Clause 5 - Meaning of “trigger event” and “acquirer”

National Security and Investment Bill – in a Public Bill Committee at 3:15 pm on 1st December 2020.

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Question proposed, That the clause stand part of the Bill.

Photo of Graham Brady Graham Brady Chair, Conservative Party 1922 Committee

With this it will be convenient to discuss:

Clause 10 stand part.

That schedule 1 be the First schedule to the Bill.

Photo of Nadhim Zahawi Nadhim Zahawi Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy), The Parliamentary Under-Secretary for Health and Social Care

I turn now to clauses 5 and 10, alongside schedule 1, which set out much of the detail on the circumstances covered by the Bill. Clause 5 begins to set the scope of what may be called in by the Secretary of State by providing the overarching definitions of “trigger event” and “acquirer”. The Government are clear that these new powers should be sufficiently broad to cover potential risks to national security. Clause 5 sets out that the new regime is focused on the acquisition of control over both qualifying entities and assets. These acquisitions are collectively known as trigger events. I do not intend now to explore what does and does not qualify as an asset or entity. Instead, I would direct hon. Members to clause 7, which provides such definitions.

Following on logically, the person gaining such control is the acquirer, and to address a query raised on Second Reading by my right hon. Friend Sir Iain Duncan Smith, I should make clear that “person” includes both a body and an individual. Subsequent clauses explain the specific ways that control can be acquired for the purpose of the Bill, but this is a necessary clause to set the broad parameters of the regime. The trigger events within scope of the call-in power are defined in clauses 8 and 9 as acquisitions of control over qualifying entities and assets, but the Government consider that the Bill must supplement that by providing for interests or rights to be treated as held or acquired, and therefore for control to be acquired in certain circumstances, such as acquisitions involving indirect holdings or connected persons.

That is why clause 10, in combination with schedule 1, sets out various ways in which rights or interests are to be treated for the purposes of the Bill as being held or acquired, including, for example, joint arrangements with other parties. These edge cases are critical to ensuring that determined hostile actors cannot deliberately structure acquisitions in certain ways to avoid being covered by the regime. While many trigger events may be straightforward, direct acquisitions by a party without any connection to other persons involved in the target entity or asset, there may be broader factors that need to be taken into account when considering how control over an entity or asset may be held.

It may be that the ability to control the entity or asset is acquired, for example, as a result of arrangements between the acquirer and other shareholders or their relationship to other shareholders. The approach taken in schedule 1 broadly mirrors the concept of holding an interest in a company, already familiar in UK company law through the persons with significant control register, introduced in 2016.

Taking each in turn, paragraph 1 of schedule 1 defines joint interests, whereby two or more people holding an interest or right jointly are each treated as holding it. That means that any joint holdings of the acquirer will be taken into account when assessing whether control has been acquired over a qualifying entity or asset.

Paragraph 2 defines joint arrangements so that parties who arrange to exercise their rights jointly in a predetermined way—for example, to always vote together in a particular way—are each treated as holding the combined rights and interests of all the parties involved in such an arrangement. That is important to prevent hostile actors from being able to co-ordinate the acquisition and exercise of rights that might otherwise fall below the threshold of a trigger event.

Paragraph 3 defines indirect holdings, whereby a person holds an interest or right indirectly through a chain of entities, where each entity in the chain has a majority stake in the entity below it, the last of which holds the interest or right. We know that determined hostile actors are likely to seek to obscure their acquisitions through complex corporate structures, so it is vital that the Secretary of State can intervene in such circumstances.

Paragraph 4 simply stipulates that interests held by nominees for another are to be treated as held by the other, rather than the nominee. Paragraph 5 defines the circumstances in which rights are to be treated as held by a person who controls their exercise; this would cover, for example, instances where a person acquired a stake in an entity, but it was evident that they had an arrangement with a third party about how to exercise the rights that came with that stake.

