce the tricky concept of where the bank is domiciled. For example, someone can borrow money from Barclays Bank, or they can go to a Russian, Chinese or Hong Kong-based bank. The sentiment behind the amendment is really important, because there is a lot of control by debt owners, be they banks or bond holders. However, it is too complicated to support at this level, because it needs much more debate and scrutiny, and we would need a much more cleverly worded amendment to support this. I do think it is a very important point, and I support the principle behind it.

[Nadhim Zahawi]

These amendments would ensure that a person becoming a major debt holder would count as a person in control of a qualifying entity. Amendment 14 would go further and ensure that a person becoming a top 3 supplier to an entity also counted as a person gaining control of a qualifying entity. I acknowledge that the hon. Members for Ilford South and for Aberdeen South are right to highlight that there are, in a small number of cases, national security risks that can be posed through debt.

Access to finance is crucial for so many businesses. In order to grow and succeed, they will often take out loans that are secured against the businesses and assets that they have fought so hard to build. That is why the Bill allows the Secretary of State to scrutinise acquisitions of control that take place where lenders exercise rights over such collateral, which goes to the point made by my hon. Friend the Member for Wyre Forest. Such an approach will prevent hostile actors from artificially structuring acquisitions in the form of loans, which, following a swift and convenient default, might otherwise allow them to evade scrutiny.

I can provide further reassurance to the Committee that the acquisition of any right or interest that enabled a person to exercise material influence over the policy of a qualifying entity, including by creditors through debt arrangements, would be in scope of the Bill. It was noted by Christian Boney, partner of Slaughter and May, that the Bill strikes an acceptable balance by not having debt providers specified as a separate case. Depending on the facts of the individual case, that might capture the acquisition of rights by the lender to appoint members of the entity’s board. That is a common approach by lenders when striking an agreement to provide significant amounts of finance, particularly for big infrastructure projects, in order to safeguard their funds. The Bill would cover a scenario where that provided material influence over the policy of the entity, but the amendments would go further still and stipulate that any person becoming the holder of 25% or more of an entity’s debt was a trigger event in itself.

The Government do not believe that the provision of loans and finance is automatically a national security issue—indeed, it is part of a healthy business ecosystem that enables businesses to flourish in this country. I fear that such an approach would likely create a chilling effect on the appetite of lenders to support otherwise attractive and viable projects. Lenders need confidence that they can see a return on ordinary debt arrangements in order to provide that service. I believe that such a chilling effect would have a detrimental impact on the range and extent of finance that is available to UK businesses, particularly SMEs, and their future prospects would suffer as a result. That is the very opposite of the Government’s intention. We must support our innovators and entrepreneurs as we seek to build back better from covid, rather than limit their opportunities to succeed.

Amendment 14 would create an additional case for any person who became a top 3 supplier to an entity. In effect, it would be a new trigger event. I share the desire of the hon. Member for Aberdeen South to ensure that business within our most sensitive supply chains can be protected. I believe the Bill does that already by allowing the Secretary of State to call in trigger events across the economy, when he reasonably suspects they may give rise to national security risks. That includes key suppliers.