The UK’s current investment review regime is set for a significant overhaul with the publication of the National Security and Investment Bill (“NSIB“), anticipated before the end of this year. Some have argued that the existing UK public interest regime – contained in the Enterprise Act 2002 – is not fit for purpose, and that without legislative reform, the UK would be left exposed at a time of evolving national security threats. The NSIB is expected to reflect these criticisms by facilitating UK Government intervention on national security grounds in a wider range of sectors and transactions (see our blog post here for further analysis on the NSIB).
UK Government’s current remit
Evidence provided to the UK Parliament’s Foreign Affairs Committee inquiry into foreign asset stripping in the UK argued recently that the UK public interest regime does not allow for adequate scrutiny of foreign investors. This regime enables the UK Government to intervene in (and potentially block, or require commitments in respect of) certain transactions on national security, media plurality, financial stability or public health grounds.
Although “national security” is framed broadly in the legislation and not given a specific definition, there have been concerns that the current framework has led to gaps in the UK Government’s intervention powers, particularly in relation to lower value and advanced technology sector transactions. These perceived gaps have led the Government, in 2018 and 2020, to reduce the applicable thresholds for deals in certain sensitive industries such as dual-use and military products, quantum computing, artificial intelligence and cryptographic authentication.
For the majority of the UK regime’s period in force, national security interventions were largely limited to transactions in the aerospace and defence sectors, in which commitments have typically been agreed to maintain the UK’s defence capabilities. More recently, increased intervention rates, and expansion of the concept of national security to encompass broader industrial policy concerns, have reflected wider international trends concerning protectionism and the COVID-19 crisis (see here for our blog post exploring the intensification of foreign investment scrutiny due to COVID-19).
The case for reform
The breadth of the UK Government’s review powers under the Enterprise Act, and the discretionary nature of such interventions, undoubtedly creates uncertainty for transacting parties. The voluntary nature of the UK public interest regime, with no strict notification required, means the decision on whether to engage with the UK Government requires careful consideration. The reforms would be an ideal opportunity to increase clarity and certainty.
Meanwhile, the increased politicisation of the investment review process, as well as enlarged focus on industrial policy considerations, may also result in commitments going wider than traditional national security concerns. For example, some of the concessions granted in the Melrose and Cobham UK cases related to workers’ rights and pensions.
At the same time, opponents of an expanded approach to foreign investment review encompassing factors such as data security argue there has been a lack of clear cases of IP been removed from the UK by foreign investors. They also point to the challenges of crafting robust, effective commitments particularly in the complex technology industries in which modern security threats may proliferate.
Whether the NSIB strikes the appropriate balance remains to be seen. The existing UK regime undoubtedly suffers from deficiencies, not least due to its inelegant framework as a bolt on to the UK merger control system. It is hoped that the new regime will improve legal certainty for businesses, while not creating undue resource burdens for notifying parties and still providing the UK Government with the desired flexibility to intervene in transactions with genuine sensitive national security implications. Whether it succeeds on these points will go some way to determining whether the UK is still viewed as an open place for foreign investors to do business, or whether a chilling effect on M&A will undermine the UK’s Global Britain aspirations in a post-Brexit age.