How the UK plans to protect itself against foreign investments
On the 11th of November, the UK government published its draft for the new National Security and Investment Bill (NSIB). The Bill introduces a new screening mechanism to assess the risks involved with foreign investments in the UK. The mechanism would institute a mandatory pre-screening for investments made in sensitive sectors. The NSIB is an expansion of the existing investment reviewing mechanism in its scope and powers of the UK.
The NSIB would implement several concepts borrowed from the Committee on Foreign Investment in the United States (CFIUS) and investment mechanisms from other EU member states. If the Bill is passed in its present form it will provide new challenges for foreign investors seeking to acquire companies in the UK.
The Bill would establish filing obligations for 17 sensitive sectors. This means that it would become mandatory for the acquiring party to notify the government of the investment if the target entity is active in one of these sectors. Other investments are open to a voluntary filing regime, as well as a “call-in”. This would allow the government to review investments they were not notified of up to five years after closing. The Bill indicates that significant civil and criminal sanctions will follow in the case of non-compliance.
The legislation is expected to be passed in the first half of 2021.
The 17 sectors include:
Critical suppliers to government
Satellite and space technologies
Critical suppliers to the emergency services
Military or dual-use technologies
Who is in Charge?
The Competition and Markets Authority (CMA) is currently in charge of investment screening. If the Bill is passed in its current state, this will no longer be the case, because the responsibility of national security reviews will fall into the hands of the Department for Business, Energy & Industrial Strategy (BEIS). They will be in charge of the Investment Security Unit (ISU), who will be performing the security reviews.
Following notification by the acquirer, the ISU will have 30 working days in which they can assess whether or not an investment should be subject to a national security assessment. If the ISU decides that an assessment is not necessary, the parties involved in the investment will be notified that the investment has been cleared.
For a national security assessment to take place, there must be reasonable suspicion that the investment could enable a national security risk. These risks are identified by the Statement of Policy Intent. The statement divides the level of risk in three categories: core areas, core activities and the wider economy. Core areas are headline sectors in which national security risks are most likely to arise. Entities in this sector often contribute to the country’s infrastructure and are active in advanced technology, military and dual-use technologies or direct suppliers to Government and the Emergency Services.
It is estimated that the new screening mechanism will drive an increase in security assessments. The BEIS expects 1,000-1,830 notifications per year. Given that in the past there have only been 12 security assessments of foreign investments based on national security, this is a significant increase.
Why is “the Bill” necessary?
The reforms come at a time in which Europe is becoming increasingly aware of the influence that foreign entities have over their economies. Earlier this year, the European Union introduced the framework for screening of foreign direct investment. This framework promotes closer cooperation of member states of the EU in the matter of the screening of foreign investments.
The Brexit procedure was completed on the 31st of December 2020. Following the split, the UK does not have to comply with EU laws and regulations anymore. This urges the UK to improve the scope of its current investment screening mechanism, in order to protect its economy.
Further demonstrating the need for the NSIB is Datenna’s own research. The Bill is supposed to protect the UK from risky foreign investments coming from all over the world. However, our research indicates that Chinese investors have been especially active in acquiring UK companies in the past ten years.
Datenna analysed 102 acquisitions of UK companies by Chinese investors. The Chinese government had a significant role in 49 per cent of the acquisitions, many of which went under the radar of the UK government.
When a Chinese investor acquires a company in the UK, it is often unclear whether the Chinese government is involved. Their involvement often goes through various layers or holding structures that obscure the connection between the investor and the government. This further illustrates the need for an effective screening mechanism.