My Lords, the hybrid Grand Committee will now begin. Some Members are here in person, respecting social distancing, others are participating remotely, but all Members will be treated equally. I must ask Members in the Room to wear a face covering except when seated at their desk, to speak sitting down, and to wipe down their desk, chair and any other touch points before and after use. If the capacity of the Committee Room is exceeded, or other safety requirements are breached, I will immediately adjourn the Committee. If there is a Division in the House, the Committee will adjourn for five minutes.
I will call Members to speak in the order listed. During the debate on each group, I invite Members, including Members in the Grand Committee Room, to email the clerk if they wish to speak after the Minister, using the Grand Committee address. I will call Members to speak in order of request.
The groupings are binding. Leave should be given to withdraw amendments. When putting the Question, I will collect voices in the Grand Committee Room only. I remind Members that Divisions cannot take place in Grand Committee. It takes unanimity to amend the Bill, so if a single voice says “Not Content” an amendment is negatived, and if a single voice says “Content” a clause stands part. If a Member taking part remotely wants their voice accounted for if the Question is put, they must make this clear when speaking on the group.
My Lords, Amendment 15 and other subsequent amendments seek to bring in an exemption from the mandatory filing requirement for acquisitions and investments by entities that are ultimately controlled by UK nationals or nationals from certain countries allied to the UK. It is important to stress that this is to exempt companies from the mandatory filing requirement, not from having to file at all.
The Bill currently provides that the mandatory filing requirement applies equally to all investors, despite the fact that the Government have acknowledged that UK investors are inherently less likely to give rise to national security concerns. A more targeted and proportionate approach, which would better reflect where national security risks are most likely to lie, would be to exempt from the mandatory filing requirement acquisitions and investments by UK nationals or entities that are ultimately controlled by UK nationals.
In addition, investors from countries which are closely allied to the UK, such as Australia, Canada, New Zealand and the US, plus any other country subsequently specified by the Secretary of State, should also be exempt from mandatory filing requirements for the reasons I have already stated. That is the thinking behind my Amendment 95, which is included in this group. To the extent that national security risks arise in relation to any such transaction, the Secretary of State would still retain the power to call in a qualifying transaction for review. As I say, the exemption would relate solely to the mandatory filing requirements.
Amending the Bill in this way would also better align the UK’s regime with those of other countries, such as the US and Australia, which I have already mentioned. I can understand why the Government may wish to appear agnostic when it comes to providing exemptions to UK nationals and friendly countries. While there is no doubt that, for example, investments from China in sensitive sectors would come under close scrutiny under the new regime—no one should pretend otherwise—it is important to bear in mind that only four of the 12 national security interventions under the existing regimes have involved Chinese investments.
My Lords, I am grateful to the noble Lord, Lord Vaizey, for introducing his amendments and explaining some issues that I agree with, such as whether the Government are trying to make a failsafe, will it catch too many people and whether there will be too much to do. Although I understand that there may be different levels of concern, depending on the relationship with the country of the acquirer, I do not fully support the amendments in this group.
Where there are already sensitive industries, especially related to defence, who owns them matters in the sense of whether they are fit and proper for that kind of industry. Those considerations can apply within the UK as well as outside so, at some point, they have to be looked at. The question is whether they should be within the same regime or left to other operations that, the Government have considered, do not necessarily pick up everything.
My experience suggests that, in most instances, companies already used to dealing with sensitive matters would already be alert to what might not be desirable, and that it would either not happen or not happen often, but that does not mean that there should be no way of acting when it does. Therefore, they should all be included within this generic framework.
The Bill will apply to more companies or interests than companies used to dealing with sensitive matters, as I have just called them. Quite a lot still looks speculative, so I wonder whether there is, or in due course might be, further subdivision where certain geographies and industries might have different thresholds, depending on how likely they are to be particularly sensitive.
There will certainly be instances where the ownership interests of Five Eyes countries or other allies are of less or maybe no concern, but that may not always be the case if the security of supply or knowledge base is threatened. There are examples in the defence industry where, following takeovers by US corporations, research has been closed down, leaving only certification, assembly or supply of parts as the UK activity. This has led to a serious loss of forward vision and an undermining of the knowledge base, as well as other issues, such as access to technology. Sometimes that might be accepted, but not always.
