National Security and Investment Bill – is this what the UK needs?

What does the Bill do?

It massively extends the range of circumstances in which the Government can intervene in and block overseas capital finding its way into UK businesses. Under the Enterprise Act 2002, even as beefed-up in recent years, the Government could only intervene by serving a Public Interest Intervention Notice and this could only happen on larger deals in a very narrow range of sectors. As we know, this did not stop the recent takeovers of ARM or Imagination Technologies (chips – not the sort you fry) or Cobham (military / defence) by overseas bidders. Under the new rules (which, unusually, have effect as of Wednesday 11^th November’s introduction of the Bill to prevent a flood of deals whilst this goes through Parliament), the Government will have power to intervene in 17 designated sectors which, in addition to military, includes sectors such as autonomous robotics, quantum computing, civil nuclear and of course, AI, sectors which thrive in the UK, largely on the back of our leading universities and allied research facilities. Moreover, there is no value threshold and the Bill covers minority investments and the purchase of selected assets, not just large and/or public takeovers.

Of key significance is that the Government will reserve the right to re-visit transactions for up to five years with the power to impose swingeing fines on acquirers who are found to have breached the rules. This may, in part, be a reaction to a pattern of behaviour by bidders in the past who have given assurances regarding the maintenance of production / retention of employees in the UK of target businesses only to renege on such assurances shortly after acquiring control.

Who is it aimed at?

In a word, China although curiously, that word doesn’t seem to appear anywhere in the Bill. Worth pointing out therefore that unlike sanctions, which prevent people doing business with named countries or individuals, this legislation could equally apply to an investment from the US or France or Germany. Who knows, if the SNP finally get to hold and win another Independence referendum, the Government might  be blocking a modest investment from an Edinburgh-based private equity firm.

Is this a good thing?

That very much depends on your views of capitalism and its role in the economy as a whole. We can all see the dangers where, for example, a start-up which has developed ground-breaking technology, is snapped up by an overseas buyer which takes the IP back home, fires the staff and closes down the UK operation by offering eye-watering sums to founders and VC backers, or where an established business with years of productive investment and innovation behind it and with a loyal and motivated workforce is taken out by a knock-out offer to its institutional shareholders. Hang on a minute though, isn’t that the whole point of capitalism and a vibrant economy? The sort that our politicians tell us we should aim for? Founders and investors take great risks in investing (time and other opportunities foregone, as well as hard cash) and proving a sceptical world wrong – think of Graphene, for example. Their reward is, at least in some cases, to sell-out  for unimaginably large sums of cash. The prospect of that is the very fuel that keeps the engine of venture capital and private equity running. Lady Cobham might complain that earlier Government action might have prevented the aerospace company’s sale to a beastly US private equity firm but the point surely, is that it wasn’t her family’s company anymore. The family decided at some point to go public and raise cash from institutional shareholders to fund acquisitions and expansion. They didn’t have to – they could have reigned in their ambition and stayed private in which case, they could have said no to any bidder, however attractive the price  The obligation of Cobham’s institutional shareholders was not to the founding family or to the Company’s heritage, it was to return as much cash as possible to their own shareholders. Would they have invested in the first place if the prospect of a takeover was more remote?

Here’s another thing, we’re very good in the UK at starting businesses but not so good at funding them into the much fabled “unicorns”. Look where the big money has come from in recent years: the US, China and sovereign wealth funds in the Gulf. If the UK doesn’t have deep enough pools of capital and we don’t want foreigners buying our brightest star companies then where is the exit coming from? And if those prospects are diminished, where is the hunger of entrepreneurs and institutional investors to grow another ARM or Imagination Technologies? There is a risk here that if, in these times of economic protectionism, the Government exercises its powers too zealously, we will be killing the very goose that lays the golden egg. This and future governments may well be unable to resist extending the scope of strategic sectors. Some of you may remember that in 2005, France, admittedly, a country not noted for unbending support of the free market, managed to convince itself that Danone, a yoghurt maker, was a strategic industry. So what next for the UK, tea, cheese makers? Oh and another thing, this looks like pretty bad news for corporate lawyers like me! That of course has no bearing whatsoever on my views.

How will this work?

The Government will be setting up a new unit within BEIS to deal with notifications. These have to be given by the potential acquiror, not the target and the Government will have 30 days to decide whether or not to intervene. Whether a failure to respond within this time period amounts to deemed consent is not yet clear. The Government will also encourage voluntary notifications.

What impact will this have on corporate acquisitions / investment?

Potential acquirers will have to carefully consider whether the target touches on any of the prescribed sectors even where that is not the core business. That could make early-stage buyer due diligence more complex and expensive and could run into difficult issues of confidentiality / disclosure in the early stages of discussions. Expect a new breed of specialist consultants to emerge, advising private equity and big corporate on these issues.

A culture of over-cautious disclosure by potential buyers could develop which in turn stretches the resources of BEIS in considering and clearing deals. A similar problem has bedevilled the anti-money laundering obligations imposed on law firms where too many Suspicious Activity Reports have been filed with the National Crime Agency. If BEIS is late in responding or requests further information from acquirors, this could delay acquisition timetables and inject more uncertainty into the acquisition process;

Buyers of relevant UK businesses which subsequently sell or are themselves taken over may have to give warranties and indemnities regarding their historic compliance with this legislation.