UK toughens takeover rules over security concerns

Boris Johnson will on Wednesday announce the biggest overhaul of British takeover law for two decades to prevent overseas companies buying up sensitive UK assets, as concern grows inside Downing Street about China’s influence.

The tough measures will require prospective foreign buyers of UK companies, shareholdings or intellectual property in 17 sensitive industries to alert a new government unit about proposed transactions.

Directors of overseas companies that fail to do so could face personal fines of up to £10m, or their businesses could pay penalties worth up to 5 per cent of annual turnover.

British officials expect about 1,000 transactions to be notified under the new takeover regime, although only a small percentage are likely to be blocked by the government or face “remedies”.

That would be a sharp increase in scrutiny of transactions given that there have been only 12 public interest interventions by the government on national security grounds since 2002.

“Hostile actors should be in no doubt there is no back door into the UK,” said Alok Sharma, business secretary. “We will continue to welcome job-creating investment . . . while shutting out those who could threaten the safety of the British people.”

Publication of the government’s National Security and Investment Bill on Wednesday follows growing concerns within the UK security agencies about how to protect critical infrastructure from potentially risky Chinese investments.

The prime minister in July reversed previous plans to allow Chinese telecoms equipment maker Huawei to supply kit for Britain’s 5G mobile phone networks following lobbying by the Trump administration in the US.

The UK government in April intervened to block an investor which was linked to the Chinese state from taking control of the board of British chip designer Imagination Technologies.

At present, under the 2002 Enterprise Act, UK authorities can intervene in deals on competition grounds or if a transaction has implications for national security, media plurality or financial stability.

But this usually only applies if the target asset has an annual turnover of more than £70m or where the merged business would have a market share of more than 25 per cent.

Now the rules will be rewritten so any transaction in 17 industries will have to be automatically declared to a new investment security unit inside the business department.

That will apply not only to company takeovers but also to purchases of large shareholdings and intellectual property in the sectors — including defence, transport, energy, artificial intelligence, computing hardware, communications, civil nuclear and space technologies.

The proposals were first drawn up three years ago under former prime minister Theresa May but have been repeatedly delayed.

The UK’s decision to tighten the rules is in line with actions by other western Five Eyes partner nations including the US and Australia.

The powers will be active from when the bill is introduced on Wednesday — rather than when the law is passed by parliament — to prevent a rush of takeovers.

The government, admitting that its existing powers “do not reflect the threats we face today”, said the new approach was “proportionate”.

The new government screening process of overseas takeovers of UK assets should be carried out within 30 working days, allowing most deals to be cleared swiftly.

One City of London executive said he was reassured that the focus was on national security rather than an intrusive 1970s-style catch-all regime.

But Veronica Roberts, a partner at law firm Herbert Smith Freehills, said the new regime could be “unsettling” for foreign investors because the mandatory filings “could be enough to disadvantage some bidders in fast-paced auction processes”.

Ministers on Friday quietly published new guidance aimed at British technology companies working with China.

The advice warned that the government has “serious concerns” about the Chinese state’s use of technologies which might violate human rights, and urged companies to be aware of the ethical repercussions of any new partnerships they enter into.

The guidance highlighted China’s use of facial recognition and predictive algorithms as being particularly problematic, pointing out that these could be used for “mass surveillance, profiling and repression of ethnic minorities in Xinjiang and elsewhere”.

It also pointed out potential “reputational consequences” for UK digital companies involved in technology which may be diverted towards the Chinese military under Beijing’s programme of civil military fusion.

The Chinese embassy in London did not immediately respond to a request for comment.

Additional reporting by Matthew Vincent

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