Instruments drawn to the special attention of the House
Draft Enterprise Act 2002 (Share of Supply) (Amendment) Order 2020
Date laid: 22 June 2020
Parliamentary procedure: affirmative
Enterprise Act 2002 (Specification of Additional Section 58 Consideration) Order 2020 (SI 2020/627)
Date made: 22 June 2020
Parliamentary procedure: made affirmative
These two Orders amend the Enterprise Act 2002 to enable the Secretary of State to intervene in mergers on two new grounds: where a UK target company is involved in artificial intelligence, cryptographic authentication and advanced materials, and to preserve critical UK public health and crisis mitigation capabilities, including those needed to deal with the current COVID-19 pandemic. The Department for Business, Energy and Industrial Strategy says that the changes are a short-term measure until more fundamental reform is taken forward through the National Security and Investment Bill. The Committee considers that the policy changes made by the two Orders are potentially very significant. As with some earlier instruments, the Committee noted and regretted a mixture of provisions, some of which are short-term to deal with the impact of the pandemic and others which represent permanent changes. So, while there will be an opportunity to raise specific issues and concerns during the debate on these Orders, the House will only be able to scrutinise the Government’s overall approach properly when the Bill is introduced into Parliament. Given the significance of the issues and the urgency to act to protect key sectors of the economy at a time of uncertainty and vulnerability, the Committee urges the Department to give a timetable for the introduction of the Bill without delay.
The Orders are drawn to the special attention of the House on the ground that they give rise to issues of public policy likely to be of interest to the House.
1.The Department for Business, Energy and Industrial Strategy (BEIS) has laid these Orders with Explanatory Memoranda (EMs). The purpose of the instruments is to amend the Enterprise Act 2002 (“the Act”) to enable the Secretary of State to intervene in mergers on two new public interest grounds: where the UK target company is involved in artificial intelligence, cryptographic authentication and advanced materials, and to preserve critical UK public health and crisis mitigation capabilities, including capabilities needed to deal with the current COVID-19 pandemic.
2.BEIS explains that Section 42 of the Act enables the Secretary of State to intervene in a merger on public interest grounds where there may be a “relevant merger situation” and public interest considerations specified in section 58 of the Act may be relevant. Section 58 currently specifies national security, media plurality (an umbrella term covering several media-related considerations) and the stability of the UK financial system as public interest considerations. Section 23 of the Act provides that a “relevant merger situation” arises where thresholds in form of a “turnover test” and/or “share of supply test” are met: the acquired business must have an annual UK turnover of more than £70 million; and/or the merger must result in the creation of, or increase in, a 25% or more combined share of sales or purchases in the UK of goods or services. According to BEIS, there have been 20 interventions under the Act in 17 years.
3.The two tests were amended in 2018 to add three new economic sectors to the public interest grounds which are considered relevant to national security: military and dual-use technologies, quantum technology and computing hardware.1 In addition, the UK turnover threshold for the target business was lowered from £70 million to £1 million and the share of supply test was amended so that it is no longer a requirement that the merger must lead to an increase in the merging parties’ share of supply to, or over, 25%.
The changes made by the Orders
4.The Enterprise Act 2002 (Specification of Additional Section 58 Consideration) Order 2020 (SI 2020/627), laid under the made affirmative procedure,2 adds the need to maintain the UK’s capability to combat, and to mitigate the effects of, public health emergencies, such as the current COVID-19 pandemic, as a public interest consideration under section 58 of the Act. This enables the Secretary of State to intervene in mergers and acquisitions on this new ground. According to BEIS, an intervention could involve imposing conditions on a merger that prohibits any reduction of critical capabilities in the UK or blocking the merger where appropriate. BEIS says that such interventions may be necessary, for example, where a UK vaccine research company, a manufacturer of personal protective equipment, an internet service provider or a food supply chain company is the target of a takeover. The Department has published guidance setting out the rationale for the changes and their legal and practical effects.3
5.The Department says that “the need for this power has been brought into focus by the demands placed on the UK by the COVID-19 pandemic and its impact on the economy” and that “as a result of the economic uncertainty caused by the pandemic, usually stable businesses may be suffering a short-term impact to their share price or profitability”, leaving UK businesses “with critical capabilities more vulnerable to takeovers”. BEIS emphasises that the new power is not time-limited to the current pandemic, but has been made permanent, as there may be a need to preserve critical capabilities in relation to future public health emergencies.
