In its 2015 world investment report, the United Nations Conference on Trade and Development lists the UK as the world’s fourth-largest recipient of foreign direct investment. One factor helping make the UK such an attractive location is its open approach and lack of political intervention in deals. Currently, the UK Government has no general power to review foreign investments or to take account of industrial policy in merger reviews. Its powers are limited to:
- Public interest intervention in merger control, which allows the Government to intervene only in deals (including some acquisitions of minority interests) giving rise to specified public interest grounds. One important ground is ‘national security’, which is not defined but has only been invoked to date in mergers involving defence companies;
- Golden shares, which allow the Government to control changes in ownership of a small number of companies operating in the defence and infrastructure sectors; and
- The Industry Act 1975, which allows the Government to prohibit foreign acquisitions of important manufacturing businesses, although this power has never been exercised to block an acquisition.
Government statements since Theresa May became Prime Minister in July 2016, and on confirmation of Hinkley Point in September, indicate significant reforms ahead. Current powers seem likely to be extended at least to permit the Government to appraise foreign ownership of critical infrastructure for the purposes of national security, but following Mrs May’s earlier comments, proposals for reform could run wider.
The Government’s options for reform
Detailed proposals will be published when the Government consults on changes needed to the legal regime. This consultation will be an important opportunity for business and investors to comment. Possible options for reform could range from:
- widening the public interest provisions in the current merger regime – whether by clarifying the scope of the current ‘national security’ test, by introducing a new public interest ground in respect of defined ‘critical infrastructure’, or by introducing more wide-ranging powers for the Government to intervene in merger reviews on public interest grounds; to
- greater use of special shares in firms operating in strategically important industries; to
- introducing a new foreign investment regime, possibly along the lines of those operated in the US, Canada or Australia.
The timing of any new measures will be crucial. Prior to Brexit, reforms continue to be constrained by the need to comply with EU rules on freedom of establishment and free movement of capital. Following Brexit, if the UK moves to a world unconstrained by free movement law, the Government will have much greater freedom to intervene in foreign acquisitions on industrial policy or public interest grounds.
In considering its next steps, the Government needs to weigh the risks of introducing less predictability and transparency for foreign investors, particularly in a climate where business is seeking greater certainty following the Brexit vote. Given the substantial amount of foreign capital invested in UK utilities, the Government will need to ensure that any reduction in clarity does not deter foreign investment required to ensure modernisation of, and continued investment and innovation in, the UK’s infrastructure.