Clause 12 - TRIGGER EVENTS: SUPPLEMENTARY

National Security and Investment Bill – in a Public Bill Committee at 11:30 am on 3rd December 2020.

Alert me about debates like this

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Energy and Industrial Strategy), Shadow Minister (Digital, Culture, Media and Sport) 11:30 am, 3rd December 2020

I beg to move amendment 16, in clause 12, page 8, line 4, leave out from “does” to end of line 11 and insert

“establishes that arrangements are in progress or contemplation which, if carried into effect, would result in a trigger event taking place.”

This amendment would expand the scope of events to be considered trigger events.

Photo of Derek Twigg Derek Twigg Labour, Halton

With this it will be convenient to discuss clause stand part.

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

It is a pleasure to serve under your chairship, Mr Twigg, and to see the Committee reconvened to debate this important Bill. On Tuesday, we had a lively, informative and generally collegiate debate in which we learned a significant amount about the Bill and each other. We learned, for example, that the hon. Member for Arundel and South Downs has an interest in low pay, the hon. Member for South Ribble is a scientist, the hon. Member for Wyre Forest has a great interest in defending business investment, and my hon. Friend the Member for Southampton, Test knows well the difference between “may” and “shall”, and entered Parliament at the same time as yourself, Mr Twigg. We learnt that my hon. Friend the Member for Ilford South has a great interest in defending our national security through supply chains. We learnt that I have a tendency to mispronounce and misplace my hon. colleagues’ constituencies—something that I am working on. We also learnt that the Minister feels this Bill is perfect in every way, clause and subsection, such was his reluctance to accept the most constructive and helpful amendments—I would say—put forward by the Opposition. As we look at our amendments today, I gently point out to the Minister that that is not a view held by everyone across the House, even by Government Members. I note the letter sent yesterday by the Intelligence and Security Committee pointing out several aspects that we have raised, requiring clarification and significantly indicating its intention—or desire—to be a greater part of both the scrutiny of this Bill and its implementation. I hope that in today’s deliberations we will meet with more support from the Minister.

We had lively debates on Tuesday and some votes, which as I have indicated that we did not win. Amendment 16, in my name and those of my hon. Friends, is a probing amendment. We seek to understand that the Minister fully understands the provisions of his Bill. That is an absolutely appropriate thing to do, as hundreds of thousands of business and individuals will be impacted by it and will have to seek to understand it. It is appropriate that we test the impact of the Bill now, particularly as the Minister has many competing duties, and, as we understand, is taking on more onerous ones.

Clause 12 contains supplementary provisions in relation to determining when a trigger event that takes place over more than one day is to be treated as taking place, and determining whether a trigger event is in progress or contemplation in circumstances where a person has entered into an agreement or arrangement that enables them to do something in the future that would result in a trigger event taking place. The amendment, as we have framed it, would considerably expand the scope of events that could be considered trigger events. In effect, it would give the Secretary of State power to call in events under contemplation, by leaving out from “does” to the end of line 11 and inserting:

“establishes that arrangements are in progress or contemplation which, if carried into effect, would result in a trigger event taking place”.

As we have discussed, the Bill gives significant powers to the Secretary of State and the amendment would significantly expand notification volumes. There are many minor transactions where parties agree that someone might have the right to buy more shares in the future, and, in themselves, these transactions do not create direct influence and are unlikely to create a threat to national security. We recognise that the amendment would require all such minor transactions to be notified; it would seek to reflect the potential intention that these minor transactions may be part of a greater contemplation of something which would lead to a trigger event.

We recognise that Government would already have the power to intervene, through notification, once a trigger event takes place, so this amendment brings all possible future trigger events into scope, not just actual, or likely, future events.

Photo of Matt Western Matt Western Opposition Whip (Commons)

It is a pleasure to serve under your chairmanship, Mr Twigg. On the point on these disguised elements, does my hon. Friend agree that the issue is about not simply shareholding, but, as we heard in the evidence sessions, membership of boards, and how voting rights might not necessarily be in line with shareholding percentages, and that they can be distorted at a future date?

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

I am grateful to my hon. Friend for that intervention. He makes a good point, which reflects why we are proposing this amendment to test the Bill. As he says, influence can be exercised in a wide range of ways.

I will elaborate on this later, but we must recognise that hostile parties will not sit back and see the Bill, then say “Oh well, that’s fine; we won’t try anything against the United Kingdom’s security,” as a consequence. They will seek ways to game and effect an influence regardless. Changes to the relationships between voting rights and shareholdings, for example, might be one way where they could seek to bypass the Bill.

