“(4) The Secretary of State must publish guidance that covers—
(a) consideration of the impact of a notifiable acquisition being deemed void under subsections (1) and (3), with particular regard to the impact on consequential obligations, liabilities and rights in completed events;
(b) who constitutes a “materially affected” person under Clause 16(1); and
(c) the informational and evidential standards that would underpin the requirement for completion “in accordance with the final order” at subsection (3).
(5) Guidance as set out under subsection (4) must be published within 3 months of this Bill becoming an Act and the Secretary of State shall review the guidance once every 12 months thereafter.”
This amendment would mandate the Secretary of State to publish guidance on the approval process of notifiable acquisitions.
“A notifiable acquisition that is completed without the approval of the Secretary of State is void.”
It is a short clause with only three subsections, of which that is the first. Subsection (2) says that the Secretary of State may approve a notifiable acquisition by giving a notification, making a final order, or giving a final notification under various clauses. Subsection (3) says:
“A notifiable acquisition, in relation to which a final order has been made, that is completed otherwise than in accordance with the final order, is void.”
I want to emphasise the consequences and impact of such a short clause. Our amendment adds a new subsection that says that the Secretary of State must publish guidance that covers
“consideration of the impact of a notifiable acquisition being deemed void…with particular regard to…consequential obligations, liabilities and rights in completed events;…who constitutes a ‘materially affected’ person…and…the informational and evidential standards that would underpin the requirement for completion ‘in accordance with the final order’ at subsection (3).”
The amendment effectively mandates the Secretary of State to publish guidance on how the mechanism of deeming non-compliant transactions void would work in practice. Once again, we tabled it genuinely in the spirit of improving the Bill, because this issue is potentially a hugely significant part of it. The two words “is void” have a huge impact, which needs to be unpacked. This is a constructive amendment; we want to ensure that there is clarity for small and medium-sized enterprises, and accountability to Parliament, on how the new powers will be exercised.
I know that the Minister rejected further new powers in the last amendment, but even without them these new powers are significant. We welcome the expanded powers to tackle national security concerns, but we need to ensure that they come with accountability and guidance. The ability for transactions to be deemed legally void where they have not been approved by the Secretary of State, or where they have not complied with the Secretary of State’s final order, has potentially huge repercussions. Again, it marks a radical shift from today’s regime under the Enterprise Act 2002 and from the Government’s White Paper.
Under the “legally void” provision, transactions that took place three to five years ago could now be immediately deemed void. If the first transaction in a chain were deemed void, that would leave the legal rights and entitlements of all subsequent transaction parties in total uncertainty. That is not just a theoretical concern that we are raising to test or probe the Bill, but a truly practical one. A number of investment transactions involve a change of shareholder parties over a three to five-year period. The automatic default of non-compliant transactions becoming void would mean an impossible series of rights, entitlements and changes having to be unwound. It may well be practically unworkable and legally uncertain.
I appreciate the point that the hon. Lady is making, in that transactions over a period of three to five years could become complex, but surely if something is called in and deemed void in the overriding interest of national security there will be an extremely good reason for it. Although the complexity of downstream transactions is regrettable, we would be acting in the British interest if we had to trigger these powers.
I thank the hon. Lady for her intervention, which by and large I agree with. That is why we are not seeking to remove the power, but to ensure that the Government and the Secretary of State explain how it would work in practice. She is right that if a bad or hostile actor has deliberately gone behind our national security framework, or the legislation as set out in the Bill, to undertake a transaction, the consequences will be on their head. However, there might be a series of other transactions as a consequence that were not made by bad or hostile actors—I will give some examples—and the impact on them should be set out, as far as possible, to give some clarity, because this is a huge area of uncertainty.
As has been stated on a number of occasions, we attract more foreign investment than any European Union country, and one reason why the UK is such an attractive location for foreign investment is that we have a robust legal framework that is trusted globally, but by giving rise to uncertainty the clause might impact that. We are not seeking to remove this power, but to have it properly explained, as far as possible.
