The Situation: The UK Government has expanded the scope of the UK's foreign direct investment ("FDI") screening controls to include businesses responding to the COVID-19 pandemic. In addition, the UK has lowered the thresholds that must be met to enable it to review investments into: (i) artificial technology; (ii) cryptographic authentication technology; and (iii) advanced materials.
The Result: The above changes widen and deepen the scope of the UK's existing FDI screening controls, with the effect that more foreign investments will be subject to review.
Looking Ahead: Clients contemplating making investments into companies with UK customers that operate in the above sectors should consider engaging with the UK Government at an early stage to seek to head off or minimise the scope of a subsequent FDI review.
Changes to the UK's FDI Screening Controls
On June 23, 2020, the UK Government passed a public health emergency statutory instrument which allows the UK Government to scrutinise foreign takeovers that threaten the UK's ability to combat and mitigate the effects of public health emergencies.
This change permits the Business Secretary to intervene in foreign takeovers of firms critical to combating either COVID-19 or future pandemics, such as vaccine research companies or personal protective equipment manufacturers, so long as:
- the target of the takeover had annual revenues from UK customers in the previous financial year greater than £70 million; or
- both the buyer and target of the takeover supply or purchase the same category of goods and services in the UK and between them have a 25% or greater share of supply.
On June 22, 2020, the UK Government also introduced a statutory instrument to lower the thresholds that must be met before the Business Secretary can review investments into: (i) artificial technology; (ii) cryptographic authentication technology; and (iii) advanced materials. These changes will allow the Business Secretary to intervene in foreign investments in these sectors, so long as:
- the target of the investment had annual revenues from UK customers in the previous financial year of more than £1 million; or
- the target of the investment has a 25% or greater share of supply in the UK; or
- the target and buyer group combined have a 25% or greater share of supply in the UK.
Existing FDI Regime in the UK
The above changes strengthen the UK's existing FDI screening controls, which are currently assessed as part of the UK's voluntary merger control regime and are contained in the Enterprise Act 2002. The UK Government will now be able to intervene in the acquisition of control by foreign investors over businesses with UK customers on four specified public interest considerations: (i) national security; (ii) media plurality; (iii) financial stability; and (iv) combating a public health emergency. In particular, the UK government will be able to: (i) prohibit the closing of a transaction pending the outcome of an FDI review; (ii) block the transaction; or (iii) make its approval subject to conditions.
These changes come ahead of a National Security and Investment Bill ("NSI"), which is expected to be introduced by the UK Government later this year. While the exact scope of the NSI is currently unknown, it is anticipated that the NSI will establish a mandatory FDI screening regime to the UK, with notifications required for transactions with national security concerns.