I recognise that this is a wide-ranging amendment, but I seek to understand how the Minister feels that the Bill, as it stands, can address the kinds of concerns that my hon. Friend has just raised. This also reflects—I emphasise this again—the approach that we are taking, as the Opposition, on the Bill. The first priority and central plank of that approach is to put our national security first, and to do everything that we can to secure the strategic and economic resources on which our security relies; that focus on putting national security first motivates this probing amendment.

As my hon. Friend indicated, there can be a number of contingent investment transactions where parties agree to future events that transfer controls or influence. For example, a buyer might buy a low share of a company today, but might acquire with it the right to influence its shareholding in the future to levels of material influence.

I think the Minister will agree that we must watch out for these disguised transactions. They can start with innocuous levels of shareholdings, but set the ground for harder-to-notice increases in influence. At the moment, the Bill leaves out these transactions from the scope of notification, so the Government could not intervene. The amendment is therefore intended to probe the Government’s approach.

I understand—and we have discussed—that we must ensure a regime that is proportionate in its notification demand, particularly for small and medium-sized enterprises. This has been raised a number of times by Members on both sides of the Committee, who are concerned about avoiding a disproportionate burden on small and medium-sized enterprises, which will make up 80% of the mandatory notification base alone, according to the Government’s impact assessment. For them, this new regime will be a major change, and we have tabled a series of amendments to ease the burden on them.

I also recognise that the amendment expands the powers, and to do so may significantly expand notification volumes without necessarily adding significantly to incremental substantive powers. There are lots of minor transactions, where parties agree that someone might have the right to buy more shares in the future. In themselves, such transactions do not necessarily create direct influence. However, we should not loosen our grip on security to make the regime more efficient for small and medium-sized enterprises. I would hope we could both ensure proportionality for small and medium-sized enterprises and maintain—indeed, increase—our guard on our national security. None of our businesses benefit when we lower our guard.

We must be awake—this is what I hope to hear from the Minister in his response—to the ways in which hostile actors might game the new regime. I am sure they are spending just as much time studying it as we are spending scrutinising it, so we must not assume that our logic will be mirrored by compliant hostile actors. We already heard from the recent head of MI6, Sir Richard Dearlove, of the sophistication of other actors. He noted in his evidence session that,

“the Chinese are highly organised and strategic in their attitude towards the West and towards us…We need to conduct our relationship with China with much more wisdom and care. The Chinese understand us incredibly well”,––[Official Report, National Security and Investment Public Bill Committee, 24 November 2020; c. 19-20, Q21.]

whereas we do not understand them nearly as well. We also heard from Dr Ashley Lenihan of the London School of Economics about the need for powers to deal with complex

“novel investments from countries such as China, Russia and Venezuela…that the Secretary of State and the investment security unit were not even aware of.” ––[Official Report, National Security and Investment Public Bill Committee, 24 November 2020; c. 34, Q40.]

That is the complex and changing security context we are in. Faced with that, our approach should be to ensure a wide scope of national security powers while creating the most efficient review process for SMEs, and the most accountable scrutiny structure for Parliament to hold Government to account.

The amendment will ensure the wide scope we need to protect our national security. As a consequence, covert transactions by hostile actors, which start innocuously but are intended to grow to material influence levels, would be ones where the Government could now intervene. We must give regard to expert evidence. We heard that information, not just influence, is critical to national security. Without the amendment, it would be harder for the Government to intervene in time, having to keep a close eye on a range of contingent transactions, and having to act promptly whenever shareholder levels move to become present trigger events, so there is a bit of a cliff edge issue there. It would be much easier and more robust for the Government to be called and act when those contingent events are agreed in the first instance.

I will go back to the expert evidence. I have quoted Professor Martin a number of times. He said

“the mantra, if I had one, would be, ‘Broad powers, sparingly used, with accountability mechanisms’.”––[Official Report, National Security and Investment Public Bill Committee, 26 November 2020; c. 80, Q96.]

I think this amendment aims to achieve that.

Christian Boney from Slaughter and May said:

“At the moment, the trigger events are focused, as you were saying, on the ability to influence a particular company, but there are certainly circumstances where, without acquiring a level of shareholding that enables a person to influence the company, the person can nevertheless gain very significant access to information”.––[Official Report, National Security and Investment Public Bill Committee, 26 November 2020; c. 75, Q88.]

The amendment seeks to probe the Government’s approach to such contingent events. I look forward to hearing from the Minister.