The hon. Lady and the Committee should recognise that, as well as the uncertainty, the clause places huge requirements on the Department for Business, Energy and Industrial Strategy, as it would require significant capability and capacity from the investment security unit to execute the effect of deeming any transaction legally void. To take that further, I will talk through some examples so that we can fully comprehend why the amendment is so important.
If this provision were applied to the takeover of a public listed company that was then found to have been void, it would be exceptionally difficult to deem that transaction void and to unwind every single dealing in the company’s shares and to answer questions of legal ownership of such shares. There are enormous practical questions about the approach taken in the Bill to deeming transactions void, and the impact assessment does not address those consequences in a sufficiently rigorous way.
We might expect that events would never come to the point where transactions have to be deemed void, that parties will be deterred by that prospect—it is an excellent deterrent—and that the power will never be used, because it is such an effective deterrent that everyone will notify and comply. To that, I say two things. First, we cannot reduce legislation to our hopes of how actors might behave. We should have regard to examples elsewhere, such as Huawei’s acquisition of 3Leaf, where the threat of having to divest still did not stop Huawei pursuing the acquisition without notifying the Committee on Foreign Investment in the United States. Secondly, threats are credible when they can be carried out. Even if the point of the provision is to act as a threat, it needs to show that it can be carried out. If a threat does not work practically, or would heavily harm other, non-hostile actors, it is less effective a deterrent. Even if we believe in the deterrence of the “legally void” provision, it is critical that the Government give thought to the provision’s operation, and that we hear their thinking on that.
There are major question marks over the provision in the clause, but they are not cause to get rid of it altogether. We can see that the “legally void” provision would deter parties from failing to notify or comply, and that it has some international overlap with similar regimes, such as that in France. However, the decision to include the “legally void” provision is a major one. We can see the reasons for it, but we can also see the uncertainty and the concern that it might cause, especially for our small and medium-sized enterprises and, importantly, for those investing in them. As I said previously, there are significant barriers to investment in small and medium-sized enterprises and start-ups as it is. While national security must always come first, we do not want to create further barriers unnecessarily by not giving clarity when there is clarity to be given.
For that reason, we want to know the Government’s thinking on how the provision would operate in practice, on three important fronts. First, we would like the Government to publish guidance that reflects an understanding of how the “legally void” provision would work, and especially how it will affect the rights, obligations and liabilities of parties involved in chain transactions. If one transaction in a chain was deemed to be legally void, what would happen to the rights of employees and—this is an important point—of pension recipients?
Secondly, we recognise that parties who are affected by the “legally void” provision could apply to the Secretary of State for validation, thereby avoiding the transaction being void, and we want clarity on which materially affected parties can do so. Would those whose employment rights or pension liabilities were affected by the transaction be able to apply or would only acquirers in the specific culpable transaction be able to do so? We urge the Government to provide clarity to our small and medium-sized enterprises and investors, because I know that they are worried about the nature of this power.
Thirdly, it is vital that the Government clarify what they expect when they apply the “legally void” provisions to transactions that do not complete in accordance with the Secretary of State’s final order. To comply with the order, to what degree would a party have to show their evidence, and what degree of evidence would be required for the transaction not to risk being deemed void? That might sound complicated, but the clause has complex implications. In some circumstances, orders might not be specific, or they may be subjective and behavioural, so we need a regime that is clear, specific, understanding and rational. We should be able to expect such clarity and rationality from the Government.
Ultimately, the Opposition’s approach is about ensuring that our small and medium-sized enterprises have clarity, and that those who invest in the UK understand the rules and how they work. The amendment is intended to ensure that there is clarity and confidence in the new regime for national security screening. That approach has been supported by experts who have given evidence to the Committee. For example, Dr Ashley Lenihan, of the London School of Economics, said:
“The Bill provides for a lot of regulatory guidance, which needs to come forward in a clear and very easily comprehensible and understandable manner.”––[Official Report, National Security and Investment Public Bill Committee,
“If the unit operates in a way where it can give unequivocal guidance to market participants at an early stage and is open to dialogue…that would be extremely helpful.”––[Official Report, National Security and Investment Public Bill Committee,
Dr Ashley Lenihan also said:
“Dealing with the kind of evolving and emerging threats we see in terms of novel investments from countries such as China, Russia and Venezuela needs the flexibility to look at retroactively and potentially unwind transactions that the Secretary of State and the investment security unit were not even aware of.”—[Official Report, National Security and Investment Public Bill Committee,
I think it is clear that we are supportive of the ability to void transactions.