My Lords, my first instinct was to say that the amendments in the name of my noble friend Lord Vaizey are obviously correct. I am sure that the majority of cases that would threaten our national security will involve foreign actors and, like him, I am concerned about the volumes of notifiable transactions.
However, I think that there might be circumstances in which the powers in the Bill could appropriately be used in respect of wholly UK companies. In that respect, I agree with the noble Baroness, Lady Bowles of Berkhamsted. For example, large company A may have a monopoly or near monopoly in providing something critical to our security. Tiny company B may have developed a new technology, which not only achieves a better result in the light of emerging risks, but at a fraction of the price. If company A acquires control of company B, it can kill the new technology and keep its monopoly profits on its old products. Sometimes, large companies acquire smaller ones to avoid disruption to lucrative markets, rather than to exploit their innovations. I do not think it would apply often, but it is a good reason not to restrict the Secretary of State’s powers in the Bill.
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.
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.
My Lords, the Bill currently provides that the mandatory filing requirement applies equally to all investors, as my noble friend Lord Vaizey said. This is despite the Government stating quite rightly that domestic investors are inherently less likely to pose a national security risk. The Bill is ultimately about managing risk, so we need to ensure that the notifications that the ISU receives are the right sample. Exempting UK nationals from this process would be a far from proportionate approach. Since we are in the business of managing risk in a proportionate manner, we should consider whether investors from specific allies—Australia, Canada, the US and New Zealand have been suggested—should be exempt since, again, the evidence strongly suggests that such investments are less likely to pose a national security risk, although I will come on to one caveat at the end of my remarks.
This aspect would also align more closely with some of our competitor jurisdictions. In any event, since national security is always paramount, it is worth noting that these amendments concern only the mandatory filing requirement. The Secretary of State would remain fully empowered to call in such transactions for review even if they concerned our citizens or allies or were below the threshold for control. That is an important distinction. I hope it means that lots of potential acquisitions by UK players will not get covered by notifiable regulations if we approve these amendments.
I am sure that the legislation is not meant to cover the situation where someone starts a business with a great idea and, say, £1,000. That business might touch on a number of sectors including, say, defence. We know that the sector definitions are very widely drawn. This entrepreneur then goes to some family and friends to seek funding, which might be through an EIS or, even better, an SEIS or possibly an EIS fund. The family and friends are all local. I know one investor who has only ever invested—with great success—in businesses run by someone he has personally met in his local pub. Such investors are vital to the UK economy and, in my opinion, do not carry a risk to security any greater than the person who started the business. As we currently have no size threshold at all, they would be caught by the Bill. It would be a great shame if they decided that they did not want to wait the 30 days or more for the Secretary of State to opine.
My Lords, I agree with the analysis of the noble Lord, Lord Vaizey, that Her Majesty’s Government have underestimated the potential workload that this unit will get, but I am not convinced that his solution to reducing that workload is the right one. We have heard many speeches but I would single out those of my noble friend Lady Bowles, the noble Baroness, Lady Noakes, and the noble Lord, Lord Lansley, as reasons why we should not be separating out one set of companies due to their nationality. The noble Lord made the point clearly that the criterion should be: is it or is it not a national security risk, rather than, does it or does it not come from Hampshire or New Hampshire? That should be the rule running through this.
The noble Lord, Lord Leigh, when moving into caveat territory, started to explain why singling out foreign companies becomes an extraordinarily difficult thing to do. First, what is one, and is it a shell company? Is it listed on NASDAQ but actually resident in Beijing? Those kinds of complications start to point to the Government’s analysis that all companies are in. Clearly, it will be easier for the company whose owner your friend meets in a pub to get through the process and not be called in, compared with one that hails from the Far East, for example. Surely, the process should be the efficiency with which the unit can deal with and dismiss issues quickly, rather than accidentally filtering out things that we should not.
On the concept that, “Our friends are our friends, so we include them as ourselves”, the noble Baroness, Lady Noakes, made the wider point about access to the technology. Access can be cut off by our friends as much as by ourselves or, indeed, by external companies. I am sorry, but I am going to repeat the example I gave at Second Reading. A British company with a US-based subsidiary took the technology to the United States, started to produce it and made one small amendment to that technology. The use and sale of the technology back to the UK was then blocked by the Department of Defense under export controls, because it considered it to then be United States strategic technology. I am sure that such things happen all the time—this example is just one that I happen to know about.