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 11:45 am, 3rd December 2020

I thank the hon. Lady and share her reflections on the collegiate way the Committee has worked. I also thank her for her comments on the quality of the Bill. It is testament to the quality of the team that has worked on it—I place on record my thanks to the excellent civil servants who have worked on the Bill—and the level of consultation. We heard from the hon. Member for Aberavon, who is not in his place, that this has been a long time coming. There was the Green Paper in 2017, the White Paper in 2018 and then the consultation. There was, of course, deep consultation before the laying of the Bill as well.

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. I want to make it clear that we are not in any way indicating any criticism of the civil servants who have worked hard, in extremely difficult conditions in the midst of a pandemic, to bring the Bill before us. I think we can all agree—we had some discussion on Tuesday about the nature of parliamentary scrutiny—that the objective of the process is that the Bill benefits.

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

Hear, hear—I agree with every word.

For the benefit of the Committee, I will begin with clause stand part, before turning to the amendment. The Secretary of State’s power to call in trigger events that have taken place is limited to a maximum of five years after the trigger event takes place and six months after the Secretary of State becomes aware of the trigger event. It is important to bear that in mind when discussing the amendment. That means that the issue of timing as to when a trigger event actually takes place is incredibly important. Many trigger events will have a self-evident completion date, as supported by contractual or other legal agreements. However, some trigger events may be less clearcut. There could be terms agreed formally by the parties, followed by further documentation, leading to a formal completion, all spread out over a period of time.

The clause ensures that where a trigger event takes place over a period of more than one day, or if it is unclear when during a period of more than one day the event has taken place, the last day of that period is treated as the date the trigger event takes place. In addition, the clause seeks to provide clarity about when a trigger event may be considered to be in progress or contemplation, where a person enters into an agreement or arrangement enabling them to do something in the future that would result in a trigger event taking place. It makes clear that entering into such agreements or arrangements, including contingent ones, does not necessarily mean that a trigger event is in progress or contemplation at the time the agreement or arrangement is entered into.

Amendment 16 would ensure that a person entering into any agreement or arrangement that enables the person, contingently or not, to do something in the future that would result in a trigger event taking place would be deemed a trigger event in progress or contemplation for the purposes of the Bill. I welcome the intention to ensure that the Secretary of State can be notified about acquisitions before they take place and I understand the motivation behind that. That is very much the Government’s policy. Indeed, the inclusion of mandatory notification and clear requirements within the proposed 17 sectors illustrates that approach in the most sensitive parts of the economy.

The timing of any notification is clearly very important. It must contain sufficient information for the Secretary of State to decide whether to give a call-in notice. That means that a proposed acquisition must be at an advanced enough stage that all the key details are known: for example, the names of all the parties involved, the size of any equity stake in the entity or asset, and the specifics of any other rights—such as any board appointment rights, which the hon. Member for Warwick and Leamington cited in his intervention—being provided to the acquirer.

In some cases, however, such details may be known, but the likelihood of a trigger event actually taking place may still be low because the acquisition is conditional. For example, the striking of a futures contract or an options agreement may stipulate conditions that must be met before the acquirer is required to, or has the right to, acquire a holding in an entity or an asset. Such arrangements are common in the marketplace where, for example, a company’s future share price might be the basis of a conditional acquisition. Equally, lenders provide finance to many UK businesses on the basis of conditional agreements, often with collateral put up by the business as security in return for the loan. Those terms may, subject to certain conditions being met, allow the lender to seize collateral if repayments are not made as agreed.

Photo of Peter Grant Peter Grant Shadow SNP Spokesperson (Europe), Shadow SNP Deputy Spokesperson (Treasury - Chief Secretary)

Can the Minister explain, first of all, why subsections (3) and (4) are included here as part of a supplementary clause when they clearly affect definitions, and as such go to the very heart of the Bill? The main clause is about defining the date on which something has happened for the purposes of calculating when later stages have to take place, but subsections (3) and (4) not only apply to those timings; they apply to everything in the Bill. I wonder whether the Minister could explain why those subsections are not included in one of the earlier clauses.

Secondly, I understand the Minister’s argument, but would it not be more prudent to work on the assumption that if somebody insists on some kind of contingent future rights being built into an agreement, they think there is a possibility that they will have to exercise them? Would it not therefore be prudent for the Government to work on the assumption that they are likely to be exercised? If not, is the Minister not concerned that we could have a situation where a whole series of small events, none of which looks particularly significant by itself, adds up to something that does become significant when taken in sequence, but there might never have been a stage during that process where the Bill, or the Act, allowed the Government to intervene?

