Thank you very much, Chair. I am James Palmer, a corporate mergers and acquisitions, and investments, partner at Herbert Smith Freehills. I have been doing that work for 34 years. I have worked with the Department for Business, Energy and Industrial Strategy on business regulation for over 25 years. I also chair our global board; we are an international firm.
Thank you very much, Mr Palmer, for sharing your expertise with us today. I see that you were on the takeover panel for SoftBank’s £24 billion takeover of Arm. Did you consider at the time that that might raise concerns for economic security and national security? More generally in your experience of takeovers and mergers, how would you—or would you—distinguish between economic security and national security on a current and forward-looking basis, if I can put it like thatQ107 ?
I was advising the takeover panel and the regulator, not one of the parties, so our thoughts were more about their role in ensuring appropriate regulation of that takeover—not from a foreign investment perspective, obviously, but there was a foreign investment angle to it. I am not a technical expert. My read of that—nothing to do with the work I did, but obviously I followed it and all the other transactions that have been looked at—is that it was more about economic security and positioning than necessarily about national security per se, but I am not the expert on it.
I think the point that you are drawing out—I heard your question earlier today—is a really fundamental one, which is that there is a spectrum of things that can be regarded as matters of national security. Indeed, the Bill papers draw this out. On the one hand, you have things that are clearly national security, like the risk of infiltration of systems that the country’s security depends on or that the country’s systems depend on—critical infrastructure being an example—but I do think that there are aspects of the Bill that are touching on things that stray more into economic influence and stability.
Again, I am not the expert on this, but I think we all know that in the debate about what is a matter of national security, there is a question of economic dependence, supply chain dependence and so on. That is one of the most difficult areas for this legislation, because where you have a straight, obvious national security real risk of some cyber-infiltration or whatever, nobody is going to argue about that. The grey into issues of supply chain dependency and more economic security starts to raise some of the more difficult areas, which I am sure we can come to.
I do not think that there is a simple binary distinction, and I am not here to give you the answer as to what the right approach is for dependency on China for supply chains. All I would say, having worked out in Asia many years ago, is that the interconnectedness of the world is not going to reduce and we are going to need to find ways of navigating that.
Q Thank you, Mr Palmer; those are very interesting and important points. In your answer to my next question, I would like you to reflect on how this could be better. You make points about the spectrum, and particularly about the need for expertise and wide-ranging consideration in this process. Do you have concerns or suggestions about how they could be better reflected in the Bill?
Also, we have heard a number of times today that under the Bill—this will be reflected in your experience—we are going from 12 call-ins to a much bigger number: 90 or 100. And the impact assessment estimates that, I think, 1,870 notifications might come in under the new regime. Could you consider how best to reflect that or to put in place the skills and the resources for the Bill, and say a little about what impact you think it might have on the attractiveness of investing in UK companies and, in particular, small and medium-sized enterprises?
I have focused on the same numbers as you. I hope the Minister will excuse my saying so, because I think the team have genuinely done a superb job of looking at a lot of granularity on a swathe of issues, but there is one data point I did not agree with: the suggestion that there will be an 18% increase in the reviews; it was framed quite narrowly. In my maths, 12 reviews in nearly 20 years going to nearly 2,000 a year is well over a 10,000% increase. I think that that is a very important context in which to look at this—as the world outside looks at this, it is potentially looked at as pretty seismic change by the UK. Again, there is lots that we can go on to as to the ways in which the detailed thinking around this has tried to mitigate that, and I know the Department has worked very, very hard in trying to mitigate it, but I think that we just need to be realistic.
In terms of the skills, there is a fundamental question, which the Bill papers have started to try to set out, which is this: how do we focus the debate so that it is not all-encompassing? Again, the Minister is aware of my views on this. I am extremely pleased—I know that some may not share this view—that the Bill does not catch a broader public interest test. The reason for that is what happens every time we introduce a power for the Government, for very sensible reasons—these things are always about competing tensions with sensible reasons —to seek to interfere, review something and decide who should own it, or whether they want to impose conditions on that.
Let me give you an analogy. Let us say that I invite someone to come and invest in this country to build a house. At the moment, if I invite them to come to this country to build a house—or a business or a small technology business—they know they can build that house, live in it and sell it to whoever they want. If I invite them in and say, “Come and live in this country and build your house, but I reserve the right to decide who you sell it to and what conditions I impose on who you sell it to,” that is a very different prism—a new prism.
