All questions

Foreign investment regime

There is generally no formal policy distinction between domestic and foreign investment in the United Kingdom. However, there follows an overview of the main (generally applicable) legislation regulating government intervention. Further details on the jurisdictional tests and processes under the public interest intervention regime are provided in Section IV.

i Merger control law

Inward investment in the United Kingdom that involves the acquisition of a business, part of the activities of a business or the creation of a joint venture may fall to be reviewed under EU or UK merger control law, if the relevant jurisdictional thresholds are met. As a general proposition, transactions will be reviewed by the European Commission (the Commission) when the EU merger control thresholds are met, and by the UK's Competition and Markets Authority (CMA) when the UK thresholds (but not the EU thresholds) are met. The authorities will investigate whether there are any competition concerns associated with a transaction. The nationality of the parties to a transaction is not a relevant consideration for this assessment.

The EU merger control regime is a mandatory, suspensory notification regime, meaning that parties must notify a transaction meeting the relevant thresholds and must await approval prior to implementation (regardless of whether they are based within or outside the EU). Significant penalties can be levied for a failure to file or for implementation prior to clearance, with potential fines reaching up to 10 per cent of the worldwide aggregate turnover of the undertakings concerned.

The UK merger control regime is a voluntary system, meaning that parties are not obliged to notify a transaction that meets the jurisdictional thresholds for review. However, pre-merger notifications are recommended in challenging cases for the sake of legal certainty, because the CMA can review (completed and anticipated) mergers on its own initiative, can issue interim orders (preventing integration or completion, or unwinding integration) and can impose conditions (e.g., requiring divestments if, on reviewing a transaction, it believes that the transaction has resulted or may be expected to result in a substantial lessening of competition).

ii Public interest review regimes

Both the UK and EU merger control regimes include provisions allowing a transaction to be reviewed on certain specified grounds other than competition law (so called 'public interest' or 'legitimate interest' grounds) when the nationality of a party to a transaction can have greater relevance.

For transactions subject to the EU merger control regime, the EUMR permits Member States to investigate a transaction to protect its 'legitimate interests' (other than the maintenance of competition). In such cases, the competition review will be conducted by the Commission (unless jurisdiction is transferred in a manner prescribed by the EUMR), and a review of the identified 'legitimate interest' will take place under the relevant domestic legislation, such as the Enterprise Act in the case of the United Kingdom. If the Commission were to clear a transaction on competition grounds, it would still be open to the UK government to intervene on the basis of a legitimate interest and to impose conditions on the transaction (for example, Fox/Sky, 2017). However, if the Commission were to block a transaction based on competition concerns, even if the government considered that it was in the UK's public interest for the transaction to go ahead, the government would not be able to override the block imposed by the Commission.

The question of what constitutes a legitimate interest is a matter for EU law. There are three specific categories of legitimate interests deemed to be compatible with general principles and other provisions of EU law, namely public security, media plurality and prudential rules. Any other legitimate interest a Member State wishes to protect must be communicated to the Commission, which then has 25 working days to assess the compatibility of that interest with EU law before a measure to protect the interest can be taken by the Member State. To trigger the intervention process, the UK Secretary of State will issue a European intervention notice under Section 67 of the Enterprise Act. Member States may also retain jurisdiction to examine national security aspects of mergers under Article 346 of the Treaty on the Functioning of the European Union (the TFEU).

The UK government acting via a Secretary of State can also intervene in a transaction on defined public interest grounds in circumstances where the relevant EU merger control thresholds are not met, including in respect of:

  1. transactions that are reviewable under UK merger control law (known as public interest cases): a public interest intervention notice is issued in such circumstances, under Section 42 of the Enterprise Act; and
  2. transactions that do not meet the requirements for notification under UK or EU merger control law but raise special public interest considerations (known as special public interest cases): a special public interest intervention notice is issued in such circumstances, under Section 59 of the Enterprise Act.

Special public interest mergers are narrowly defined and limited to certain mergers in the newspaper and broadcasting sectors, and mergers involving certain government contractors or subcontractors who hold or receive confidential information or material relating to defence. Such cases are rare, this provision only having been used twice under the Enterprise Act to date, both of which were in the defence sector.

For both public interest cases and special public interest cases, the public interest considerations on which the Secretary of State may rely to justify intervention are set out in the Enterprise Act, and include:

  1. interests of national security, including public security;
  2. the need for sufficient plurality of persons with control of the media, the need for a wide range of broadcasting (of high quality and appealing to a wide variety of tastes and interests) or the need for persons carrying on media enterprises, or those with control of such enterprises, to have a genuine commitment to broadcasting standards;
  3. the need for the accurate presentation of news and free expression of opinion in newspapers;
  4. the need for sufficient plurality of views in newspapers; and
  5. maintaining the stability of the UK financial system.

