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01 November 2017
On October 17 2017 the Department for Business, Energy and Industrial Strategy published a green paper setting out the government's proposals to reform and strengthen its powers to scrutinise investments in critical businesses and infrastructure which could provide opportunities for foreign investors to "undertake espionage, sabotage or exert inappropriate leverage".
The foreword to the green paper notes that, on the one hand, the relevant legal framework must provide the government with sufficient power to safeguard the United Kingdom's national security. On the other hand, the framework should not limit market access for any foreign investor. In keeping with this, the proposals aim to follow the examples of other developed countries and ensure that any national security issues can be considered in a clear, consistent and proportionate way.
At present, the Enterprise Act 2002 allows the government to intervene in mergers if it reasonably expects there to be exceptional public interest concerns relating to national security, financial stability or media plurality.
However, the government has this power only if the following jurisdictional thresholds are satisfied:
Where the above thresholds are not met, the government still has the power to intervene in mergers, but only in limited circumstances relating to certain defence contractors, media companies or specific national infrastructure sectors.
The government considers that its powers to combat national security challenges are limited and appear less well established than equivalent review procedures in certain developed countries, including the United States (ie, the Committee on Foreign Investment in the United States regime) and France (the Ministry for the Economy and Finance regime), each of which are considered in detail in the green paper as examples of how to reshape the United Kingdom's review mechanisms. The purpose of the green paper is therefore to consult on a number of proposed short and longer-term reforms to strengthen the government's powers.
The green paper proposes to introduce new jurisdictional tests to the Enterprise Act 2002 for businesses in:
The green paper proposes that transactions relating to these two sectors will be reviewable if:
If these thresholds are met, the relevant merger would be subject to scrutiny by:
These assessments would be conducted separately and there are no proposals at present for any amendments to the principles underlying the Competition and Markets Authority's competition assessment.
However, even if these thresholds are exceeded in respect of a merger relating to these sectors, the notification regime would continue to be voluntary, which is the existing position under the Enterprise Act. In accordance with existing practice, the government would be able to 'call in' cases that are not voluntarily notified if they are above the relevant thresholds and raise potential concerns.
Responses to the above proposals should reach the government by November 14 2017.
The green paper also seeks views from businesses, investors and their advisers about possible long-term reforms to protect national security while retaining an open approach to trade and investment. Specifically, the green paper sets out two proposed options (which are not mutually exclusive).
Expanded call-in power as part of a voluntary notification regime
Under this option, the secretary of state would be able to intervene where he or she reasonably believed that national security risks were raised by:
The government is also considering:
In other words, under this option, there would no longer be a requirement for a relevant merger situation (ie, two enterprises ceasing to be distinct and the jurisdiction thresholds in the Enterprise Act being met). The green paper envisages that the determination of whether a transaction raises national security issues would be conducted separately from and would not impact on the existing competition review process.
As with the present Enterprise Act regime, investors would be able to notify the government voluntarily if they thought that a merger could raise national security concerns. The government would have time to intervene in a transaction after it occurred (ie, a call-in power). The green paper suggests a three-month window.
If the secretary of state is of the view that a transaction raises national security concerns, the green paper proposes that he or she would have the ability to impose conditions on the deal or block it altogether (which are the powers available to the secretary of state under the existing public interest regime). There would be an effective mechanism for affected parties to seek judicial review of the secretary of state's decision.
Mandatory notification regime
Under this option, the government would introduce a mandatory notification regime which would cover companies active in the provision of 'essential functions' within key sectors (ie, activities where national security risks from investments are most pronounced). The government is also considering whether certain individual businesses or assets should be included in the scope of this regime, even if the wider sector in which they operate is not within the scope. Another point for consultation in the green paper is whether the government should have the power to bring plots of UK land within the regime's scope where foreign ownership of that land could give rise to a national security risk (eg, the land is close to a national security sensitive site).
The government has suggested the following sectors for discussion:
The green paper sets out a proposed list of essential functions for each of these sectors. For example, for the civil nuclear industry, an essential function would be the operation of civil nuclear reactors for the primary purpose of electricity generation. In relation to energy, an essential function would be upstream gas and petroleum infrastructure with a throughput equivalent to more than 20 million barrels of oil equivalent a year.
This proposed regime would be supported by clear penalties for non-compliance (eg, criminal offences, financial penalties or director disqualification).
Responses to the above proposals should reach the government by January 9 2018.
The green paper also refers to the European Commission's draft proposals for a regulation establishing a framework for screening foreign direct investments into the European Union, dated September 14 2017. These proposals set out a framework for intensified cooperation and information sharing between EU member states, including reviewing foreign direct investment and a mechanism for the European Commission to opine on investments of 'Union interest'. The green paper notes that the UK government is considering its approach to these proposals, which are likely to come into effect at a similar time to the proposed national reforms and when the United Kingdom leaves the European Union. This raises the prospect that UK companies will be subject to the proposed investment screening following Brexit. The green paper emphasises that the proposed EU framework should not be used to control market access for protectionist reasons and that free trade and investment must be a priority for both the UK and European economies to be successful.
For further information on this topic please contact Will Pearce, Nicholas Spearing or William Tong at Davis Polk & Wardwell London LLP by telephone (+44 20 7418 1300) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Davis Polk & Wardwell website can be accessed at www.davispolk.com.
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