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

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

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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 3:15 pm, 1st December 2020

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.