Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2018

Baroness Burt of Solihull Excerpts

Tuesday 1st May 2018 Lords Chamber

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Henley) (Con)]

My Lords, these changes will extend the Government’s powers to intervene in mergers that might give rise to national security implications. The powers to make this secondary legislation are found in the Enterprise Act 2002.

The changes contained in the instrument will amend the share of supply test to allow the scrutiny of more mergers in three areas of the economy: military and dual-use technologies, and two parts of the advanced technology sector encompassing computing hardware and quantum technologies. Subject to parliamentary approval for this affirmative procedure statutory instrument, a second negative procedure statutory instrument will be laid to amend the turnover test to allow the scrutiny of more mergers in the same three areas of the economy.

Before I explain the changes in detail, I will say a few background words about the Government’s position relating to national security and mergers. The United Kingdom economy is open to the world. Core to our economic approach is to trade with and invest in other countries, and to welcome foreign investment into our economy. To facilitate this open economy, our framework of laws and policies on protecting national security and on the conduct of mergers must be continuously reviewed and updated. This tradition of periodic refinement has enabled the United Kingdom to remain a place where people can invest with confidence.

The Enterprise Act 2002 is the key legal means for the Government to examine mergers for the purposes of national security and other specified public interest criteria. In the light of technological advancements, economic developments and changes in the national security threat, it is now time for reform. Last year we set out a two-stage approach, beginning with action through this instrument and the proposed related instrument amending the turnover test.

I will briefly expand on the amendments. The changes made by this order and the proposed order amending the turnover threshold relate to mergers involving businesses active in three areas of the economy. First, the instrument covers businesses that produce military and dual-use technologies. Military technology includes such items as arms, and military and paramilitary equipment, while dual-use technology could have both military and civilian uses. These items can pose clear and immediate risks to the United Kingdom, our people and society. Furthermore, the acquisition of items that provide the UK with its military advantage can raise significant national security concerns. The instrument ensures that businesses involved in the development or production of goods that form parts of the UK’s export control regime will be in scope.

Secondly, the instrument addresses the risks created through advances in computing hardware, which now mean there are ubiquitous goods with the potential to be directed remotely should a hostile actor obtain access or control. Thirdly, it will bring quantum technology within scope. The huge technological potential offered by this area also presents national security challenges.

As a result of the changes made by the instrument, the Government will be able to intervene if the target business in a merger has a share of supply of at least 25% before the merger. The acquiring party will not need to have any share of the supply of the same goods or services for the test to be met.

We are making these changes because we are concerned about possible scenarios whereby a business with no existing share of supply in the UK buys a business in one of these three areas of the economy. Such a merger would not result in an increase in the share of supply in the UK and, therefore, the current share of supply test set out under the Enterprise Act would not be met. The changes will apply only to the areas of the economy that I have set out.

The amendments made by the second, negative statutory instrument will mean that the Government are able to intervene in a merger if the target firm or business being taken over has a UK turnover of more than £1 million, rather than the Act’s current £70 million threshold, in the same three areas of the economy covered by the first instrument. Microbusinesses are excluded from the scope of the revised thresholds, ensuring that the Government take as proportionate and focused an approach as possible to delivering our policy intention.

We have incorporated the constructive feedback from our consultation last October into the substance of these reforms. We have published an impact assessment and guidance to provide greater clarity to businesses and investors.

We will continue to assess risks in other sectors. If there is evidence to suggest that the Government should take action in additional areas of the economy, they will bring forward further legislation. In the longer term, the Government will bring forward primary legislation to make more substantive changes to how they scrutinise national security implications of foreign investment. We consulted on the proposals and are analysing the responses. A White Paper will follow in due course. I commend the order to the House.

[Baroness Burt of Solihull (LD)]

My Lords, as the Minister said, the United Kingdom prides itself on having an open economy—open to trade and open to takeover and mergers, in the UK as well as overseas.

However, in some areas, mergers may be open to threats to our national security in the fields referred to in this order of dual-use military technologies, computing hardware and quantum-based technology. Examples of such threats might be espionage, disruptive or destructive actions, or exploiting investment as inappropriate leverage in other negotiations. I therefore understand why the Government might want to strengthen their powers to scrutinise mergers and takeovers which fall into these areas.

However, I hope that the Minister will forgive me if I express a few concerns, and a number of questions are worth putting to him. First, some of the responses to the Government’s consultation were quite hostile. Why did the Government reject the opinion of several legal firms that the proposals were “inappropriate” or “disproportionate”? Why is the special public interest regime, meant to deal with mergers below the £70 million threshold, considered inadequate? Why have the Government decided on these three sectors specifically? Why does the order not cover other sectors that could have national security implications?

While the Government are not doing it at present, we need to be wary of significantly expanding the national security grounds for intervention because they could be used spuriously, as we see President Trump doing. We need to ensure that Parliament can keep the Government accountable for this power. We are currently far from the situation that exists in the USA, with President Trump using national security concerns spuriously to protect US economic interests, but will the Minister commit to coming to this House regularly, as the Secretary of State has done in connection with GKN, so that Parliament can hold the Executive to account for how these powers are used? In addition, we have been calling for a public interest test that could widen the grounds for ministerial intervention. However, this is controlled at EU level so would require EU agreement or would need to be done post Brexit. Does the Minister agree that the grounds for ministerial intervention in corporate takeovers, particularly by foreign companies, need to be expanded? For example, would he be prepared to work with the EU to consider the case for intervention in mergers to ensure that the UK’s research and innovation capacity is not restricted? I look forward to hearing what he has to say.