United Kingdom
- 16/11/2020
- Jurisdictions
The UK does not have a domestic legal framework that specifically governs foreign direct investment into the UK, nor does its legal framework make a formal distinction between investments of foreign and UK origin. However, the Enterprise Act 2002 (the Enterprise Act), which also governs the UK’s merger control regime, includes provisions enabling the Secretary of State to intervene in mergers which may raise certain public interest concerns (the public interest intervention regime). The Enterprise Act was last amended in June 2020. Other regimes which can affect investment into the UK exist where the UK government holds “golden shares” in certain companies which enable it to prevent other investors from accumulating shares above a defined threshold and under the UK Industry Act 1975 which grants the Secretary of State the right to block an acquisition by a non-UK entity of an important manufacturing undertaking when a change of control would be contrary to the interests of the UK.
As it currently stands the public interest intervention regime is the principal means by which foreign direct investment may be subjected to review in the UK.
Scope
The public interest intervention regime applies to all relevant merger situations i.e. the proposed transaction must (i) result in two or more enterprises ceasing to be distinct and meet either (ii) the UK turnover test (UK turnover exceeds £70 million) or (iii) the share of supply test (merger creates or enhances a 25% share of supply or purchases of any goods or services in the UK). In the case of (i) military or dual-use goods which are subject to export control, (ii) computer processing units, (iii) quantum technology, (iv) artificial intelligence, (v) advanced materials, and (vi) cryptographic authentication technology, the UK turnover test is met when the target's UK turnover exceeds £1 million and the share of supply test is met when the target has a share of supply of 25% or more of relevant goods or services in the UK (without the need for the transaction to lead to an increase in that market share).
Where a relevant merger situation exists and the EUMR thresholds are met as well, the UK government may carry out a separate review of the proposed transaction under the public interest intervention regime. The UK government may also intervene on the public interest grounds in relation to certain transactions that do not meet the above tests, where the transaction in question falls within the special public interest regime. This applies to transactions in the newspaper and broadcasting sectors, and mergers involving certain government contractors or subcontractors who hold or receive confidential defence-related information.
Note that while the UK remains subject to EU competition rules, any UK government intervention under the public interest intervention regime must be compatible with EU law.
Review criteria
The Secretary of State examines whether the transaction raises concerns with regard to national security, media plurality, stability of the UK financial system, or the need to combat a public health emergency. The Secretary of State may add further public interest considerations to this list.
Application procedure
There is no system of mandatory notification for mergers in the UK. However, a large number of transactions are in practice notified prior to completion to give the parties legal certainty. Irrespective of a notification, the CMA or the Secretary for State may commence an investigation of their own initiative.
Filing fees
UK legislation does not provide for filing fees.
Implementation and government practice
If there are reasonable grounds for suspecting a relevant merger situation to which one of the public interest considerations is relevant, the Secretary of State will issue a Public Interest Intervention Notice (PIIN) under the public interest intervention regime or a Special Public Interest Intervention Notice (SPIIN) under the special public interest regime to the CMA. Where the UK government wishes to review a transaction notified under the EUMR in order to protect its legitimate interests, it will issue a European Intervention Notice.
The CMA must prepare a Phase 1 report for the Secretary of State, including views received from third parties and any remedies offered by the parties to mitigate the concerns. Upon the conclusion of the Phase 1 CMA report, the Secretary of State can (i) conclude that there are no relevant public interest concerns and the merger can proceed; (ii) accept remedies offered by the parties in order to mitigate national security risks; or (iii) refer the merger back to the CMA for further investigation.
If the Secretary of State refers the merger back to the CMA for further consideration, the CMA prepares a Phase 2 report and investigates whether the merger is likely to operate against the public interest. It will also consider whether any remedies are appropriate to deal with any competition issues and the public interest consideration. The Secretary of State may (i) find that there are no relevant public interest concerns and that the merger can proceed (ii) find that there are relevant public interest concerns and impose conditions or (iii) block the transaction entirely if it consider that no remedies can adequately address the public interest concerns.
Due process
The Phase 1 and Phase 2 reports from the CMA, as well as the final decision of the Secretary of State are issued in writing to the parties and are published. The CMA and the Secretary of State are required to publish reasons for their reports and decisions.
