The UK government recently published proposed reforms designed to strengthen its powers to investigate national security implications for investments in certain types of UK assets and industries. These proposals may have significant consequences for investors. The current consultation launched by the UK government provides an opportunity to put forward views on the proposals which the government will take into consideration.
The proposals follow a government review of the United Kingdom’s current approach to considering national security ramifications of foreign investment, which the government determined was less developed than the approaches of key comparative G7 nations. The government also expressed its support for the Takeover Panel’s proposals to prevent abusive asset stripping by making the intentions of proposed buyers of UK public companies more transparent, and stated its intention to enhance its powers to ensure that public funds are protected in merger situations—for instance, where a target has benefitted from public investment.
The current regime under the Enterprise Act 2002 does not permit government intervention for national security reasons where the turnover of a UK company is less than £70 million or where the merger takes the parties’ combined share of supply of particular goods or services above 25 per cent, except where a company falls within the special public interest regime (typically defence contractors or companies holding confidential defence material under licence). The scope of the Enterprise Act excludes transactions involving small but highly specialised businesses, as well as investments where the investor has no existing presence in the market. Furthermore, the Enterprise Act does not cover investments in new infrastructure projects (e.g., new-build nuclear plants) or transfers of assets which include machinery or—critically—intellectual property for use in multi-purpose computing hardware and quantum-based technology. The UK government recognizes that technological advances potentially could allow a hostile foreign state to make an investment in technology-rich assets and thereby gain a position to remotely undermine UK national security.
The government proposals involve both immediate short-term steps and long-term reforms.
The short-term steps, which are subject to public consultation ending as soon as 14 November 2017, involve the amendment of the turnover and supply tests in the Enterprise Act to enable the government to investigate and potentially intervene in any merger that falls outside the current thresholds in two areas:
The military use sector and “dual use” sector (i.e., assets having both a military and civilian application)
Parts of the advanced technology sector
For these areas alone, the turnover threshold will be dropped to £1 million and the share of supply threshold removed entirely. These changes will likely pass into UK law very quickly, and the public consultation seeks input as to how these sectors will be defined, among other things.
These proposed amendments to the jurisdictional thresholds do not distinguish between domestic and foreign transactions, and notification to the UK Competition and Markets Authority (CMA) will remain voluntary. However, the reduction in thresholds may result in companies increasingly notifying transactions in the covered sectors to the CMA to achieve better legal certainty, given the CMA’s ability to review un-notified transactions and impose “hold-separate” orders.
As part of the longer-term reforms, the government has expressed an intention to expand its existing powers in the Enterprise Act beyond the special public interest regime to enable it to unilaterally prescribe and scrutinise a broader range of investments for national security concerns (call-in power). As discussed previously, categories of investment under the proposal would include new projects and asset sales (including land in close proximity to national-security-sensitive sites). For companies that are the subject of foreign investment, the government proposes to introduce a concept of “significant influence” to enable it to scrutinise transactions resulting in the acquisition of more than 25 per cent control, or equivalent transaction structures amounting to significant influence or control of, or unrestricted access to, a UK business or UK assets.
The government also proposes that the United Kingdom introduce a mandatory notification regime for foreign investment in certain critical functions in the economy, citing as a minimum the civil nuclear, defence, telecommunication and transport sectors, as well as emergency services and government. It believes the existing regulatory or licensing regimes in these industries do not provide sufficient powers to the government to protect national security, and currently there are no reasonable alternative means of adequately mitigating any potential risk posed by foreign ownership or control.
These long-term proposals are open for public consultation until 9 January 2018.
In making these proposals, the UK government has made it clear that the United Kingdom remains “open for business”. At this stage, the long-term proposals do not contain significant detail as to how the new system would operate. The UK government has emphasised that it intends for the CMA to remain independent, and that it does not wish to interfere with other public-interest assessments (e.g., relating to media plurality or prudential concerns). It is notable, however, that the new system would incorporate judicial review, arguably creating greater similarity to the European Commission’s recent proposal concerning the screening of transactions on national security grounds than, for example, the Committee on Foreign Investment in the United States, an inter-agency committee of the US government. Nevertheless, the longer-term proposals suggest that the UK government will take a more interventionist role in the future with respect to foreign investment in the United Kingdom in critical or strategic industries.
Overall, both the short- and long-term proposals create the prospect of significant change to the regulatory approvals and processes that may apply to mergers and acquisitions in the United Kingdom, particularly in sensitive sectors. Companies and other entities potentially affected by these proposals should consider taking part in the public consultation process, so that the UK government can take their views into consideration.