My Lords, we have some sympathy with the intention here, which is to seek clarification about whether certain investors or countries should be more or less encouraged to invest here, although this may not be exactly the right way to achieve that. Such clarification is clearly needed and is sought in a different way by Amendment 91, which we will reach next week, I think, and which stands in the name of my noble friend Lord West.
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We have had discussions with both researchers and funders, and they support these amendments. They would like to limit the application of the Bill to acquisitions by foreign entities because they are worried about the system being clogged up and think that that would be an easy way to deal with the issue. If one removed investments and collaborations within the UK from the scope of the Bill, that would materially lessen the impact. I think we all sympathise with their aim: we want the unit in the department to focus on where the risk is greatest, and we are all seeking a way to achieve that.
I have a particular question about Amendment 96, which may be more linked to the first amendment than I had realised. Why was the 25% threshold selected for voting rights, partnership and a body corporate in order to define a foreign person? If a hostile state has a stake in or control over a critically important company, but that happens to be below the 25% threshold, it therefore still has access to critical data, technology and intellectual property. That is where the risk to security lies, rather than in whether it is above or below a 25% threshold. The department will have to consider any access to such data if the data itself is key. More than the percentage of ownership, it will be about control, and the figure could be below 25%.
To touch on another point, the policy statement for Clause 14 allows regulations which will prescribe the form and content of a mandatory notice. Can the Minister confirm—I am sure it is the case—that the department will consult the stakeholders across all 17 sectors as they develop the form, so that it is workable and practical and is tested for accessibility with those who will have to use it? Is that possible now or could it be done afterwards in writing?
I thank all noble Lords who have contributed to this very useful short debate. I welcome the amendments proposed by my noble friend Lord Vaizey. Taken together, as numerous speakers have said, his amendments would exempt UK investors and investors from other particular countries from the Bill’s mandatory notification regime. As it stands, both the mandatory and the voluntary notification regimes provided for by the Bill are both actor and nationality-agnostic. The mandatory notification regime is based on the risks posed by acquisitions of target entities due to those entities’ activities, rather than the risks posed by the acquirers. The risks posed by acquirers are then considered on a case-by-case basis by the Secretary of State as part of the particular national security assessment.
My noble friend is right to suggest that, in many cases, acquisitions by UK nationals and UK-based companies, or those based in like-minded countries, are less likely to give rise to national security concerns, even in relatively sensitive sectors. Such acquirers, if their proposed acquisitions do not give rise to national security risks, will find their acquisitions cleared to proceed by the Secretary of State, following assessment or following call-in, should that be necessary, for further review.
However, an acquirer’s nationality cannot tell the Secretary of State everything he needs to know about that acquirer’s intent. For example, it is possible that a UK acquirer may be paid by a hostile actor or otherwise have strong links to hostile actors based outside the UK. A similar rationale follows for the amendment’s reference to other like-minded countries. So, excluding purely on the basis of nationality could create a loophole to exploit.
The particular approach of the amendments in this group also raises some practical challenges. For instance, the references to nationality appear not to deal with the issue of dual nationality; nor is a change of nationality covered. Key considerations in designing this regime have included ensuring that it is not discriminatory, and that it upholds our World Trade Organization and other international obligations in this regard. It is not clear that these amendments would achieve this.
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It is important for me to acknowledge that the Government have intervened in eight transactions that involved investors from countries that have historically been allies, such as the US, Canada, Italy and Germany; they extracted undertakings from those investors to protect UK national security interests. A consistent theme in those interventions, in addition to the usual concerns about access to sensitive data, has been the Government’s interest in ensuring continuity of supply to critical services to government and to maintain strategic capabilities. Such concerns, I acknowledge, are effectively nationality-agnostic, because they go to ensuring that critical capabilities, skills and manufacturing are maintained in the UK and not moved abroad. As a result, it is likely that in particularly sensitive sectors we will see the Government calling in transactions involving investors from so-called friendly countries and imposing remedies under the new regime. The Government can, via regulation, exempt certain acquirers from notification requirements but no investors or classes of investor are currently exempt. Nevertheless, these interventions happened before the Bill was introduced, so I do not believe that they undermine my point—namely, that friendly countries and UK investors should be exempt from the mandatory filing requirement, which will not exist until the Bill is passed.