Any CMA decision may be appealed to the Competition Appeal Tribunal (CAT). Rulings by the CAT may be appealed to the Court of Appeal in England and Wales, or the UK’s Supreme Court in certain cases. A decision by the Secretary of State may be subject to judicial review by the High Court of England and Wales on grounds of errors of law and procedure.
Time limits
Upon the Secretary of State issuing a PIIN, a SPIIN or a European Intervention Notice, the Secretary of State will set a date for the CMA to prepare a Phase 1 report. There is no statutory deadline. The CMA must deliver its Phase 2 report to the Secretary of State within 24 weeks (with a possible extension of eight weeks). The Secretary of State must publish its final decision within 30 days of receipt of the CMA’s Phase 2 report.
Confidentiality
The Enterprise Act imposes a general restriction on the disclosure of information which a public authority obtains during the exercise of any of its functions pursuant to the Enterprise Act. The CMA’s report will be redacted to prevent disclosure of business secrets and information contrary to the public interest.
Sanctions
During screening, the CMA may issue an initial enforcement order (IEO) preventing the integration of the target entity with the purchaser’s business. The CMA may impose a penalty for a breach of an IEO of up to 5% of the group annual worldwide turnover of the addressee of the IEO.
Legislative developments
On 11 November 2020, the UK government published the National Security and Investment Bill (NSIB). This bill proposes the introduction of a standalone foreign direct investment regime for the first time in the UK. It also goes beyond the original proposals made in the July 2018 White Paper, which called for a mandatory rather than a voluntary regime.
The NSIB proposes a mandatory notification obligation for the acquisitions of certain shares or voting rights in entities in sectors perceived to be of highest national security risk. The UK government has said that it expects certain transactions in the following seventeen sectors to face mandatory notification: (i) civil nuclear; (ii) communications; (iii) data infrastructure; (iv) defence; (v) energy; (vi) transport; (vii) artificial intelligence; (viii) autonomous robotics; (ix) computing hardware; (x) cryptographic authentication; (xi) advanced materials; (xii) quantum technologies; (xiii) engineering biology; (xiv) critical suppliers to government; (xv) critical suppliers to the emergency services; (xvi) military or dual-use technologies; and (xvii) satellite and space technologies. Nonetheless, the UK government will be launching an eight-week consultation in order to work out which parts of these seventeen sectors will be subject to mandatory notification.
The NSIB proposes that the mandatory notification regime will be supported by a voluntary notification regime, with parties encouraged to notify certain transactions which they consider may be of interest from a national security perspective. The UK government will also have a “call-in” mechanism allowing it to review transactions that have not been notified and which it feels may affect national security. The NSIB proposes allowing the UK government to review a broad range of transactions, including those with low levels of shareholding, and a broad range of asset types. The NSIB also proposes no turnover or market share thresholds, which a transaction must meet to be reviewed. The result is that the new regime will likely capture a very wide range of transactions.
The NSIB proposes separating the national security assessment from any merger control analysis and so the CMA will no longer be involved in national security assessment. Instead, the Secretary of State along with the new Investment Security Unit will undertake the national security assessment and decide on the outcome of the review. The NSIB proposes only allowing the Secretary of State to “call in” a transaction for review where there is a reasonable suspicion that it may give rise to a national security risk. The NSIB also proposes that where a notification is made by the parties, the Secretary of State will have 30 working days to decide whether to “call-in” the transaction. The Secretary of State will then have a further 30 working days to review the transaction, which is extendable by a further 45 working days. The Secretary of State then must decide whether to approve the transaction, to approve it subject to conditions or to prohibit the transaction.
The NSIB will now be subject to approval and amendment by the UK Parliament. The UK government will not be able to review transactions under this new regime until the NSIB is passed into law by Parliament. However, the NSIB proposes allowing the UK government to ability to “call in” transactions that occur during the transition period between the NSIB being introduced to Parliament and the date it comes into force. With this new regime, the UK government estimates that between 1,000 and 1,830 transactions will be notified each year, which is considerable increase from the twelve transactions that have been reviewed on national security grounds since the existing regime was introduced.
The above information is a summary that does not constitute legal advice. For exhaustive information, advice, and assistance please get in touch with our lawyers.