The Bill team have done a really good job of trying to narrow that so that everybody does not think, “Help! If I come to the UK, there is a Government discretion,” but there is an innate tension between, on one hand, the desire to have a broad power to interfere in circumstances that we have not all thought about to protect something as important as national security and, on the other hand, a desire to give investors certainty. My unhelpful view is that there is not a simple route through that, and I do worry about, in particular, small technology businesses.
Again, the team have done a good job of trying to narrow the sectors. This is a very different proposition, in terms of granularity, from what we saw in 2017 and 2018. But I think a lot of further work may be needed. The Government have been clear that they want to receive further feedback on how to narrow the remit. One example is the breadth of the communications sector, which has no de minimis. Artificial intelligence is not a thing done by four clever businesses anymore; it is a thing done by thousands of businesses. I think an awful lot of businesses are going to get caught that are not actually what the ministerial team are worried about.
The second bit is that, even outside the mandatory regime, other transactions may be judged with hindsight to be a matter of national security. Under the regime, a Minister—maybe not the current Minister, but whoever it is in the future—may decide that it is a matter of national security. As you have already highlighted, there is a spectrum of where economics becomes national security. People are going to worry about the predictability of investing in this country.
I am thinking particularly about smaller businesses. Obviously, there will be huge attractions to investing in the UK for technology. We have skills and expertise that can only be exploited here. The UK has had a very distinctive position as one of the few countries in the world where businesses without a particular nexus to a country have chosen to go as a destination of choice. Those businesses are the ones I am most worried about.
There is also the cost and risk for small businesses. If I was a European venture capitalist, how comfortable would I be in investing in a technology business in the UK that I will be able to sell it to an American or Danish buyer—not the Chinese—in five years’ time, or at least to do so simply? In terms of the call-in power, why would boards take a 1% risk that in five years’ time somebody will judge your transaction as being one that should have been notified? Why would I take even a 1% risk of my transaction being unravelled? I think that the Department has worked very hard—this is not just ritual politeness; I really think it has—to try to narrow it, but I do not think it has done so enough, because I think that there will be a lot more than 1,800 notifications.
Q Thank you. You made it clear that you are praising the Department for the work it has done, and I accept your reluctance to criticise it; I think you are right—there is a lot of work, and this is a very complex area. Do you have any direct recommendations you would make to the Department in terms of what might need to change and in particular the preparations it should make for dealing with this large number of notifications?
My partner, Veronica Roberts, appeared before the Foreign Affairs Committee on Tuesday, and she and I will be submitting a list to this Committee. I am afraid we do not have time to go through it today, but I will draw out a couple. Some of the mandatory filing sectors are very broad, such as communications. Again, the Government have said that they welcome narrowing those. There are not de minimises in a number of those sectors. It is true that there are other jurisdictions that do not have de minimises, but they are not jurisdictions with as large a proportion of their GDP linked to trade, and they are not jurisdictions that are as much seen as international business headquarters as well as centres of international business; there is a difference.
There is a de minimis for transport, for example, and it is very focused on ports over a certain threshold and on airports over certain levels of traffic. That is excellent, because those are the kinds of business that it makes sense that you would want to catch. The same layering has not been applied elsewhere. In particular, I worry about catching the sale or the licensing of intellectual property in relation to any of the technology areas. I think that that will catch an awful lot of things that people have not thought about yet, and I think that it will create a big burden for those small businesses.
I can conceive that in one or two very narrow areas—in some of the material science and so on, I am told—there may be low-value things that need to be caught. I am personally very sceptical that low-value things need to be caught in many other areas, because how can they be that important to the economy if they have a value that is below £1 million?
One of our concerns is that, although we know that the Government are very committed to a free trade agenda here and trying to make this work, I have worked with new regulators as they have developed for a very long time, and—forgive my saying so—I have never seen a regulator whose remit was only at the level that was predicted when it was set up. All remits expand exponentially, and that is one of the fears we have.
I would certainly advocate ensuring that the factors that the Secretary of State has to have regard to include, for example, impact on trade. The cost-benefit analysis sets out a sensible attempt—again, it is a much more developed piece of work than the, frankly, not-that-great cost-benefit analysis done in 2017-18; this one is a good and credible attempt—to work out what the actual cash costs are. But it does not address, as the Regulatory Policy Committee drew out, the real economic costs. It may all be okay, but the risks there are not hundreds of millions, but absolutely billions, and the UK’s competitive positioning there.
Q I was going to ask you about whether the Bill is proportionate between being very focused on national security—albeit, as you quite rightly point out, there is a spectrum of that—versus public interest, but I think that you have answered that issue in saying that you would very much guard against expanding it.
