Has the Conservative Government slammed the door on Foreign Investment?

The UK Government has today announced proposals to strengthen scrutiny of foreign investments in the UK.  It proposes to lower the value at which Ministers can intervene and scrutinise mergers and foreign investments.

The Green Paper is the result of the Government’s review of the Enterprise Act 2002 and its powers in relation to foreign investment and national security.

Short Term

In the short term, the Government proposes to amend the turnover threshold to allow the Government to examine and potentially intervene in mergers that currently fall outside the thresholds in two areas:

(i)            the dual use and military use sector

(ii)           parts of the advanced technology sector.

For these areas only, the Government proposes to lower the turnover threshold from £70 million to £1 million.  It will also remove the current requirement for the merger to increase the share of supply to or over 25%. The Government is proposing to make these changes through secondary legislation, which is much faster and has opened a 4-week consultation.

Longer Term

In the longer term, the Government has set out plans to make more substantive changes to how it scrutinises the national security implications of foreign investment.  The precise shape and scope of the changes will be decided after a formal 12-week consultation.

The proposals focus on ensuring scrutiny of foreign investment in ‘critical businesses’ and whether they raise any national security concerns. It will provide Ministers with the ability to act in circumstances where this might be the case.

The proposals are concerned only with national security, and are designed to be focused and proportionate in their scope and application.

Potential changes include:

  • an expanded version of the ‘call-in’ power, modelled on the existing power within the Enterprise Act 2002, to allow Government to scrutinise a broader range of transactions for national security concerns within a voluntary notification regime and/or;
  • a mandatory notification regime for foreign investment into the provision of a focused set of ‘essential functions’ in key parts of the economy. Mandatory notification could also be required for new projects that could reasonably be expected in future to provide essential functions and/or foreign investment in specific businesses or assets. These longer-term changes will be subject to a 12-week consultation, with views welcome from the public and relevant stakeholders.

Implications for future M&A Deals

These latest announcements would seem to sit uncomfortably with the Government’s post-Brexit “Global Britain” narrative, though it should be noted that they are entirely consistent with the proposals set out in the Conservative Party’s general election manifesto.

The Green Paper comes at a time when the M&A landscape is already incredibly politicised in the UK, with political and public policy factors likely to play an ever more important part in future M&A transactions.

High profile mergers are likely to be subject to increasing levels of political scrutiny, with issues around national security, economic competitiveness, financial stability, trade policy and job security receiving considerable attention and, in some cases, obstructing and derailing the whole process.

It is important for companies to understand the political and policy dynamics of any transaction, to conduct the appropriate political due diligence and include a communications strategy that can successfully navigate the public policy challenges. Often, this will require a proactive approach with public policy makers, with careful consideration of the key messages and senior stakeholder engagement.

Newgate Communications provides this public policy support to clients as part of its integrated communications offer, with a team that combines considerable financial PR, public policy and regulatory expertise with deep insight and understanding of the political landscape.

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