National Security and Investment Bill

Debate between Lord Vaizey of Didcot and Baroness Bowles of Berkhamsted

Committee stage
Tuesday 9th March 2021 Grand Committee

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

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.

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.

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

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.

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.