Clause 6 - Notifiable acquisitions

National Security and Investment Bill – in a Public Bill Committee at 3:30 pm on 1st December 2020.

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Photo of Stephen Kinnock Stephen Kinnock Shadow Minister (Foreign and Commonwealth Affairs) 3:30 pm, 1st December 2020

I beg to move amendment 6, in clause 6, page 4, line 27, at end insert—

‘(4A) The Secretary of State must have regard to the protection of critical national infrastructure when making regulations under this section.’

This amendment would require the Secretary of State to have regard to the protection of critical national infrastructure when making notifiable acquisition regulations.

It is a pleasure to serve under your chairmanship, Sir Graham. I congratulate the Minister on his recent appointment as the vaccine tsar. I must say, he is taking multi-tasking to a whole new level, and we wish him well.

I rise to speak in favour of amendment 6, which is closely related to amendments 7 and 8. Sir Graham, should I speak to amendments 7 and 8 as well now, or to amendment 6 alone?

Photo of Stephen Kinnock Stephen Kinnock Shadow Minister (Foreign and Commonwealth Affairs)

Thank you, Sir Graham.

Before we go down into the weeds of it, it is worth taking a step back and thinking about the fundamental purpose of the Bill. The amendments are informed by that fundamental purpose, because we wish to be constructive and to support the Bill, but also to improve it. We feel that if our amendments are not accepted, it will be a real missed opportunity to achieve something even better. We can take this Bill from good to great—an objective I am sure the Minister would support.

The aim needs to be around national security, yes, but also about economic resilience, because underlying economic resilience is actually what is required for our national security. The two are fundamentally intertwined. To build that resilience, we need sovereign capability. We need, as a country, to have a business culture based on purpose, rather than on fast bucks and short termism. We need resilience so that we are a country with a healthy and viable manufacturing sector that enables us to export more, because we would argue that the persistent trade deficit we face as a country has an impact on our national security. We also need to develop that sovereign capability. As the covid crisis has demonstrated, we have ended up being far too exposed to highly extended supply chains, many of which go through countries that are not our natural allies. That has left us lacking in resilience. The Bill is about managing risk, and our risk levels are far too high because of the economic model we have fallen into.

Photo of Simon Baynes Simon Baynes Conservative, Clwyd South

I understand what you are saying, but I think what you are suggesting really changes the whole Bill, because, as we were discussing with the witnesses, it is almost more about national interest. This is about national security, not national infrastructure. What you are proposing is a fundamental change or add-on to the nature of the Bill, which would have ramifications throughout the whole Bill process. I think it is important to make that point at this stage.

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

I was not proposing anything; the hon. Gentleman was.

Photo of Stephen Kinnock Stephen Kinnock Shadow Minister (Foreign and Commonwealth Affairs)

I thank the hon. Member for Clwyd South for his intervention. I take that point absolutely, but I think it is important sometimes to go back to the mindset we have around this legislation. The Opposition feel that there are opportunities to strengthen the Bill. Every single Bill that the Department for Business, Energy and Industrial Strategy puts forward should be informed by that need to strengthen our sovereign capability and make us less reliant on risky supply chains, and to be somewhat more realistic about the way that the world and globalisation work. It really was just contextual, but I do take the hon. Member’s point that we should remain within those parameters. I think the mindset is really important.

On the issue of exposure to highly extended supply chains and the way in which we have had the floodgates open for hostile foreign takeovers, this country has the highest number of hostile foreign takeovers in the entire OECD. That really speaks volumes about our economic model.

In terms of relations with China, the Bill is not an anti-China Bill as such, but we all know that the key economic development of the last few decades has been the rise of China. The reality is that we have been naïve and complacent in the way we have dealt with China. Previous Prime Ministers announced a so-called golden era, whereby we were going to open our markets to China, the Chinese were going to do the same, and they would gradually align with the international rules-based order, its norms and even its values, some thought.

That has been an unmitigated disaster. None of that has happened. In fact, what we have seen is that the benefits of the golden era have flowed almost exclusively from west to east. We are still running a £19 billion trade deficit with China and we are still seeing extremely hostile political acts, not least what is happening in Hong Kong and the persecution of the Uyghur people in Xinjiang. Both economically and politically, the strategy has failed.