Paragraphs 6 and 7 provide for the circumstances in which rights that are exercisable only in certain circumstances and rights attached to shares held by way of security are respectively to be treated as held, and mirror corresponding provisions in schedule 1A to the Companies Act 2006.

Paragraphs 8 to 10 define connected persons; as set out, connected persons are each to be treated as holding the combined rights or interests of both or all of them. That would cover, for example, shares in a company separately by a husband and wife or a brother and sister. Finally, paragraph 11 sets out that two or more persons sharing a common purpose are to be treated as holding the combined interests or rights for both or all. That would include two or more persons who co-ordinate their influence in relation to an entity or an asset, similar to joint arrangements. This will ensure that the Secretary of State is able to assess the impact of co-ordinated acquisitions.

Taken together, the concepts detailed in schedule 1 are a crucial part of ensuring that the new regime is flexible enough to deal with the complex reality of some acquisitions of control over entities and assets. Without these provisions, hostile actors could seek to take advantage of the gaps by structuring acquisitions in a way that would be out of scope of the regime, despite the very real risks that that might present. I trust that colleagues on both sides of the Committee want to ensure that the regime covers such cases suitably.

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Energy and Industrial Strategy), Shadow Minister (Digital, Culture, Media and Sport)

I thank the Minister for his comments on clauses 5 and 10 and schedule 1, which are quite technical provisions designed to allow for the different ways in which control may be acquired over a qualifying entity or asset or a trigger event may occur. I shall not repeat what the Minister so ably set out, but simply say that we recognise the need to set out ways to mitigate the impact of hostile actors, as he put it, going to complex lengths to hide their interest in a qualifying asset or entity. However, having the powers and these definitions is not the same as actually using them. There have been several instances in which hostile actors have behaved in entirely transparent ways that we have not identified and prevented. While these provisions are necessary, we need to see the ways in which the Secretary of State will actively identify evolving risks even as they hide behind complex financial organisations.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Department for Business, Energy and Industrial Strategy) (Energy and Climate Change), Shadow Minister (Business, Energy and Industrial Strategy)

Will the Minister expand on some of the provisions in schedule 1, particularly as they relate to what might be a UK version of the case that I mentioned earlier concerning the US company that Dr Lenihan mentioned in his evidence? A company that had gone bankrupt had its assets, patents and employees bought up by what might have been conceived to be a hostile company in the US, in this case Huawei. If we imagine that happening in the UK, some questions arise about how schedule 1 is worded.

That sort of action might happen in a number of ways. It could be that a potentially hostile company buys up a failed, bankrupt company with the intention of making that company work again but so that it has control of its activities thereafter. Alternatively, the hostile company or organisation might want to buy up elements of the company not to make it work but to make off with the things that it wanted and then push the company further into liquidation. The company would not work but its assets and intellectual property would have passed into the hands of the other organisation.

Parts of schedule 1 look like a GCSE maths test. Paragraph 6(2) states:

“rights that are exercisable by an administrator or by creditors while an entity is in relevant insolvency proceedings are not to be regarded as held by the administrator or creditors even while the entity is in those proceedings.”

The question is: who actually holds the rights in those circumstances? Is it the person or company that has gone bust? Are they held to hold the rights even though an administrator is acting, as we would ordinarily understand, in place of the company in, for example, trying to get the best price for the company on behalf of the creditors, and therefore has certain rights to act in place of the company, including allowing that company to trade for the time being? Is it the person who has gone bust who has the rights, or is it the company that may have taken over the rights but has dissolved the company, so that the company no longer exists, but the creditors or administrators do not have the rights either because the company is finally in liquidation and the other company has meanwhile made off with the assets? Does the Minister consider that the wording and arrangements in the schedule are sufficient to take account of those sorts of circumstances?

