On 11 November 2020, the U.K. Government announced long-awaited and extensive reforms to the U.K. foreign investment regime.
The reforms proposed are more significant than anticipated and include a mandatory notification regime alongside broader “call-in” powers for the Secretary of State. The regime will likely extend to a much broader range of sectors than effected currently.
The new framework represents a marked attempt by the U.K. to “catch up” with international trends, where intervention in foreign direct investment (FDI) is on the rise. This is driven by global geo-political considerations, but is also in response to strong public outcry over a number of high profile takeovers by foreign companies in which the U.K. government had only limited grounds to intervene—Kraft's 2009 acquisition of the chocolate manufacturer Cadbury, Pfizer's aborted takeover of AstraZeneca in 2014 and Softbank's takeover of ARM in 2016, where undertakings were imposed using the U.K.-listed company Takeover Code because the government did not have the relevant powers under the Enterprise Act.
In the short term, we expect the new regime to create some uncertainty, longer deal time timetables and further expense for deal makers.
In the longer term, we expect any nervousness about FDI regimes such as the U.K.'s to ease as these become the international norm—at least in jurisdictions where substantive intervention continues to be comparatively rare.
What is The Existing Regime?
To recap, there is currently no screening regime specifically targeted at foreign investment. Foreign investment control is exercised through the Secretary of State (“SoS”) under the general merger control regime; the SoS can intervene in a transaction on the basis of public interest in three situations regardless of the nationality of the purchaser:
- Public interest intervention. The SoS can only intervene if the transaction meets certain financial thresholds, and raises one or more of the public interest considerations specified in legislation. These grounds include (among others) defence and national security, plurality of media and stability of the U.K. financial system. The grounds were expanded to include public health in response to COVID-19 in July 2020.
- Special public interest intervention. These are special grounds where the SoS can still intervene even if the transaction is not a “relevant merger situation” for the purpose of U.K. merger control. They are currently limited to suppliers of newspapers or broadcasting and government contractors holding confidential information relating to defence.
- Critical national infrastructure mergers. These are transactions in military or dual-use goods subject to export control laws, computer processing units or quantum technology. The thresholds for intervention are reduced to £1 million and the share of supply test is also modified.
The SoS' intervention will normally involve a review—coordinated with the U.K. Competition and Markets Authority (the CMA)—with potential remedies including commitments or even prohibition.
The U.K. attempted an update of this regime in June 2018 through the introduction of lower thresholds for transactions in certain sectors. Clearly, the government feels piecemeal updates are no longer sufficient and an overhaul is required.
How is The Proposed Regime Different?
The Bill is considerably more wide-ranging than anticipated by either commentators or the July 2018 White Paper.
The regime is extensive and there are significant gaps yet to be covered by implementing regulation. We'd expect further clarity and information to appear in the coming months.
However, as the proposals stand, we'd single out three headline changes:
- Mandatory notification. The regime includes a hybrid mandatory/voluntary notification regime, with certain sectors requiring mandatory notification. This comes with the risk of penalty for non-compliance: up to 5 percent of worldwide turnover and even imprisonment.
- The draft list of sectors subject to mandatory notification is broad. This list is still under consultation,1 and we'd expect responses to target and perhaps attempt to narrow down the scope of businesses caught in sectors such as energy, transport and communications. Energy infrastructure, for example, is increasingly popular with foreign institutional investors who could easily be unnerved by the prospect of FDI review.
- The SoS can “call-in” a wider range of transactions—even if they didn't have to be notified, and retroactively. This is in effect a significant expansion of the SoS' current powers. It allows the SoS to “call-in” non-notified transactions up to five years post-completion. This includes the power to review any transactions that took place after the Bill's introduction (i.e., 11 November 2020). The Statement of policy intent published by the Department for Business, Energy and Industrial Strategy (BEIS) sets out the various factors the SoS will consider in exercising this power.
What Has Reaction Been?
Predictably, there has been swift criticism of the regime. John Fingleton—who ran the U.K. Office of Fair Trading from 2005 until 2012—said the regime was “over-expansive” and dismissed its benefits as “very illusory.” He raised the concern that such an FDI regime could ruin the City's reputation as a global business hub; a reputation which is more crucial than ever with looming end of the Brexit Transition period, and the need to rejuvenate the U.K. economy post-COVID-19. A further concern is that, once a minister is given the power to intervene in a merger, any vested interest—Fingleton cites bodies such as trade unions, as well as typical merger control complainants like competitors and customers—can begin agitating.
There is also skepticism that, logistically, the new Investment Security Unit within BEIS will be able to handle the estimated 1,000–1,830 notifications the Impact Assessment anticipates; a number that dwarfs the 56 reviews carried out by the CMA in 2018–2019.
Perhaps the most alarming aspect to both lawyers and dealmakers is the retroactive power the Government has given itself to review transactions. The concern is that any parties now seeking to close a transaction are in hinterland until commencement of the Act—there is no mandatory notification regime yet so one cannot notify, but there is still a risk the SoS can “call in” their transaction retrospectively. The current regime requires deal-making parties to simply take the risk. We note, as well, that the SoS' retrospective “call in” powers are broadened to the “wider economy,” so they are not even limited to the risk factors identified elsewhere in its Statement of policy intent.
Such wide-ranging powers are particularly unnerving considering the U.K.'s permissive starting point, with no formal foreign investment regime, and only limited instances where the SoS can intervene. Investors are being asked to place an unusually high degree of trust in the current U.K. Government.
What Will The Impact Be?
Critics will be quick to claim this new FDI regime will “chill” foreign investment in the U.K., at a particularly critical juncture for the country.
Despite everything, we think this is unlikely. FDI regimes are proliferating all around the world currently and investors are rapidly having to adjust to an environment where politics is more intrusive everywhere than it used to be. Substantive intervention by the U.K. is likely to remain rare, much detail is to come but the notification and review process looks quite streamlined by international standards with statutory timetables. Nervousness will ease with experience.
Commentary that substantive intervention will increase in the U.K. should be read with caution. As discussed, these changes have been anticipated for some time; and, while the regime is indeed more expansive than expected, much is an effort to codify existing government practice. For example, the Government would no longer have to rely on post-offer commitments under the Takeover Code, as done in Softbank's takeover of ARM in 2016.
However, we would anticipate the following in the near term:
- Longer deal timetables. The SoS will have an initial 30 working day period from notification to carry out the assessment, unilaterally extendable by another 45 working days. This is significantly longer than the comparable Phase 1 review by the CMA, which takes a maximum of 40 working days (or 50 days if remedies are offered) before Phase 2.
- Extra expense on buyers. The extra notification, with scope for requests for information from the Government, will create expense for buyers. In particular, the new scope for third parties to agitate may result in a boom in lobbying in particularly contentious cases.
- Uncertainty. As already mentioned, the retroactive powers of the government create significant legal uncertainty for buyers in the interim period. Even after commencement of the Act, we expect there to be a teething period where implementing regulations are tweaked and the process streamlined within the new Investment Security Unit.
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