It is heartening to see in the Bill some evidence that the Government are learning that lesson. I think the Bill is the Government saying, “Yes, we have been naïve and complacent. We do need to take a more hard-headed, realistic approach to China in particular, so we are going to take some action.” But as I said, the Bill could do so much more and be so much better. It is in that spirit that we have tabled our amendment.

There is also an added element of urgency: the covid crisis will leave many British businesses distressed and vulnerable. They will be vulnerable to more hostile foreign takeovers, including those backed by state-owned enterprises and state-backed investment vehicles. When we talk about China, there is, of course, no difference between business and the state—business is the state. The Chinese Communist party has a membership of 90 million people. It is absolutely clear that any time a business takes a decision, regardless of whether it is ostensibly or nominally in the private sector, it is the CCP that makes the call. We are dealing with a situation in which our business community—distressed, vulnerable and potentially with huge cash-flow issues—is going to be susceptible to those kinds of hostile foreign takeovers.

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Energy and Industrial Strategy), Shadow Minister (Digital, Culture, Media and Sport) 3:45 pm, 1st December 2020

My hon. Friend is making an excellent point. In addition to the critical issue of the state of many small businesses after covid, there is Brexit. The low value of the pound means that our distressed assets will be cheaper on the global market.

Photo of Stephen Kinnock Stephen Kinnock Shadow Minister (Foreign and Commonwealth Affairs)

My hon. Friend makes a crucial point. As we have constantly said, this is about risk and the hierarchy of risks we face. Risk is always sensitive to what is happening in terms of the global economic outlook. As she rightly points out, Brexit and leaving the transition period will be a seismic event for our country. It will have a massive impact on our currency and the strength of the pound. Combining that with the covid situation means that we have to be careful. We have to be vigilant and ensure that we defend our national interest. That is why it is important that our mindset involves taking a holistic view of our national interest, particularly in the turbulent times in which we find ourselves. This is fundamentally about saying that our national security is not for sale. Our national security does not have a price tag, and it has to be the primary consideration.

With those contextual comments in mind, I move on to amendment 6, which considers a particular aspect of our economy. It focuses on the asset side of the ledger in terms of this Bill—namely, critical national infrastructure. Our amendment would require the Secretary of State to have regard to the protection of critical national infrastructure when making notifiable acquisition regulations. Going back to China, it is remarkable how much of our critical national infrastructure is in the hands of Chinese enterprises or state-backed investment vehicles. This is happening now, right under our noses, and needs to be taken into account in discussing this amendment.

In essence, our amendment offers a way to ensure that critical national infrastructure is given particular and extra consideration in the national security and investment assessments within the regime. Given that the Bill fails to define national security, it does not, by definition, reference critical national infrastructure.

To drill down further, the Government’s consultation on the Bill lists the 17 sectors that might come under the regime’s mandatory notification process, but it does not explicitly list the UK’s critical national infrastructure. In fact, there is not a direct overlap. Five sectors are not included in the 17 that are in the consultation, but they are in our critical national infrastructure. The 17 range from advanced materials, advanced robotics, artificial intelligence, civil nuclear, communications, computing hardware, critical suppliers to Government, critical suppliers to the emergency services, cryptographic authentication, data infrastructure, data infrastructure, defence, energy, engineering biology, military and dual use, quantum technology, satellite and space technologies, to transport. However, the Centre for the Protection of National Infrastructure defines 13 areas as critical national infrastructure, including several sectors that are not included in the 17: food, Government more broadly––not just critical suppliers––health, space and water.

If we look at the impact of the pandemic and think about what critical national infrastructure means, we see that the 17 sectors are already out of date. Given our experience with covid and the concerns about food supply, that is clearly an issue we need to examine closely. Water is crucial to our wellbeing as a nation, yet it is not included in the 17. Our amendment argues that critical national infrastructure should be taken as an asset class. If defined as an asset class, the landscape moves and the definitions of sectors move, but there is clarity about critical national infrastructure always being within the scope of the Bill.

