Status of foreign direct investment control law in United Kingdom
The United Kingdom (UK) ranks 4th globally and 2nd in Europe in the FDI Index.
FDI in the United Kingdom is, and has been, principally governed by the Enterprise Act 2002 (the “Act”). On 17 October 2017, the UK Government published a Green Paper ‘National Security and Infrastructure Investment Review’ proposing short and long-term proposals to reform how the UK Government can ensure that national security is not undermined by inbound mergers or investments, having first identified that in certain sectors of the UK economy, the jurisdictional thresholds under the current merger regime in the UK are no longer working effectively as a threshold for intervention on national security.
Two public consultations followed, the first focusing on the changes to the Act and the second on longer term options. The Act was reviewed in order to (a) strengthen existing UK measures and (b) expand the UK Government’s power to be able to intervene in certain transactions involving the acquisition of businesses supplying products in the military, dual-use, quantum technology and/or computer hardware section for national security and other public interest concerns.
The UK has a voluntary merger notification system for review of transactions on both public interest and antitrust grounds whereby the parties involved make their own assessment as to whether to notify a deal for approval prior to completion.
The Competition and Markets Authority (“CMA”) has jurisdiction to review a deal if it has reasonable grounds to suspect that the transaction may give rise to concerns over national security, the stability of the UK financial system or media plurality.
The old rules
Prior to 11 June 2018, the CMA had jurisdiction over mergers where either:
- the target business had a UK turnover of £70 million in the last financial year (“Turnover Test”); or
- both the buyer and the target supply the same category of goods or services in the UK (or a substantial part of it accounting for at least 25% of such supply) (“Share of Supply Test”).
If a transaction did not satisfy the above thresholds, the UK Government’s power to intervene was limited to mergers involving certain public interest and security issues (notably relating to defence) or certain newspaper and broadcasting companies. Under the old rules, the UK Government only intervened on national security grounds seven times and of these, six of the cases had clear military grounds for intervention.
The new rules
Amendments, which came into force on 11 June 2018, were made to the tests laid out above to ensure that the UK Government has sufficient powers to deal with threats to UK national security. The threshold tests were amended as follows:
- The Turnover Test is lowered whereby the ‘target’ business must have UK turnover of more than £1 million per annum (rather than £70 million); or
- The existing Share of Supply Test will still apply even if only the target business has a 25% or more share of supply i.e. there will not be a requirement for both the buyer and the target to supply the same category of goods or services and the test is met even if the share of supply does not increase as a result of the merger (so long as the relevant enterprise has 25%).
Under the new rules, the revised tests will only apply to mergers in three sectors of the UK economy:
(a) The development or production of military items and “dual-use” items (dual-use being for both military and civilian use) included in the existing UK Strategic Export Control List. This area extends to businesses who hold related software technology or information that can be used in connection with the development or production of such items;
(b) The design and maintenance aspects of computing hardware, being businesses that own, supply or create intellectual property in the functional capability of multi-purpose computing hardware (which may have an unintended broad interpretation); and
(c) The development, design, manufacturing or production of goods for use in, or supply of services based on, quantum technology, being quantum computing or simulation, quantum imaging, sensing, timing or navigation, quantum communications, and quantum resistant cryptography.
Hot topics: intended changes / discussions
The UK Government is still considering the responses to the second consultation. The long-term reforms are expected to be far more significant and wide-reaching across a broader scope of sectors/transaction types and the UK Government intends to introduce further measures, which may or may not involve expanding the range of sectors which will trigger a public interest merger review process and/or a mandatory notification regime. The UK Government’s actual intention remains unclear but will be announced in a White Paper later this year.
The CMA has currently 24 open ongoing cases, none of which appear to be being investigated in respect of national security on foreign investment.
Previously, HCC’s acquired S company in 2017 as the target company’s operations were mainly in the production of “walkie talkie” devices supplied to the police and the ambulance services. Whilst there was no clear military link in this case, the CMA still felt it was appropriate to intervene. The acquisition was eventually allowed to proceed with conditions, but it perhaps demonstrates the UK Government’s progressively tightening attitude, even before the amendments to the Act were passed into law.
More recently, the CMA served on 18 June 2018 an initial enforcement order under the Act for the purposes of preventing any action in relation to the anticipated acquisition by GAH company of NAL. The seller of NAL is owned by private equity fund, BC. The proposed buyer, GAH company, whose parent company is the Chinese S Mineral Resources Co. Ltd, has effectively been blocked from completing the acquisition. The specifics of the case are not public but it is clear that there is concern by CMA as to the sale of a UK company holding ministry of defence contracts to an overseas buyer, possibly from China.
This article is excerpted from “Accessing Europe and the Middle East: Foreign Direct Investment Control Considerations”.