UK Proposes Enhanced Scrutiny of Foreign Investment

The UK government has published proposals¹ for extending government scrutiny of investment to address the national security risks posed by acquisitions of ownership of, or control over, certain entities or assets. Notifications of transactions would be voluntary, but the Government could also ‘call in’ unnotified transactions for assessment, and could impose conditions on the parties or, in rare circumstances, block or unwind a deal. The Government has invited comments by 16 October before drafting new primary legislation. 

As foreshadowed in the Government’s Green Paper last October² and the recent initial step of amending the Enterprise Act 2002 to enable interventions in high-risk sectors³ (dual use and military use, quantum and computing technologies), the UK government proposes to increase its powers to scrutinise foreign investment to protect national security. Key points include: 

• The new process would be proportionate, targeted, predictable and transparent, striking a balance between encouraging foreign investment while addressing evolving national security threats. 
• These reforms would bring the UK closer in line with similar regimes in other countries (e.g., U.S.,⁴ Germany, France, Japan, Australia) as they also update their powers in response to similar risks. 
• The reforms would only concern national security, not wider public interest issues, on which the Government has no plans for changes to the existing regime. 
• There would be no mandatory requirement, but instead a voluntary notification system, supported by official guidance on when and how national security concerns are likely to be triggered and powers to intervene in transactions that have not been notified. The Government has published a draft Statement of Policy Intent alongside the White Paper with details on both these aspects. 
• Potential “trigger events” would no longer include any reference to an entity’s turnover or share of supply and would represent a significant expansion of the range of transactions within the scope of the process by covering: 
  • Acquisitions of more than 25% of votes or shares in an entity.
  • Acquisitions of significant influence or control over an entity. 
  • Further acquisitions of significant influence or control over an entity beyond the above thresholds. Acquisitions of more than 50% of an asset (real and personal property, contractual rights and intellectual property, but not money). 
  • Acquisitions of significant influence or control over an asset.
  • Exceptional instances where loans or conditional acquisitions (like futures options) may also give rise to national security risks (e.g., a loan with a sensitive asset secured as collateral). 
• Despite widespread commentary that the measures are directed primarily at China, the proposals could apply to investments from any country. 
• Of about 200 notifications expected each year, roughly 100 “trigger events” are considered likely to meet the clear legal test to be subject to a full assessment, taking up to 30 working days, extendable by a further 45 days. 
• Of those 100 full assessments, about 50 are expected to meet a clear legal test justifying a remedy. Remedies could take the form of conditions imposed on any party (an indicative list would be published with the legislation) or the Government could block a deal or unwind it (subject to the prescribed period for intervention). 
• Criminal offences (up to five years imprisonment) and financial penalties would incentivise compliance. A specific appeals process would be created, based on judicial review principles whereby appeals are made against the lawfulness of a decision. 
• The new process would sit as efficiently as possible alongside other regimes and processes, retaining the role and the independence of the Competition and Markets Authority and, at least until the UK leaves the EU, directives and regulations including the Merger Regulations and the forthcoming Foreign Direct Investment Screening Regulation (which aims to enhance cooperation between Member States and provide for the Commission to submit non-binding opinions). 

How Dechert Can Help 

Companies and investors should familiarise themselves with the implications of the proposals and consider submitting comments to the Government by its deadline of 16 October. 

Dechert lawyers have extensive experience, including as former regulators, in these and related issues including negotiating bilateral investment treaties and managing national security reviews. 

Footnotes 

_{1) UK Government White Paper “National security and investment: proposed legislative reforms”
2) UK Government Green Paper: “National security and investment review”
3) See our recent OnPoint 'Mergers and Takeovers: UK Strengthens National Security Scrutiny'
4) The authorities governing the equivalent review process in the United States, led by the Committee on Foreign Investment in the United States (“CFIUS”), will be expanded pursuant to the Foreign Investment Risk Review Modernization Act of 2018, which is expected shortly to become law. See our recent OnPoint 'House Passes CFIUS Reform as Trump Administration Reiterates Support'}