The European Commission and, separately, the UK Government have recently proposed tightening national security controls on foreign direct investment (FDI). A draft EU Regulation would establish a common approach by Member States, co-operation when FDI may affect more than one of them, and assessment by the Commission if it may affect ‘Union interests’. The UK proposals would extend scrutiny to investment in small military, dual use and advanced technology businesses and, in the longer-term, to a range of other sectors. Dechert can assist businesses and investors seeking to clarify if and how they may be affected.

In recent months both the European Commission and the UK Government have made proposals to reinforce the assessment of FDI that may raise national security concerns, in the light of increased risks that ownership or control of critical businesses or infrastructure could provide opportunities for espionage or sabotage, or to exert inappropriate leverage. These proposals follow steps taken by a number of countries to strengthen their national mechanisms, for example by Germany in July 20171.

European Union

The Commission’s proposed Regulation2 aims to establish common standards and increased cooperation between Member States in conducting assessments of FDI but without affecting their freedom to adopt new or to change their existing mechanisms, or indeed to remain without such mechanisms. Member States would retain decision-making on FDI approvals. (FDI is defined broadly as any investment by a third-country investor aiming to establish or maintain lasting and direct links with the target; it does not require a controlling stake and only portfolio investments are expressly excluded.)

The draft Regulation would establish:

  • Common principles to be applied by Member States including: transparency and predictability for investors; equal treatment for foreign investors irrespective of their country of origin; clear timeframes for reaching decisions; and provision for judicial review of decisions;
  • Common criteria to be applied in selecting proposals to be assessed, including definitions of critical infrastructure, critical technologies, the security of supply of critical inputs, or the ability to control access to sensitive information;
  • A cooperation mechanism between Member States and the Commission. This could be activated when FDI in one Member State may affect the security of another;
  • Assessments to be conducted by the Commission if FDI may affect programmes of ‘Union interest’ i.e. those with a significant share of EU funding or critical areas of infrastructure, technologies or inputs. But decisions on the investment concerned would ultimately remain for Member States to take.

The Commission has started a detailed analysis of FDI flows into strategic sectors and assets in the EU, and has set up a coordination group with Member States to help identify sectors and assets that have strategic implications at national, cross-border or EU level and to discuss issues of common concern, such as subsidies and other practices by third countries facilitating strategic acquisitions.

The proposed Regulation is subject to approval by the European Parliament and EU Member States, and it is unlikely to come into effect before the UK has left the EU.

United Kingdom

A recently-published Green Paper3 proposes reforms to maintain the UK’s strong track record in attracting overseas investment, with a transparent and reliable regime governing mergers across the whole economy, by strengthening safeguards to protect national security in a targeted and proportionate way so that public confidence in the regime remains high.

Under the Enterprise Act 2002, Ministers may intervene in mergers on issues of national security, financial stability and media plurality if the acquired company has an annual turnover over £70 million and/or the merging companies will collectively supply or acquire 25% or more of goods or services of a particular description in the UK (or a substantial part of it), provided that the merger results in an increment to that share. There have been only 12 public interest interventions since the Enterprise Act 2002 was enacted, 7 of them on national security grounds.

In the short term, the Government proposes to prioritise the highest risks, which it considers lie in the military, dual-use and advanced technology sectors. It proposes to extend its powers to examine and potentially intervene in mergers involving a wider range of such businesses by lowering the turnover threshold from £70 million to £1 million and by dropping from the supply threshold the requirement for the merger to increase the share of supply – instead, the threshold would be met if the target business has an existing share of supply of 25% or more. These lower thresholds would apply to enterprises that:

a) Design or manufacture items or hold related software and technology specified on the UK Military List, UK Dual-Use List, UK Radioactive Source List and EU Dual-Use Lists (and possibly also items subject to temporary export controls);

b) Own or create intellectual property rights in the functional capability of multi-purpose computing hardware, or design, maintain or support the secure provisioning or management of multi-purpose computing hardware; or

c) Research, develop, design or manufacture goods for use in, or supply services based on, quantum computing or quantum communications technologies. This would include the creation of relevant intellectual property or components.

These short term proposals do not include any changes to the current voluntary (rather than mandatory) basis of the UK’s merger notification regime. But, although intended only to address national security concerns and not competition issues, the new lower thresholds would significantly extend the range of transactions in the affected sectors open to scrutiny by the CMA.

For the longer term, the Government has invited views on proposed reforms that would both protect national security while retaining the UK’s openness to trade and investment. It is considering two main possible options, which could be implemented separately or in combination.

First, retaining the existing voluntary notification regime but with an expanded ‘call-in’ power to allow for scrutiny of a broader range of transactions. These might be defined as acquiring more than 25% of a company’s shares or votes, or gaining (directly or indirectly) significant influence or control over a company or over its assets or businesses in the UK. To help businesses to interpret this, the Government would publish a list of indicative alternative means by which an investor can obtain significant influence or control. These powers might be extended to new projects and to the sales of bare assets such as machinery or intellectual property transferred without the other elements of a stand-alone business.

Secondly, introducing a mandatory notification regime for foreign investment in essential functions in key sectors such as civil nuclear, defence, energy, telecommunications, the transport sector, and the manufacture of military and dual-use items and advanced technology. Other areas might also be included such as: government and emergency services; new projects expected to provide essential functions; specific businesses or assets even though the wider sector in which they operate is not in scope; and plots of land or buildings in proximity to a national security-sensitive site. Within these sectors and areas, the regime would be restricted to essential functions which:

  • Undertake, or are crucial to the undertaking of, the essential functions which the Government views as critical to ensuring the national security of the UK;
  • Where foreign ownership or control could pose a risk which there are no other reasonable means of adequately mitigating; and
  • Where existing licensing or regulatory regimes are insufficient to provide the Government with the information and powers required to protect national security.

Following its national security assessment of a transaction (on which it provides no details), the Government proposes that any new regime should mirror the powers currently available under the Enterprise Act 2002 – namely the ability to impose conditions on the deal or, in extremis, to block it altogether. For transactions that took place before the assessment, the Government would have the power (as the CMA does) to unwind deals should that be necessary and proportionate to protect national security. Any new regime would allow for judicial review of the decision. The clear separation between competition assessments conducted by the independent CMA and national security assessments conducted by the Government would be retained.