The UK White Paper on investment control: have you responded?

United KingdomScotland

On 24 July 2018, the UK Government published for consultation a White Paper setting out its proposals for a new national security and investment control regime. The proposed regime is loosely based on UK merger control – it provides for voluntary notification and expanded call-in powers for non-notified transactions. It would give the Government wide powers to review a potentially large number of deals on the grounds of national security. The Government clearly expects this new regime to have an impact: it estimates that it could result in a total of 200 notifications a year, of which 100 would be closely scrutinised and 50 would result in remedies to address national security concerns. This compares to a recent average of 60 to 80 decisions a year by the UK competition authority under the current UK merger control regime, of which only a handful resulted in remedies or in-depth reviews.

The Government has opted for a voluntary regime with backstop call-in powers instead of a mandatory regime, which was another option it consulted on in October 2017. To address concerns around legal certainty, the Government is proposing to provide guidance to businesses clarifying the scope of the new regime and how the Government expects to exercise its new powers, in a statement of policy intent to be approved by Parliament. It published a draft for consultation with the White Paper.

A key feature of the proposed regime (which distinguishes it from UK merger control) is that a Government decision to call in a transaction imposes an automatic stay on completion. A breach of the stay would attract criminal as well as civil penalties: unlimited fines and/or up to five years’ imprisonment for individuals and fines of up to 10% worldwide turnover for companies.

The proposed remit of the new regime is broad; although it is solely concerned with national security (rather than the broader public interest), it is not confined to certain sectors of the economy or to foreign investors only. Triggers include acquisitions of control or of “significant influence” over entities and/or assets. The types of transactions caught are not dissimilar to those caught by UK and/or EU merger control, with a focus on whether the acquirer would be involved in the management and direction of the target or asset. However, the threshold is potentially low(er).

In the draft guidance, the Government gives examples of sectors of the economy where it considers that national security risks are more likely to arise (and therefore the exercise of these powers is more likely). These include the usual suspects such as sensitive parts of the national infrastructure sectors (e.g. defence, energy, civil nuclear). The guidance also lists less typical and potentially wide areas, such as artificial intelligence and machine learning, computing hardware and networking and data communication. Although at a slightly lesser risk than the above, the list includes other sectors of national infrastructure such as food, finance and health. This approach is similar to that recently taken in Germany, which broadened the scope of its foreign investment control rules in July 2017. Given the potential breadth of the new regime, it is likely that businesses will want a helping hand from the Government in the form of informal advice, particularly in the early days of the new regime, in order to carry out a self-assessment of risk.

The Government’s proposals follow recent amendments to lower the thresholds under UK merger control for reviewing transactions involving dual-use items, computing hardware and quantum technology (which came into force in June 2018). The proposals are also published in the context of a growing trend towards increasing scrutiny of foreign investments. The EU is aiming to finalise its proposals for a new framework to screen foreign investments before the end of the year, and other countries, including Germany, France, Italy, Japan, Canada and the US, are reviewing or have recently revised such rules.

The consultation closes on 16 October: any businesses with concerns, comments or questions on the regime should be finalising their responses now.

The White Paper is available here.