National Security and Investment Bill

Lord Leigh of Hurley Excerpts

Committee stage
Tuesday 9th March 2021 Grand Committee

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The noble Lord, Lord Bilimoria, has withdrawn so I call the next speaker, the noble Lord, Lord Leigh of Hurley.

[Lord Leigh of Hurley (Con)]

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.

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.

[Lord Fox (LD)]

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.

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.

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[Lord Leigh of Hurley (Con)]

My Lords, I will speak to Amendment 17, which is in my name. I thank the noble Baroness, Lady Hayter, for her comments in respect of her amendment, which might actually be a better amendment than mine but none the less would achieve much the same thing. She probably does it in a more elegant way, but the purpose of my amendment is to understand the logic here and to persuade my noble friend the Minister that he should revert to 25% throughout.

The mandatory notification obligation in Clause 6(2)(b), which the noble Baroness, Lady Hayter, wants to delete, is triggered as a result of acquiring over 15% of shareholding or voting rights. In paragraph 52 and elsewhere, the White Paper specifies 25% but forecasts 15% for notifiable acquisitions. Accordingly, it is not, and is not intended to be, consistent with Clause 8, as the noble Baroness said, but that leads us into problems. Let us try to walk through this. It is complicated.

As I read it, Clause 6 is there so that the Secretary of State is given a mandatory notification for them to consider whether a trigger event has happened. Let us look at what a trigger event is, then. For that, we have to rely on Clause 8 to see under what definitions a people has gained control. Clause 8 lists four situations, three of which are where the shareholding is 25% or more. That is fine, but that clearly does not apply in a 15% situation. So you have to rely on the fourth situation, which is set out in Clause 8(8), which bites because it is the scenario where there is the ability, alone or with others,

“materially to influence the policy of the entity.”

Therefore, if an investor goes from, say, 14% to 20%, a lot of work has to be undertaken to see whether that person can materially influence the policy. If the threshold was 25%, there would be no need to do this. So given that it is most unlikely that a sub-25% shareholder can materially alter the policy—more importantly, this will be hard to determine in practice, as the noble Baroness, Lady Hayter, said—are we not creating an unnecessary problem for ourselves? What does “materially influence the policy” mean anyway? Which policy? All policies? Dividend policy? Maybe. Hiring and firing policy? Most unlikely. Again, this will lead to consternation and commercial agreements on shareholders’ rights having to be implemented, which will be hard to negotiate because, when you enter this sort of area, there will be uncertainty over whether you can materially alter policy.

In my plea for certainty and clarity, can we make it 25% throughout? The risk of a 15% shareholder throwing their weight around to demand that action be taken to change a policy that would be against our national interest is somewhat remote. I suggest that, with a 15% threshold, there will be significantly more cases to consider, the overwhelming majority of which will not have national security implications. The current filing threshold of 15% is significantly below the thresholds used in a number of other major foreign direct investment regimes. France’s is 25%, which the amendment proposes, and Canada’s is 33.3%. I note that my noble friend Lord Vaizey is not due to speak on this group, unfortunately, but if he did I am sure that he would continue to encourage the Minister to look to Canada rather than France, which is perhaps a natural progression.

I am aware that some countries have a 15% threshold, but they are not jurisdictions seen as international business headquarters or centres of international business in the same way as we are, and we have to remember that there is a difference. Considering the volume of transactions, it will even, I suggest, lead to transactions that pose a national risk being overlooked because of the volume generated by this very low, 15% threshold.

While we are on this clause, can the Minister help me with Clause 6(3), which is relevant to the clause we are debating? It states:

“But a notifiable acquisition does not take place if complying with the requirement to give a mandatory notice under section 14(1) in relation to the gaining of control, or the acquisition of the right or interest, would be impossible for the person within subsection (2).”


What does “would be impossible” mean? I have asked around, and no one I have asked can be sure. Is this when a public company’s shareholder trips over 15%? What does “complying … would be impossible” mean? Could we all argue that it is impossible, give all sorts of reasons unspecified and that is the end of it? If much, much better brains than mine cannot understand the clause, it must need amending. I cannot amend it because I do not know what it is trying to achieve, but it cannot be good law to have clauses which are not immediately intelligible to, if not the layman, then the reasonably well-informed reader.

The whole of Clause 6 is difficult. It talks about regulations we have not seen and then gives power for those regulations to be amended at will under subsection (5). I think subsection (5) is where a white list is introduced in the regulations, but it, and subsection (6) allow carte blanche and, accordingly, more uncertainty. Can the Minister commit to look at Clause 6 again, specifically with the amendment I have tabled and with the amendment that he can see I will perhaps have to table on Report? Amendment 94, tabled by the noble Lord, Lord Fox, which we discussed the other day, would have helped. Can the Minister give some assurances that parliamentary scrutiny will be given to these regulations?