The Secretary of State has the power to modify the above-mentioned list of public interest considerations by specifying a new consideration, or removing or amending any existing specified consideration. Under Section 42(3) of the Enterprise Act, the Secretary of State may also intervene based on public interest considerations that are not specified in the Enterprise Act, but that in the opinion of the Secretary of State ought to be so specified.

Although all public interest considerations could, in principle, be applicable to foreign investors, national security considerations (including national security, public security and UK security) are clearly of greatest relevance to FDI, given the potential importance of the nationality of the investor.

iii Treaty on the Functioning of the European Union

While the United Kingdom remains within the EU, FDI is to a certain extent affected by EU law. One of the key aims of the TFEU is the establishment and development of an internal market between EU Member States. To this end, the TFEU contains provisions to remove tariff and non-tariff barriers to trade, establishment and the movement of capital between Member States. The TFEU thus largely acts to lower the barriers to FDI, at least from other parts of the EU. The prohibition against restrictions on the freedom of establishment for nationals of one EU Member State in the territory of another Member State and the prohibition against restrictions on free movement of capital between EU Member States are particularly relevant.

There are, however, some limitations on the freedoms granted by the TFEU. In particular, the TFEU provisions enshrining freedom of establishment and free movement of capital have been interpreted to be subject to overriding considerations, such as the protection of national security.

Furthermore, Article 346(1) TFEU underlines that obligations in the TFEU do not preclude a Member State's rights to take certain steps to protect its essential security interests. Article 346(1) TFEU is a permissive article, and acts to disapply the TFEU rules in certain circumstances. In this way, Member States can derogate from the TFEU protections where justified by that Article.

iv Golden shares

Following the privatisation of certain companies in the 1980s and early 1990s, the government retained 'golden shares'. Golden shares do not give the government a general right to intervene in a company's day-to-day affairs, but generally the company's articles of association provide that, without the consent of the holder of the special share (that is, the government department concerned), no shareholder may hold more than a stated percentage (usually 15 per cent) of the equity share capital of the company.

The Court of Justice of the European Union (CJEU) has previously held that the use of these golden shares can, in certain cases, contravene EU law on the free movement of capital and on the freedom of establishment, and that their use is acceptable only in specific circumstances and subject to strict conditions.

There have been cases in which the CJEU has not accepted the legality of specific golden shares; for example, in 2003, it held that the government golden share in BAA plc breached EU law, although it confirmed that a potential justification existed for EU Member States holding a degree of influence over private companies that were originally public undertakings if they were active in providing services in the public interest or strategic services, provided the restrictions applied equally to nationals of the Member State concerned and of other EU Member States, and complied with the principle of proportionality.

Hinkley Point contract approval 2016

Hinkley Point C is an £18 billion project to construct a nuclear power plant in Somerset, England. It is intended that construction will be mainly financed by EDF (the largely state-owned French utility company) with around one-third of the finance coming from two state-owned Chinese nuclear power companies. Following the board decision of EDF to approve the Hinkley Point plant, former Prime Minister Theresa May's Conservative government decided to launch a further comprehensive review of the project prior to entering into a contract with EDF. This signalled a more cautious approach than that previously taken by former Prime Minister David Cameron's government, which had championed the project. The further review was seen as being motivated, in large part, by security concerns over Chinese involvement. In September 2016, the government gave the final go-ahead to Hinkley Point C under a revised agreement. The government announced that it would have a golden share in the project, which gives it the right to block any change of ownership or control of the power plant during the construction period. The government indicated that future approval of nuclear projects would also be conditional on it holding golden shares. At the same time as this approval, the government further stated its intention to pursue wider reform of the legal framework for foreign investment in critical British infrastructure. Draft proposals have now been introduced, as is discussed further in Section VII.

v UK Industry Act 1975

Under the terms of Section 13 of the UK Industry Act 1975, the Secretary of State can block an acquisition by a non-UK-based entity of an 'important manufacturing undertaking' when it appears to the Secretary of State that a change of control would be contrary to the interests of the United Kingdom, or to any substantial part of it.

An 'important manufacturing undertaking' is an undertaking that, insofar as it is carried on in the United Kingdom, is wholly or mainly engaged in the manufacturing industry, and is considered by the Secretary of State to be of special importance to the United Kingdom, or to any substantial part of it.

There is no public record of this provision having ever been used to block an acquisition of a UK business and so this provision will not be considered further in this chapter. Ultimately, the EU law provisions on freedom of establishment and free movement of capital will be relevant to its exercise.