Reed Smith Client Alerts

Today, 23 June 2020, the UK expanded powers of the Government to intervene on public interest grounds in transactions which involve the UK’s capacity to combat a public health emergency, such as coronavirus.

Countries concurrently welcome and restrict foreign direct investments (FDIs) – investments that form a controlling ownership of a business by a foreign investor.

The UK is taking steps to introduce new FDI rules, and the European Commission (the Commission) has issued guidance to Member States, leading certain Member States to introduce pre-clearance requirements for FDI in additional sectors and to open investigations into FDI. Investors from outside the UK or EU will need to take steps to consider these new rules at the outset of transactions in certain sectors.

The new and proposed rules focus on transactions involving new technology and a widening scope of what is considered ‘critical’ infrastructure. In the UK specifically, changes to merger control rules will extend jurisdiction to review competition and national interest aspects of transactions affecting businesses which have activities in technology and defence sectors.

Authors: Marjorie C. Holmes Peter Teare Ross Mackenzie Emma Weeden Vaibhav Adlakha Catriona Casha

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The EU regulation and guidance

EU regulation 2019/452, the FDI Screening Regulation, provides a framework for EU Member States to screen foreign investments into the EU on the grounds of security or public order, and for Member States to cooperate with each other and the Commission.

This is designed to minimise inconsistencies that may arise in different Member States’ own regulations. The EU will supervise how Member States apply their laws to FDI and may issue opinions where a proposed FDI is likely to affect projects and programmes of EU interest, such as Galileo, the satellite navigation system, or Trans-European networks.

The regulation takes effect from 11 October 2020. Ahead of its implementation, the EU has published Guidance, strongly counselling against opportunistic FDI and warning that “vigilance is required to ensure that any such FDI does not have a harmful impact on the EU’s capacity to cover the health needs of its citizens”.

Member States are entitled to use their respective FDI screening mechanisms, such as “golden shares” or other nationalization measures to inhibit FDI. The Guidance also provides that they can step in and act as market participants to prevent predatory takeovers where national security or public policy concerns are present.

The UK application

Powers of intervention

While the UK does not have a dedicated framework to regulate FDI, the Government may intervene in public interest cases where the jurisdictional thresholds of UK merger control are met and the transaction might affect national security, media plurality, or the stability of the UK financial system.

The Special Public Interest Regime is also in force: in mergers that involve government contractors that hold or receive confidential defence-related information and certain newspaper and broadcasting businesses, the Government may intervene where no turnover or share of supply tests are met.