Photo of Matt Western Matt Western Opposition Whip (Commons)

As always, my hon. Friend makes important points. To amplify those, if we had been sitting down and writing this Bill 10 years ago, which would have been a pretty good thing to have done, with hindsight––

Photo of Matt Western Matt Western Opposition Whip (Commons)

I think I chose my time horizon pretty well. Had we been doing so, we may not have been considering these 17 categories, traffic light systems, underground systems, public transport or railway infrastructure in a way that we have to nowadays because we understand just how interconnected things are. We understand what the threats and risks are from these sorts of investments from possibly rogue organisations, states or businesses.

Photo of Stephen Kinnock Stephen Kinnock Shadow Minister (Foreign and Commonwealth Affairs)

I thank my hon. Friend. This is genuinely not an attempt to make a party political point. There is no doubt that we should have seen the impact of the rise of China long before 2010. This is something that has been going on for a long time. President Xi Jinping was appointed in 2013 and there has been a qualitative shift in China’s outlook and the way in which it is engaging with the world. There is an increasingly aggressive and assertive set of economic policies. One of the experts said that the objective is to dominate the global technology scene. That is an explicit objective in the Made in China 2025 vision that the President and the Chinese Communist party adhere to. While we are not trying to make party political points here, a lot has changed in the last seven years.

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)

Does my hon. Friend consider that had these provisions, as amended, been in place in, say, 2015, the Government would not have signed the Secretary of State’s investment agreement with the Chinese state nuclear corporation, giving it control of a nuclear power plant and the right to build its own reactor, staff it with its own staff and run it entirely according to its own interest? Does he think that it was perhaps naive to do that? Might greater protection have been afforded for future deals under this sort of arrangement?

Photo of Stephen Kinnock Stephen Kinnock Shadow Minister (Foreign and Commonwealth Affairs)

I thank my hon. Friend. His intervention is telling because it points to a fundamental failing at the heart of Government in terms of being joined up and credible. We cannot condemn aspects of China’s activity and its increasingly assertive behaviour —potential military threats to Taiwan, and sabre-rattling in the South China sea—while opening up our nuclear energy capability to that same hostile foreign actor. Security is about our credibility, resilience and ability to stand strong and united, because we know that the Chinese Communist party will exploit weakness and division. Consistency is vital—consistency and security are two sides of the same coin.

To answer my hon. Friend’s question, I profoundly and sincerely hope that the investment to which he refers would not have passed this test. Frankly, if it had passed this test, the Bill would end up not being worth the paper it is written on. This is about the implementation of the Bill and the Government’s capability to stand up for our national security and critical national infrastructure, which is at the heart of the amendment.

It is worth pointing out that the Intelligence and Security Committee defines our critical national infra- structure as

“certain ‘critical’ elements of infrastructure, the loss or comprise of which would have a major detrimental impact on the availability or integrity of essential services, leading to severe economic or social consequences or to loss of life.”

I am convinced that no Member present would argue with that definition or against putting those considerations at the heart of what Parliament and the Government stand for.

We must include critical national infrastructure. It would follow best practice—our allies the United States and Canada both include critical national infrastructure in their list of key factors to assess as part of national security, so we would not be reinventing the wheel but simply following best practice. In the expert witness sessions, I asked Sir Richard Dearlove specifically whether he thought that a definition of critical national infrastructure should be included in the Bill. He said:

“I would certainly see that as advantageous, because it defines a clear area where you start and from which you can make judgments”.––[Official Report, National Security and Investment Public Bill Committee, 24 November 2020; c. 24, Q31.]

As I said the start of my comments, sovereign capability is what this is really about, and our sovereign capability is profoundly undermined by the fact that so much of our critical national infrastructure is not in our own hands. Supply chains are over-extended and often depend on actors that perhaps 10 years ago we did not see as we do now, which has to be taken into account. I urge hon. Members to consider the amendment seriously, because it goes to the heart of what Parliament and Government should be about.

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

Amendment 6 would require the Secretary of State to have regard to the protection of critical national infrastructure when making notifiable acquisition regulations. I welcome the intention of the hon. Member for Aberavon to ensure that the protection of critical national infrastructure is considered by the Secretary of State. Indeed, I take it as a ringing endorsement of the approach the Government have taken in clause 6 to define the specific sectors and activities subject to mandatory notification clearance.

