Increasing government scrutiny of foreign takeovers

The UK government has recently announced the implementation of the National Security and Investment Bill (NSI), which will give ministers far greater power to scrutinise foreign takeovers on national security grounds. It means that foreign acquirers ‘operating in sensitive areas’ must ‘seek authorisation from the government before transaction completion.’ Large areas of industries such as energy, telecoms and defence will be affected, which is a significant expansion compared to prior legislation when only small sectors were covered.

 

Prior to this new legislation, the government was more passive in its scrutiny of foreign takeovers.  The takeovers were only screened if the target firm had revenues of at least 70 million GBP. As a result, a number of controversial takeovers have occurred such as that of Illumination Technologies, a semiconductor designer, which was acquired by a private equity group Canyon Bridge controlled by the Chinese government. There have been accusations that their research has been used for weapons development. The more protectionist US government blocked a similar takeover by the same firm. The NSI represents a major step up in the government’s power. It is expected that 95 deals could require full national security assessments annually, with 10 needing “remedies”, which is a considerable rise on the 12 interventions on national security grounds that have occurred over the past 19 years. Furthermore, if rulings are not obeyed, the potential consequences are severe as foreign directors could face 5 years in jail and fines could reach 5% of annual revenues. Foreign acquirers of sensitive assets will thus be subject to substantially higher scrutiny.

 

Major concerns have been raised over the potentially detrimental impact on inward investment. The Institute of Directors, an influential business lobby group primarily composed of senior executives, warned that this regulation risks tarnishing the UK’s reputation as an attractive destination for foreign investment due to the increased risk of politicisation of acquisitions and longer transaction completion periods (national security assessments could take up to 6 months). Additionally, there is a concerning lack of transparency. The bill did not explicitly define “national security” meaning that it can be interpreted in a way that legally allows ministers to pursue economic nationalism and block takeovers on broader economic grounds such as maintaining employment. Due to the more hostile environment and greater uncertainty, inwards investment could fall and transaction activity could slow.

 

However, the NSI is critical for ensuring that sensitive assets remain operational and under domestic control. The government already ensures that core industries such as military shipbuilding and civil nuclear are fully screened. In the case of civil nuclear, the government goes even further because it owns numerous firms in the nuclear fuel supply chain, meaning that foreign investors will never be allowed to acquire such critical firms. With the new legislation, the scope of industries in which screening criteria can be used has been significantly extended. For example, the sale of prominent semiconductor designer ARM Holdings to Softbank in 2016 was approved by the government despite widespread criticism. At the time, the government did not have the necessary powers to block it. ARM’s current sale to NVIDIA is subject to significantly greater scrutiny, and the government is likely to use its new national security laws, alongside standard competition rules, to block the acquisition.

 

The introduction of tighter restrictions on foreign takeovers of sensitive assets is a necessary policy shift. Whilst attracting foreign investment is crucial to the success of any economy, even with this new regulation, the UK will likely remain very attractive due to strong fundamentals such as a strong rule of law and good infrastructure. Moreover, the consensus is that national security should always be prioritised over economic interests so potentially compromising foreign investment to maintain national security is an acceptable trade-off.  Furthermore, peer countries such as Australia, the US and Germany have all tightened their foreign takeover rules in the past year due to increased concerns that strategic assets could be sold at a bargain. This new regulation keeps the UK level with its peers.

 

By Jon Garner

Sector Head: Jackson Philips

 

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