U.K. Announces Law to Protect Key Assets From Foreign Buyers

(Bloomberg) -- The U.K. plans sweeping powers to intervene in foreign takeovers of British assets deemed a threat to national security.

A draft law to be published Wednesday would expand the range of transactions open to government intervention, the Department for Business, Energy and Industrial Strategy said. There will be scope for fines and retroactive interventions in deals that complete after the bill’s publication -- a potentially controversial provision that critics warn could deter investors.

The legislation does not explicitly identify any particular country, but comes against a backdrop of heightened political concerns in the U.K. over China’s involvement in critically important infrastructure projects.

The proposed legislation would overhaul rules dating back to 2002 and cover sectors including defense, energy and transport as the government seeks to stop British companies, infrastructure and intellectual property falling into “hostile” ownership. At the same time, the department said the new scrutiny process will be “slicker” than at present, by imposing set time-frames within which ministers must come to a decision.

‘Hostile Actors’

“The U.K. remains one of the most attractive investment destinations in the world and we want to keep it that way,” Business Secretary Alok Sharma said in a statement. “But hostile actors should be in no doubt -- there is no back door into the U.K.”

Members of Johnson’s Conservative Party have been campaigning for government action against foreign involvement in security-sensitive projects, with a particular focus on the influence of China. Earlier this year, they pressed the premier to ban Huawei Technologies Co. from the U.K.’s next-generation wireless networks, reversing an earlier decision to allow the company a role.

China’s involvement in Britain’s nuclear power program has also given rise to concerns. In 2016, then Prime Minister Theresa May paused the Hinkley Point C nuclear project, which is backed by Chinese investment, before eventually allowing it to proceed.

“The Chinese government always asks Chinese companies to follow market principles and international rules, and carry out foreign investment and cooperation based on laws and regulations” Chinese Foreign Ministry spokesman Wang Wenbin told a regular briefing Wednesday in Beijing. “At the same time, we hope relevant foreign governments can foster an open, fair and nondiscriminatory environment for Chinese companies to invest and operate there.”

Timeframe

Under the National Security and Investment Bill, foreign buyers from all countries purchasing British assets in 17 sectors would be obliged to notify the government of the transaction. Only some deals in those sectors will be covered, and a separate consultation will determine the full scope of the law.

Ministers would then have 30 days to either allow a transaction to proceed or call it in for further scrutiny on national security grounds. If that path is chosen, the business secretary would have a further 30 days to make a decision, extendable by another 45 days in the most complex cases.

Punishments for non-compliance with the new regime includes five years imprisonment and fines of as much as 5% of global turnover or 10 million pounds ($13 million) -- whichever is greater. Transactions subject to mandatory notification that take place without being cleared will be legally void, BEIS said.

Conditions imposed on sensitive deals could include limits on the size of shareholdings by foreign investors, restrictions on access to commercial information and limits on access to certain projects, according to BEIS. The department has in the past also imposed conditions on pensions and investment.

Once a deal is cleared, ministers will not be able to revisit it -- unless inaccurate information was provided.

Retroactive

But as reported last month by Bloomberg, there are some retroactive elements to the legislation. Ministers will have 5 years to scrutinize transactions in the wider economy beyond the 17 sectors. They’ll have powers to unpick them if they are judged a threat to national security -- a provision the government said is in line with French, Italian and German practice.

U.K. Plans New Law to Undo Foreign Deals on Security Grounds

The retroactivity applies from Wednesday, so the government won’t be able to intervene in already completed deals.

To stave off the chances of such an intervention, there will be a voluntary process of notification for industries not among the 17 listed in the legislation. Companies involved in deals between now and when the law takes effect -- a process that’s likely to take months -- are encouraged to discuss their transactions with the business department to seek guidance.

Law firms warned the new provisions may slow down the speed of transactions as more fall under government scrutiny.

There could be “potentially significant impacts on deal timetables” as well as “a potential reduction in deal certainty and an increase in overall execution risk, at least until the government’s approach becomes clear and hopefully predictable,” said Nigel Parr, a partner at Ashurst LLP.

Key Sectors

“While the new measures will slow down investment in the affected sectors, I expect that only in very limited cases will they prevent investment altogether,” Mark Chivers, a partner at DLA Piper, said in a statement. “The area in which they will have the greatest impact is in distressed scenarios and competitive situations, where speed and certainty are paramount.”

But Tom Tugendhat, an influential Conservative China-skeptic who chairs the House of Commons Foreign Affairs Committee, told Bloomberg the legislation “shouldn’t deter investment.”

“What it will do with any luck is it will create a much greater climate of investment and support that will allow businesses to become a virtuous circle within certain clusters in the U.K.,” he said.

The proposals by Prime Minister Boris Johnson’s government builds on plans announced by May for a voluntary notification process. BEIS estimates more than 1,000 deals a year may be subject to the new notification requirement, with 70-95 called in for further scrutiny and around 10 requiring some sort of remedy.

Rarely Used

Until now, interventions have been governed by the 2002 Enterprise Act, which allows government action when a proposed merger would affect media plurality, national security or public contracts. The business department made changes in 2018 which removed thresholds on market share and turnover for some companies, but the new draft legislation will apply across all sectors.

The government intervened 12 times for national security reasons under the old legislation.

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