I want to close by thinking again about the Google acquisition of DeepMind, which took place in 2014. DeepMind has been in the news this week for its fantastic, innovative work on understanding how life itself works. In a letter, the Intelligence and Security Committee has asked what transactions would have come under the purview of this Bill had it been in place earlier. The Opposition have been calling for it, as has the Intelligence and Security Committee. Had it been in place in 2014, and had the Secretary of State for Business at that time been as focused on national security as he should have been, which some might argue was not the case, what would be the expectation? Had he decided in 2019 that that transaction should have been notified because of its security implications and, as a consequence, that it was not valid and should be voided, what would have then been the expectation?
What would be the expectations of the employees of DeepMind, who are now in California, with regard to relocating back to the UK? How would their pension rights be affected? How would acquisitions that DeepMind and/or Google had made over the years be impacted? I do not expect the Minister to be able to set out in detail every potential scenario, but it is right that we have greater and more effective guidance than is to be found in the Bill or its supporting documentation. I look forward to the Minister supporting our amendment and taking it forward.
I thank the hon. Lady for her constructive engagement with the whole Bill, and especially with clause 13. She referred to the Intelligence and Security Committee, and this Committee will know that I have written to the Chairman of the Intelligence and Security Committee.
However, in answer to one of the questions raised in the letter that has been circulated to the Committee, which the hon. Lady referred to, it would clearly not be appropriate for me to speculate on individual cases, not least because decisions on past interventions have been taken by previous Ministers or Governments, who made their decisions based on the facts as they were known at the time. The Enterprise Act 2002 has provided a robust basis for nearly two decades to intervene on mergers that might have raised concern. However, it is also right that we modernise our powers, and that is exactly what this Bill will do.
The Bill provides—we had a similar discussion about that at Second Reading—that if an asset or company is deemed very valuable to the United Kingdom, it does not matter who the acquirer is, even if they are from a friendly nation, and an intervention can still be made by the Secretary State.
Clause 13 sets out the mechanisms by which the Secretary of State may approve a notifiable acquisition. After I have set out the rationale for the clause, I will speak to the amendment itself. As I have set out previously, notifiable acquisitions are acquisitions of certain shares or voting rights in specified qualifying entities active within 17 sensitive sectors of the economy. These acquisitions must be notified to, and require approval from, the Secretary of State before they may take place.
That approval can be given in three ways. First, when a mandatory notice is submitted by the acquirer, the Secretary of State may decide not to exercise the call-in power—for example, because he does not reasonably suspect that a national security risk may arise. In those circumstances, he is required to notify each relevant person, following the review period of up to 30 working days, that no further action will be taken under the Bill in relation to the proposed notifiable acquisition.
Secondly, when the Secretary of State exercises the call-in power in relation to the notifiable acquisition, he may make a final order at the end of the assessment process, which, in effect, gives approval to the notifiable acquisition, subject to conditions. Again, in that instance the notifiable acquisition is clear to proceed.
Thirdly, as an alternative to the previous scenarios, at the end of the full assessment process the Secretary of State may ultimately conclude that no remedies are required. In those circumstances, he is required to give a final notification that confirms that no further action will be taken under the Bill in relation to the call-in notice. Once more, that means that the acquisition is cleared to take place.
Those three routes and outcomes are of critical importance to business, investors and their advisers. It is the means by which they receive certainty about whether they have the Secretary of State’s approval to proceed. In those cases where the Secretary of State confirms that no further action will be taken under the Bill, he cannot revisit the acquisition again barring a narrow exception for circumstances where false or misleading information has been provided to him.
Conversely, subsection (1) places beyond doubt that notifiable acquisitions that take place without the approval of the Secretary of State are void. I am very pleased to hear that the hon. Lady thinks that is an excellent deterrent. That means that the acquisition has no legal effect.