As the hon. Gentleman will know, we intend to introduce regulations under the clause once the Bill has received Royal Assent, and we are currently consulting on the sector definitions, which cover much of the critical national infrastructure that he quite rightly shared with the Committee, including energy, civil, nuclear, transport, communications and defence. We are publicly consulting, in particular with sector experts, the legal profession, business and investment communities, to ensure that those definitions provide clarity and certainty, and are focused on the specific parts of sectors and activities that can pose risks to our national security. I can assure the hon. Gentleman that, in developing any notifiable acquisition regulations, the Secretary of State will always take into account the national security needs of the country within the critical national infrastructure sectors, the advanced technology sectors and the wider economy.

Photo of Stephen Kinnock Stephen Kinnock Shadow Minister (Foreign and Commonwealth Affairs) 4:00 pm, 1st December 2020

I thank the Minister for giving way; he is being very generous. Does he not see the advantage of including this point on the face of the Bill? It makes an important statement—it is a political statement, really—about the need to ensure that, whatever the regulations say, critical national infrastructure is embedded in 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 hear what the hon. Gentleman says. The word that slightly worries businesses is “political” statement. I think that that is a concern. I think his intention is right, and the reason why we have taken the route of mandatory notification for the 17 sectors is precisely the point he makes. I assure him that the Secretary of State will always take into account the national security needs of the country within the critical national infrastructure sectors. Indeed, the hon. Gentleman will recall that the Government introduced a statutory instrument to include health in the Enterprise Act 2002 when the covid pandemic hit.

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)

I wonder whether I can tempt the Minister to confirm that the 2015 Secretary of State’s investment agreement concerning Chinese control of the nuclear power station and reactor was a naive act by the Government and did not take national security properly into consideration, and that the Secretary of State who signed that agreement in the Minister’s Department clearly did not do so. Will the Minister both reflect on the naivety of that deal and give an indication that such a deal would never be contemplated by this Department in future?

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)

I was not quite; I was referring to the investment agreement on the Hinkley deal that enabled the Chinese state nuclear corporation to develop one third of that series of reactors entirely within its own resources. That was signed into the agreement by the then Secretary of State so that they would be junior partners in Hinkley, equal partners in Sizewell and 100% owners, operators and organisers of Bradwell. That is what I was referring to. The Minister ought to say a few words on the likely actions of the Department in future under the terms of the Bill.

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

Crucially, Minister, interesting though this topic may be, those last few words should be firmly in your mind in any response you give.

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 am grateful to you, Sir Graham, for refocusing our attention on the amendment. Suffice it to say that national security is always taken into account when it comes to nuclear or energy, as it was at the time of those agreements. The point I am trying to make is that we must be flexible to ensure that the new regime can adapt to the threats of tomorrow. That is the right approach to ensure that we can keep this country safe. Of course, any such regulations will be subject to parliamentary approval through the draft affirmative procedure, giving Members of this House and the other place the opportunity to ensure that the mandatory notification and clearance regime works effectively. As such, I cannot accept the amendment and I hope that the hon. Member for Aberavon will seek leave to withdraw it.

Photo of Stephen Kinnock Stephen Kinnock Shadow Minister (Foreign and Commonwealth Affairs)

I thank the Minister, but I am afraid that we will have to push the amendment to a Division, because it is so fundamental to how we see the purpose of the Bill. We have heard lots of assurances today along the lines of, “Trust us. We are on the right track. We get it.” I hope the Minister will forgive us, but we prefer the “trust but verify” model. Therefore, we think that this provision should be in the Bill, and I will have to press the amendment to a Division.

Question put, That the amendment be made.

Division number 5 National Security and Investment Bill — Clause 6 - Notifiable acquisitions

Aye: 5 MPs

No: 10 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

The Committee divided: Ayes 5, Noes 10.

Question accordingly negatived.

