Takeovers: UK rules aim to protect against malign foreign investment

Giles Warrington of Pinsent Masons, the law firm behind Out-Law, was commenting on the day new legislation takes effect in the UK which will give the government powers to intervene in mergers and acquisitions involving UK companies on the basis of the need to maintain the capability to combat and to mitigate the effects of public health emergencies. The government already has public interest powers to review mergers and acquisitions on the grounds of national security, media plurality and financial stability.

In addition to the new public health emergency ground for intervention, which takes effect on 23 June, the government is putting forward draft legislation which would expand the government's powers to intervene in mergers and acquisitions on national security grounds. The proposals seek to make it easier for the government to review deals in three specific sectors: artificial intelligence, cryptographic authentication technology, and advanced materials. The draft legislation is subject to parliamentary approval.

The latest measures follow steps taken in 2018 to lower the thresholds for intervention under the national security regime where the target business in the UK is active in one or more of the dual use goods, computing hardware, or quantum technology sectors.

"The UK has historically had a relatively relaxed foreign direct investment (FDI) regime," Warrington said. "However, it is now being strengthened materially."

"The government has also reiterated its intention to bring forward a new National Security and Investment Bill to introduce a comprehensive FDI regime. The Theresa May government first mooted the Bill and its proposals were far-reaching, for example covering acquisitions of minority stakes and property interests – including intellectual property – as well as full company acquisitions.  They also covered a wide scope of economic activity, such as core infrastructure and critical suppliers to UK government and the emergency service sector.  We await the bill later this year to see whether these proposals are being adopted in full," he said.

The government said that the introduction of the new public health emergency ground for intervention is designed to safeguard the UK's ability to respond to public health emergencies, such as the current coronavirus crisis.

"The economic disruption caused by the pandemic may mean that some businesses with critical capabilities are more susceptible to takeovers – either from outwardly hostile approaches, or financially distressed companies being sold to malicious parties," the government said. "These new powers will enable the government to intervene if a business that is directly involved in a pandemic response, for example, a vaccine research company or personal protective equipment manufacturer – finds itself the target of a takeover."

Giles Warrington of Pinsent Masons said: "The new emergency legislation entering into force today is designed to catch acquisitions which might impact on the UK’s ability to combat or mitigate a public health emergency. Businesses active in the healthcare sector, particularly those which have a role in fighting pandemics, are among those most likely to be impacted, but the guidance accompanying the legislation makes it clear that it could also apply to those involved in mitigating the impact of a pandemic, such as internet service providers or food supply chain companies.  However, with limited exceptions, the new legislation will only apply to acquisitions which satisfy the normal thresholds of the UK merger control rules."

"The new rules will enable the government to intervene in relevant acquisitions either before or post-completion. As with the existing UK merger control and public interest regime, it will not be mandatory for acquisitions to be notified to the government under the new framework. However, a post-completion intervention can be highly intrusive and could, in theory, ultimately lead to the risk of the acquirer being required to divest the business concerned. In practice, it is expected that the majority of cases where the government does intervene would end up with commitments being required of the acquirer - for example, to maintain UK strategic abilities - rather than outright prohibition. Ultimately, where a potentially relevant business is being acquired by a foreign acquirer, the rules would now need to be a consideration. In some cases, an approach to the Department for Business, Energy and Industrial Strategy or other relevant government department in advance of completion might be advisable," he said.

Concerns over potentially exploitative foreign investment have been expressed elsewhere in Europe too. In March this year, the European Commission issued a policy paper stressing the urgency of implementing and enforcing FDI regimes in the light of the Covid-19 crisis, focusing in particular on FDI which posed a risk to critical health infrastructures and supply of critical inputs. 

A number of countries have already strengthened their investment regimes in the light of Covid-19. Germany recently extended its FDI regime, which requires notifications of certain investments in critical infrastructure by non-EU/EFTA investors, by extending the list of healthcare targets which are covered – for example, the list now includes PPE and vaccine producers and producers of certain types of essential medicines, medical devices and diagnostic devices.