M&A into the UK: tight controls expected soon on deals across tech and defence sectors, new regime may follow across wider sectors

Part 1 | What is this about? 

On 17 October 2017, the UK Department for Business, Energy, and Industrial Strategy (BEIS) announced its long-anticipated proposals on increased scrutiny of inwards investment into the UK.  The “National Security and Infrastructure Investment Review” Green Paper has been published, which considers whether the UK has adequate powers to address security concerns in relation to inwards investment into the UK, and consults on two different sets of proposals.  The conclusion is that controls on foreign investment are necessary – and with some urgency, particularly in relation to military and mixed goods subject to export controls, and advanced technology.

If these products are relevant to your business, and the availability of overseas financing is important to your commercial strategy, you should consider responding to the consultations to ensure that your voice is heard and your interests understood.

Current regime not sufficient

The Green Paper goes to some lengths to emphasise that the UK is a free-trading nation and highlights the importance of inwards investment for the UK economy.  However, it also considers the security risks around foreign interests in private businesses which operate national infrastructure, including: access to people, assets or data (facilitating espionage); increased potential for disruptive or destructive actions; and scope for “inappropriate leverage” of investment-derived influence.  It goes on to note the cumulative risk associated with multiple instances of ownership or control across industry sectors by a particular foreign entity, in addition to risks from a single investment.

The conclusion of the Green Paper is that the UK regime for protecting national security is not sufficient.  This is not entirely surprising, given that there is currently no tailored-made “regime”, but a patchwork of powers that are either sector-specific or only apply if the “public interest” provisions of the generic EU or UK merger control rules are in play.

So-called “loopholes” in this legislative patchwork are identified – namely, the inability to take action in relation to smaller mergers, green-field projects, bare asset sales, and acquisitions of “proximate sites” (for example, where the target business is located next to a military base).  This is interesting terminology – these “loopholes” are more usually seen as necessary bright line limitations on merger control interference in business’ freedom to contract (and even elsewhere in the Green Paper they are referred to as “safe harbours”).

A two-stage overhaul is proposed:

• first, the Government wishes to reduce the threshold for reviewing national security issues to £1 million as regards foreign acquisitions of control or significant influence in relation to the defence and advanced tech sectors (we discuss how these proposals will affect the defence sector here). The consultation on this proposal runs for four weeks, until 14 November 2017;
• second, it is considering whether the current approach of using the UK merger regime to deal with national security concerns should be replaced with standalone foreign investment notification and clearance requirements. These would apply to “essential functions in key parts of the economy”.  We have listed the proposed affected activities here.  The consultation on these proposals runs for 12 weeks, until 9 January 2018.

We have looked at these proposals in more detail in Part 2 of this article.

The impact of these proposals

It is fairly certain that there will be controls in the near future on investments into businesses with a turnover of £1 million or more in the military and dual use, and advanced tech sectors.  The government already has delegated powers to make the necessary amendments and the short consultation period indicates a desire to proceed promptly.

The wider proposals in the longer consultation concern issues which would require a full parliamentary process to create or amend legislation.  This was not included in the legislative agenda announced in the Queen’s Speech of June 2017.

Clearly, businesses that either would be directly affected or whose supply chains would be impacted by the controls will want to review the ramifications of these proposals carefully and may wish to challenge the need for additional intervention in their sector.  Other issues that are likely to be raised in response to the consultation include the need for transparency (which is typically low for public interest investigations, particularly in comparison to standard merger control procedure).  We would also expect calls for clarity on the procedure for the new controls and the criteria on which notified transactions will be assessed.

Another issue will be the interaction with the merger control regime, which the Green Paper accepts will need to be clear.  Currently, the Competition and Markets Authority (CMA) provides advice and recommendations to the Government on public interest issues, although such cases are rare.  It would be very unusual for a standalone foreign investment control investigation, focused on national security and political considerations, to be conducted by a competition authority. It will be interesting to see whether the CMA itself believes that it is adequately equipped to advise on such potentially fraught political questions, as opposed to its standard decision-making process based on rigorous legal and economic analysis.

The Green Paper treads a careful line between confirming the UK’s openness to trade and inwards investment, whilst also concluding that foreign investment controls are needed to protect national security.  The focus is not, however, protectionist and there is no echo of the wider objectives which can be found in other regimes, such as preserving Australian ownership of Australian land, or of protecting Canadian culture.  However it seems inevitable that the controls will have some degree of adverse impact on foreign investment into the UK at a time when Brexit is already putting pressure on our global position as a good location to do business.

Continue reading:

Part 2 | The detailed proposals for consultation

Part 3 | The government’s proposed list of “essential functions in key parts of the economy”