I will just explain why. I remember working when the public interest regime still applied. The move away from the public interest regime started in the 1980s. Pre the 1980s, this country was not an international investment destination; it really was not. We have earned that position. Whatever one’s politics—I am not party political—this is something that the UK has earned. We have done that by moving to being pretty open-minded in foreign investment. We have actually not worried that much about national security considerations being controlled through ownership, because again this debate has been—sorry, let me first come back to the Minister’s point.
I am very nervous that if you open it up to public interest, you vest that authority in a politician; forgive me, but that is what leads to lobbying, to short-termism, and to completely inconsistent decision taking. I am afraid that whatever Ministers at the time may say about these decisions, there is no external credibility on the predictability of those. It does not matter whether Ministers think they are doing it in good faith or on security grounds. It does not come over that way.
On broadening it to public interest, I completely agree. I am very grateful—because I know that there was a debate about this—that it has been rightly focused just on national security, albeit with a broad ability to intervene to protect the national interest.
Thank you very much indeed for your useful and interesting evidence. I want to ask about some tangible examples, just to get a sense of where you stand on this spectrum—in this debate between economic openness and national security. You have made your position on it quite clear, which is that we should not sacrifice one to the other. Do you think that the Arm-SoftBank transaction would have gone through under this regime?Q
My own view is that I actually hope so, because I think that there is a debate here. We all identify a business that has been established in the UK, and we regard it with pride as a national asset. I completely understand that. I am not just interested in global M and A; I am interested in investment in the UK. My goal is not just M and A. It is the investment, which we will not get without M and A at the end, because investors want to know that they have the ability to realise.
My own judgment—I am not an economist, but most of the economic evidence that I have seen supports this—is that you do better by allowing people to come in, allowing them to sell, not necessarily completely untrammelled, but on a broadly liberal perspective, giving them the certainty and confidence to do that.
I think what we are debating here is about those things that are generated solely in the UK—for example, research, work and ideas that are funded by the UK Government. I can see why the UK Government might want to keep control over those things and link their funding to a level of control. If someone takes funding on that basis, I can see that. I do not know enough about the history of Arm, but it was acquired by a Japanese parent, not by a so-called hostile actor. If we are not going to allow Japanese businesses to buy into our technology businesses, I think we look like a less interesting technology investment and growth destination. We might hold on to a business for another five years, but what businesses are we losing for our children and grandchildren in 10, 20 and 30 years’ time? That is how I look at the question.
Q What about AstraZeneca and Pfizer, which, of course, did not go through, mainly because of the political debate that raged around it?
Partly. I was involved in that as well—not entirely, actually. By the way, I think there is a misunderstanding about hostile versus agreed deals. Agreed deals, politically, are regarded as generally okay, and hostile deals as not. But it is about price normally. In occasional cases, there may be other factors, but I think that should not be the determinant of whether a deal is favoured or not.
On AstraZeneca-Pfizer, the challenge there is that AstraZeneca is not just a UK company; it is a global company. Most of its business is not in the UK; it is all around the world. It was built up by making acquisitions all around the world. If we say that it cannot be acquired by an American pharmaceuticals company, what message does that give to businesses that want to come and headquarter in the UK to then go and buy elsewhere? The UK has been a net acquirer globally, and I think that our openness is what has allowed us to do that.
I completely understand the concerns about jobs, and I completely understand the concerns about science and the preservation of skills, and I do not dismiss those, but I worry that by trying to hold on to what we have today, we lose the appeal in the long term, a bit at a time, to people coming in the future. It seems to me that if we are going to have research in the UK, which I think we will, it should flow from our research skills, not from holding on to things that want to leave.
Q Could you just say a word about comparable jurisdictions, such as the United States, where their CFIUS law brings into play the extent to which the acquirer has a history of compliance with US law, and the same for us—not just the acquirer, but perhaps also the state that that acquirer comes from?
There is an interesting issue about compliance with law. You need to be careful, because clearly, the draft legislation envisages—as, by the way, I think, the current very broad discretion, which catches an awful lot of transactions, gives discretion to do—allowing quite a bit of leeway to exercise judgment as to what is a national security issue. If you have an investor that is clearly law-abiding and not about to try to put toxic software into your systems or whatever it might be, you are going to worry a lot less about them, so I do not want to limit the discretion.
Do I think that you need to draw out compliance with law in particular? I am nervous about doing so, because it could become a hobby horse for a company that has breached some law somewhere or other. If a big global company has 50,000 employees, people make mistakes; someone somewhere will do something that will transgress. So I worry about it missing the substance. I think there is a discretion to look more substantively, rather than being too much tied to whether they are law-abiding or not. Again, there is clearly a China focus here—I am neutral on that issue; that is for you—but you are not going to know whether a Chinese company is law-abiding outside China or in China, in particular if it has not invested outside China before.