I thank the Minister for eloquently setting out the clause. I have to suggest that he not place words into my mouth—certainly as we have such excellent reporting. Although I did not say that I thought it was an excellent deterrent, I did indicate that it could be an effective deterrent, were it considered workable.
I am grateful for that clarification. I wrote down the hon. Lady’s words. She did say that it is an excellent deterrent, and went on to make her argument for the amendment.
To return to the substance, the provision means that the acquisition has no legal effect if it is void. It is not recognised by the law as having taken place. Clearly, voiding is a situation that it is in the interests of all parties to avoid, which should act as a powerful compliance incentive, if I can describe it as such. The Government’s view is that voiding is the logical result of a regime based on mandatory notification and clearance for acquisitions in the most sensitive sectors before they take place.
Although the Secretary of State, or the courts, may be in a position to punish non-compliance with criminal or civil sanctions, voiding is necessary to limit or prevent risks to national security that may otherwise arise where such acquisitions take place without approval. For example, there may be day one risks whereby hostile actors acquire control of an entity and seek to extract its intellectual property and other assets immediately. This is a reasonable and proportionate approach, and in arriving at this position we have carefully considered the precedent of other investment screening regimes. For example, France, Germany and Italy all have voiding provisions.
Amendment 17 would require the Secretary of State to publish guidance within three months of Royal Assent and then review it annually in relation to the approval process for notifiable acquisitions. I have listened carefully to the hon. Lady’s case for the amendment, and I hope that I can begin on common ground by saying that clearly voiding an acquisition is something that it is in the interests of all parties to avoid. That is why we are consulting on the sector definitions covered by mandatory notification and clearance, rather than simply presenting them to Parliament and external stakeholders like a fait accompli in the Bill.
That approach will allow experts from the sectors and the legal profession, and businesses and investors, to help us to refine the final definitions and tighten them up to ensure that the regime is targeted and provides legal certainty. Equally, mandatory notification applies only to the clearest acquisitions, focused on objective thresholds of shares and voting rights. Together, that will help acquirers to determine whether their acquisitions are in scope of mandatory notification, and therefore allow them to comply with their statutory obligation and avoid any voiding scenarios altogether.
I agree that the sensible starting point is that, if a major transaction has not complied with legal requirements, it did not happen. As the shadow Minister outlined in her comments, however, it is easy to imagine situations in which the fact of a transaction such as this becoming void could have significant impacts on people who are completely innocent of any failure to comply with the law. Is the Minister comfortable with the fact that the Bill has almost literally nothing to say about those people and that there is not provision for any kind of redress? There is no statement as to what happens to people who may quite innocently find themselves facing significant detriment through the actions and failures of others.
I am grateful for the hon. Gentleman’s intervention. As I was laying out, there is precedent from other screening legislation in Germany, France and elsewhere. Of course, the hon. Member for Newcastle upon Tyne Central is concerned about the hundreds of thousands of people who may be shareholders in a company. If the acquisition was a notifiable acquisition and completed without approval, it is void, regardless of the number of shareholders.
I return to the point I was making before the hon. Gentleman’s intervention. Together, this will help the acquirers determine whether their acquisitions are in scope of mandatory notification. None the less, the Bill sets out the various ways in which an acquisition may be retrospectively validated, both proactively by the Secretary of State and in response to a validation application, where non-compliance occurs. I believe the guidance that the amendment would require the Secretary of State to publish is well meaning but fraught with difficulties.
There are a number of reasons why the Government must reject the suggested approach. First, the amendment is an invitation to the Secretary of State to, in effect, legislate through guidance to set out the legal implications of acquisitions being voided pursuant to clause 13. In our view, it would not be appropriate for the Secretary of State to do so, as it is for Parliament to legislate, but ultimately for the courts to interpret and apply that legislation.
The hon. Member for Newcastle upon Tyne Central will be aware of the much-quoted report from the House of Lords Select Committee on the Constitution, which has emphasised the importance of avoiding guidance being used as a substitute for legislation. We have no intention to do so in respect of voiding.
