New mandatory UK FDI regime to control foreign investment

On 11 November 2020, over two years after the White Paper on National Security and Investment introduced by Theresa May’s Government, the UK Government finally published its long-awaited National Security and Investment Bill. When adopted, this will overhaul the existing regime relating to foreign investment control in a root and branch fashion not seen for 20 years.

The Bill aligns with the tightening of foreign investment control regimes globally, reflecting a much greater protectionist policy stance recently taken by many governments. Whilst a new self-standing foreign investment regime separate from UK merger control was anticipated and whilst the policy objectives are consistent with the 2018 White Paper, what is striking is the sheer scale of the proposed new regime. It goes significantly beyond that contemplated in the White Paper, introducing a hybrid mandatory / voluntary filing system and leading to a forecast 1,000 to 2,000 notifications per year with 70 to 95 of those being called in. If these forecasts are correct, and comparing these numbers against the current UK merger control regime in which around 60 cases are reviewed annually by the Competition and Markets Authority, then it is clear that the Bill is likely to impose a significant additional regulatory burden for companies seeking to invest in the UK.

This update explores some of the key features of the proposed new regime alongside immediate considerations for businesses and investors.

Existing Powers

Current powers relating to foreign investment control date from the Enterprise Act 2002. At present, the Government can only intervene on specified public interest grounds, which until recently comprised national security, media plurality and maintaining financial stability.

Other than in limited circumstances, intervention in a transaction is only possible where it meets the jurisdictional thresholds for review by the CMA relating to turnover or share of supply. As a short-term measure to address increased concerns surrounding foreign investment, the Government twice lowered the jurisdictional thresholds that apply to the review of transactions by the CMA in certain sensitive sectors, including for the military and dual-use, quantum technology, computing hardware sectors (in June 2018) and the artificial intelligence, cryptographic authentication technology and advanced materials sectors (in June 2020). In June this year, the Government also added a new public interest ground relating to the UK’s ability to combat public health emergencies (which we have written about here).

The Government has concluded that these existing powers are inadequate to address long-term shifts in the balance of power across the globe and the changing threats faced by the UK. In the 12 public interest interventions to date, Chinese ownership has been regarded as a particular risk to national security, with interventions by the Secretary of State in Northern Aerospace/Gardner Aerospace, Impcross/Gardner Aerospace and Mettis Aerospace/Aerostar (which we reported on here). Chinese influence in the digital and technology sphere has also been identified as an area of concern. However, of note, scrutiny is not confined to Chinese interests; the Government has also scrutinised transactions involving US and Canadian parties. Whilst recognising that the UK economy needs to remain open to foreign investment, the Government has concluded that a strengthening of its powers is needed to respond to these, and other broader domestic concerns relating to foreign investment in the UK.

The New Regime

The new National Security and Investment Bill will introduce a separate national security investment screening regime, which will sit alongside UK merger control. It is a hybrid mandatory / voluntary regime, with mandatory pre-notification for a wide range of transactions and the ability to “call in” a yet further range of transactions. The regime draws on features of FDI systems from around the world. The Secretary of State will be the decision-maker for the purposes of the UK regime and undertake that role in a ‘quasi-judicial’ capacity. A dedicated Investment Security Unit sitting within BEIS will be the point of contract for businesses making notifications and wishing to understand the Bill.

Key features of the proposed new regime include:

