On June 22, 2020, the UK Government introduced legislation to Parliament that further strengthens its ability to intervene in transactions on national security and other public interest grounds.
Specifically, the UK Government has sought additional powers to intervene in transactions where there is need to preserve the capability of the UK to respond to a public health emergency or mitigate its effects. These new powers relating to public health emergencies came into effect on June 23, 2020. This development in the UK is the latest in a line of measures introduced in other European jurisdictions to tighten foreign direct investment (FDI) screening rules in the context of the COVID-19 pandemic.
In addition, the UK Government took this opportunity to expand the list of sectors for which lower intervention thresholds apply in the UK, to include artificial intelligence, cryptographic authentication technology and advanced materials. These measures relating to critical technology sectors will come into effect at a later date, following Parliamentary debate and approval by both Houses of Parliament.
Grounds for Public Interest Intervention
As a result of this new legislation, there are now four public interest grounds on which the UK Government may intervene in transactions:
- to protect UK national security interests;
- to ensure media plurality in all or a part of the UK, including accurate presentation of news and freedom of expression;
- to preserve the stability of the UK financial system; and
- to maintain in the UK the capability to combat, and to mitigate the effects of, public health emergencies.
In order to intervene on any one or more these grounds, the UK Government (acting via a relevant Secretary of State) must have a reasonable belief that one or more of the public interest grounds are relevant to the consideration of a transaction. On the whole, to date, these powers have been exercised relatively sparingly. By its own calculations, UK Government interventions under the pre-existing categories total twenty in number since the Enterprise Act 2002 came into force. Notably, nine of these interventions have occurred in the last two years since May 2018, with seven of these interventions having related to national security concerns and two having concerned the preservation of media plurality. Public interest in preserving the stability of the UK financial system has been invoked only once, in relation to the proposed acquisition of HBOS by Lloyds TSB in 2009, and for which the power to intervene on this public interest ground was specifically created.
In terms of outcomes following intervention, no transactions have been blocked and undertakings (in a variety of forms tailored to the transaction and parties) have been the most common end result. For some of the most significant transactions, parties have offered undertakings in advance and agreed these with the Secretary of State. This suggests that the UK Government has been approachable on matters relating to FDI and, on the whole, willing to work with parties to secure respective regulatory and commercial objectives.
While the current COVID-19 pandemic is clearly an important catalyst for the addition of the fourth category, the UK Government has nonetheless drafted the legislation for longer term and provided flexibility to act in relation to other public health emergencies. The scope for potential intervention under the language of the new legislation appears particularly broad given that the “capacity to combat” a public health emergency may involve a large number of business sectors and supply chains, not limited to healthcare. Moreover – and as is currently being felt across the business community with COVID-19 – the “effects” of public health emergencies may touch the wider economy. The application of this new public interest ground remains to be seen, but for now the Business Secretary has noted his predominant interest is to be able to “intervene if a business that is directly involved in a pandemic response, for example, a vaccine research company or personal protective equipment manufacturer – finds itself the target of a takeover”.
Lowering of Thresholds
In 2018, and as described in our alert at the time, the UK Government lowered the threshold for intervention from £70 million to £1 million, based on UK turnover of the target, within certain technology sectors relating to dual-use goods, computing hardware and quantum technologies. The share of supply test as applied to critical technology businesses was also amended.
As part of the current reforms, the list of critical technologies is proposed (subject to Parliamentary approval) to be expanded to include:
- research into and supply of services employing artificial intelligence, and the production or development of anything designed for use in artificial intelligence
- for which “artificial intelligence” is defined more broadly than the existing quantum technology category and specifically includes any “technology enabling the programming or training of a device or software to use or process external data (independent of any further input or programming) to carry out or undertake (with a view to achieving complex, specific tasks) – (i) automated data analysis or automated decision making, or (ii) analogous processing and use of data or information”;
- cryptographic authentication technology, including developing or producing any product which has cryptographic authentication as its primary function, research into cryptographic authentication and supplying services employing cryptographic authentication
- for which “cryptographic authentication” concerns methods of verifying (i) the identity of persons, users, processes or devices or (ii) the origin or content of a message, data or information where the method of verification has been encrypted; and
- developing, producing, researching, owning, creating or supplying advanced materials, including related intellectual property and component parts (not necessarily being advanced materials) used in the manufacture of advanced materials
- for which “advanced materials” include (i) materials capable of modifying the appearance, detectability, traceability or identification of objects by humans or sensors within specified ranges up to and including ultraviolet, (ii) alloys formed from chemical and electrochemical reduction of metals, polymers and ceramics in their solid state, (iii) processes taking solid state alloys in or into crude or semi-fabricated forms, or powders for additive manufacturing, and (iv) other metamaterials (not including fibre-reinforced plastics in certain applications and packaged device components for civil application).
The view of the UK Government is that all of these types of critical technology are central to national security, which warrants the lowered thresholds and enhanced ability to intervene. It is likely the Government is concerned both to protect the ability of UK based companies to generate vital, modern technologies in this area for use in a wide range of applications across the UK economy, without reliance on or opening up potential interference from outside states and actors, and also to keep high quality R&D jobs in these sectors in the UK.
These lowered thresholds will (as in 2018) also lower the thresholds for intervention by the UK Competition and Markets Authority to address competition law concerns relating to transactions involving these cutting-edge technologies.
Wider UK FDI Reforms
Earlier this month, we commented on UK Government statements and wider media speculation that new UK proposals or legislation concerning national security and investment would shortly be brought forward and lay the ground for substantial and wide-reaching reforms to the UK’s approach to FDI screening. The Secretary of State for Business has confirmed that deeper and more comprehensive changes to the UK FDI regime will follow in a National Security and Investment Bill said to be “forthcoming”. Earlier statements have suggested that such legislative proposals will be made public in the “coming weeks”.