Foreign investment regulation
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FI Monitor Issue 5, 2022
Since our last update in May 2022, the UK government has started publishing details of the first transactions found to raise national security concerns where remedies (Final Orders) have been imposed. Combined with our own experience of the regime in practice, these developments illustrate several important trends in terms of how the UK government is exercising its powers under the new regime, with implications for investors and target businesses.
When the UK government published its first set of statistics covering the first three months of the regime, 17 deals of 222 notified had been called in for in-depth review, but none were yet subject to a Final Order (see our earlier blog). Since July 2022, the UK government has now published summaries of ten cases where a Final Order has been imposed:
As the graph below shows, in those transactions which were not blocked, the most common conditions involve restrictions on the sharing of sensitive information, technology or IP between the target and acquirer (or other third parties). Other conditions involve:
As expected, the types of remedies required to mitigate risks to national security are broadly in line with the UK government’s practice under the previous public interest regime, and this trend is expected to continue.
Timely illustrations of practice under the previous regime are the undertakings accepted in two transactions where the Secretary of State intervened on national security grounds before the current regime came into force. In Cobham / Ultra, the strict conditions to clearance included creating two new “SecureCos” (UK entities which encompass the facilities that deliver sensitive capabilities to the government), placing a government appointed non-executive director on the board of each SecureCo, and giving the government strong step-in rights (similar to a “special share”). In Parker-Hannifin / Meggitt, the undertakings ensure security of supply to the UK’s Ministry of Defence and protect sensitive information and sovereign UK defense capabilities.
One notable difference, however, is that far fewer details of the specific conditions imposed on parties are published as the UK government seeks to balance the trade-off between protecting national security and providing transparency and certainty for the market. Also, unlike the previous regime, there is no public consultation on the terms of a Final Order. The UK government’s approach towards the level of detail that should be made available is expected to be subject to review as practice develops.
The UK government’s previous statements that the regime would be “nationality agnostic” have borne out in practice. Several Final Orders, as well as transactions currently under review, involve acquirers from traditional allies including France, Germany, Australia, and the United States. One case (the acquisition by UK-based private equity firm Epiris of Sepura, from Chinese owners) demonstrated that even UK investors are not immune from the imposition of remedies. Together, these cases emphasize the regime’s focus on the nature of the target’s business and – in some sectors – the need to protect sensitive information, technology or critical infrastructure, irrespective of the acquirer’s nationality.
A notable trend, however, is the significant proportion of Final Order cases involving Chinese acquirers (over half so far). This reflects concerns expressed by UK government ministers and security services over the threat posed by technology transfer to China. Back in July, during the contest to be the UK’s next Prime Minister, the recently appointed new Prime Minister Rishi Sunak MP set out a series of plans to tackle what he called the “largest threat to Britain and the world’s security” (China and the Chinese Communist Party), including:
More recently, at the G20 summit in Indonesia, the Prime Minister cited the UK’s national security and investment regime as a good example of the UK’s powers to defend itself against China as “undoubtedly the biggest state-based threat to our economic security”. The new Secretary of State for Business, Grant Shapps MP, is now charged with implementing those powers. His first published decision – ordering China’s Nexperia to sell the 86 percent stake in Newport Wafer Fab (the UK’s largest semiconductor manufacturer) which it acquired in July 2021 – has underscored the government’s approach. As Nexperia has announced its intention to appeal the government’s decision, this could be a test case for the regime.
Mirroring this trend, a significant proportion of Final Order cases involve targets developing advanced or sensitive technologies (particularly those with dual-use applications), as well as those owning and operating critical national infrastructure assets (notably in the energy sector).
We are also seeing the UK government using its expansive powers to review a broad range of transaction structures. That a third of the Final Order cases so far involve transactions where the relevant “change of control” falls outside the mandatory notification regime highlights the need for investors to be mindful of the government’s broader call-in powers. These include:
These cases illustrate the importance of assessing the risk of certain transactions being called-in – and the benefits of voluntary notification – when the criteria for mandatory notification are not met.
One of the stated benefits of the regime is the clear (and relatively short) statutory time periods for review. It has become increasingly clear, however, that while the vast majority of cases are cleared within these timescales, the period for review of cases raising concerns can be long and unpredictable.
There are two main reasons for this:
The net result is that the majority of notified deals are cleared within 6–7 weeks of notification, but parties should be aware that, in the more complex cases, reviews can be on-going for over 6–7 months – and this should be anticipated in deal documents with appropriate long-stop dates and obligations on all parties to cooperate with the ISU’s review.
The UK’s new regime has now been fully operational for 10 months, but it is still relatively early days for transactions that raise concerns to undergo a full national security review and conclude with remedies. Practice is therefore still developing, and the ISU continues to monitor and update its guidance to reflect developments. The current turbulent political climate in the UK could also impact the types of deal that attract heightened scrutiny.
To view previous versions of our foreign investment monitor, please visit our archive here.
Please get in touch with us or your usual Freshfields contact if you would like to discuss these or any other regulatory issues in more detail.
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