1. Most critically, as mentioned, the Bill will introduce a mandatory FDI regime into the UK for the first time – a major structural change to the control of transactions on a par with the Enterprise Act 2002. And it will do so for a wide range of sectors. The Government has opened a consultation on which sectors, and which parts of these sectors should be covered by the mandatory regime (available here). These include, for example, energy networks, transport networks, a wide range of engineering and chemical materials, data infrastructure and technology, and any critical services supplied to Government.
2. Under the mandatory regime, investors and businesses will be required to submit a formal notification for clearance of the acquisition. Transactions covered by mandatory notification will not be permitted to complete until clearance has been provided. If completion takes place without the approval of the Secretary of State, the transaction will be legally void.
3. There will be a parallel voluntary notification / “call in” track for transactions not caught by mandatory pre-notification. Where parties consider that a proposed transaction or acquisition may raise national security concerns, they can submit a voluntary notification to the Government. This is not mandated by law, but notifications are ‘encouraged’ from those who consider that their transaction may raise national security concerns. The advantage of making a voluntary notification is that a decision will be made on whether to ‘call in’ the transaction and thereby provide certainty to the parties. The draft Statement of Policy Intent (available here) provides information on the kinds of transactions that may raise security concerns. The Secretary of State will also have the power to ‘call in’ transactions that have not been notified, and which have given rise to or may give rise to a risk to national security.
4. One of the most eye-catching features is that the ‘call in’ power has retrospective effect in a number of ways:
   1. Transactions that complete from today, 12 November 2020, are at risk of being called in. Parties are encouraged to contact BEIS.
   2. The Government will in the future be able to call in a transaction entered into up to five years earlier, subject to a six-month cap from the time it had knowledge of it.
5. The legislation covers any person who gains control of a qualifying entity or qualifying asset, whether or not they are from a perceived ‘hostile’ state. The Secretary of State may make further regulations exempting acquisitions from the mandatory notification regime on the basis of the characteristics of the acquirer.
6. The mandatory regime catches a widely drawn range of levels of influence or control over an entity, including:
   1. an acquisition or increase in the percentage of shares or voting rights held to more than 15%, 25%, 50% or 75%; or
   2. where the acquisition of voting rights enables a person to secure or prevent the passing of any class of resolution governing the affairs of the entity.
7. In addition, for the purposes of the voluntary regime / ‘call in’ track only, the gaining of ‘material influence’ will engage the regime.
8. The net result is that notifications will be triggered as acquirers move up through the stages of control, a principle imported from UK merger control. The fact that the ability to pass any class of resolution, including therefore a special resolution, triggers is also significant. The concept of material influence is similarly imported from UK merger control, and it makes sense that this is reserved for the voluntary track, in line with UK merger control which is also voluntary, so that mandatory triggers are bright line events. Clearly, that was the Government’s aim in introducing a mandatory notification system for FDI.
9. The regime will extend to the acquisition of assets; an area that is currently not captured by existing powers. This extension results from Government concern that asset acquisitions, particularly those relating to intellectual property, may give rise to national security considerations. The definition of control applied to asset acquisitions is very broad and encompasses acquiring a right or interest that allows the person to:
   1. use the asset, or use it to a greater extent than prior to the acquisition; or
   2. direct or control how the asset is used, or direct or control it to a greater extent than prior to the acquisition.
10. Regarding procedures:
    1. Following receipt of a notification, the Secretary of State will have a maximum of 30 working days to decide whether to subject the transaction to a detailed review on the basis that there may be a national security concern (i.e. ‘call in’ the transaction).
    2. Once a transaction has been called in (whether it was notified or not), the Government has up to 30 working days to undertake a detailed national security assessment of the transaction. This period can be extended by 45 working days, and possibly longer where agreed with the acquirer.
11. During the assessment period, businesses and investors can continue to progress the transaction, unless the Government orders otherwise. However, where the transaction has been notified under the mandatory regime, it must not be completed until clearance is given.
12. The Government will have the power to apply remedies to address national security risks, including orders requiring certain actions to be taken by relevant parties or as a last resort, blocking or unwinding the deal. Possible conditions that may be imposed appear similar to undertakings that have been offered under the existing regime (which we have previously written about here), such as altering the amount of shares an investor is allowed to acquire, restricting access to commercial information, or controlling access to certain operational sites or works.
13. The proposed legislation will create a strong range of civil and criminal sanctions to apply in situations of non-compliance, including fines of up to 5% of worldwide turnover or £10 million (whichever is the greater) and imprisonment of up to 5 years.

Comment

Clearly the Bill is now subject to Parliamentary scrutiny and debate. But if it is adopted in its current form, it will bring about a wholesale reform to the current foreign investment control regime.

In announcing the Bill, the Government was at pains to stress that the UK remains open to foreign investment and sought to emphasise the benefits of its intention to have an efficient review process and the certainty to be gained from having a clearance decision.

That said, the broad scope of the regime, the scrutiny by the UK Government of the investment plans and strategy of a wide range of investors, the inclusion of a voluntary notification approach and the ability to call-in non-notified transactions will give rise to concerns and uncertainty for many companies entering into UK related M&A transactions. And in practical terms, such controls will materially impact on investment strategy, deal feasibility, deal structure and transaction timings.

Businesses and investors will need to get to grips with its requirements immediately, most notably because the Secretary of State has the power to call in a transaction where a trigger event (that has or may give rise to a risk to national security) takes place during the period beginning 12 November 2020 and ending the day before the Bill commences. As such, it is possible that transactions that complete from 12 November 2020 may be scrutinised by the new regime when that comes into force.

The impact of this Bill should not be underestimated. It is far reaching and marks a dramatic shift in approach by the UK Government. If adopted, it will provide the UK Government with wide-ranging powers to act as a gatekeeper for much of the inward bound UK investment. As a result, all investors now need to scrutinise the detail carefully and consider its implications on their investment strategies.