Buyer Beware: UK Foreign Direct Investment Rules Now Much Tougher

November 17, 2020

A review of the UK’s limited controls over Foreign Direct Investment (FDI) began in 2016, leading to a 2018 White Paper which indicated that changes were on the way. The National Security and Investment Bill announced in November 2020 by the UK government is the culmination of that review process, but it surprised most by going well beyond what was suggested in 2018.

The proposed new regime will operate alongside the existing UK merger control framework, which provides for voluntary notification of qualifying transactions. That system will continue to allow for reviews on competition/antitrust grounds as well as the public interest grounds of media plurality, financial stability and public health emergencies. National security issues will be covered only by the new legal framework (replacing the current controls on national security grounds which are also part of the merger control framework).

The key features of the proposed new regime for national security review of FDI into the UK are as follows:

  • No definition of “national security.” “National security” was deliberately left undefined in the Bill, meaning the government will have significant flexibility to intervene in transactions.
  • No thresholds. There will be no minimum turnover level or value requirement in relation to the target business or asset.
  • Mandatory notification for certain acquisitions of entities, including minority stakes. Transactions involving the acquisition of a minimum level of interest (typically at least a 15 percent holding) in an entity (i.e., not an “asset deal”) active in certain parts of 17 key industry sectors must be notified to and cleared by the government before closing. (The scope of this is subject to an ongoing consultation.) The review will determine whether national security concerns are raised. Transactions subject to the requirement which are not notified will be void.
  • Review of other transactions/investments not subject to mandatory notification (the “call-in” power). A very wide range of other transactions and investments may be reviewed for up to five years after they have taken place, on national security grounds (reduced to six months if the government becomes aware of the transaction). This covers any acquisition of an entity (where at least “material influence” will be gained; a low bar), as well as certain asset acquisitions (where the purchaser will obtain a right or interest providing the ability to use, direct or control the asset, or do so to a greater extent than before the transaction).
  • Wide range of asset acquisitions can be called in. The types of asset acquisitions which can be called in for review are very wide. “Asset” is defined broadly to include land; tangible movable property; and ideas, information or techniques which have industrial, commercial or other economic value (including trade secrets, databases, source code, algorithms, formulae, designs, plans, drawings and specifications and software).
  • Voluntary notification for transactions/investments not subject to mandatory notification. Transactions not caught by the mandatory notification regime may be voluntarily notified if the parties consider that national security concerns may arise (so there is a risk of the call-in power otherwise being used). In practice, a purchaser investing in any sector falling outside the mandatory regime which may raise a national security issue will have to weigh the burden of a voluntary notification (which then starts the formal review period; see below) against the risk of a post-closing call-in if it chooses not to notify the government voluntarily (which will be open for up to five years, reduced to six months if the government becomes aware of the transaction).
  • UK and extraterritorial application to entities and assets. A target entity falls within the regime if it carries on activities in the UK or supplies goods or services to persons in the UK. A target asset falls within the regime if it is used in connection with activities carried on in the UK or the supply of goods or services to persons in the UK. Therefore, a target asset or entity does not need to be registered or located in the UK.
  • UK and extraterritorial application to purchasers (of all types). The regime will apply to purchasers from any country (UK, EU or elsewhere). Any type of purchaser, not just state-backed, is covered.
  • Retrospective application. Any transaction caught by the regime (not only the mandatory notification requirement) which closes on or after 12 November 2020 and before adoption of the Bill may retrospectively be reviewed using the call-in powers once the Bill becomes law. This power will remain in place for five years following the Bill becoming law (reduced to six months if the government becomes aware of the transaction, including before the Bill becomes law).
  • Fixed timetables for review, but in practice, flexible. The headline review period for notified transactions (compulsory or voluntary) trailed by the government is 30 working days, but even “simple” reviews are likely to take longer, not least since the government will decide when time starts to run.
  • Enforcement powers. The regime is backed by an extensive range of enforcement powers, including: as noted, voidness of transactions closed in breach of the mandatory notification and clearance requirement; personal and corporate sanctions for noncompliance with the mandatory notification requirement; a power to adopt “hold separate” orders to prevent integration where an acquisition has legally closed but is under review; and a wide range of remedies to deal with risks to national security (including blocking or unwinding deals and the imposition of conditions).

It’s clear that the UK’s National Security and Investment Bill, once adopted, will herald a dramatic change to the UK FDI rules. The government’s own estimate is that up to some1,800 notifications of transactions may be made each year and that up to 95 transactions each year may raise enough concerns to be looked at in detail. Those figures are truly extraordinary when compared with the very limited number of cases reviewed under the current national security regime.

The current regime is clearly too weak by current international standards, but once adopted, the Bill will make the UK’s regime one of the most comprehensive in the world. Given the retrospective application of the rules and its wide scope of coverage, a purchaser contemplating a corporate or asset acquisition or investment which has any link to the UK and which may raise national security concerns needs to consider now whether the regime may apply and the potential consequences of that. Those consequences include impacts on deal feasibility, contractual conditionality, timetables, certainty and overall execution risk.