- FDI rules in the UK have recently been tightened in the context of the COVID-19 pandemic. The UK can now intervene in transactions on the grounds of public health emergencies. Also, lower jurisdictional thresholds apply to transactions relating to artificial intelligence, cryptographic authentication and advanced materials.
- A broader FDI reform is forthcoming in the UK. The new notification system may be similar to CFIUS in the US. The Bill is yet to be published; some reports say this may happen in the next few weeks.
- The EU FDI Regulation, which entered into full effect on 11 October, does not apply to the UK.
The UK has become one of the latest in a line of countries around the world to tighten FDI screening rules in the context of the COVID-19 pandemic. The legislative changes that were passed recently affect the rules in two respects. They introduce the public health emergency as a new public interest consideration. They also lower the intervention thresholds for transactions in certain sensitive technology sectors. Similarly to other jurisdictions, the measures aim to protect key domestic businesses against opportunistic acquisitions by foreign buyers amid the economic disruption caused by the COVID-19 pandemic. These amendments represent efforts to mitigate potential risks to national security ahead of the more comprehensive framework for the scrutiny of transactions under the forthcoming National Security and Investment Bill.
In addition to the pending UK reforms, EU Regulation 2019/452 establishing a framework for the screening of FDIs into the EU took full effect on 11 October 2020. While it does not establish a centralized, EU-wide foreign investment screening mechanism, the Regulation creates a system for cooperation between the EU Commission and Member States. The UK is outside of this system, even during the present Brexit transition period.
We have set out below a brief summary of the current the FDI screening regime with references to the recent amendments and the proposed reform.
I. Current Regime
FDI an extension of merger control. The Secretary of State (SoS) has the power to request the Competition and Markets Authority (“CMA”), the authority responsible for merger control, to investigate aspects of transactions affecting the “public interest”. The request takes the form of an “intervention” notice issued by the SoS to the CMA on the SoS’s own initiative, or following information provided by the CMA. The CMA will either include the public interest considerations in an ongoing merger review or call in the transaction for investigation. The CMA investigates public interest aspects on behalf of the relevant SoS/government department (e.g., the Ministry of Defence), and reports to them. Ultimate decision-making on the public interest aspects lies with the SoS.
The SoS could previously rely on three public interest considerations: national and public security; media plurality and broadcasting standards; and financial stability. The SoS can however add further considerations to the list and has recently done so. From 23 June, the SoS can also intervene in transactions where there is a need to maintain the UK’s capability to respond to public health emergencies or mitigate their effects. The amendment captures acquisitions of a business directly involved in the fight against the COVID-19 pandemic, e.g. a vaccine research company or personal protective equipment (PPE) manufacturer. The consideration is however sufficiently vaguely worded to potentially apply to a wide range of different sectors apart from healthcare and pharmaceuticals, e.g. manufacturing and food supply.
The powers are not specific to foreign investors, though will often be relevant in such cases.
The UK does not currently have an active distinct domestic framework governing FDI (powers under the Industry Act 1975 to block foreign acquisitions of an ‘important manufacturing’ business appear never to have been used.) Specific licensing or authorisations apply in particular sectors such as banking/finance, communications, water, electricity, gas and energy, nuclear and aviation.
Types of investments subject to public interest interventions. Investments in an ‘enterprise’ can be reviewed if they yield control, or the lower level of ‘material influence’. Such influence is typically presumed at a 25% shareholding but can in circumstances arise at lower levels, e.g., where there is board representation.
An ‘enterprise’ is defined as the activities (or part of the activities) of a business. As such, assets alone (e.g. real estate or intellectual property) are unlikely to be considered sufficient to constitute an enterprise, unless they are accompanied by revenue-generating activities or other components of a stand-alone business such as employees, existing contracts or customer records.
Jurisdictional thresholds. Apart from the public interest considerations, the following general thresholds must be met for the SoS to have jurisdiction to intervene: (i) the target’s UK-wide turnover exceeds £70 million; or (ii) the investor’s and the target’s UK market shares (“share of supply”) together amount to at least 25 percent. In view of technological advancements, economic developments and changes in the national security threat, the UK lowered the thresholds for three specific areas of economy in 2018 in order to address gaps in the Government’s powers in the short-term pending a broader reform. Specifically, where the target is active in military/dual-use goods subject to export control, computing hardware or quantum technologies, the £70 million threshold is lowered to £1 million; and the alternative market share test can be met by the target alone (no increment required).
