The UK Government has proposed sweeping changes to the way that it reviews foreign investment into the UK. The proposed new regime would enable the UK Government to intervene in a much wider range of transactions from acquisitions of shareholdings to investments in assets and land (including minority investments and acquiring limited rights in companies or assets) irrespective of the size of the deal or companies involved, where the UK Government is concerned that the transaction would give rise to national security concerns.
The new regime is also intended to cover a much larger part of the UK economy than the existing regime. The UK Government has identified ‘core areas’ that it intends to focus its foreign investment powers on which will include national infrastructure (civil nuclear; communications; defence; energy; and transport), advanced technologies, critical direct suppliers to the UK Government and emergency service sectors as well as military or dual-use (i.e. military or civil) goods, software or technology.
The UK Government’s powers to remedy national security concerns will be broad and the regime will also provide for the ability to block or unwind transactions. This is of particular relevance given that the decision-making authority for the new regime will lie with a senior minister within the UK Government rather than with an independent authority such as the CMA (the UK competition authority, which currently has responsibility for reporting on national security public interest cases). Penalties for non-compliance will also be significant potentially carrying criminal sanctions.
The proposals bring the UK in-line with other jurisdictions which are strengthening their ability to scrutinise foreign investment. In particular, there are a number of similarities with the equivalent US regime (known as CFIUS) which has become increasingly active in recent years (and which is itself is subject to proposals for reform). Similarly, the EU is in the process of consulting on a new EU-wide regime while countries such as Germany, France, Australia and Japan have either recently expanded their foreign investment powers or are in the process of doing so.
While the proposed UK regime will continue to be voluntary, the UK Government expects approximately 200 notifications per year under its proposals and that it will require remedies in relation to approximately 50 transactions. In comparison, there was only one public intervention in 2017 on national security grounds which was the acquisition of Sepura by China’s Hytera.
The significance of the UK Government’s proposals in the context of future M&A and other transactions is highlighted by the recent national security intervention in Chinese-owned Shaanxi Ligeance Mineral Resources Co. Limited’s proposed acquisition of Northern Aerospace Limited, a British aircraft component maker from private equity firm Better Capital Limited for £44 million. While ultimately this transaction was cleared by the CMA, the parties to this deal had to provide undertakings to the UK Government to overcome national security concerns. Moreover, while the transaction has now taken place the intervention of the UK Government did at one point potentially derail the entire transaction with Better Capital publicly calling into question whether the deal would proceed. See our further briefing on this transaction here.
A number of questions remain open in relation to the UK Government’s proposals and we will address these in our response to the consultation. We will continue to monitor developments and provide further updates in due course.
On 24 July 2018, the UK Government published the National Security and Investment White Paper (the “Paper”) which sets out the UK Government’s new powers to scrutinise foreign investments and address the risks that can arise from foreign parties acquiring ownership or control over businesses and assets that have national security implications.
The Paper provides for parties to notify the UK Government ahead of any transaction that could give rise to security risks. This will apply irrespective of the transaction size and even if it involves just the acquisition of or acquiring some level of significant influence over an asset, land, intellectual property or shareholding. The UK Government will also be able to “call-in” transactions that may give rise to national security risks to assess them more fully. In laying the Paper before Parliament, the Secretary of State for Business, Energy and industrial Strategy (Greg Clark) stated that this “call-in” power would be economy-wide.
This Paper follows the recent amendments made to the existing national security public interest regime (which significantly lowered the thresholds for scrutiny of transactions in three specific areas of the economy, military/dual-use, computing hardware and quantum technology) which came into force in June 2018. These reforms are intended to provide a short term solution for foreign investment review while the UK Government finalises its long term approach to dealing with its national security concerns. The UK Government’s previous consultation and Green Paper published in October 2017 suggested a number of proposals for reform to foreign investment review and the Paper sets out the UK Government’s favoured proposal in significant detail.
A voluntary system but with powers to call-in potentially problematic transactions and criminal and civil sanctions for breaches
Currently, the UK Government’s powers to intervene in relevant transactions on national security grounds derive from the public interest regime provided for by the Enterprise Act 2002 (the “Act”). In its Green Paper, the UK Government concluded that the existing public interest powers are limited and insufficient, particularly in contrast to other countries’ regimes.
However, the UK Government is not intending to introduce a mandatory notification procedure as is the case in a number of other jurisdictions. Rather the UK Government is intending to maintain a voluntary system whereby it will encourage voluntary notification from parties who consider that their transaction may raise national security concerns.
