Snapshot: foreign investment law and policy in United Kingdom

Law and policy

What, in general terms, are your government’s policies and practices regarding oversight and review of foreign investment?

The party line is that the UK is open for business, and foreign investment is therefore encouraged, subject to regulatory oversight. This is the result of the UK’s long history as a trading nation, and advocate of free trade and open markets.

However, the idea that more stringent controls need to be placed on foreign investment, in particular in the technology sector, and in light of concerns over the security of critical national infrastructure, has been gaining traction in policy circles for a number of years. This has resulted in some reform to safeguard critical national infrastructure, with more on the horizon.

Thus far, the regulatory regime has not distinguished between foreign and domestic investment if there is a ‘relevant merger situation’, meaning that the relevant thresholds are met. However, practitioners should note that, at the time of writing, the government has introduced draft legislation, the National Security and Investment Bill, which, if implemented, will impose a specific notification regime for investment in 17 sectors.  

This chapter focuses on the public interest issues. Those considering investment in an airline that operates in the UK should refer to Lexology Getting the Deal Through – Air Transport 2021. Persons considering investment in entities active in the UK defence and security sectors should also consider whether consent is required from the Ministry of Defence to assign or novate any contracts the target has with it.

Where sectoral regulators have jurisdiction, such as in relation to water, electricity, gas, or telecommunications, they may have an important influence over the outcome of a merger review, particularly where they have concurrent powers that may be relevant to remedies. This is outside the scope of this chapter, but will need to be carefully considered by practitioners if necessary.

What are the main laws that directly or indirectly regulate acquisitions and investments by foreign nationals and investors on the basis of the national interest?

In addition to the usual controls that apply to all public bodies under the UK’s general administrative law, at the time of writing, the laws specifically addressing intervention on public interest grounds are:

• the Enterprise Act 2002 (EA02) (as amended); and
• the Takeover Code (in relation to certain public companies).

Moreover, draft legislation in the form of the National Security and Investment Bill is currently under parliamentary consideration.

Outline the scope of application of these laws, including what kinds of investments or transactions are caught. Are minority interests caught? Are there specific sectors over which the authorities have a power to oversee and prevent foreign investment or sectors that are the subject of special scrutiny?

At the time of writing, the UK government can intervene in three categories of transaction on public interest grounds, which are outlined below.

These are deals within the UK merger control regime that raise public interest considerations (section 42(1) and (2) EA02).

The Secretary of State can intervene in public interest mergers, where he or she has reasonable grounds to suspect that the UK merger control regime is applicable; the jurisdictional thresholds are met; and one or more ‘public interest considerations’ are relevant and need to be considered with relation to the deal (section 42(1) and (2) EA02).

What constitutes a public interest consideration may be varied from time to time by the Secretary of State or by amending, removing or adding to the considerations listed by way of an order (section 58(2) EA02). Currently, the considerations include:

• defence: the interests of national security, including public security (section 58(1) and (2) EA02);
• accurate news and free expression: the need for accurate presentation of news and free expression of opinion in newspapers (section 58(2A) EA02);
• plurality of the media: in relation to every different audience in the UK, or in a particular area or locality of the UK, for there to be a sufficient plurality of persons with control of the media enterprises serving that audience (section 58(2C)(a) EA02) (media plurality is defined in section 58(2B) EA02);
• broadcasting: for the availability throughout the UK of a wide range of broadcasting that (taken as a whole) is both of high quality and calculated to appeal to a wide variety of tastes and interests (section 58(2C)(b) EA02);
• media standards: for persons carrying on media enterprises, and for those with control of these enterprises, to have a genuine commitment to the attainment in relation to broadcasting of the standards objectives set out in section 319 of the Communications Act 2003 (section 58(2C)(c) EA02); and
• prudential regulation in the interest of maintaining the stability of the UK financial system (section 58(2D) EA02).

These are deals within the UK merger control regime (though not necessarily meeting the same jurisdictional thresholds), and raise public interest considerations (section 59 EA02).

These interventions can happen where the jurisdictional thresholds are not met, provided that:

• the structure is of a type to which the UK merger rules apply (section 59(1) EA02);
• immediately before implementation, at least one of the enterprises concerned was carried on in the UK or by or under the control of a body corporate incorporated in the UK and a person carrying on one or more of the enterprises concerned was a relevant government contractor (section 59(3B EA02), or the person or persons by whom one of the enterprises was carried on supplied at least 25 per cent of all newspapers of any description, or all broadcasting of any description in the UK, or a substantial part of the UK (section 59(3C) and (3D) EA02); and
• one or more public interest considerations is relevant to a consideration of the transaction (section 59(2) EA02).

UK critical national infrastructure mergers

These are deals that are caught by recent reforms to the Enterprise Act pursuant to the Enterprise Act 2002 (Turnover Test) (Amendment) Order 2018 and the Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2018.

Though not listed as a public interest consideration in section 58 EA02, in 2018 reforms were introduced to the turnover and share of supply threshold tests for particular industries, in essence addressing public interest concerns, but via a different mechanism. The turnover test and share of supply test amendment orders amend the thresholds set out in section 23 EA02, resulting in many more mergers being caught by the UK regulation in particular sectors. The relevant sectors are set out in section 23A EA02, and include certain activities relating to the military, dual use and quantum computing sectors.

The effect of these reforms is to reduce the turnover threshold to £1 million, and to remove the requirement that there be an increase in share of supply, where the share is 25 per cent or more. The result is that more transactions will be subject to UK merger review in these particular sectors, which are viewed as crucial from a national security or critical national infrastructure point of view.

How is a foreign investor or foreign investment defined in the applicable law?

Neither foreign investor nor foreign investment is defined in the EA02; the rules currently apply to all investments regardless of provenance. However, practitioners should note proposed reforms in the National Security and Investment Bill, which at the time of writing has not entered into legislation, but is being considered by Parliament.

Are there special rules for investments made by foreign state-owned enterprises (SOEs) and sovereign wealth funds (SWFs)? How is an SOE or SWF defined?

To date, there are no special rules.

Which officials or bodies are the competent authorities to review mergers or acquisitions on national interest grounds?

This depends on the sector in question; for example, if the national interest ground is news plurality, Ofcom is likely to be involved in the review. In general, the Competition and Markets Authority (CMA) will work with the appropriate regulator or government department.

Notwithstanding the above-mentioned laws and policies, how much discretion do the authorities have to approve or reject transactions on national interest grounds?

The authorities must have a legal basis for any intervention, as a basic tenet of the rule of law. In principle, therefore, there is no discretion to intervene otherwise than in accordance with the relevant laws.

However, the definitions in the existing legal bases are relatively broad, which could give some flexibility to intervention. Second, the government departments or sectoral regulators may seek to exert influence over the normal merger control process, where the relevant thresholds are met.

Third, new public interests grounds can be added to the list set out in section 58 EA02 relatively swiftly or, alternatively, they can be removed or amended (section 58(3) EA02).

The Secretary of State also has the power to intervene in transactions on the basis of a consideration that is not specified, but that in his or her opinion ought to be. Steps must then be taken as soon as practicable to ensure that it is contained in an order laid before both Houses of Parliament and approved within 28 days of the day the order was made (sections 42(7), 42(8)(b) and 124(7) EA02).

Law stated date

Give the date on which the information above is accurate.

20 November 2020.