Government tightens control of foreign investment to tackle security risks
12 November 2020: Major changes to the scrutiny of foreign acquisitions and investment in the UK have been outlined by the government as it looks to beef up national security and prevent overseas companies from buying up sensitive UK assets.
The National Security and Investment Bill published yesterday sets out new powers that allow the government to scrutinize investments and intervene in takeovers and investments by foreign companies where it believes there could be a risk to national security.
The new powers, which come into immediate effect from 12 November 2020, stipulate that prospective overseas buyers of UK companies, shareholdings or intellectual property across 17 sensitive industries (including civil nuclear, communications, data infrastructure, artificial intelligence and computing hardware) will have to alert a new government unit – the Investment Security Unit – about their proposed transactions (mandatory notification). Directors of overseas companies that fail to do so could face personal fines of up to £10m, or their businesses could pay penalties worth up to 5% of annual turnover.
Also, a voluntary notification system should see parties notify “trigger events” they consider may be of interest from a national security perspective. Meanwhile, an expansive “call-in” mechanism will enable the government to review non-notified transactions up to five years post-completion, reduced to six months if the government has become aware of the transaction.
The measures in the Bill go much further than proposals outlined in 2018 after the government warned that the gravity of the current economic situation and the knock-on effect of the coronavirus pandemic could open the door to a greater risk of small businesses operating in sensitive areas being swallowed up or being subject to broader transfers of control.
David Petrie, ICAEW’s Head of Corporate Finance, commented that the 17 industries covered by the new rules were united by the fact they were all cash-hungry and their ability to attract investment – often from overseas – was critical to their growth.
At the same time, the government has admitted that existing powers to intervene under the Enterprise Act 2002 are not fit for purpose in light of changing threats and new technologies being developed by startups that fell outside of the scope of current scrutiny.
Under the 2002 Enterprise Act, UK authorities could intervene in deals on competition grounds, or if a transaction has implications for national security, media plurality or financial stability. However, this previously applied if the target asset had an annual turnover of more than £70m or where the merged business would have a market share of more than 25%.
In 2018, and again earlier this year, the government amended its powers under the Enterprise Act 2002 to provide for a lower threshold for intervention in certain sensitive sectors of the economy.
British officials expect the new rules to result in a huge ramping up in the number of deals under scrutiny. There have been only 12 public interest interventions by the government on national security grounds since 2002. It is expected that between 1,000 and 1,830 notifications a year would fall under the new takeover regime, although only a small percentage are likely to be blocked by the government or face “remedies”.
“This is going to have to be a large new government department and adequate resourcing will be essential,” Petrie said. “The unit should not be working with the 30-day approval period as the target for giving approval or carrying out further review. If the digital system works as promised, advisors will want to know within a day so at most, if they can progress. If deals match the core but unstated criterion, which more than likely is that the investor is not from a country on the UK Government's unseen prohibited list, then the deal should get the green light before the company runs out of money. This is a real concern for hundreds of early-stage tech businesses. Even with some of the largest deals and infrastructure transactions, an investor can go cold and simply walk away.”
Against a backdrop of growing international protectionism, the new rules bring the UK in line with other jurisdictions that already have similar rules in place, including France and Germany. “The challenge is to introduce a regime where advisors can get the Stop/Go very quickly, investors can feel confident with and that doesn’t inhibit overseas investment,” Petrie said.
The government is continuing to consult on a tighter definition of businesses caught by the mandatory notification requirement. However, while understandable given its political sensitivity, the absence of explicit detail on the countries excluded from investing creates huge uncertainty for those caught by the rules.
“Whilst the rubric surrounding the legislation talks about transparency and encouraging investment, in reality, this is a major new hurdle,” said Petrie. “Review by a new government department of pretty much every tech deal is going to be the new normal for companies and their advisers. If this legislation genuinely does protect our national security, then perhaps more advisory fees and the costs of running a new government department is a price that as a nation we are happy to pay.”