Britain has long presented an image to the world of being open to business, with a regulatory regime on takeovers that encouraged international investment. This week’s publication of the National Security and Investment Bill represents not only the biggest overhaul of British takeover law for 20 years, but also signals the end of this open-door policy.
The timing is no accident. Covid-19 has highlighted the importance of self-reliance and national control of essential industries for nations everywhere. Australia moved to tighten its takeover laws earlier this year while in Europe, politicians in Germany and France have warned of the need to protect critical companies from opportunistic foreign buyers. Concerns over the growing geopolitical influence of China and the role of its state-backed entities in furthering its overseas ambitions have only helped to stoke the new protectionist mood.
In the case of the UK, the pandemic, as well as Brexit, present an opportunity to set out a new regime. An overhaul has been long overdue. The 2002 Enterprise Act, the centrepiece of UK competition law, has not been fit for purpose for some time. In recent years ministers have, all too often, resorted to a case-by-case approach to takeovers, getting involved in everything from steel to cars. The result has been a lack of consistency, often marked by attempts to extract binding commitments on jobs or technology from foreign owners at the eleventh hour. Sweeping proposals in a national security and investment white paper under former prime minister Theresa May were widely condemned as too broad.
The new bill will, according to business secretary Alok Sharma, show hostile actors that there is “no back door” into the UK. Under the Enterprise Act authorities had been able to intervene on grounds of national security, media plurality or financial stability. Under the new rules, the threshold for intervention of £70m annual turnover for a takeover target (or 25 per cent combined market share) has been swept away — allowing officials to intervene in even the smallest of deals, including the buying of equity stakes and purchases of intellectual property. Any transaction in 17 sensitive industries will have to be automatically declared to a new investment security unit. The industries range from artificial intelligence to advanced materials. Widening the scope makes sense; the nature of what is “strategic” has changed from the tanks and submarines of previous decades to include robotics and AI.
In practice, however, there are real risks of protectionism and bureaucracy. The absence of a threshold on deal size means the potential for intervention is large. The new “national security” test will probably allow for a wide range of issues to be taken into account and could lead to extensive lobbying. Officials said they expected as many as 1,000 transactions to be notified each year — a sharp increase given there have been only 12 public interest interventions by the government on national security grounds since 2002.
Prospective investors will need to be confident the new regime is robust enough to stop individual politicians from being able to intervene on issues of personal interest. Entrepreneurs, too, may balk at the prospect of having their options limited by officials when selling their business — and choose to locate their headquarters elsewhere.
The government knows a post-Brexit Britain will need to strike a balance between encouraging investment while fostering its own critical industries. Investors must hope that officials will not risk intervening in those transactions that are best left to the market.