Amendment 17 looks to strike a more proportionate balance between protecting national security and reducing unnecessary burdens on investors. We want to be seen as an investment-friendly country.

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

My Lords, I thank noble Lords for introducing their amendments and exploring the reasoning behind them, which I have found helpful. I put my name down to speak to Amendment 17, which was signed by my noble friend Lord Clement-Jones, for whom I am broadly substituting because he is regrettably unavailable until later today. Like the noble Baroness, Lady Hayter, I was wondering why the Government chose 15% as the threshold above which a notification would become mandatory.

On the previous group, I wondered whether we could have different thresholds for different reasons. That would not be without precedent. For example, Australia has different percentage thresholds for lesser and more sensitive assets and different business value thresholds depending on the country of the acquirer. However, here we have 15%, which might be a number above which you fear an activist shareholder, but why?

In the UK, shareholders get some additional rights at 5%: they can go to court to prevent the conversion of a public company to a private company; they can call a general meeting; they can require the circulation of a written resolution to shareholders in a private company; or they can require the passing of a resolution at an annual general meeting of a public company. At 10%, you can call a poll vote on a resolution. At more than 10%, in a private company, you can prevent a meeting being held at short notice. At 15%, you can apply to the court to cancel a variation of class rights, provided that the shareholders have not consented to or voted in favour of the variation. Getting to 25% is significant, because it gives the right to prevent the passing of a special resolution, which could affect various articles and other things. I cannot see that preventing a change in class rights, assuming that a court would agree, is significant. I am slightly bemused about where that 15% number was plucked from.

We get to the point about whether fear of an activist shareholder is what this is all about. We hear of the insistence on having a director, when there is a certain quantity of shares, but they have to be able to control all the other directors, which does not always happen. It brings to the fore a thought about who owns the other shares, which would have to be taken into account in any assessments. Conditions might then be put on a company in respect of what happens to other shareholders to allow a transaction to pass.

As the noble Lord, Lord Leigh, explained, this makes something more complicated for reasons that do not yet seem clear. There are surely other inherent safeguards that would do the job. From that point of view, I support Amendment 17 signed by my noble friend but, as has been explained, there are other ways in which it could be achieved.

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

I have received a request from the noble Lord, Lord Leigh of Hurley, to speak after the Minister. I call the noble Lord.

[Lord Leigh of Hurley (Con)]

I thank my noble friend the Minister for his very considered comments, in particular his explanation of Clause 6(3). I think it allows a coach and horses to be driven through most of this legislation if someone can claim an impossibility. The examples he gave were excellent but there will be many other examples where people can claim an impossible circumstance. We will come on later to talk about, for example, the position of administrators and liquidators, and I can think of many others as well. I would have thought Clause 6(3) needed refinement.

Both the Minister and the noble Lord, Lord Fox, mentioned “materially control” as opposed to “materially influence”. There is a difference and this is not about materially controlling but about materially influencing. Regarding Clause 8(8), I accept that there are definitions elsewhere of materially influencing the policy. However, I remain of the view that it is not possible below 15%, or indeed below 25%, to materially influence the policy as far as national security is concerned. Therefore, I very much hope that my noble friend the Minister has a chance to reflect on this specifically before Report.

[Lord Callanan (Con)]

I will take that as a comment and not as a question. I continue to look at all aspects of the Bill to see how they can be improved.

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Moved by

[Lord Leigh of Hurley]

20: Clause 7, page 5, line 10, at end insert “, save that any entity that has annual turnover in the United Kingdom less than £10 million is not a qualifying entity for the purposes of this Act (other than in circumstances where the acquisition of that entity is by means of artificial arrangements which do not reflect economic reality and are intended to circumvent the provisions of the Act).”
Member’s explanatory statement
This amendment, and the amendment to page 5, line 20 in the name of Lord Leigh of Hurley, seek to introduce value thresholds for qualifying entities and assets (subject to anti-avoidance provisions to prevent the circumvention of the Act), which would bring the NSI regime in line with other leading foreign investment regimes that have de minimis financial thresholds for notification.

[Lord Leigh of Hurley (Con)]

My Lords, the Bill is probably more important than many people have realised. I suspect it is not by coincidence that, as I was pleasantly surprised to read in my Sunday papers—on the front page of the business news, no less—it has finally attracted attention from the business community. It has, to be honest, been a bit slow in picking up the significance and importance of this Bill. I am delighted that the noble Lord, Lord Bilimoria, will be speaking to this group of amendments, representing as he does the most important business representative body.