I confess that I am somewhat surprised by the Minister’s comments. Does he feel that all guidance is an invitation to the Secretary of State to effectively legislate through guidance? Is that something that the Minister feels is the case for all guidance? If that is the case, we will not be getting very much guidance for businesses at all. Does he not feel that, in terms of regulatory clarity, there should be effective help and guidance that is not legislation? He is right to say that it is for the legal system to interpret, but it is also right that we have clear laws to be interpreted. As the hon. Member for Glenrothes said, there is currently nothing in the Bill about what “voiding” means and what it could mean.
Of course, not all guidance is guidance that the Lords Constitution Committee would have effectively considered to be a substitute for legislation. I will make some more headway, as I am conscious of the time.
Furthermore, the legal implications of voiding will depend on the particular facts of each case. It will ultimately be for the courts, as I said earlier, to resolve any disputes between parties.
Secondly, and for the same reasons, it would not be appropriate for the Secretary of State to publish guidance on who constitutes a “materially affected” person under clause 16(1). If it will assist the Committee, I will say that we consider these to be ordinary words of the English language and that whether a person has been materially affected by voiding will depend on the particular facts of each case. Ultimately, it will be for the courts to interpret this provision and to resolve any disputes between parties.
Thirdly, we do not consider guidance under paragraph (c) in the amendment to be necessary or appropriate. Final orders issued by the Secretary of State will need to be clear, and it is expected that in most instances they will follow extensive discussions with the parties so that all understand the conditions being imposed on the trigger event. That is equally true in relation to voided acquisitions scrutinised by the Secretary of State retrospectively. Where remedies imposed by the Secretary of State include restrictions on completion, it will be an objective question of fact, dependent on the circumstances of each case, whether the acquisition proceeds contrary to those conditions. This does not involve any determination by the Secretary of State, and it would ultimately be for the courts to resolve any disputes between parties, so it would not be appropriate for the Secretary of State to issue guidance setting out the “informational and evidential standards” that would apply. More generally, the value of any guidance would be limited, given that it would necessarily reflect the fact that retrospective validation will be dependent on the facts of an individual case.
The new regime understandably covers a broader range of acquisitions than is the case now. That is absolutely correct, as the hon. Lady stated. The combination of that fact with the reality that some voided acquisitions will come to light months or years after they take place and any number of events, involving numerous parties, may have occurred since then means that the Secretary of State must consider any validation application on a case-by-case basis. That is the right approach to keep this country safe, and this takes us back to the central issue that voiding is the logical result of a regime based on mandatory notification and clearance for acquisitions in the most sensitive sectors before they take place.
I sense that the Minister’s speech is coming to a close. He makes the point that voiding is the logical consequence of the new regime, based on mandatory notification. I have said that we recognise that, but, further to the intervention by the hon. Member for Glenrothes, if it is the necessary consequence, why is it not included in the impact assessment?
I thank the hon. Lady and the hon. Member for Glenrothes for their questions. It would be nigh on impossible to have an impact assessment as to what happened to a deal that should have been notified under the 17 sectors and then was voided. I believe that is something the Opposition should understand, in terms of the proportionality of the new regime, and I hope that it is something the hon. Lady and her colleagues can support. I hope that she will withdraw her amendment.
I thank the Minister for his remarks. As I set out, we recognise the importance of this power. We were not seeking to remove the power to void—for transactions to be deemed void. But as I also set out, the two words “is void” have a huge impact, and it is of concern that neither the Bill nor the impact assessment addresses that. The Minister said that it would be impossible to assess the impact of voiding, but the impact assessment, where it looks at the number of affected businesses, estimates the number of investment decisions, notifications, security assessments and remedies. It makes estimates of all those, but has nothing to say on the number of potential voidings. That is a significant gap in the Bill and the impact assessment and, as a consequence, in the level of certainty and understanding about the Bill.
I have said a number of times that we are going from a standing start of 12 notifications in 18 years under the Enterprise Act 2002, which the Minister cited as having robust powers, to the almost 2,000 that we are expecting. Given his response, however, on which we see no likelihood of him moving, and given that we acknowledge the importance of the powers, I beg to ask leave to withdraw the amendment.