This information was provided by Matt Butter on 15 September 2020,
and should be reviewed against any later legislative updates.
There is currently no legal framework that specifically governs inward foreign direct investment in the UK. However, the UK government has published draft proposals for a new, voluntary regime relating to national security. A draft Bill (the National Security and Investment Bill 2019-20) was announced in December 2019 but there is currently no date for when this will be implemented.
There are a number of existing regimes under which the government has the power to intervene in transactions.
Many transactions are subject to review from a competition law standpoint, and there are a number of powers included in the Enterprise Act 2002 as part of the UK merger control process where the government may intervene on public interest or national security grounds.
In addition, the UK Industry Act 1975 allows the government to block an acquisition by a non-UK based entity of an “important manufacturing undertaking” where the change of control would be contrary to national interests.
Under the Enterprise Act 2002, a transaction is subject to review where either
(1) the UK turnover associated with the enterprise being acquired exceeds £70 million or
(2) the transaction creates or enhances a 25% share of supply or purchases of any goods or services in the UK.
Where the target enterprise is involved in any of the following activities, the turnover threshold is reduced to £1 million:
(a) military or dual-use goods subject to export control;
(b) computer processing units; or
(c) quantum technology.
There are no financial thresholds under the UK Industry Act 1975.
The above control measures are not specifically limited to certain sectors. All sectors that are of strategic interest to the UK may be reviewed. However, the key industry sectors that controls have been applied to in practice typically include:
(a) defence and national security;
(b) key infrastructure such as water and electricity;
(c) companies producing dual-use or military technology;
(d) computer processing units;
(e) quantum technology ; and
(f) media and broadcasting.
4. Does the legislation apply to investment activities in a defined term? If so please provide a description.
The controls typically apply to a “relevant merger situation” that meets the above financial thresholds. A relevant merger situation will generally be created if two or more enterprises cease to be distinct by virtue of being brought under common ownership (i.e. primarily aimed at mergers and acquisitions). The term “control” is not limited to the acquisition of outright voting control but includes situations of material influence that does not amount to outright control. Accordingly, this could include acquisitions of minority shareholdings. Material influence is presumed for acquisitions of 25% or more, and can arise at lower levels (e.g. 10 or 15%).
5. Could the legislation be applicable to a broader category of activity, such as transactions whereby the foreign person acquires ownership or controlling interest by means of e.g. increased ownership through a rights issue?
Yes. The review criteria apply where there is an acquisition that provides the acquirer with “material influence” over the target enterprise (see response above).
Under the Enterprise Act, the UK government can intervene in a transaction on broadly defined public interest grounds, including:
(a) interests of national security, including public security;
(b) the need for plurality of persons with control of the media and for accurate presentation of the news (i.e. newspapers and TV networks); and
(c) maintaining the stability of the UK financial system.
Under the UK Industry Act, the government can block an acquisition by a foreign person of an “important manufacturing undertaking”. However, there is no record of this power having been applied to block a transaction to date.
7. Is the screening requirement triggered in relation to foreign (EU or non-EU) investors, or may it also be triggered by domestic investors?
There is no formal FDI screening mechanism other than the powers outlined above. The merger control review process may apply regardless of whether the acquirer is located in the UK or overseas.
8. Would the screening mechanism apply to an investor from another EU Member State if the investor is owned by a foreign entity (non-EU Member State)?
Yes. See answer to question 7.
9. Are there any specific thresholds for when the screening procedure is triggered / exempted? (Threshold could be the % of ownership or value of the investment.)
Yes. See answers to questions 2 and 4 above.
10. Does the screening mechanism apply also for foreign investments in publicly listed companies? (For examples when stocks are traded on the open market).
The controls under the Enterprise Act apply where there is a relevant merger situation, including an acquisition of “material influence” over the enterprise. These could apply in cases where publicly traded shares are purchased where the above thresholds are met.
The Enterprise Act contains a general restriction on the disclosure of specified information, including where information has been submitted to a public authority when performing any function under the Enterprise Act.
The Freedom of Information Act 2000 gives a right for any person to access information held by a public authority. However, this includes several exemptions including in relation to information that must not be disclosed on national security grounds.
12. Would it be normal procedure to use mitigation agreements and typical clauses in relation to FDI? Is it required by law?
There is no legal requirement to include clauses in a purchase agreement relating to FDI. However, it is common practice to include provisions relating to merger control clearance, which would typically include any review by EU or UK competition law authorities as well as any public interest review under the Enterprise Act.
13. What are the notification obligations (or could the notification be voluntary), i.e. before or after the investment is completed (e.g. in an M&A transaction, would the notification have to be made before signing or closing)?
Under the UK merger control system, there is no obligation to notify where the above transaction thresholds are met, though these are recommended in practice for the sake of certainty, because government authorities would have the power to review, prevent or impose conditions on those transactions.
Under the current provisions of the proposed draft Bill on national security investments, any notification on national security grounds would remain voluntary. Parties will be encouraged to notify the government of trigger events that they consider relevant for national security purposes.
Not applicable. However, under merger control requirements in practice it is typical for both/all parties to notify to ensure that the intended transaction can proceed.
15. Does the competent authority have a right to call-in, or to ex officio start a screening i.e. ask for information about an investment that has not been notified?
Yes, where the Enterprise Act or UK Industry Act criteria are met.
16. What information does the authority normally require in a notification? For example, information about the ownership of the investor, the financing of the investment, and any ties to a foreign government?
Where an investigation is raised under the Enterprise Act, the government will instruct the Competition and Markets Authority to issue an intervention notice requesting various details relating to the transactions (including for instance full details of the parties involved and the parties’ business activities).
17. What are the main steps of the procedure and the time limits for those steps? Is there a period within which the competent authority has to issue a decision?
18. Does the competent authority take the final decision or another authority or governmental body (e.g. consultation with other authorities)?
In an Enterprise Act public interest case, any decision to allow a transaction or to impose conditions would be made by the relevant Secretary of State (the Secretary of State for Business, Energy and Industrial Strategy in relation to all public interest cases other than those relating to the media), on the basis of a report prepared by the Competition and Markets Authority.
See answer to question 11 above.
20. What types of decisions may the authority adopt, for example, to stop or condition an investment?
Under the UK merger control regime the Competition and Markets Authority can review transactions and prevent the transaction from taking place, by preventing integration or completion, unwinding integration or imposing conditions such as requiring Ministry of Defence approval for assignment of contracts or putting other safeguards in place to secure national security interests.
21. What are the tools available to enforce decisions (for example fines or injunctions), and what are the penalties for not adhering to a decision by the competent authority?
Administrative financial penalties may be imposed for failure to provide information to the Competition and Markets Authority in relation to a transaction investigation. If a party fails to comply with any undertaking it has given or any order imposed on it, the CMA can start civil proceedings in the court for an injunction or any other appropriate relief. Any third party affected by this who has sustained a loss can also bring an action for damages. The CMA can also start civil proceedings to enforce interim measures while carrying out its investigation (e.g. restrictions on information sharing between the parties).
Criminal penalties may be imposed where a person intentionally alters, suppresses or destroys information required to be provided under an information notice issued by the CMA or for knowingly or recklessly providing false or misleading information to the CMA.
22. Is the authority's decision subject to appeal in court or are there other means of changing a decision (new notification or filing)?
The parties and any other interested party may appeal to the Competition Appeal Tribunal for a review of the decision made by the CMA or Secretary of State, including a decision to block a transaction on public interest grounds. Where such an appeal is unsuccessful, the alternative would be to bring a case for judicial review if there are sufficient grounds for review (e.g. illegality of the decision).