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 for the hon. Gentleman’s intervention. I am just getting to the crux of the resistance to this amendment on the Government Benches, so if he will allow me, I will do that. As far as subsections (3) and (4) are concerned, we think they are exactly where they should be in the Bill.

In the loan scenario, obviously loans are routinely paid back by businesses as planned, so lenders do not have the option of enforcing any rights towards collateral. Indeed, even where businesses default on payments, lenders will often look for an alternative way to recoup their funds, such as restructuring the repayment amounts or repayment period. That is why the Secretary of State generally only expects to be notified about and, if the legal test is met, to call in acquisitions when they are genuinely in progress or contemplation, not just when they are optional or might take place in the future, as the amendment would effectively do. That could include where an option holder had resolved to exercise their option, or where a lender had decided to enforce their collateral.

None the less, the clause as drafted does provide the Secretary of State with the ability to call in at the time agreements or arrangements are entered into. That would be determined on a case-by-case basis and would, as per subsection (4), take into account how likely it is in practice that the person will do the thing that would result in a trigger event taking place. The amendment put forward by the hon. Member for Newcastle upon Tyne Central—she is right to probe on this—would mean that entry into any agreement or arrangement under which a trigger event could take place in future would be treated as a trigger event currently in progress or contemplation, allowing it to be notified and called in by the Secretary of State. We believe that this would—unintentionally, I am sure—have two significant negative implications.

First, it would mean that hundreds or thousands of theoretical acquisitions would become available for voluntary notification, many of which would simply never come to pass. It may encourage lenders and option holders to routinely notify the Secretary of State of every arrangement they enter into. It would require a huge amount of resource for Whitehall to process those cases in return for little, if any, national security gain.

Secondly, I fear it would harm our national security. Making all potential acquisitions open to voluntary notification at the stage of entry into the initial agreement or other preliminary arrangements would require the Secretary of State to make the one and only decision on whether or not to call in the acquisition at that point, too—prematurely, one would say. They would be asked to do so on the facts as they stood at that moment in time, although the acquisition may not occur for months or years, if at all.

That means that the Secretary of State would not be able to consider any subsequent significant developments, such as behaviour by the acquirer or rapid advances in the technology developed by the target entity. Furthermore, the Secretary of State would not be able to revisit the call-in decision, even if there were such developments, unless false or misleading information was provided and it materially affected the decisions. That is why entering into agreements or arrangements should not in all cases be treated as a trigger event in progress or contemplation.

I trust the hon. Lady can support this justification, and I ask her to withdraw the amendment.

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Energy and Industrial Strategy), Shadow Minister (Digital, Culture, Media and Sport) 12:00 pm, 3rd December 2020

I thank the Minister for his response. I listened carefully to what he laid out. I have some considerations, which I do not feel he fully addressed.

In broad terms, he raised many points that I have raised about why the amendment is broad in scope and could lead to a huge increase in the number of potential trigger events. However, I think he said that hundreds of thousands of actions or contemplations would be considered trigger events. I think it is truer to say that they could be considered trigger events and that the power to consider them as trigger events or not, as in the wording of our amendment, would lie with the Secretary of State. It is a broadening of the Secretary of State’s powers to consider the contemplation of future acts as a trigger event. That is the aim, rather than necessarily bringing them all into scope.

I will not debate with the Minister whether we can trust the Secretary of State to exercise those powers in a proportionate way, but I think he is effectively saying that the concern is that the Secretary of State would not have the resources to do that. I still did not hear him address the gaming point—the idea that transactions would be deliberately set up in a way that escapes the remit of the Bill. The increased powers for the Secretary of State would address that.

I was also concerned that the Minister said that if an event was called in at this stage, it could not be called in again, even if there was material new information. Surely if a trigger event occurred in future, such as shareholding going above 25%, it could be called in, regardless of whether it had been called in earlier under the amendment. Would he like to respond to that question, particularly as to how this increases the powers of the Secretary of State, rather than necessarily significantly increasing the number of trigger events?

Photo of Derek Twigg Derek Twigg Labour, Halton

Order. To be clear, you are asking the Minister to intervene, because he cannot come back afterwards.

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

I am disappointed that the Minister chose not to address the genuine concern about the provisions in the Bill being gamed by hostile actors.

I share his concerns about increasing the powers of the Secretary of State at a time when, as we understand, there are many more calls on the Department’s responsibilities and it may not have the resources. We have already noted the conflict of interest that can occur between national security and the Department’s focus on increased investment.

As I said, this is a probing amendment, so I will not press it to a vote. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 12 ordered to stand part of the Bill.