The only other thing I would say on comparator regimes is that the whole debate on this has been framed, as it was in the 2017 paper, around the main rationale, which was, “Other countries are doing this, so we need to look at it.” A much better rationale, which has also been articulated by the Government, is, “We’re coming out of the EU. We’ve got EU-based legislation at the moment. It’s actually the right time to take stock, rather than necessarily that the old regime was hugely defective.” I do not think it was as defective as everybody is saying.
We keep talking about France, the US and Australia. My firm is the largest law firm, or one of the largest law firms, in Australia, and we are in all the markets—France, Germany, Italy and Spain—that keep being cited. Those countries are our very friendly trading partners, but none of them has the reputation for being as open and free trade-oriented as this country. I think we need to be careful about setting comparisons with the most controlling of our friends, not the least controlling, because there are a whole load of countries that have not been named in any of the discussions that are not doing any of this.
Take Ireland and technology. Maybe, under pressure from the EU, they will introduce something, but the Irish have been trying to grow technology; so have the Danes and the Swedes, and the Dutch as well. The Dutch will come out with some proposals in this area, but my expectation is that they will be much more limited. The Dutch are very internationally competitive. For new industries—for green tech, which we really want to be in—the Nordic countries are significant competitors, and I do not think they are going to have all this. I think that, for investors, that is a factor we just need to bear in mind as we try to find the right balance.
When you were answering Chi Onwurah’s question, you posed the question, why would you buy a company if there is just a 1% risk that you would not be able to sell? I was going to ask you how the Bill could be market distorting in terms of the valuations of some of these businesses. You raise a very good point about investing in a business where you think you have fewer buyers than there were originally because of the Bill. That is a very important point. The flip side of that is the extent to which the Bill could be used as a frustrating measure for hostile takeovers. Have you done much on the price-distorting nature of what is going on?Q
I have not done any analysis, and I have not read the economics—that is beyond my pay grade—but I have worked on hostile takeovers for a very long time, and I have been involved in loads of auctions of businesses, with debates about who the buyers are and so on. It is blindingly obvious, isn’t it, that if you have fewer buyers, it has a price impact? I think the question is, what is the appropriate, proportionate acceptance of that? I do not think we should kid ourselves; if we want to dial up focus on national security, there will be a level of impact. I think what the Government are trying to do—they have sent very strong signals that this is their goal, which I am supportive of—is to ensure that, yes, we do it, and, yes, there may be a little bit of consequence, but that we try to keep it in proportion.
I think the risk we have here is not with the 10 or so active interventions that the Minister and Lord Grimstone have talked about in briefings on this, which is a very positive signal and a big reduction from the 50 or so that were consulted on before—that gave us, frankly, very high levels of concern. The concerns are, first, will that be held without a really rigorous review mechanism that ensures there is accountability over that review? I would raise four-year, eight-year, 12-year, continual reviews, where you actually look at economic impact and there are evidence-based requirements. I would also bring in proportionality on those to the judgments, because if you ask a group of very intelligent civil servants to think about risk and say that their job is to protect national security, you can find national security risks in almost anything.
I think there will be market distortion impact. John Fingleton, the former chief executive of the Office of Fair Trading, has commented broadly on this. The Economist wrote in an August article about the negative economic impact on US GDP being significant from its equivalent step up of the CFIUS rules. I think it is about trying to thread the needle in a way that keeps that very narrow and limited.
Q Very quickly, although this looks at equity investment, do you have any thoughts about the fact that debt holders can be much more influential and therefore possibly get away with the assets?
I heard the question that you raised this morning on that. I am not troubled by that. I think debt is a bit of a myth. The material influence test that the Government have picked is lower than a number of other EU countries have gone for but is at least consistent—it is levered off the test we already use, which I think is helpful—so I am personally a bit less worried about that than some others are. Finance does not worry me that much. If somebody seeks to foreclose and exercise, they are not going to be able to do so if they are going to be caught. I think we could get ourselves in a knot, and I think the London financing markets could be disastrously impacted if we were to start to try to regulate lending heavily on this.
I am afraid that brings us pretty much to the end of the time available. Many thanks, Mr Palmer, for your time and your assistance to the Committee.
We will move seamlessly on to the next session and hear evidence from David Offenbach, a consultant at Simons Muirhead & Burton. While he is taking his seat, let me say to those members of the Committee who were not able to ask questions last time that I will try to make sure that you get an opportunity on this occasion or a future one.