The UK government has put forward a proposal that would give it sweeping new powers to review and block mergers and acquisitions from foreign investors if those are believed to compromise national security.
It’s the latest country to do so amid an intense debate about the influence of Chinese investment in the West. The proposed changes to existing UK rules on this issue predate today’s tensions with China by several years and the British government is not saying its proposal has anything to do with China. But it’s no coincidence that Australia (pdf) and the EU have all proposed similar laws in the last year. And China has done the same with its 2019 Foreign Investment Law.
After the euro zone debt crisis of 2009, Chinese investors snapped up companies on the brink of bankruptcy across Europe. At the time it felt like a good deal: China had cash and Europe had distressed assets. But Europeans didn’t fully view China as an economic or political competitor back then. Now that Beijing is on its way to becoming the world’s superpower, and its companies are directly competing with Europe’s crown jewels, it’s a different story. And it doesn’t help that relations between Europe and China have soured, and officials in Brussels and London now view Chinese investment as a security threat in some areas. Also, Europeans feel that their companies are not given full and fair access to the Chinese market. They’ve taken steps to “level the playing field,” as they call it, and foreign direct investment review mechanisms are one of the tools in their belt.
That was the lay of the land even before the coronavirus pandemic shut economies down and caused an unprecedented global recession. Many companies have gone—or will go—under and governments are worried about a 2008-style shopping spree from Chinese and other foreign investors that could compromise national security. Is that fear justified?
The National Security and Investment Bill
Under the proposed National Security and Investment (NSI) Bill, which will be debated in the UK’s House of Commons next week (Nov. 17), foreign investors looking to buy British companies and intellectual property, or other assets in 17 key industries, will have to alert a new team of regulators within the Department for Business, Energy, and Industrial Strategy called the Investment Security Unit. The unit will assess prospective investments within 30 days and either green-light them or impose conditions.
If directors of foreign companies don’t follow those rules they could face jail time and fines of up to 5% of annual turnover, or a single fine of £10 million. If a transaction that is subject to mandatory notification isn’t cleared by regulators, it will be “legally void.” Controversially, the Investment Security Unit will have the power to review transactions up to five years after they take place, starting from the moment the NSI Bill becomes law.
According to the Financial Times (paywall), the rules contained in the bill will apply from next week rather than when it becomes law, in order to avoid a rush of takeovers by foreign investors who want to avoid the process. (The bill, which was introduced by the Department for Business, Energy, and Industrial Strategy, is widely expected to become law after both houses of Parliament amend and approve it.)
The bill updates and extends the Enterprise Act of 2002, which gave the UK secretary of state the power to probe and prevent mergers on public interest grounds, including in media, defense, and finance. But there have only been 12 cases since 2002 in which the government has intervened in a proposed transaction on these grounds; more often than not, UK regulators work with companies to adjust the timing or nature of their proposed deal. “We always have an informal discussion to stop [public interest notices] getting issued,” says Peter Teare, a partner at the law firm Reed Smith in London who specializes in defense and aerospace M&A. “If one gets issued, someone has screwed up.”
The NSI Bill will also give the government the right to intervene in smaller transactions that fall short of an acquisition. “Barring narrow exceptions,” the press release notes, ”the government’s current powers are limited to mergers involving target enterprises with a turnover of £70 million or a combined share of supply of 25% or more,” while the NSI Bill will “not include minimum turnover and share of supply thresholds.”
“To that extent it has filled a gap,” says Teare. “But in terms of preventing bad actors coming in and acquiring national security assets, the government’s always had that power.”
The business backlash
The UK is considered Europe’s most business-friendly country and there have been some rumblings that this bill could tarnish that reputation.
Investors and some lawmakers are particularly worried about the lack of a clear definition of “national security” and the vagueness around what the appeals process will be if a transaction is blocked. The government’s press release simply states that “the bill will include a safeguarding mechanism for parties to appeal where necessary.” This will surely come up at second reading next week, a mandatory step for any bill to eventually become law.
“I hope that section can be heavily debated by Parliament and…the wider business community,” says Peter Lu, a partner at Baker Mackenzie who leads the law firm’s China practice in the UK, “because that’s not giving certainty to business if you say, we can look at a transaction which happened last year.” (The five-year retrospective clause only applies to “transactions in the wider economy which were not notified to [the Investment Security Unit] but may raise national security concerns.”)
There are signs that the NSI Bill may be for naught, since the Chinese appear less interested in investing abroad. According to the New York-based researchers at Rhodium Group (pdf), domestic constraints on capital and the iron fist of regulators mean that M&A interest from China actually decreased even before the pandemic. In June, the group analyzed newly announced global acquisitions from Chinese investors and found “no signs of a Chinese outbound investment boom, like the one seen after the global financial crisis a decade ago.” Instead, they concluded, “takeovers are headed in the other direction: into China.”
But, to the extend they’re investing in Europe, it’s in the UK: In a 2019 report, Rhodium Group found that “since 2000, the UK has attracted the most Chinese FDI in the EU by far, with a cumulative volume” of €50.3 billion ($59.43 billion). In 2019, 30% of Chinese FDI in Europe went to the UK (pdf, p. 10). Meanwhile, the Henry Jackson Society (HJS), a right-leaning think tank in the UK, identified 115 British companies that were partly or wholly acquired by Chinese investors in the past decade, a third of which were in sensitive industries. Speaking of the NSI Bill, Alan Mendoza, executive director of HJS, said in a release, “this new legislation has the ring of slamming the stable door after the horse has bolted.”
The NSI Bill adds more transparency to a fairly opaque area of business. It seeks to standardize the criteria for accepting or rejecting transactions and creates an authority whose sole job it is to manage that process.
While this bill is certainly different in that it brings more transactions under the government’s remit and imposes very harsh penalties for non-compliance, Teare says there’s already an informal discussion that goes on with the government for large prospective deals in sensitive sectors like those he works in. So “if you ask me, is it going to make a big difference to my life? No. It’s going to formalize a process which has been carried on informally for some time.”
Alluding to the fact that M&A can get political, Lu says he is “very hopeful [that] this new business unit will have the same mindset [as other UK regulators of] focusing on national security risk rather than other factors.” These days, when a major transaction involves Chinese investment, alarm bells go off with ministers. In April, for example, the UK government intervened when the board of British chipmaker Imagination Technologies tried to appoint four new board members with ties to a venture fund controlled by the Chinese government. “A lot of Chinese are watching this bill,” says Lu, and “know what is coming.”
Still, the UK government has emphasized it doesn’t want to scare off foreign investors. And lawyers like Teare are cautioning their clients: “Don’t get too worked up about this.”