Successive UK governments have sought to position the United Kingdom as highly welcoming of foreign investment, as exemplified by relatively relaxed laws to prevent takeovers of businesses in the United Kingdom. However, the trade-off to this “open for business” policy has been that, in comparison to the peer G7 countries, the UK government’s ability to intervene in or prevent mergers which might present a threat to national security in its widest sense has been limited. Recognising this shortfall in powers, the UK government has in recent years sought to enhance its rights to prevent or mitigate national security risks arising from foreign ownership of, or influence over, UK businesses in increasing numbers of sectors. In the short term this has been reflected through a suite of amendments to existing legislation and, in the long term, through more comprehensive powers set out in the forthcoming National Security and Investment Bill.
2. The Current Regime and Stopgap Measures
Under the current UK foreign investment regime (set out in the Enterprise Act 2002 (the “Enterprise Act”)), the UK government has no power to intervene unless the merger raises at least one of four specific public interest issues – national security, financial stability (implemented in response to the 2008 financial crisis), media plurality or to combat a public health emergency (implemented in response to the Covid-19 pandemic – see further below). Even then, the UK government has no power to intervene on national security grounds unless the UK target’s annual turnover is more than £70 million and/or where the merger results in a combined share of supply of particular goods or services above 25% of the market. These thresholds therefore excluded from UK government scrutiny transactions involving small but highly specialised businesses, which are increasingly driving the development of innovative goods and technological advances as well as investments where the investor had no pre-existing presence in the market.
Recognising the aforementioned limitations to their powers, the changes in the national security threat facing the UK and the fact that essential goods and services are provided by increasingly more diverse networks of businesses (including those with a small turnover), in June 2018 the UK government amended the relevant tests in three sectors of the economy: military and dual-use technologies, quantum technology and computing hardware. Transactions in these sectors were subject to revised thresholds – the turnover threshold dropped to £1 million and the share of supply threshold is now met where the target enterprise alone has a 25% share in the market. Small transactions in specialised markets are now subject to UK government intervention on grounds of national security.
Since 2018, the UK government has monitored the evolving national security environment and earlier this year applied three further key sectors – artificial intelligence, cryptographic authentication and advanced materials sectors – to the reduced thresholds, enabling the UK government to scrutinise transactions in these developing sectors. Nevertheless, this revised regime is intended to be only temporary, pending the implementation of broader reforms introducing an entirely new foreign investment regime (see The National Security and Investment Bill below).
3. What’s Everyone Else Doing?
The announcement of the reduced thresholds for further key sectors comes at a time when increasingly protective measures are being taken by governments around the world to protect their national security-critical businesses. For example, in March this year, Spain issued decrees making screening mandatory for foreign direct investments acquiring more than 10% of entities in certain sectors such as healthcare, technology and critical infrastructure. Similarly, Germany has accelerated a reform process with the announcement of the Foreign Trade and Payments Act (Außenwirtschaftsgesetz – AWG) which, if passed, will set lower thresholds for investments that are likely to be subject to review by the German government.
The above is set against a backdrop of an EU regulation which will come into force in October 2020 designed to safeguard the European Union’s security and public order in relation to foreign investment in EU member states. The regulation establishes minimum standards that an EU member state must meet for review mechanisms established at a national level. As the United Kingdom has now left the European Union, it does not have to meet these standards. However as the UK government has indicated that it intends to adopt laws that are consistent with EU standards, it may choose to do the same with respect to this regulation.
4. The National Security and Investment Bill
Against the background of this developing environment the UK government announced the National Security and Investment Bill (the “NS&I Bill”) in December 2019. The NS&I Bill is intended to introduce a system of control on foreign investments consistent with peer jurisdictions (e.g., the Committee on Foreign Investment in the United States and the Foreign Investment Review Board in Australia); whilst also granting the UK government enhanced powers to investigate and intervene in transactions of national security. The main elements of the NS&I Bill include: (i) establishing a notification system whereby businesses will flag transactions with potential security concerns to the government for screening; and (ii) enabling the government to mitigate national security risks (e.g., by adding conditions to a transaction or blocking it outright). The new powers would apply to all sectors of the UK economy, without reference to the parties’ share of supply or turnover. The current proposal is not particularly detailed and does not contain a definition of “national security” and, as yet, no date has been set for the next stage of the NS&I Bill’s legislative process (which has also been slowed by Brexit and Covid-19).
In the short term, buyers, sellers and target businesses operating in one of the named protected sectors in the United Kingdom will need to carefully consider how to manage the growing risk of intervention by the UK government in their transactions. For example, parties may elect to engage with the United Kindom’s Competition and Markets Authority (CMA) at the start of a transaction rather than waiting to be called upon, thereby mitigating the risk of spending time and money on a transaction that has to be restructured or unwound—or alternatively, the risk could be addressed within the relevant transaction documents, for example by the inclusion of a condition precedent or a split sign and close as is the norm in the United States should the CMA intervene.
However, in the long term, everyone will need to monitor the progress of the NS&I Bill and how it will reshape the mergers and acquisitions market in the United Kingdom. With the end of the Brexit transition period approaching and as a result of the Covid-19 impact on the United Kingdom’s economy, the expectation is that the UK government will try to balance two competing interests – ensuring that the United Kingdom remains “open for business” and attractive to foreign investment but at the same time protecting UK businesses from foreign investment, which may present a threat to the United Kingdom’s critical national security in the widest sense.