Increased M&A Regulation in the UK – a Protectionist Approach?

The UK Government has announced the introduction of new legislation that grants it greater powers to intervene in foreign takeover of UK firms, citing national security concerns as the driving factor behind the legislation. The decision is consistent with that of a host of other western countries in recent times, aligning takeover policy with that of the US, Australia, Canada and New-Zealand.

The new ‘National Security and Investment Bill’ introduces mandatory notification legislation, meaning the government has to be notified of potential acquisitions of more than a 15% stake in UK firms operating in any of 17 specified ‘sensitive’ industries. If the takeover is deemed to have implications on UK national security, the acquirer and deal will be subject to a National Security Review by the Department of Business, Energy & Industrial Strategy (BEIS).

Sanctions for non-compliance with the policy include fines of the greater of up to 5% of worldwide turnover or £10 million – and imprisonment for up to five years. Transactions covered by mandatory notification that take place without clearance will be legally void.

‘What led the UK to bring forward some sort of legislation quite aggressively is the coronavirus pandemic and the concern that certain domestic industries are suffering financially and therefore potentially vulnerable [to takeovers],’ said Giles Warrington, an M&A lawyer with Pinsent Mason. The 17 industries, including Artificial Intelligence, military technologies and satellite and space technologies are deemed to be integral to national security. Crucially, and whilst not highlighted specifically in the bill, the plan prevents state banked entities and sovereign wealth funds from acquiring UK firms in sensitive industries for non-financial reasons.

Whilst not directed at a specified foreign actor, some believe the legislation is a direct action in order to prevent further Chinese investment into crucial infrastructure in the United Kingdom. In July 2020, UK ministers banned Chinese tech firm Huawei from participating in Britain’s 5G networks for national security reasons, following the United States’ very public decision to do so. The UK has previously taken a more laissez-faire approach to acquisitions regulation, with previous threshold for intervention being on firms with revenues over 70 million GBP, or when an entity with market share greater than 25% would be created. Many cite this as a reason behind what has become known as ‘The Great British Sell Off,’ with foreign direct investment prevalent in many key UK industries including airports – Aberdeen, Glasgow and Southampton are all 79% foreign owned and controlled – and the Energy Industry with Abu Dhabi Future Energy Company owning and controlling windfarms in Norfolk.

The legislation is likely to further dampen what has been a disappointing year for UK M&A, with a 28% decrease in the number of deals including overseas firms buying UK businesses when compared to the same period in 2019. The protectionist measures will ultimately reduce the attractiveness of Britain to FDI, with deals likely to take longer due to the new screening process. The fast-paced nature of auction processes for firms is likely to be impacted, with deals to take up to 30 days to be cleared by the new security unit within BEIS.

Whilst in line with all Five Eyes partner nations, the UKs decision to introduce protectionist measures at a time of hostile international relations is unlikely to improve relationships with foreign nations such as China. With the upcoming withdrawal from the EU in late January, some are questioning the decision to seemingly isolate the country from the fastest growing economy in the world and from a viable trading partner in the post Brexit landscape. On the other hand, the legislation has been described simply as a procedural hurdle, and simply the catching up of Britain to the US and Australia regarding national security, with some predicting M&A activity to be unaffected.

 

By Daniel Regan

Sector Head: Venkat Rajasingham

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