Amendment proposed: 5, in clause 6, page 5, line 3, at end insert—

“(10) Before making regulations under this section, the Secretary of State must—

(a) provide the Intelligence and Security Committee with one week’s advance notice of his/her intention to bring forward such regulations; and

(b) make any necessary amendments to legislation to allow the Intelligence and Security Committee to respond with recommendations.”—

This amendment would require the Secretary of State to notify the Intelligence and Security Committee before making regulations under this section, and would provide a mechanism for the Committee to respond with recommendations.

Question put, That the amendment be made.

Division number 6 National Security and Investment Bill — Clause 6 - Notifiable acquisitions

Aye: 6 MPs

No: 10 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

The Committee divided: Ayes 6, Noes 10.

Question accordingly negatived.

Photo of Stephen Flynn Stephen Flynn Shadow SNP Deputy Spokesperson (Treasury - Financial Secretary)

I beg to move amendment 13, in clause 6, page 5, line 3, at end insert—

“(10) Notifiable acquisition regulations must be reviewed one year after they are made, and at least once every five years thereafter.”

This amendment would require notifiable acquisition regulations (including which sectors are covered) to be reviewed one year after they are made, and once every five years thereafter.

It is a pleasure to see you in the Chair once again, Sir Graham. As things stand, I think it is probably a fair assessment, based on what we have heard, that perhaps if the Government had their time again they might have been able to bring forward a consultation in relation to which sectors will be linked to the Bill once it is on the statute book.

I think that a disappointing approach has been taken. It could have been done in a much more constructive manner. The purpose of the amendment is to try to highlight that the issue is a real one, and to highlight the scale and scope of the sectors. As we talked about, there is perhaps concern about whether a specific sector goes far enough. For instance, does artificial intelligence look properly at the role of social media? Does the infrastructure tie into social media in any way, shape or form? There are other examples of that too. Having the review after a year would perhaps allow the Government to be a little more certain about where their priorities lie, and to provide additional certainty to businesses in what is an ever-moving landscape. National security is, of course, an ever-evolving issue, as we have heard passionately from a number of Members.

I will keep my remarks succinct. The amendment is about tightening things up and removing the difficulties that are being caused by the lag between the Bill and the consultation, and doing so in a constructive fashion to try to assist the Government.

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

To discuss this amendment, I believe it would be helpful to revisit briefly the role of notifiable acquisition regulations under the regime. A key part of the Bill is the ability it affords the Secretary of State to make acquisitions of certain shares or voting rights in certain entities—notifiable acquisitions, meaning they must be notified and cleared by the Secretary of State before they can take place. Those types of entity are to be specified in regulations by the Secretary of State and the Government have published a consultation on the definitions of those types of entity, which fall within 17 key sensitive sectors of the economy that we propose to initially be covered by the mandatory notifiable regime.

The regulation-making powers in the clause are the best and most proportionate way to enable the Secretary of State to change over time what does and does not constitute a notifiable acquisition. That is crucial for two main reasons. First, it would not be the right approach to set the types of entity covered by mandatory notification and their definitions in stone, forever, in 2020. We all know how difficult this year is. The Secretary of State must be able to update them, in some cases rapidly, as the threats we face evolve and to keep pace with technological development.

Secondly, the Secretary of State must be able to react to the operation of this regime in practice. While the Bill does not include a white list that exempts specific acquirers from the mandatory regime, we have been clear that we will monitor closely the volumes and patterns of the notifications made to the Secretary of State. It may emerge over time, for example, that acquisitions by institutional investors and pension funds are routinely being notified but very rarely remedied or even called in. Such evidence could build the case for using the powers in this clause to make exemptions to the definition of a notifiable acquisition, on the basis of the characteristics of the acquirer.

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

Order. I do not know who the person who has just walked in is, but only Members are allowed in the room. Please leave immediately.

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

It is therefore right that the Secretary of State keeps a constant watch on the regulations. Indeed, it is vital that he has the flexibility to re-assess and, if needed, seek to update the regulations as soon as is needed, while taking a proportionate approach that gives as much stability to business and investors as possible. Ensuring this vital timeliness and balance means it would not be appropriate to impose particular requirements on when and how frequently the Secretary of State should review the powers, so I cannot accept the amendment. However, I agree wholeheartedly with the hon. Member for Aberdeen South that keeping the regulations up to date and proportionate is of the utmost importance, and I can assure him that that is what the Secretary of State will do.