There are significant concerns. Amendment 20 would achieve consistency with other regimes which have de minimis thresholds for notification. A key concern is not to dampen innovation in the UK, where vast VC investment is essential to the growth of businesses, particularly in the tech sector, where we have been spectacularly successful. The cost of investment is high for people watching every penny in a start-up. These are the most mobile entrepreneurs, of course. People just graduating or completing a PhD can choose pretty much any country in the world to start their business. They often start their business knowing it will need a lot of capital to be attractive, and possibly hoping it will be sold to realise capital gain. So, impediments will be a deterrent, particularly for small businesses.

Equally, investors in small businesses want to be sure they can obtain a clean and simple exit. I know that tech businesses can go for astonishingly high valuations and revenue multiples, much to the horror of people like me and, I suspect, other noble Lords in this Committee, who were brought up to regard post-tax profits multiples of seven as perfectly respectable, and are astonished to see revenue multiples of seven on transactions. What we might regard as a small business can have a huge valuation. I hope the Minister finds an acceptable number for a de minimis threshold and, as a result, cuts out a lot of red tape for small businesses, which are looking for government to honour their commitment in these happy post-Brexit days to less red tape for business people—particularly from this Government. Introducing the value thresholds of £10 million in annual turnover in the UK for qualifying entities and £10 million gross value for qualifying assets, subject to anti-avoidance provisions, is a proportionate approach. But, obviously, we look to the Minister to suggest another number if he thinks that is appropriate.

Amendment 52A, which is also in my name, is extremely important. It introduces a fast-track process for transactions that clearly might not raise national security concerns, but which none the less need to be notified due to their targeted activities being in a specified sector. The Bill currently envisages that the ISU will reach an initial decision on whether to clear a notified transaction or call it in for a detailed assessment within 30 working days of accepting the notification as complete. A number of parties who contributed to the public consultation were worried that the ISU would not be able to manage even the modest expected flow of transactions. If a 30-day period is granted and then an extension, which it is within its power to do, one can easily see this becoming the norm. Frankly, this will be far too long. As Ministers know, most things in life, but transactions in particular, have a momentum, and imposing a delay of 30-plus working days could lead to huge uncertainty and worry. People will be aware that the transaction is taking place, and they will be worried about their jobs in case the transaction does not happen. Employers will be nervous, because they will know that this is the point at which their employees are most vulnerable to being poached or headhunted. This long freeze on activity could be a disaster, to the point where business owners become reluctant to take in investment for this very reason, which would be a great shame.

To minimise the deterrent effect of the new regime on foreign investment into the UK, this amendment would introduce a fast-track procedure for non-problematic transactions, enabling the acquirer to request a review period of 10 working days, instead of 30, combined with reduced information requirements for the notification. The use of a fast-track initial review procedure would not prevent the Secretary of State referring a transaction for an in-depth assessment, if considered necessary. The timetable for such subsequent review would not be affected.

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In other words, a person is not treated as gaining control of an entity simply by exercising their rights as an administrator during the relevant insolvency proceedings. I hope that that allows my noble friend to put the audience’s minds at rest, if they raise this issue tomorrow night. I hope that noble Lords feel that I have adequately addressed their concerns and I ask that these amendments be withdrawn.

[Lord Leigh of Hurley (Con)]

I thank the Minister and all noble Lords who contributed to this group. We did not quite get unanimity, but we got close to it from those who spoke. The second-biggest accolade of my life has to be the noble Lord, Lord Clement-Jones, calling my arguments “cogent”, so I am grateful to him for that.

It is noticeable that the noble Lord, Lord Bilimoria—I know that he speaks on behalf of himself—spoke as president of the CBI. It is regarded by some as the advocate for large businesses, but he recognises that small businesses may struggle with this Bill. Although I take the point of my noble friend Lady Noakes that a very small business could be subject to a national security risk, I have to say to the Minister that there must be some level below which this Bill should not apply. He suggested that the Government start with £1 million as a stopgap, but I started with £10 million. What do you say?

I also take his points that revenue and gross asset definitions are difficult sometimes, but there are other ways—for example, just looking at the amount invested in a project or business. If it is less than £0.5 million, would we really think that there is a national security risk from someone taking a 15% stake? Perhaps we could have another look at that.

I thank the Minister again for his comments on the working days needed. I am sure that he is sincere in his view that this will be a deadline but we have seen circumstances where the deadline becomes the norm, and 30 working days with a possible extension of another 40 is a long time. The takeover panel gives rulings within an hour. I would have thought that the Secretary of State might allow himself to be stretched to having the option of allowing a reply within 10 working days in certain circumstances where it is apparent that an urgent matter needs to be resolved for all sorts of extremely important reasons, as we discussed earlier. It could be an opportunity for the Secretary of State to agree to a sticker of 10 working days, as it were, going on a particular case because of a threat to employment, a threat to a business’s viability or certain other criteria.