6.The draft Enterprise Act 2002 (Share of Supply) (Amendment) Order 2020 proposes to add three new categories of businesses to be subject to the share of supply test: business involved in artificial intelligence,4 cryptographic authentication5 and advanced materials.6 This would extend the powers of the Secretary of State to intervene in mergers of businesses involved in these sectors on public interest grounds. The instrument would also extend the powers of the Competition and Markets Authority to investigate mergers of such businesses on competition grounds. BEIS expects 16 additional merger and acquisition cases to fall within the scope of the public interest consideration regime per year as a result of this change. The Department told the Committee that parties “may appeal to the Competition Appeal Tribunal (CAT) if aggrieved by a decision of the Secretary of State as part of the merger review process. The CAT will review the decision by applying the same principles as the High Court on an application for judicial review.” The Department has shared with the Committee draft guidance setting out the rationale for the changes and the legal and practical effects of the Order. BEIS will publish the guidance once the instrument has completed its parliamentary process.
7.BEIS explains that, as a consequence of the pandemic, “the depreciative effect on sterling coupled with financial uncertainty for many enterprises means the risk of hostile actors exploiting the situation through aggressive acquisitions of UK businesses has increased”. The Department says that the three additional sectors were identified as parts of the economy where risks to national security were most likely to arise during a consultation on proposed legislative reforms in relation to national security and investment which ran from 24 July 2018 until 16 October 2018.7 We asked the Department why, nearly two years later and with the draft Order having been laid before Parliament, the Government’s response to this consultation had not been published. BEIS told us that:
“This consultation was on proposals for long-term legislative reforms, not for the amendments made by the Order. It is referred to in the EM as part of the wider policy background to the Order although there is not a direct link between the two. The consultation response will be published in due course, along with the accompanying primary legislation.”
Future reform
8.According to BEIS, a further Order, the Enterprise Act 2002 (Turnover) (Amendment) Order 2020, will be laid before Parliament under the negative procedure, to ensure that the lower turnover test threshold of over £1million will apply to businesses in the new categories of artificial intelligence, cryptographic authentication and advanced materials that have been added to the share of supply test by this instrument. The intention is for this second instrument to come into force immediately after the draft Order. The Department told the Committee that this lower threshold “is considered to be the appropriate level of turnover to capture those businesses that, although small, may have a critical role in matters that may affect national security”. The House may wish to explore whether lowering the threshold to £1 million will be sufficient in relation to very small but nevertheless critical businesses that may be vulnerable to hostile takeovers.
9.BEIS says that the changes introduced by the two Orders are intended as a “short-term measure” which will apply until more fundamental reform can be taken forward through the National Security and Investment Bill, which the Government plan to introduce when Parliamentary time allows. In the view of the Committee, the policy changes made by the two Orders are potentially very significant. As with some earlier instruments, the Committee noted and regretted a mixture of provisions, some of which are short-term to deal with the impact of the pandemic and others which represent permanent changes. So, while there will be an opportunity to raise specific issues and concerns during the debate on these Orders, the House will only be able to scrutinise the Government’s overall approach properly when the Bill is introduced into Parliament. Given the significance of the issues and the urgency to act to protect key sectors of the economy at a time of uncertainty and vulnerability, the Committee urges the Department to give a timetable for the introduction of the Bill without delay.
Terminology
10.Throughout the EMs, the Department uses the term “merger”, reflecting the terminology of the relevant legislation. At the same time, BEIS emphasises that the Orders enable the Secretary of State to intervene to protect key UK businesses from “aggressive acquisitions” and “takeovers”. It is not made clear in the EMs whether the term “merger”, as defined in the legislation, includes acquisitions and takeovers, when, in practice, they are different processes and have different consequences for the businesses involved. The Department told us that the “terms are frequently used interchangeably, however for the purposes of the Enterprise Act 2002, the important point is that a ‘relevant merger situation ’ constitutes two or more enterprises ceasing to be distinct which can include an mutual decision of two companies to combine or where one company purchases another”. The Committee believes that it would have been helpful if the EMs had been clearer on the terminology used.
Conclusion
11.The two Orders seek to enhance the powers of the Secretary of State to intervene in mergers and acquisitions on two new grounds: where there are national security concerns because the UK target companies are involved in artificial intelligence, cryptographic authentication or advanced materials, or where the UK’s ability to deal with the effects of a public health emergency, such as the current pandemic, may be at risk. The policy changes are potentially very significant and raise a number of issues which could usefully be raised during the debate. Proper scrutiny of the Government’s overall approach, however, will only be possible when the Department introduces the National Security and Investment Bill into Parliament. We urge the Department to give a timetable for this without delay. The Orders are drawn to the special attention of the House on the ground that they give rise to issues of public policy likely to be of interest to the House.
