Foreign Direct Investment: Changes in the United Kingdom

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Have there been any recent changes to the Foreign Investment rules in the UK?

At present in the UK, foreign investment transactions involving certain public interest and security issues (notably relating to defence), media plurality covering certain newspaper and broadcasting companies and financial stability are subject to review. However, there have been a number of recent changes to the rules in the UK, including a broadening of the sectors subject to the new lower thresholds for the Turnover Test to £1 million per annum and Share of Supply Test to where the same category of goods or services is being supplied in the UK (or a substantial part of it accounting for 25% or more of such supply, even if the share of supply does not increase as a result of the merger).

As a result, since 11 June 2018:

  1. the development or production of military items and "dual-use" items;
  2. the design and maintenance aspects of computing hardware; and
  3. the development, design, manufacturing or production of goods for use in, or supply of services based on, quantum technology,  are more likely to be caught by these lower thresholds.

The UK Government also recently passed with effect from 23 June 2020 new legislation to intervene in certain deals of substance involving businesses critical to the UK's ability to combat, and to mitigate the effects of, public health emergencies such as the COVID-19 pandemic.

If yes, please provide a brief summary of the changes. (Please include links to existing detailed summaries if available)

Further sectors targeted

On 21 June 2020 it was further proposed that the new lower thresholds for the Turnover Test and Share of Supply Test be extended to the following sectors:

  1. artificial intelligence;
  2. advanced materials; and
  3. cryptographic authentication technology.

This expansion of categories will need to be debated and approved by Parliament before it can come into effect.

For transactions caught by the amended thresholds, notification will continue to be voluntary. Those involved in transactions can choose to notify the transaction to the Competition Market Authority (CMA) or take the risk that the CMA or Secretary of State will decide to initiate an investigation up to four months after completion of the transaction (or completion of the transaction is made public, if later).

New legislation to intervene in matters of public health

The UK Government also recently passed with effect from 23 June 2020 new legislation to intervene in certain deals of substance involving businesses critical to the UK's ability to combat, and to mitigate the effects of, public health emergencies such as the COVID-19 pandemic. The categories of businesses covered includes targets that are directly involved in a pandemic response, such as pharmaceutical companies and research bodies involved in vaccine research, as well as companies involved in the manufacture of personal protective equipment (PPE) and other essential medical supplies.

This new legislation is also wide enough to cover companies active in the food supply chain and logistics companies that play an essential role in keeping supply chains moving in exceptional circumstances or private healthcare companies that may offer resources to relieve the NHS. 

The Government may intervene where each of the following tests are met: 

  1. Acquisitions of minority or controlling stakes - investments giving the acquirer materially influence over the target, which may occur at shareholdings as low as 10-15 %, (or even lower due to the wide discretion of the CMA which may consider other factors such as the size of other shareholdings, veto/consent rights and other negative controls, board representation, commercial agreements and the investor's industry expertise). Joint ventures and deals which allow the investor to move from a position of material influence to control may also be caught;
  2. The target is an 'enterprise' – it must comprise an activity or assets capable of generating revenue. An enterprise usually includes assets, contracts and employees necessary to carry on a business, but assets alone will sometimes suffice where they enable a business activity to be carried on; and
  3. The 'turnover' or 'share of supply' tests are satisfied, being either:
    1. the target's UK turnover exceeds £70 million; or
    2. the acquisition creates or enhances a share of supply of goods or services in the UK of at least 25% (a test which the CMA interprets increasingly widely).

We expect that the Government will use its wide discretion for a period whilst the concerns surrounding the current COVID-19 pandemic remain heightened. As a result, market participants should seek advice before proceeding with transactions in these sectors.

Proposed new legislation in the UK

Despite the measures recently brought in or that are being debated, the current legislative position on FDI in the UK is expected to undergo further significant overhaul. Following public consultation on the Government's White Paper on "National Security and Investment" published in July 2018 (the White Paper), on 19 December 2019, the National Security and Investment Bill 2019-20 (the Bill) was announced in the Queen's Speech. The Bill will replace the Enterprise Act 2002 (the "Act") when passed.

The Bill intends to create "a notification system whereby businesses flag transactions with potential security concerns to the Government for quick, efficient screening", providing "powers to mitigate risks to national security by adding conditions to a transaction or blocking the transaction as a last resort" and a "safeguarding mechanism for parties to appeal where necessary".

Scope of the Bill

In keeping with the White Paper, the scope of the Government's powers under the Bill are intended to be more expansive than before, as the scope will cover any form of transaction, investment, or other commercial activity, regardless of the sector, revenue and market share. With no minimum threshold the proposed powers are potentially far-reaching, save that the scope is limited to "national security" concerns. 

On first reading, "national security" may appear extremely broad and subjective, however, it is a well understood term in national and international law, narrower than a subjectively broader interpretation of a "national interest" or "public interest". 

The Bill is intended to cover national security risks from investment in entities and assets, acknowledging that national security concerns will change over time, especially given advances in technology and the reliance on data. The "trigger events" that may be reviewed on national security grounds, include the acquisition of: 

  1. more than 25% of the shares or voting rights of an entity; 
  2. significant influence or control over any entity;
  3. further influence or control of an entity beyond the above thresholds; 
  4. more than 50% of an asset, including land and intellectual property; and 
  5. significant influence or control over an asset.

The Government has provided extensive guidance on the above triggers, whilst retaining ultimate discretion.

Broadening of coverage to assets and intellectual property and anti-circumvention

It is worth highlighting that a key new feature of the Bill is to upgrade the Government's powers to scrutinise investments and consider the risks that can arise from hostile parties acquiring ownership of, or control over, not only businesses or other entities, but now also assets that have national security implications, particularly intellectual property. 

