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

(Bloomberg) -- Boris Johnson’s government is drawing up plans for a radical new law that would give ministers power to unravel foreign investments in U.K. companies -- potentially casting doubt on deals that have already been concluded -- to stop hostile states gaining control over key assets.

The National Security and Investment Bill is in the final stages of drafting and could be published later this month, according to people familiar with the matter who spoke on condition of anonymity because the subject is sensitive.

It aims to cover deals in sectors such as defense and critical infrastructure, and will make provisions to protect sensitive intellectual property.

Among the most potentially controversial parts of the draft law is a proposal to allow the government to intervene retrospectively in circumstances where national security is an issue. That would mean allowing government officials to look at past takeovers and mergers where concerns have been raised.

Darren Jones, an opposition Labour Party lawmaker who chairs Parliament’s Business, Energy and Industrial Strategy Committee, said that while a bill is needed to update U.K. powers regarding foreign takeovers, the government “mustn’t go so far as to scare off those who wish to invest in the future success of our country.”

‘Shortsighted’

“The U.K. economy benefits enormously from foreign direct investment because we’re known as a country that’s open for business,” Jones said. “To suggest that ministers will ‘unwind’ existing arrangements -- other than in the most important of national security cases -- seems both impractical and shortsighted.”

While the draft legislation as it stands does not explicitly target any particular country, it comes against a backdrop of heightened political concerns in the U.K. over China’s involvement in critically important infrastructure programs. Members of Johnson’s ruling Conservative Party welcomed the legislation.

“Our partners from Australia to Paris are tightening up their investment rules and the news that the U.K. is doing the same is very welcome,” Foreign Affairs Committee Chairman Tom Tugendhat said. “We need to protect our businesses just as much as others do and this is a welcome sign that the government is preparing to act.”

Another Tory, Bob Seely, said the government should be “congratulated” over the legislation. “This is not about protectionism, but about bringing us to the same level as other countries,” he said. “U.K. companies should not be raided for intellectual property -- even if it’s legal -- and shipped overseas.”

China Concerns

Tory MPs, including Tugendhat and Seely, pressed Johnson earlier this year to ban Huawei Technologies Co. from the U.K.’s next-generation wireless networks, reversing an earlier decision to allow the company a role.

Longstanding concerns have also been raised over China’s involvement in Britain’s nuclear power program. 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 bill will be brought forward when parliamentary time allows and remains a priority for the government’s agenda,” a spokesman for the Department for Business, Energy and Industrial Strategy said.

The draft law is likely to be presented to Parliament later this month, the people said, though the timetable could slip. The bill is a blueprint to allow Johnson’s government to strengthen its powers of scrutiny and to intervene in takeovers and mergers to protect national security.

Outlining its proposals in December, the government said its aim was to safeguard key assets while providing a transparent system for business.

Unusual Step

At the time, the government said its plan would include powers to mitigate the risks to national security by “adding conditions to a transaction or blocking the transaction as a last resort.” A regime of sanctions for companies that fail to comply with the new regime was also proposed.

But introducing a law that could apply retroactively would be highly unusual in the U.K. and risks undermining investor confidence at a time when the government wants to boost trade and attract foreign partners after Brexit. The Institute of Directors, one of the country’s main business lobby groups, said retrospective measures “should only be introduced in extreme circumstances.”

“There’s a real risk of a chilling effect on wider investment, particularly if interventions could be made retroactively,” IoD Director of Policy Roger Barker said in a statement. “It is paramount that the government offers as much transparency as possible around its methods and rationale for interfering.”

The proposed law is close to being finalized, but some parts are still subject to internal debate, the people said.

Under the plans, the bill would include certain elements that are retroactive, enabling ministers to look back at past investments. One person familiar with the draft suggested this was with a particular deal in mind, though another denied that was the case.

The law is also likely to cover protections for intellectual property and academic partnerships, as well as mergers, acquisitions and investments.

A new notification system requiring businesses to flag transactions with potential security concerns to the government is also being discussed.

©2020 Bloomberg L.P.