Town and Country Planning (Permitted Development and Miscellaneous Amendments) (England) (Coronavirus) Regulations 2020 (SI 2020/632)
Date laid: 24 June 2020
Parliamentary procedure: negative
This instrument changes planning legislation to allow local development to support the Government’s economic renewal package following the coronavirus outbreak. The changes are a mixture of temporary and permanent measures. One of the permanent changes, a new permitted development right allowing up to two additional storeys to be constructed on existing purpose-built blocks of flats, gave rise to concerns during consultation in 2018. The House may wish to explore further the absence of any requirement to provide or contribute financially to affordable housing and how neighbourhood and other concerns will be taken into account under the new lighter planning regime for such developments.
This instrument is drawn to the special attention of the House on the ground that it gives rise to issues of public policy likely to be of interest to the House.
12.The Ministry of Housing, Communities and Local Government (MHCLG) has laid this instrument with an Explanatory Memorandum (EM) and Impact Assessment (IA). The purpose of the instrument is to make changes to planning legislation which, according to MHCLG, will allow local development to support the Government’s economic renewal package following the COVID-19 pandemic. The changes are a mixture of temporary and permanent measures.
The key changes made by the instrument
13.The instrument provides an additional allowance for the temporary use of land from 1 July 2020 to 31 December 2020. During this period, land may be used for any purpose, except those uses that are set out as not permitted in the legislation, without an application for planning permission for up to 56 days. The instrument also introduces a new time-limited permitted development right to allow a market to be held by or on behalf of a local authority on an unlimited number of days between 25 June 2020 and 23 March 2021 without the requirement to apply for planning permission. MHCLG says that these temporary measures will allow local authorities to provide additional space for markets for food, drink and other goods and for outdoor events, helping businesses to operate safely during the pandemic.
14.In addition, the instrument introduces a new permanent permitted development right (Class A — New dwellinghouses on detached blocks of flats) to allow up to two additional storeys to be constructed on existing, detached, purpose-built blocks of flats of three storeys or more up to a total height of the extended building of 30 metres. MHCLG says that this new right is aligned with, and delivers an element of, the type of development supported by the revised National Planning Policy Framework8 which supports extending commercial and residential buildings upwards to provide new homes.
15.The new right applies to blocks built between 1 July 1948 and 5 March 2018, when the intention to introduce a permitted development right to build upwards was first announced. MHCLG told the Committee that the end-date is needed to prevent applications being made for planning permission of a three-storey building in the knowledge that any proposal for a higher building may be refused, but with the intention of adding additional new storeys when the new permitted development right is introduced. The new right does not affect building and fire safety requirements which are covered by separate regulations. MHCLG also says that, with regard to the impact of construction on the neighbourhood, developers will be required to prepare a report “setting out the proposed hours of operation and how they intend to minimise any adverse impacts of noise, dust, vibration and traffic movements during the building works on occupiers of the building and neighbouring premises”.
16.The EM states that proposals for building new homes on existing blocks of flats were included in a public consultation on wider planning reforms between 29 October 2018 and 14 January 2019.9 The consultation set out different options for building up and received responses from local planning authorities, members of the public and business and interest groups. While those supporting the proposal for a new permitted development right for upward extensions “recognised that increasing density may relieve pressure for additional housing sites, allow for additional homes to be created by transport hubs and in town centres, and reduce the need for development in the green belt”, more than half of the 326 responses were opposed to the proposal. According to MHCLG, respondents raised a range of concerns, including that communities and local planning authorities would have no say over how and where a permitted development right might be applied, about the quality of homes delivered by building up, how access and safety would be addressed and about the impact on existing occupiers and neighbours. Further concerns were expressed about the impact on the amenity and character of an area, structural requirements, safety implications, access and the design. It was suggested that the impact on transport could best be considered through individual planning applications, rather than the lighter touch permitted development right process. MHCLG says that following consultation, it carried out further engagement with interested parties to inform the technical details of the proposals.
17.MHCLG explains that the decision to limit extensions to two additional storeys and to a total of 30 meters was informed by the feedback to the consultation and that while a full application for planning permission will no longer be required under the new arrangements, the new permitted development right will be subject to developers obtaining prior approval from the local planning authority. According to MHCLG, this process allows local planning authorities to consider key planning matters which reflect the concerns raised during consultation. The matters to be considered include the appearance of the development and its impact on the amenity of the neighbourhood, including overlooking, privacy and the loss of light; the provision of adequate natural light in all habitable rooms; the impact on transport and highways, including parking; as well as risks of flooding and contamination. In addition, local planning authorities will need to consider any potential impact on protected vistas in London and on air traffic and defence assets, with the Civil Aviation Authority or Defence Secretary being able to block developments. The new right does not apply in Conservation Areas, National Parks and the Broads, areas of outstanding natural beauty, or sites of special scientific interest or if the building is listed or a scheduled monument.