If parties choose not to notify, the UK Government will have the right to intervene, including after the event (for a set period) in order to protect national security. In particular, the UK Government will be able to “call-in” a transaction (i.e. review a transaction even if it has not been notified). In assessing whether to call in a transaction the Government will have regard to the following three risk factors:
• the target risk: the entity or asset subject to the trigger event could be used to undermine national security;
• the trigger event risk: the trigger event gives someone the means to use the entity or asset to undermine national security; and
• the acquirer risk: the person acquiring control over the target has the potential to use its control or ownership of the target to undermine national security.
The UK Government has also sufficiently enhanced the penalties for breach of the new regime. The Paper proposes that some breaches of the UK Government’s decisions will be classified as a criminal rather than a civil offence.
No value or size of parties thresholds for intervention
Currently, the UK Government can intervene in transactions which lead to a concentration with a share of supply of 25% or more, or with turnover of £70m. The short-term reforms which came into force in June 2018, decreased the turnover threshold to £1m in three key areas: (i) quantum technology; (ii) computing hardware and (iii) dual use and military use sector and removed the requirement for there to be an increment to the share of supply.
The Paper suggests that both thresholds should be removed entirely. As a result, any transaction with a foreign buyer in relevant sectors that could prompt national security risks could be subject to the new regime, and that could involve a sale of a single asset of any value.
Moreover, the ‘trigger events’ for the UK Government to call in a transaction are broad and will include:
• acquisitions of 25% of an entity’s shares or votes;
• acquisitions of significant influence or control over an entity;
• further acquisitions of significant influence or control over an entity beyond the above thresholds; and
• acquisitions of significant influence or control over an asset.
Foreign investment review will cover large parts of the economy
The current and recently reformed regime covers certain products or services including military and dual-use products and certain advanced technologies including quantum technology.
However, the proposed new regime significantly expands the sectors of the economy which will be subject to foreign investment review. The UK Government has identified ‘core areas’ which it currently considers are most likely to pose national security risks including:
• national infrastructure: civil nuclear; communications; defence; energy; and transport;
• advanced technologies: advanced materials and manufacturing science; artificial intelligence and machine learning; autonomous robotic systems; computing hardware; cryptographic technology; nanotechnologies; networking and data communication; quantum technology; and synthetic biology;
• critical direct suppliers to the UK Government and emergency services sectors; and
• military or dual-use (which can have both military and civilian applications) goods, software and technology.
The UK Government has proposed that transactions relating to land could also pose a risk to national security because of the strategic location of the land or its proximity to a sensitive site.
The proposed new regime will consist of the following steps:
• Notification: parties submit a notification having identified one or more national security implications of their transaction. Informal pre-notification interaction with the Government is also encouraged.
• Screening: the UK Government expects approximately 200 notifications per year and is aiming to quickly screen out those in relation to which it has no national security concerns.
• National security assessment: Notifications which raise national security concerns (estimated to be around 100 of the notified cases) will be subject to a full assessment.
• Remedies: If national security is at risk, the UK Government will impose such remedies as it deems necessary and proportionate. The UK Government’s initial analysis indicates that this will arise in around half of the cases subject to a full assessment (i.e. 50 of all notified cases).
If the UK Government calls in a transaction, it will then have a prescribed period of up to 30 working days, potentially extendable by a further 45 working days, to complete its full national security assessment.
Decision-making will fall within the remit of the UK Government
Under the proposed regime a senior minister within the UK Government will be the decision-maker on foreign investment cases. This is a major change to the current regime where national security public interest cases are operated by the CMA, the UK competition authority. While the CMA will likely be pleased to have national security removed from its purview (it has publicly stated a number of times that it does not have the expertise to assess national security cases itself), it is noteworthy that foreign investment review will be a UK Government decision rather than that of an independent authority.
International trend towards foreign investment review
The UK is not the first country to increase its powers to closely scrutinise foreign investment. The US, Australia, Germany, France and Japan have either already or are in the process of expanding their powers in this area.
In addition, the European Commission has proposed an EU-wide Foreign Direct Investment (“FDI”) screening regulation to provide a cooperation mechanism between Member States to mitigate against potential security risks posed by FDI from third countries into the EU. The proposal sets out procedural requirements for Member States both with and without a formal national security screening mechanism, as well as annual reporting obligations.
The changes made by these jurisdictions – and the fact that over 130 countries globally have foreign investment review procedures – highlights that foreign investment review is becoming a common place consideration for M&A and other transactions of all sizes.
The Paper is now subject to a 12-week consultation period. The Government will use the responses to refine its proposals ahead of the introduction of primary legislation.
The Government will also publish detailed guidance in the form of a statement of policy intent (draft already available here). This will provide detail about the areas of the economy where trigger events are most likely to raise national security concerns.
Compliments of Eversheds Sutherland, a member of the EACCNY