New Year, New Rules: UK implements tougher restrictions on foreign investment

January 19, 2022

3 min read

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What's going on here?

The UK National Security and Investment Act came into force on 4 January 2022, increasing regulation on foreign investment into the UK to protect national security.

What does this mean?

The government now has power to review or prevent certain transactions which may be problematic for UK national security. All acquisitions of ‘material influence’ (which has no threshold of % stake in a company) will be subject to the new regulations, as well as transactions increasing an investor’s shares or voting rights to 25%, 50%, or 75%. It will also apply to acquisitions of control – for example, if you acquire a company with any intellectual property rights.  The power to call in a review of a transaction is limited to only six months after the Secretary of State learns of the transaction, which can be up to five years after the transaction of interest occurred.

Some transactions are now subject to ‘mandatory notifications’ too, requiring parties to notify the government of investment plans. The government has set out 17 sectors (including artificial intelligence and energy) whereby transactions normally subject to simple review powers will need to gain clearance from the government before completion. Otherwise, the transaction will be automatically void.

These powers apply equally to UK-based investors and those based abroad. However, the government has recognised that UK investors pose less of a threat to national security.

What's the big picture effect?

In the past few years, interest in government regulation of investment has been growing. A large body of scholars, alongside politicians, have been calling for restrictions on the amount of control foreign investors can have in so-called ‘critical industries’. These are industries deemed essential to national security and focus on energy, technology, and communications. Criticism has focused mainly on Chinese investors over perceived links with the state. For example, in 2020 the government U-turned on plans for Huawei to operate in the UK’s 5G network. In July 2020, then Digital Secretary, Oliver Dowden, announced a ban on the installation of Huawei equipment in 5G networks from September 2021. Providers are also required to remove all Huawei equipment currently installed by July 2027. To strengthen government powers over such situations, the Telecommunications (Security) Bill was announced in November 2020 and became law in November 2021. It gave the government more power to prevent ‘high risk’ vendors supplying equipment to any UK telecommunications providers, with fines of up to £100,000 per day for continued offending. 

Additionally, the government is scrutinising the national security implications of Nvidia’s acquisition of Arm, a UK chip designer currently owned by SoftBank. In November 2021, the current Secretary of State for Digital, Culture, Media and Sport, Nadine Dorries, referred the acquisition proposals for a Phase 2 review by the Competition and Markets Authority (CMA). One of the review’s requirements is to consider if the merger would be in the public interest, given its national security implications – Phase 1 focused solely on competition concerns. 

Whilst restrictions on foreign investment might help secure the UK against foreign interference in the future, in the short-term it is detrimental to the critical industries affected. The UK received £1.6tn of foreign direct investment (FDI) in 2019 and whilst this figure will not entirely drop off, industries will find it harder to access the finance required for expansion. This could harm the UK’s drive for green energy as firms struggle to attract capital for expensive new projects. 

This new legislation also has an effect on M&A activity more generally. Increased powers of review and mandatory notifications delay completion; investors may find similar targets elsewhere to complete faster with similar results. UK-based investing organisations should not feel an impact right now, but organisations facilitating foreign investment, such as law firms, might see a slowdown in activity as investors spend more time and money on an unchanged financial gain. A particular area of concern is the UK’s rapidly growing tech sector which currently receives more venture capital than Germany and France combined. A fall in investment would stifle innovation, especially in artificial intelligence, which is earmarked as one of the critical industries for mandatory notifications.

The UK’s new restrictions on foreign investment are designed to protect national security by preventing investors linked to hostile states from significantly disrupting the UK economy, communications and defence networks. However, increased regulation can harm the industries it is designed to protect by cutting off access to much needed foreign capital for innovation.

Report written by Phoebe Turner

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