A regular briefing for the alternative asset management industry.
In recent years, governments around the world have been reviewing their powers to scrutinise and intervene in transactions that affect national security. It is not easy to get the balance right. On the one hand, the instinct of policy-makers is to require a wide range of transactions to be notifiable in advance, or reviewable after the event, and to take sweeping powers to prevent deals, or to order them to be unwound. On the other hand, for governments that want to encourage foreign investment in crucial sectors of the economy, such a heavy-handed approach will be counterproductive. Uncertain, expensive and time-consuming hurdles to investment and M&A activity are likely to have a chilling effect on inward investment, and may persuade entrepreneurs to locate innovative businesses elsewhere.
The UK government is currently grappling with exactly this dilemma. When it launched its National Security and Investment Bill in November last year, it provoked an avalanche of criticism. Most commentators did not disagree with the policy intent – they recognised that the UK's existing powers to call in transactions need to be beefed up – but there were serious concerns that the proposed powers were too broad. These concerns are the subject of ongoing discussion – evident from debates in the House of Lords this week. Among other things, businesses are concerned that the regime will not be limited to acquisitions made by foreign investors and, therefore, unlike other foreign investment regimes, will also capture acquisitions by UK acquirers and those from "friendly" countries.
The British Private Equity and Venture Capital Association (BVCA) was among those who responded to the consultation by pointing out that, as initially proposed, the new rules could delay and increase the cost of deals to such an extent "that they will reduce the appeal of the UK as a base for international early-stage innovators". Alternative asset managers contemplating acquisitions or disposals were similarly concerned about unnecessary hurdles for deals when national security was clearly not in issue. The BVCA response recounted the (unfortunate) experience of the recently reformed US rules and urged the government to learn the lessons.
Despite continuing to hold the line on many points, the government did make it plain last week that it has heard some of the concerns. Its response to the consultation sets out revised definitions for the 17 sectors (including defence, energy and transport) that would be within the mandatory notification regime envisaged by the Bill and, on the whole, these have been narrowed in response to industry feedback. Moreover, the government says that it intends to refine the definitions further in discussion with stakeholders.
These 17 definitions are crucial because they identify the types of transactions that could be subject to mandatory pre-deal scrutiny and approval on grounds of national security by a new regulator, the Investment Security Unit. The new law will require prior notification of a deal that involves an acquisition of "control" of an entity in one of the designated sectors – and an acquisition of "control" could occur when a party has only 15% of the shares or votes (a threshold which is itself another key area of ongoing debate). Criminal penalties can apply when a deal is not notified, so parties will necessarily be conservative in their assessment, making it even more crucial that the definitions are as narrow, and as clear, as possible. The government's initial proposals were widely thought not to satisfy either of these requirements.
...The new law will require prior notification of a deal that involves an acquisition of "control" of an entity in one of the designated sectors – and an acquisition of "control" could occur when a party has only 15% of the shares or votes (a threshold which is itself another key area of ongoing debate)....