As a result of the broadening of the triggers to include assets and intellectual property, the Government is seeking to ensure that hostile parties cannot circumvent the law by other means, for example, through asset-only transactions or intellectual property licencing deals.  

What was the rationale for the changes?

At an EU level – and especially in the context of COVID-19 – the European Commission has singled out the issue of foreign direct investment screening.  In their guidance to Member States on 25 March 2020, it was made clear that foreign investment needs to be balanced by appropriate screening tools.  Pursuant to the EU Regulation (2019/452) on Screening of Foreign Direct Investment, commencing from 11 October 2020, Member States will be empowered to review investments within their scope on the grounds of national security or public order, and to take measures to address specific risks. Notably this applies to all sectors and is not subject to any minimum thresholds. 

The rationale for the Bill is therefore twofold, being as a result of both the EU-led changes and a domestic agenda to further align the Government's powers with the approach of key allies such as the "Five Eyes" partners (including the United States and Australia), and others such as Germany and Japan, who have recently strengthened their powers to scrutinise and intervene in business transactions to protect national security. 

Despite the UK's imminent exit from the EU (the so-called "Brexit"), expected in 2021, international alignment of this nature would be welcome to those seeking firmer restrictions and scrutiny of FDI. Notwithstanding, this is also likely to raise concerns for those hoping for a more open investment climate and may make it more difficult for the UK Government to secure favourable trade deals in a post-Brexit world. 

Under the Bill, the Government intends to strengthen its powers to scrutinise and intervene in business transactions to protect national security whilst at the same time providing businesses and investors with the certainty and transparency they need to do business in the UK. The Bill also seeks to ensure that the UK remains a global champion of free trade and investment and remains one of the most open countries in the world for innovative and dynamic investment. 

There is a delicate balancing act at play here and it may not always be possible for the Government to adhere to apparent competing interests. 

Are these changes temporary and if yes, when are they likely to be reviewed again? If not, are they part of a bigger reform (ie have there been any other recent developments, and are you expecting any further changes)?

If the Bill is passed into law in the UK, it will replace the Act as the primary source of law applicable to foreign investment in the UK. Other changes are not temporary but are expected to be less of an issue as concerns regarding COVID-19 dissipate.

Are there any particular sectors that are affected the most?

The Department for Business, Energy and Industrial Strategy (BEIS) has provided detailed guidance on their proposed approach to the Bill's "target assets" that could give rise to a national security concern if acquired or controlled.

A non-exhaustive list of examples from BEIS guidance, includes:

  1. assets that could be used to cause an emergency;
  2. dual military and civilian use assets, covering entities with advanced manufacturing or technology capabilities;
  3. intellectual property used in cyber security; 
  4. an entity or asset integral to UK defence;
  5. assets that could be manipulated or controlled to cause detrimental harm or to extract sensitive information;
  6. access to healthcare databases; and 
  7. civil nuclear and chemical sites.

In addition, the new powers under the Bill are intended to cover a wider remit of UK infrastructure, with the guidance covering "critical national infrastructure which are necessary for the UK to function or for daily life" and will include energy networks and major airports and other "core"  infrastructure. The BEIS guidance provides further detail as to the core areas of infrastructure that are expected to fall within the remit of the Bill. 

Other key areas covered include certain aspects of advantaged technologies, such as AI and machine learning, autonomous robotic systems, computing hardware, cryptographic technology, materials and manufacturing technology, nanotechnologies, network/data technologies, quantum technology and synthetic biology. This is not an exhaustive list but a guide at present.

The Bill will also cover critical suppliers to the Government or the emergency services sector (expected to cover PPE and other essential supplies during and post COVID-19) as well as dual-use products and technologies. However, in all cases the Government will have final discretion as to whether an area falls within the remit of national security for them to intervene.

What is the outlook for foreign investment in the UK?

We expect continued alignment with the Five Eyes and further security of foreign investment under the Bill as described above, particularly while concerns regarding COVID-19 exist.

What it is your advice to foreign investors in the UK?

For targeted assets (or sectors) under the current Act and expected under the Bill, to conduct an early review process to determine whether there are any risks to the transaction.  Early consultation with the CMA is still possible.

Does the UK FDI regulator coordinate with other government agencies, including the antitrust regulator?

The CMA has primary oversight of foreign investment under the Act (as well as for antirust matters in the UK). The Secretary of State for BEIS has the primary role in Government for the legislation although other Ministers take an interest in matters under their domain.

For example, in April 2020 Conservative MP Tom Tugendhat, Chair of the Foreign Affairs Committee, along with three other MPs who Chair the Committee for BEIS, the Digital, Culture, Media and Sport Committee and the Defence Committee, penned a letter to Prime Minister Boris Johnson, expressing their concerns regarding a certain English-based semiconductor and software design company with overseas ownership. The UK board was reportedly summoned to answer questions by MPs, who were concerned with potential risks to UK critical digital infrastructure, national security concerns and the commitment of the company to remain a UK-headquartered business.

A parliamentary inquiry was opened by the Foreign Affairs Committee to assess in what circumstances the UK Foreign & Commonwealth Office ("FCO") should be given powers to intervene in the review of transactions under contemplation of the Bill.  The results of the consultation are awaited. Irrespective of the outcome, it appears that there is a desire for a more interventionist approach by many functions of the Government.

Notwithstanding Brexit, currently at the EU level Member States and the European Commission can exchange information and raise concerns related to specific investments and should encourage international cooperation on investment screening, including sharing experience, best practices and information on issues of common concerns.


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