Towards a UK Investment Act?

Orrick, Herrington & Sutcliffe LLP

Orrick, Herrington & Sutcliffe LLP

Against the background of UK policy moving towards a more nationally-led trade and investment policy following this summer’s referendum, the new UK government is still in the process of establishing its policies regarding some of the key economic challenges facing the country in the coming decades. A major theme, common to many other large economies, is the renewal of critical infrastructure. In the context of a nationalist mood amongst voters and the perception that there is a gap to be filled in the UK’s investment law, it is useful to look both at the recent history of UK foreign investment control and referable indicators from the legal systems of other major economies, particularly the Commonwealth.

The more general competence of investment law is one of the domains which passed from the UK parliament to the EU Commission, as part of the Treaty on the Functioning of the European Union (the “Lisbon Treaty”). Other competencies, such as energy, are domains of shared competence and so the area of critical energy infrastructure is one area in which it can be seen that the UK has formulated national policy that will be discussed here. Further, given the UK’s recent vote on the re-negotiation of its relationship with the European Union, it is possible to conceive that the UK may seek to pull together the existing elements of its legislation and policy into a clearer general statute on foreign investment control. This new regime would sit alongside any other trade agreements that it may seek to negotiate, whether with the EU or with other countries and trade blocs.

Emerging position on critical energy infrastructure

The UK imposes few controls on foreign investment. There are no sectors of the economy where restricted foreign investment applies, other than that the investor must comply with monopoly and merger rules and restrictions around any pre-existing government interest, such as a golden share obtained on privatisation. Even in the defence sector, there is no formal rule restricting foreign participation1.

The one exception, common with other countries, is national security. The Enterprise Act 2002 grants the Secretary of State special powers to serve an intervention notice on where a proposed merger represents to a threat to national security, media plurality or the stability of the UK financial system. Intervention notices have been served to date on all of these grounds.

In the offshore oil and gas industry, the national security issue has arisen in a number of cases. Production at the Rhum field, a major gas field in the North Sea in which BP and the National Iranian Oil Company each have 50% shares, was halted in 2010 due to the international sanctions regime imposed upon Iran. As NIOC was a listed entity for sanctions purposes, the situation arose where off-takers were prevented by sanctions from paying for that off-take and new investment would have breached sanctions. In 2013, citing field safety reasons around the difficulties of decommissioning high pressure gas fields, the Secretary of State allowed BP to re-commence production on the basis that the NIOC’s interest and revenues (until the end of the licence term) would be managed by the (then) Department of Energy and Climate Change (“DECC”)2. Although NIOC can expect to receive its share of the revenue eventually, the combination of sanctions and the temporary management scheme mean that NIOC cannot sell its interest in the field, which has effectively been expropriated for the stated grounds of safety. A further case arose when the Secretary of State blocked the sale of 12 North Sea gas fields to LetterOne, citing the possibility that its Russian owners might become subject to EU sanctions in the future. Although the parties to the transaction had devised a complex structure involving a specially formed Dutch foundation able to step in and temporarily operate the fields were LetterOne or its owners to become subjects to the EU sanctions, the Secretary of State stated that he would be compelled to order the sale of the fields to a third party, to obviate the risk of health and safety and environmental concerns, if the deal were to proceed3 .Such interventions, criticised by some commentators as being less predictable and a potential dampener on investment, have been few. There is concern as to what a widening of such criteria would mean to the UK’s ability to attract the investment that it will need for critical infrastructure.

The decision by the UK government to give the go ahead for the investment of French and Chinese investors in the Hinkley Point C on 15 September 2016 is therefore of significance beyond that project individually. The decision was made with a nod to the existing national security criteria but went further. In letters exchanged by the major French investor, EdF, and the Secretary of State, further conditions were imposed that outline the shape of an evolving policy to reform the legislative scheme set out in the Enterprise Act 2002. Principally, the foreign investors will not be able to sell significant stakes in the new nuclear projects prior to the completion of construction without UK government consent.  The government also stated that it would would take a “special share” in all future nuclear new build projects in the UK, or will impose similar conditions, with the stated aim of preventing significant stakes being sold without UK government consent. This effectively extends the Enterprise Act 2002 powers of intervention to critical infrastructure projects still in the construction phase. Significantly, the Hinkley Point decision included the important statement that there will be reforms to the Government’s approach to the ownership and control of critical infrastructure to ensure that the full implications of foreign ownership are scrutinised for the purposes of national security. This will include a review of the public interest regime in the Enterprise Act 2002 and the introduction of a national security requirement for continuing Government approval of the ownership and control of critical infrastructure4.

What then might that reform entail?

Some models for a wider foreign investment control regime

Although the competition authorities of a number of jurisdictions have expressed a preference for a rules-based system of merger control that does not take into account industrial policy or non-competition considerations, it is a reality that the governments of many major economies retain the power to intervene on the grounds that a merger presents a threat to national security on a much wider basis than the UK. It is also notable how these governments have refined the criteria around how they exercise those powers, with a view to safeguarding the national interest whilst competing to attract critical infrastructure investment.