Photo of Stephen Flynn Stephen Flynn Shadow SNP Deputy Spokesperson (Treasury - Financial Secretary)

I will certainly take that assurance from the Minister in the spirit in which it is given, but that is probably as far as that will go. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of 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

Clause 6 defines the circumstances covered by mandatory notification. The Bill calls them notifiable acquisitions, on the basis that they must be notified and cleared by the Secretary of State before they can take place. The Government have looked carefully at investment screening regimes around the world, in particular those of our Five Eyes allies and other security partners. Common among them all is the inclusion of a mandatory notification component to ensure that the most sensitive transactions must be actively considered and receive clearance by the relevant authority before they can take place. We have concluded that that is the right step for the United Kingdom to take as well. That reflects our developed view that the Government must have greater assurance that certain acquisitions in the most sensitive sectors, including both the national infrastructure sectors and certain advanced technology sectors, are safe to proceed.

Without that, the risks that some acquisitions may pose from day one, with hostile actors seeking to extract sensitive intellectual property immediately and transport it to far flung corners of the world, may already have crystallised. In such circumstances, intervention after the event would too often be irrelevant, as unwinding the acquisition would not unwind the risk to our national security itself. That is why it is vital that the Bill includes a mandatory notification element at its heart, and that is why the Government have strengthened the policy consulted on in the 2018 White Paper.

Clause 6 provides for acquisitions of certain shares or voting rights in specified qualifying entities that are engaged in specified activities in the UK to be notifiable. By specified, I mean specified in regulations by the Secretary of State. The Government have published a consultation on the definitions of those activities, which fall within 17 key sensitive sectors of the UK economy that we propose to initially be covered by the mandatory notification regime.

We are currently engaging with a wide range of external experts as part of that consultation and welcome input from sector specialists, the business and investor communities, and the legal profession, to help refine the definitions. That will ensure that the scope of the mandatory notification elements of the regime is targeted and proportionate, and keeps Britain firmly open for business. I know that is something that you are particularly passionate about, Sir Graham.

Acquisitions of certain shares or voting rights in these specified entities will be notifiable. The regulations will therefore be the mechanism by which we will place the final part of the definitions of the acquisitions that are to be subject to the mandatory notification regime, giving parties the certainty they need to assess whether their acquisitions fall within the regime.

On that point, hon. Members will see in subsection (2) that the types of acquisition covered by mandatory notification are not simply the full list of trigger events that we will come to discuss in clause 8. That is deliberate. The nature of any modern investment screening regime is that it must provide sufficient flexibility for the Government to examine a broad range of circumstances, given the increasingly novel way in which acquisitions are being structured and the vigorous way hostile actors are pursuing their ends.

However, it must also provide clarity and certainty to businesses and investors, which is particularly true when we consider the mandatory notification regime, under which failure to obtain clearance before completing will result in the voiding of a notifiable acquisition, and possibly criminal or civil penalties. Parties must be able to self-assess whether they are in scope. To that end, notifiable acquisitions are objective circumstances, primarily based around an acquisition taking a party’s holding of shares or votes, to or past a particular numerical threshold. It also includes the acquisition of voting rights in a specified entity that enables the person to secure or prevent the passage of any class of resolution governing the affairs of the entity.

I emphasise that this approach does not prevent other types of trigger events being notified to the Secretary of State, or otherwise stop him from exercising the call-in power in respect of other types of trigger events, where the legal test is met. This is simply about the scope of the mandatory notification element of the regime.

I should also note that, under subsection (2)(b), the definition of a notifiable acquisition includes a circumstance that is not, in and of itself, a trigger event. Acquisitions that take a party’s shares or voting rights in a specified entity to 15% or more, not exceeding 25%, are notifiable even though they are not, by themselves, trigger events that may be called in by the Secretary for State for scrutiny under the Bill.

The reason why we have nevertheless required such acquisitions to be notified is that increases in shares or voting rights to 15% or more may realistically result in the acquirer having material influence over the policy of the entity, and therefore control of it. That would constitute a trigger event. The notification requirement is thus intended to ensure that the Secretary of State is made aware of the proposed acquisition and can take steps to determine whether material influence will be acquired. That will require an assessment of all the circumstances of the case, including any other rights being acquired, such as board representation. The Secretary of State will be able to obtain the relevant information from the notification form or through his information-gathering powers.

