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The UK has championed an open and dynamic market economy, including foreign direct investment ("FDI") into the UK, ever since political theorists such as Adam Smith argued the benefits of free trade over mercantilism in the mid-19th century. Since the merger regime was last reformed, in 2002, no UK deal has been blocked on public interest grounds to date and, prior to 2019, there had, on average, been less than one public interest intervention notice issued by the Government on the grounds of national security per year.
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While it is still largely true that the UK is open to foreign investment and takeovers, 2019 saw an increase in interventionist policy in the UK, with several public interest intervention notices issued on grounds of national security. In the majority of these cases, the deals have been approved following undertakings provided by the acquirer to address the concerns, often involving the ring-fencing of sensitive information. In addition, recent legislative changes have expanded the scope of the Government's powers to intervene in deals. In particular, as elsewhere in the world (notably in Germany, France and Spain), the COVID-19 pandemic has accelerated an already growing trend of increased scrutiny of FDI in key sectors. With Brexit on the horizon and the COVID-19 pandemic ongoing, we expect sensitivity to continue to increase in the UK.
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Unlike most jurisdictions, the FDI regime is not mandatory in the UK. However, the Government can intervene in deals that meet the relevant jurisdictional thresholds to (i) protect national security; (ii) ensure media plurality; (iii) ensure the stability of the financial system; and, most recently, (iv) combat, or mitigate the effects of, public health emergencies. Lower thresholds exist for cases involving (A) military and dual-use goods; (B) computing hardware; (C) quantum technology; (D) artificial intelligence; (E) cryptographic authentication technology; and (F) advanced materials.
FDI regulation is driven by politics and understanding the political angle and "populist" issues will be fundamental for investors looking to do business in the UK. The UK Government is expected to introduce a new FDI regime shortly, separate to the existing merger regime. The Government is clear that it expects to review many more cases than under the existing rules, even as it tries to balance the interests of protecting national interests and seeking to retain the UK's reputation as a welcome environment for foreign investment in a post-Brexit world. Navigating these regulatory regimes has never been more complex and challenging. Whether target or acquirer, corporates, private equity and strategic investors will need to make a thorough assessment of, and have a clear strategy for dealing with, the execution risk that these issues create. This includes considering the possible impact on deal timetables and terms, in particular balancing clearance risk between parties through "hell or high water" clauses, committed undertakings and remedy packages, amongst others. FDI regulation is now a "top 5" consideration for investors.
"National interests" are not always tightly drawn. In 2005, the French Government famously leapt to the defence of yoghurt maker, Danone, claiming it was an asset of national importance. In the UK, FDI came under increased scrutiny in 2010, when British confectioner, Cadbury's, became the subject of a hostile bid from US corporate, Kraft Foods. Numerous parties called on the Government to intervene on grounds of public interest and the deal sparked major reforms to the UK Takeover Code. The moral of the story, never underestimate the political power of sweet treats.