Photo of Mark Garnier Mark Garnier Chair, Committees on Arms Export Controls, Chair, Committees on Arms Export Controls 3:30 pm, 1st December 2020

I think the answer to the hon. Gentleman’s question under insolvency law is that the rights belong ultimately to the creditors and shareholders of the company that has been wound up, which is pretty bog standard insolvency law.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Department for Business, Energy and Industrial Strategy) (Energy and Climate Change), Shadow Minister (Business, Energy and Industrial Strategy)

Yes, indeed, that is right, but what seems to be the case under the schedule is that the creditors and shareholders of that company would expect their rights and their ownership the remaining assets of the company to be protected and acted on by the administrators of the company, who, according to the schedule, do not have access to and ownership of those rights. Even though what the hon. Member says is absolutely right in terms of the ultimate interests of the shareholders and creditors, what agency do those shareholders and creditors have to do anything relating to rights under the Bill? Should those shareholders and creditors, for example, be held liable under the Bill for reporting what those rights are?

Photo of Mark Garnier Mark Garnier Chair, Committees on Arms Export Controls, Chair, Committees on Arms Export Controls

The administrators are employed to work on behalf of the creditors and shareholders, so they are serving their interests. It strikes me as relatively obvious that the rights over that intellectual property and those things that are relevant in this schedule still, either directly or indirectly through the administrators, lie with the creditors and shareholders.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Department for Business, Energy and Industrial Strategy) (Energy and Climate Change), Shadow Minister (Business, Energy and Industrial Strategy)

But if the IP, the patents and various other things have been made off with by another company, and the administrators have presumably agreed to that, although they never hold the rights, where are the shareholders and creditors’ duties and rights at that point? Indeed, what is the remedy as far as the Government are concerned in those circumstances?

I can honestly say I am fairly confused about this, so I do not have the full answer to the hon. Member’s concerns. I am raising this more because I am not sure whether the wording in the schedule is fully adequate for those circumstances. I would be grateful if the Minister gave me some assurance, took some of the clouds from my mind about this, or alternatively said, “Well, we’re going to have a look at this to see whether there is a bit of a problem that we might have to fix.”

Photo of Nadhim Zahawi Nadhim Zahawi Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy), The Parliamentary Under-Secretary for Health and Social Care

My hon. Friend the Member for Wyre Forest addressed the issue of the administrator’s acting on behalf of the creditors. The important point to focus on—I will happily write to the hon. Member for Southampton, Test after the sitting—is that ultimately, it is the acquirer. If a malign actor were come to acquire those assets, and it is notifiable as part of the 17 sectors, then the transaction is made void. That is the remedy, effectively, because the acquirer would have to come forward and make representations to the investment unit about why they are acquiring and get clearance.

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Energy and Industrial Strategy), Shadow Minister (Digital, Culture, Media and Sport)

I thank my hon. Friend the Member for Southampton, Test for the points that he is making. I wish to put to him, and effectively the Minister as well, an example which was raised yesterday in debate on the Telecommunications (Security) Bill, with which I am intimately familiar as the collaboration is between Nortel, an equipment vendor for whom I worked in the past, and Huawei, on a project to develop new technology. When two entities come together and collaborate, which I do not think will meet any of the trigger events described here, but instead create something which has IP in it which is of value, how does that come under the provisions of the clauses and the schedule?

Photo of Graham Brady Graham Brady Chair, Conservative Party 1922 Committee

I have let everyone speak. I do not know whether there are any more answers that the Minister wants to offer.

Photo of Nadhim Zahawi Nadhim Zahawi Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy), The Parliamentary Under-Secretary for Health and Social Care

Let us take the example given by the hon. Member of Nortel collaborating with Huawei or any other entity. They have to satisfy themselves that if they wish to acquire something else in future, they will effectively have to go through the same process of national security clearance. Collaboration between entities or in academia are covered under the separate guidance, including from the agencies, on who they collaborate with, but I think that is a different issue. Once an asset is created that has a national security implication for the United Kingdom, the Bill comes into play.

Question put and agreed to.

Clause 5 accordingly agreed to stand part of the Bill.