The 15% threshold is broadly consistent with the UK’s merger framework. As the Competition and Markets Authority notes in its mergers guidance:

“Although there is no presumption of material influence below 25%, the CMA may examine any shareholding of 15% or more in order to see whether the holder might be able materially to influence the company’s policy.”

We think that strikes the right balance by requiring parties to focus on a numerical threshold only, while still allowing the Secretary of State to be notified about—and then to call in if the legal test is met—more subjective acquisitions of control in the most sensitive sectors.

I will say a few more words about the regulation-making powers set out in the clause. They are the best and most proportionate way to enable the Government to change, over time, what does and does not constitute a “notifiable acquisition”. That is crucial for two main reasons. First—I have already spoken about sectors—it would not be the right approach to set the sectors covered by mandatory notification and their definitions in stone, forever. The Government must be able to update them—in some cases rapidly—as the threats we face evolve, and to keep pace with technological advances. As I am fond of saying, many of those advanced technology sectors simply did not exist in 2002 when the Enterprise Act was developed. They were merely a speck or, if you will, a quantum dot on the horizon.

Secondly, the Government must be able to react to the operation of that regime in practice. As I explained earlier to the hon. Member for Aberdeen South, although the Bill does not include a white list to exempt specific acquirers, we have been clear that we will closely monitor the volumes and patterns of notifications made to the Secretary of State. It may emerge over time, for example, that acquisitions by institutional investors and pension funds are routine. Such evidence could build the case for using the powers in the clause to make exemptions to the definition a notifiable acquisition on the basis of the characteristics of the acquirer, as subsection (5)(b) would enable us to do.

That is the approach of a Government intent on getting the right balance, both now and in future, between protecting our national security and keeping the UK a premier investment destination. I hope that sentiment is shared on both sides of the Committee.

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Energy and Industrial Strategy), Shadow Minister (Digital, Culture, Media and Sport) 4:15 pm, 1st December 2020

I will be brief because I know that we have to make progress, but I will say a few words on clause 6, which is in some ways the heart of the Bill, defining as it does what a “notifiable acquisition” is.

I regret that despite the Minister’s repeated assurances, I am not entirely convinced that he has come to the Committee ready to make changes in response to our very constructive proposals. He has repeated on a number of occasions that the Bill is the best and most proportionate means, despite our constructive suggestions to the contrary. I remind him that—as we see in this clause in particular—the Bill gives significant powers to the Secretary of State, and particularly significant additional powers on delegated legislation. It is possible that not every clause is as perfect as it could be or as he seems to think it is. In particular, the amendment set out by my hon. Friend the Member for Aberavon was a really important contribution to bringing critical national infrastructure directly and clearly into the remit of the Bill. If the Minister is so opposed to including them directly, what elements of critical national infrastructure does he think do not form part of our national security?

My hon. Friend the Member for Southampton, Test made an excellent point with the example of our nuclear capability. Only five years ago, the then Prime Minister and Chancellor of the Exchequer were happy to hand not only the financing but the technological development, innovation and reputational consequences to China. Does the Minister agree that if we had had this Bill 10 years ago, as we wished, having critical national infrastructure in it would have made that impossible?

There is also the case of Huawei. When that was debated last night, it was clear that if we had been writing this Bill five or 10 years ago, I doubt whether the then Government would have included telecommunications, given their lack of interest in many acquisitions and procurements in that area. We now see the impact of having a high-risk vendor in our 5G and fibre network on our national security. We will not oppose clause stand part but we hope to encourage the Minister to accept our most constructive and supportive amendments.

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

Before I put the question formally, for the benefit of Members––particularly new Members who have not been able to be here as much in the last year as would otherwise have been the case––let me say that a good way of thinking of the rules of order in Committee is to think of them as being pretty much the same as in the Chamber. Similarly, above and below the bar applies in Committee as well as in the Chamber.

Question put and agreed to.

Clause 6 accordingly ordered to stand part of the Bill.