UK’s New Investment Rules Kicks Off Eyeing Foreign M&A

Starting today (Tuesday, Jan. 4), it will be a lot more challenging to acquire certain companies in the United Kingdom. This is because the National Security and Investment Act (NSI), approved in 2021, will enter into force in the country.

The NSI creates an independent investment review authority, comparable to the Committee on Foreign Investment in the United States (CFIUS), that enables the government to scrutinize and intervene in deals that could affect the national security of the country.

This law represents a major expansion of the U.K.’s national security review powers. It replaces the existing public interest merger provisions of the Enterprise Act 2002 when the transaction involves national security issues.

Under the new measure, more scrutiny will be applied to any acquisition of “material influence” or the acquisition of control over assets, including real estate and intellectual property, which could pose a threat to national security.

While the measure applies to U.K. and non-U.K. investors, the government has said the nation’s investors are unlikely to raise national security concerns.

See also: Britain Wary of Foreign Takeovers By U.S. Companies

In addition to a possible review, starting this month, British companies in 17 different sectors, from artificial intelligence to energy, are required to notify the government about foreign takeovers or large investments as part of the law.

This list of 17 sectors includes high technology areas and critical infrastructure that will allow the government to decide the future in some of the most innovative areas. For instance, data infrastructure and cryptographic authentication, two of the sectors affected, will likely play a very important role in the development of the payment industry as the U.K. is moving to a more open banking system and using new technologies. Yet, from Jan. 4, any attempt from a non-U.K. firm to acquire a U.K. target may need to notify the operation and could be subject to a government review.

“What we are seeing is increased sensitivity in the area of national security, no doubt about it,” said Douglas Lahnborg, a London antitrust lawyer at Orrick Herrington & Sutcliffe LLP.

In 2020, U.S. companies spent $137 billion on British companies, the highest level since Dealogic, the London-based financial markets platform, began tracking these numbers in 1995. In 2021, U.S. companies invested about $100 million, the second-highest level ever.

NSI expands the types of transactions covered by such reviews. It goes beyond full acquisitions and includes minority investments, acquisitions of voting rights and assets. The failure to follow the new rules could result in sanctions such as fines and criminal liability, as well as the possibility of the cancellation of the deal.

While the law provides the U.K. government with significant powers to scrutinize deals, the real question is how the government will use these powers, as they may be used with great discretion.

A recent open letter from Lord Callanan, the U.K.’s minister for business, energy and corporate responsibility, said the country is open for business. He said the NSI will be used in a limited way to stop a minority of acquisitions that pose a potential risk to the U.K.

“As a government, we have always wrapped our arms around business and we will continue to welcome the huge role foreign direct investment plays in our economy — creating jobs and driving growth across the country,” he wrote. However, while we prize our open approach to investment, we must balance this with measures that protect the safety of our citizens.”

Most acquisitions would be unaffected by these powers, the letter said, but he noted there’s “an unavoidable truth that a handful want to do us harm.”

While the U.K. may be relatively new to the enforcement of these new powers, the US has wide experience. One recent and notorious case occurred in 2018, when then President Donald Trump used his powers as chair of CFIUS to kill Broadcom’s proposed buyout of Qualcomm, citing national security concerns, not without controversy.

Under the unusual move by a U.S. president, the firms were ordered to abandon the proposed deal. The order also prohibited all 15 of Broadcom’s proposed candidates for Qualcomm’s board from standing for election.