The amendments that entered into force on 21 July build on changes already introduced in 2018. More specifically, they add a further three categories central to national security to the list of activities subject to lower thresholds:
(i) Artificial intelligence: a technology enabling the programming, or execution of a computational process capable of undertaking complex tasks commonly associated with human intelligence
(ii) Cryptographic authentication: a technology enabling 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.
(iii) Advanced materials: e.g. materials capable of modifying the appearance, detectability, traceability or identification of objects by humans or sensors within specified ranges up to and including ultraviolet.
The SoS can also intervene in “special” public interest cases where an investment does not meet any of the thresholds stated above but relates to (i) a business that supplies at least 25% of all newspapers of any description, or of all broadcasting of any description in the UK; or (ii) a government contractor or subcontractor who holds or receives confidential information or material relating to defence.
The substantive test for clearance is whether the transaction “operates or may be expected to operate against the public interest”. Relevant factors will depend on the basis for the intervention. For example, reviews of transactions relating to the defence sector have tended to focus on the maintenance of strategic capabilities within the UK and the protection of classified information and technology.
UK merger control procedures also apply in public interest interventions. Public interest interventions are based on the same legal instrument as UK merger control (Enterprise Act 2002).
As with UK merger control generally, there is no duty to notify a transaction and there is no stigma attached to not doing so: parties can choose to notify, or take the chance of a post-closing investigation. But with completed deals the CMA or SoS may early on impose an interim order, e.g., a ‘hold separate’ order prohibiting further integration of the businesses. The SoS ultimately has the power to block a transaction and order its unwinding, although undertakings to address the concerns may be accepted.
Reviews for public interest concerns are generally subject to the usual merger control timelines and (where relevant) are carried out in parallel with investigation of competition concerns. The SoS’s involvement can however significantly extend the review process. Where advance notification is made and depending on the stage at which the SoS decides to intervene, the CMA’s review may extend well beyond its usual Phase I administrative timetable of 40 working days for merger cases, working instead towards a deadline fixed by the SoS in the intervention notice. Once the CMA submits its report the SoS must decide “as soon as reasonably practicable” whether to (conditionally or unconditionally) clear the case, or refer it to Phase II. When examining a completed transaction the SoS has four months to launch a Phase II, running from the date of closing or the (later) date when the SoS became aware of the deal. In a Phase II the CMA has an additional 24 weeks (subject to possible extensions) to submit a detailed report to the SoS, who then has further 30 business days to adopt a decision.
II. Proposed Reform
On 24 July 2018, the UK published the National Security and Investment White Paper envisaging a new national security review regime, a framework which would be based on a separate legal instrument, outside of UK merger control.
The proposed regime would introduce a notification system, possibly similar to CFIUS in the United States. The framework is expected to apply to investments that pose or may pose a risk to national security, irrespective of the relevant sector or the size of the business (i.e. no market share or turnover thresholds). A number of factors would be taken into account to assess the national security implications such as the target risk (e.g. the nature of the entity’s activities and of the assets) and the acquirer risk (e.g. the nationality of the investor’s ultimate controlling parent).
The UK government announced the National Security and Investment Bill in December 2019. While the bill has been slow to emerge, latest reports say it may be published in the coming weeks. There are indications that the bill will focus on sectors such as defense and critical infrastructure, and will also seek to protect sensitive IP. The UK Parliament’s Foreign Affairs select committee is also investigating whether it would be opportune to add a “black-list” to the bill which would prohibit foreign investment in certain particularly strategically important sectors, in the same way that China has done.
The bill would cover different types of transactions ranging from mergers, acquisitions and investments to academic partnerships. The government will likely be given powers to intervene retroactively in completed deals, although this provision appears to be the subject of much debate and Members of Parliament have already indicated that they oppose such retroactive powers.