18.As part of the prior approval process, local planning authorities will have to display a site notice and serve notice on the owners and occupiers of the block and any adjoining owner or occupier who will have 21 days to comment on the proposals, including on matters such as amenity. Local planning authorities must take into account any representations made in determining a prior approval application and will have eight weeks to make a decision. MHCLG told the Committee that the new permitted development right “does not require affordable housing provision, therefore this is not a matter for prior approval”, but that “[w]here additional floorspace is created through the right by the addition of extra storeys and a local authority has a charging schedule in place a community infrastructure levy may be payable”. The IA estimates the Total Net Present Social Value of the new right to be £440.5 million. The Committee notes the absence of any requirement on developers to provide or contribute financially to affordable housing under the new permitted development right.
19.The instrument also amends existing permitted development rights to ensure that new homes that have been developed through permitted development rights provide adequate natural light. MHCLG says that these changes are made in response to concerns raised about the quality of homes delivered in some developments under existing rights for changes of use to housing. The changes require developers to submit detailed floor plans as part of the prior approval process. There will be a short transition period, so that applications for prior approval submitted before 1 August 2020 will be determined according to the right as in force at that time. Applications with a “prior approval event” before 1 August 2020 will have three years in which to complete the development.
20.Finally, in addition to a number of minor amendments and clarifications, the instrument limits the compensation liability where a local planning authority withdraws the new permitted development right to extend upwards existing purpose-built blocks of flats to create additional homes. This limits to 12 months the period during which a local planning authority may be liable to pay compensation and excludes compensation liability where it withdraws permitted development rights where it is “necessary to protect local amenity or the well-being of the area”.
Further regulations
21.MHCLG says that it intends to bring forward further regulations shortly to set a fee per dwelling, which will reflect the reduced consideration required for a prior approval application compared with a full planning application and which will offset local planning authorities’ costs of considering these applications. The IA states that MHCLG expects to set the prior approval fee at £334 per new dwelling up to a maximum of 50 units, and then £100 per dwelling thereafter. In addition, MHCLG plans to introduce further permitted development rights to allow building upwards, including for new and bigger homes, as set out in its policy paper Planning for the Future in March 2020.10
Conclusion
22.This instrument changes planning legislation to allow local development to support the Government’s economic renewal package following the coronavirus outbreak. Following concerns raised during consultation, the House may wish to explore further the absence of any requirement to provide or contribute financially to affordable housing and how neighbourhood and other concerns will be taken into account under the new lighter planning requirements for extending upwards existing purpose-built blocks of flats. The instrument is drawn to the special attention of the House on the ground that it gives rise to issues of public policy likely to be of interest to the House.
1 Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2018 (SI 2018/578), see: 24th Report, Session 2017-19 (HL Paper 114). Enterprise Act 2002 (Turnover Test) (Amendment) Order 2018 (SI 2018/593), see: 31st Report, (Session 2017-19, HL Paper 148).
2 Under this procedure, the Order is brought into effect immediately and Parliament has 28 days to debate and approve it retrospectively.
3 BEIS, Enterprise Act 2002: guidance on changes to the public interest considerations in merger cases (26 June 2020): https://www.gov.uk/government/publications/enterprise-act-2020-guidance-on-changes-to-the-public-interest-considerations-in-merger-cases [accessed 1 July 2020].
4 According to BEIS, the term AI refers to technology enabling the programming, or execution of a computational process capable of undertaking complex tasks commonly associated with human intelligence.
5 Cryptographic technology enables information to be protected whilst in storage or in transit by making it inaccessible or unreadable by everyone except those who have the information needed to access or read it.
6 According to BEIS, advanced materials refer to breakthroughs in materials and manufacturing science which underpin advances in the physical and digital world and stem from understanding, manipulating and exploiting the composition, arrangement and properties of matter.
7 BEIS, National security and investment: proposed legislative reforms (24 July 2018): https://www.gov.uk/government/consultations/national-security-and-investment-proposed-reforms [accessed 2 July 2020].
8 See MHCLG, National Planning Policy, paragraph 118e (last updated 19 June 2019): https://www.gov.uk/government/publications/national-planning-policy-framework--2 [accessed 2 July 2020].
9 MHCLG, Planning Reform: supporting the high street and increasing the delivery of new homes (last updated 3 May 2019): https://www.gov.uk/government/consultations/planning-reform-supporting-the-high-street-and-increasing-the-delivery-of-new-homes [accessed 2 July 2020].
10 MHCLG, Planning for the future (12 March 2020): https://www.gov.uk/government/publications/planning-for-the-future [accessed 2 July 2020].