The “Canada model” has been cited by a number of commentators, and some UK politicians, as a possible model for the UK foreign trade model in the future, following the signature of the EU-Canada Comprehensive Economic and Trade Agreement (“CETA”) on 30 October 20165. Canada retains a foreign investment control regime in the form of the Investment Canada Act. This regime operates on a national level, albeit now at reduced thresholds with its free trade partners, notwithstanding both the CETA and the North American Free Trade Agreement. In the Canadian regime, there are lower thresholds for reviewing an acquisition of control of Canadian businesses involved in cultural industries, financial services, transportation services, and uranium production. Although there is no specific provision on foreign state-owned enterprises (“SOEs”), debate around this subject caused a high profile bid by China Minmetals for Noranda, a major mining company, to fail in 2004. In its approval in December 2012 of Petronas’ C$6 billion acquisition of Progress Energy (the owner of a proposed LNG export project on the west coast), and CNOOC’s C$12bn takeover of Nexen Inc., the Canadian government indicated a clear preference for private foreign investment over investment by SOEs, minority SOE investments over acquisitions of control by SOEs, and a lower tolerance for SOEs acquiring control of leading firms in any sectors of Canada’s economy. It also stated that a foreign SOE acquisition of control over oilsands projects would only be permitted “in exceptional circumstances”. There is therefore a clear move to including industrial policy in the foreign investment control regime, albeit with sufficient legal certainty and implemented in a manner that inspires business confidence in Canada as an investment destination.

Elsewhere in the Commonwealth, similar legislation exists in Australia in the form of the Foreign Acquisitions and Takeovers Act 1975 and the related acts and regulations administered by the Foreign Investment Review Board. The Australian regime has been substantially overhauled in 2015 and 2016 bringing in stricter review and penalties for infringement, with a particular focus on Australian food security by a strengthening of the control over foreign investment in agricultural land6. New Zealand has the Overseas Investment Act 2005 administered by the Overseas Investment Office. This regime has also grown out of a regime on the foreign ownership of sensitive land and fishing grounds, taking into account the history of New Zealand’s founding cultures and has evolved to cover foreign involvement in major business interests7.

These regimes shine some light on the direction that UK investment policy might move during the upcoming review of the Enterprise Act 2002 regime.

Concluding thoughts

No major economy wishes to become a less competitive destination for major investment in critical infrastructure. The Canadian example is instructive in that a lurch towards protectionism and unclear regulatory criteria was successfully resisted. After the substantial political pressure that followed the China Minmetals deal failure in 2004, the Canadian government had been under strong political pressure to introduce restrictive measures on state-owned enterprises, which were tabled in a proposed Bill C-59 that was never approved. More specific and nuanced criteria around national security and state-owned enterprises were later announced only in conjunction the successful approval of two major investments in critical energy infrastructure (CNOOC and Petronas). Additionally, acquisitions by SOEs which do not confer control may well be subject to review under the national security jurisdiction but are not reviewed under the Canadian SOE guidelines. When compared with the almost limitless jurisdiction of CFIUS regulators in the United States and the much wider meaning of “control”, the benefit of the much clearer regulatory guidelines in Canada is quickly apparent in the number of major energy transactions concluded.

The UK’s critical energy infrastructure is not a closed system, and nothing symbolises this more than the gas and power interconnectors. Many of the concepts integral to the concept of the Energy Union had their genesis in the UK, not least the internal energy market, open access to infrastructure and competition in energy markets. These will continue to be a reality in some form during and after the UK’s renegotiation of its trade relationship with Europe, whether by dint of parallel implementation in UK legislation and regulation or through the existence of parallel pan-European energy structures8. It will therefore be important to any expansion of UK national security criteria to remain discrete from the considerations that affect competition and markets review of merger control. The sheer cost and environmental risk of nuclear projects may justify a form of government control through golden shares much as safety and environmental concerns in the North Sea may require intervention, however regulators and governments also need to be receptive to solutions proposed by foreign investors to achieve these aims, in order to ensure the benefits of competition and the free movement of capital.

One core aspect of the Hinkley decision was clearly the creation of excess capacity in an electricity-dependent economy that is already capacity constrained. Competitive producers have no market incentive to create this excess capacity which has a social and wider economic value because, in the government’s assessment, cuts in supply are more costly to the economy as a whole than the cost of acquiring this excess capacity9 . The government therefore seeks, in buying that capacity through generous off-take guarantees, to impose conditions that safeguard this public investment. In this context, it is worth noting the part of the Hinkley announcement that states that the new legal framework for future foreign investment in Britain’s critical infrastructure will include (and will therefore not be limited to) nuclear energy. One can see how new transmission capacity, gas and power interconnectors and the next transportation fuel infrastructure (whether gas or electric) could give rise to similar considerations. Clear criteria around the nature and benefit of the investment being made rather than a focus on the nature of those able to provide the necessary size of investment (which may include foreign pension and wealth funds or state-owned enterprises) could entail a “net benefit” test. An assessment of the “net benefit to the UK” might therefore involve an assessment of the effect of the investment on the level of economic activity, on employment, on the utilisation of parts, components and services produced in the UK and the contribution of the investment to the UK’s ability to compete in world markets.  Such an approach may be more workable in the UK context, where there is already substantial foreign involvement in critical infrastructure.



  1. There is an informal process for clearance from the Ministry of Defence for any investment or divestment where there is a contract in place with the MoD, although these rules are not in the public domain.
  2. Hydrocarbons (Temporary Management Scheme) Regulations 2013.
  8. The EU acquis on gas already applies through EFTA and the Energy Community to integrating energy markets in non-EU Europe and the Caucasus.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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