Introduction
The UK has become one of the latest in a line of countries around the world to tighten FDI screening rules in the context of the COVID-19 pandemic (see e.g. our update on Germany here). The legislative changes that were announced last month affect the rules in two respects. They immediately introduce the public health emergency as a new public interest consideration. They will also lower the intervention thresholds for transactions in certain sensitive technology sectors. Similarly to other jurisdictions, the measures aim to protect key domestic businesses against opportunistic acquisitions by foreign buyers amid the economic disruption caused by the COVID-19 pandemic.
These amendments represent efforts to mitigate potential risks to national security ahead of the more comprehensive framework for the scrutiny of transactions under the forthcoming National Security and Investment Bill. It is worth noting that while the EU Foreign Direct Investment Regulation will be in full force from 11 October, it is understood that the FDI coordination mechanisms between the EC and the EU 27 as foreseen in the Regulation do not extend to the UK authorities (see our publication on EU FDI Regulation here and our FDI hub with FDI updates across several key jurisdictions around the world here).
New Public Interest Consideration (already in force). The Secretary of State (SoS) can intervene in a transaction that affects the “public interest”. The SoS could previously rely on three public interest considerations: national and public security; media plurality and broadcasting standards; and financial stability. From 23 June, the SoS can also intervene in transactions where there is a need to maintain the UK’s capability to respond to public health emergencies or mitigate their effects. The amendment captures acquisitions of a business directly involved in the fight against the COVID-19 pandemic, e.g. a vaccine research company or personal protective equipment (PPE) manufacturer. The consideration is however sufficiently vaguely worded to potentially apply to a wide range of different sectors apart from healthcare and pharmaceuticals, e.g. manufacturing and food supply.
Expansion of Jurisdictional Scope (statutory instrument pending). Apart from the public interest considerations, the following general thresholds must be met for the SoS to have jurisdiction to intervene: (i) the target’s UK-wide turnover exceeds £70 million; or (ii) the investor’s and the target’s UK market shares (“share of supply”) together amount to at least 25 percent. In view of technological advancements, economic developments and changes in the national security threat, the UK lowered the thresholds for three specific areas of economy in 2018. Specifically, where the target is active in military/dual-use goods subject to export control, computing hardware or quantum technologies, the £70 million threshold is lowered to £1 million; and the alternative market share test can be met by the target alone (no increment required).
The proposed amendments build on the changes introduced in 2018. More specifically, they seek to add a further three categories central to national security to the list of activities subject to lower thresholds:
(i) Artificial intelligence: a technology enabling the programming, or execution of a computational process capable of undertaking complex tasks commonly associated with human intelligence
(ii) Cryptographic authentication: a technology enabling information to be protected whilst in storage or in transit by making it inaccessible or unreadable by everyone except those who have the information needed to access or read it.
(iii) Advanced materials: e.g. materials capable of modifying the appearance, detectability, traceability or identification of objects by humans or sensors within specified ranges up to and including ultraviolet.
Proposal for Wider FDI Reform (Bill in preparation). In 2018 the UK published a National Security and Investment White Paper envisaging a new national security review regime, a framework which would be based on a separate legal instrument, distinct from UK merger control.
The proposed regime would introduce a notification system, possibly similar to the CFIUS in the United States. The framework is expected to apply to investments that pose or may pose a risk to national security, irrespective of the relevant sector or the size of the business (i.e. no market share or turnover thresholds). A number of factors would be taken into account to assess the national security implications such as the target risk (e.g. the nature of the entity’s activities and of the assets) and the acquirer risk (e.g. the nationality of the investor’s ultimate controlling parent).
The UK government announced the National Security and Investment Bill 2019-2020 in December 2019. While the bill is not yet publicly available, the Prime Minister has recently indicated that more information would be published in the coming weeks. In light of recent developments (e.g. a reaction of Members of Parliament to a failed attempt by a Chinese investor to appoint four Chinese government-backed members on the board of an UK business, Imagination Technologies), national security is likely to be pushed to the top of the UK government’s legislative agenda.
Conclusion
FDI control in the UK is currently in transition, with the government striving to enact a stand-alone screening framework. While the new system is in preparation, the recent legislative amendments aim to address the challenges brought about by the sudden economic disruptions resulting from the COVID-19 pandemic. In line with the stop-gap nature of the measures, it must be expected that any transactions captured by the new rules will be subject to greater intervention and closer scrutiny during the pandemic than usual. This is a space to watch as these steps pave the way for a comprehensive FDI screening mechanism.
