On 11 November 2020, the U.K. Government announced long-awaited and extensive reforms to the U.K. foreign investment regime.
The reforms proposed are more significant than anticipated and include a mandatory notification regime alongside broader “call-in” powers for the Secretary of State. The regime will likely extend to a much broader range of sectors than effected currently.
The new framework represents a marked attempt by the U.K. to “catch up” with international trends, where intervention in foreign direct investment (FDI) is on the rise. This is driven by global geo-political considerations, but is also in response to strong public outcry over a number of high profile takeovers by foreign companies in which the U.K. government had only limited grounds to intervene—Kraft’s 2009 acquisition of the chocolate manufacturer Cadbury, Pfizer’s aborted takeover of AstraZeneca in 2014 and Softbank’s takeover of ARM in 2016, where undertakings were imposed using the U.K.-listed company Takeover Code because the government did not have the relevant powers under the Enterprise Act.
In the short term, we expect the new regime to create some uncertainty, longer deal time timetables and further expense for deal makers.
In the longer term, we expect any nervousness about FDI regimes such as the U.K.’s to ease as these become the international norm—at least in jurisdictions where substantive intervention continues to be comparatively rare.
To recap, there is currently no screening regime specifically targeted at foreign investment. Foreign investment control is exercised through the Secretary of State (“SoS”) under the general merger control regime; the SoS can intervene in a transaction on the basis of public interest in three situations regardless of the nationality of the purchaser:
The SoS’ intervention will normally involve a review—coordinated with the U.K. Competition and Markets Authority (the CMA)—with potential remedies including commitments or even prohibition.
The U.K. attempted an update of this regime in June 2018 through the introduction of lower thresholds for transactions in certain sectors. Clearly, the government feels piecemeal updates are no longer sufficient and an overhaul is required.
The Bill is considerably more wide-ranging than anticipated by either commentators or the July 2018 White Paper.
The regime is extensive and there are significant gaps yet to be covered by implementing regulation. We’d expect further clarity and information to appear in the coming months.
However, as the proposals stand, we’d single out three headline changes:
Predictably, there has been swift criticism of the regime. John Fingleton—who ran the U.K. Office of Fair Trading from 2005 until 2012—said the regime was “over-expansive” and dismissed its benefits as “very illusory.” He raised the concern that such an FDI regime could ruin the City’s reputation as a global business hub; a reputation which is more crucial than ever with looming end of the Brexit Transition period, and the need to rejuvenate the U.K. economy post-COVID-19. A further concern is that, once a minister is given the power to intervene in a merger, any vested interest—Fingleton cites bodies such as trade unions, as well as typical merger control complainants like competitors and customers—can begin agitating.
There is also skepticism that, logistically, the new Investment Security Unit within BEIS will be able to handle the estimated 1,000–1,830 notifications the Impact Assessment anticipates; a number that dwarfs the 56 reviews carried out by the CMA in 2018–2019.
Perhaps the most alarming aspect to both lawyers and dealmakers is the retroactive power the Government has given itself to review transactions. The concern is that any parties now seeking to close a transaction are in hinterland until commencement of the Act—there is no mandatory notification regime yet so one cannot notify, but there is still a risk the SoS can “call in” their transaction retrospectively. The current regime requires deal-making parties to simply take the risk. We note, as well, that the SoS’ retrospective “call in” powers are broadened to the “wider economy,” so they are not even limited to the risk factors identified elsewhere in its Statement of policy intent.
Such wide-ranging powers are particularly unnerving considering the U.K.’s permissive starting point, with no formal foreign investment regime, and only limited instances where the SoS can intervene. Investors are being asked to place an unusually high degree of trust in the current U.K. Government.
Critics will be quick to claim this new FDI regime will “chill” foreign investment in the U.K., at a particularly critical juncture for the country.
Despite everything, we think this is unlikely. FDI regimes are proliferating all around the world currently and investors are rapidly having to adjust to an environment where politics is more intrusive everywhere than it used to be. Substantive intervention by the U.K. is likely to remain rare, much detail is to come but the notification and review process looks quite streamlined by international standards with statutory timetables. Nervousness will ease with experience.
Commentary that substantive intervention will increase in the U.K. should be read with caution. As discussed, these changes have been anticipated for some time; and, while the regime is indeed more expansive than expected, much is an effort to codify existing government practice. For example, the Government would no longer have to rely on post-offer commitments under the Takeover Code, as done in Softbank’s takeover of ARM in 2016.
However, we would anticipate the following in the near term:
If you would like further information on the above, please do not hesitate to contact the authors.