I looked at the evidence given to the Bill Committee in the other place and was particularly struck by two interventions from witnesses. One was from Dr Ashley Lenihan from the London School of Economics, who said that for the legislation to cover domestic investors would be “truly rare” in comparison to similar legislation in other countries and, importantly, that the inclusion of domestic investors will
“lead to a much larger volume of mandatory notifications than most other national security FDI regimes”.—[Official Report, Commons, National Security and Investment Bill Committee, 24/11/20; col. 33.]
This brings out the point that was a theme of our debate on our first day in Committee and at Second Reading, which is that the Government have wildly underestimated the number of notifications they expect to get. As I say, I think we are all united in wanting to see this legislation passed, but we all want to see it passed in a form that is workable, does not overwhelm the new unit that the Government are setting up and does not put off investors by placing too onerous burdens on them.
In addition, other evidence given to the Bill Committee in the other place in the same session included that of Michael Leiter, a lawyer from Skadden Arps, a US law firm. He said that including domestic investors “is probably not wise”. He went on:
“I think trying to take a slightly smaller bite of the apple and not including current UK businesses in the scheme would be well advised.”—[Official Report, Commons, National Security and Investment Bill Committee, 24/11/20; col. 42.]
So I pray in aid those two experts in making the point that this amendment in no way undermines the regime that the Government propose to bring in, but it does make it a slightly more practical approach as this legislation beds down. Indeed, Mr Leiter pointed out later that the Bill can still catch transactions in which the ultimate actor may be foreign, because the unit that the Government are setting up can still look at the ultimate parent or, indeed, at a follow-on transaction.
I understand why the Government may want the legislation to pass in its current form—to have a belt-and-braces approach and to avoid people trying to hide behind a UK investor or a friendly foreign investor—but in my view the Government will still have powers to call in such transactions if they believe that this is the case. I beg to move.
It is one thing to recognise that we do not—indeed cannot—stand alone on defence issues, but quite another to accept, always and without review, what might be serious diminution or removal of all active participation. Therefore, although I expect the results of reviews to be different for different categories of acquirer, I do not see how there can be any blanket exclusion at the initial filtering stage. I am very interested in how different thresholds may play a part in reducing the number of transactions that would have to be filtered.
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.
We all know the purpose of the Bill and it is not to restrict UK investors investing in UK companies. If we go down the route of exempting UK companies, we need to look more carefully at the definition of a UK company, which Amendment 96 seeks to do. I recognise that this is difficult. For example, many companies have private equity investment in them. They are clearly UK companies with a UK HQ, UK board and UK business but because the general partner investor may be based in, say, Guernsey, for the limited partners requirement—and the limited partner is almost certainly based abroad—they would need to be treated as a UK company to ensure a level playing field.
My noble friend Lady Noakes and the noble Baroness, Lady Bennett of Manor Castle, have made some valid points. It is indeed true, for example, that many companies which are essentially Chinese are listed on NASDAQ. Would we call them American or Chinese? There has to be some very careful examination.
My last concern, which I mentioned in respect of Amendment 95, is to stop shell companies being created in countries such as Australia. Under these amendments, a shell company could buy a UK tech business and be sold immediately thereafter to a non-friendly company. Undertakings would therefore have to be put in to protect against that situation.
Regional agnosticism, the gospel according to the noble Lord, Lord Lansley, is the sensible approach here, and I hope that the Minister can explain his views on this issue.
None the less, we wish to consider over time how we might temper and adjust the regime to take account of areas of lower risk. Under Clause 6, the Bill gives the Secretary of State the ability to make exemptions from the mandatory notification regime based on the “characteristics” of the acquirer. This may include nationality if this is judged appropriate and the various issues that I have highlighted can be resolved.
We will of course monitor closely how the regime works in practice to determine through detailed further work and carefully assess whether any such exemptions should be introduced. Any such regulations would be subject to appropriate parliamentary scrutiny through the affirmative procedure.
I welcome the opportunity to discuss the impact of nationality on the regime with my noble friends and to set out our thinking in more detail. However, for the reasons I have given, I cannot accept my noble friend’s amendments. Before I conclude, I can confirm to the noble Baroness, Lady Hayter, that the Government will engage with a number of stakeholders on the voluntary and mandatory notification forms. Therefore, given the points I have made, I wonder whether my noble friend will consider withdrawing his amendment.