By John Colahan
As part of UK Prime Minister Theresa May’s new industrial strategy, private equity deal teams should expect a more interventionist approach to the acquisition of strategically important UK businesses by foreign buyers. The UK government has signaled its intention of creating a “proper industrial strategy”, making it capable of stepping in when British companies receive foreign takeover bids, and has announced a revamp of the current public interest regime to guarantee government review of foreign ownership and control of “critical infrastructure” projects. Exactly what that framework might look like is to be confirmed and determining which businesses are strategically important to the UK will be challenging. Recent commentary has focused on nuclear and energy projects, but previous public concern over a range of other businesses (such as food, technology and pharmaceuticals) means that wider sectors could be affected.
The newly restructured Department for Business, Energy and Industrial Strategy (BEIS) has already taken positions on potentially strategically sensitive mergers, for example, by giving its seal of approval to the acquisition by Japan’s Softbank of FTSE 100 technology company Arm. The buyer took the unusual step of publicly pledging to maintain British jobs and technology after talks with the Prime Minister. Further, the UK government announced, along with the approval of the new Hinkley Point C project, a “special share requirement” or similar condition be included in all future UK nuclear projects, with the result that a significant stake cannot be sold without government consent. Deal making in Britain has typically been free from political interference, but the government has said that it is currently reviewing foreign takeovers on a “case by case” basis.
On the buy side, deal teams should consider the industrial sector and national strategic importance of targets. Whilst the threat of a new regime looms over strategically important UK M&A, acquirers will likely be advised to take pre-emptive measures where there are potential concerns, such as discussions with BEIS, to reduce the level of government scrutiny after transaction announcements. This will particularly be the case where non-UK co-investors are involved. On the sell side, deal teams may need to cast the net more widely when exiting investments, particularly where preferred bidders have direct or indirect state backing or originate from jurisdictions that have historically raised objections under potentially similar regimes, such as China under CFIUS. All deal teams will need to consider implications on timetable.
There is an existing regime for government public interest based intervention on UK deals. Under the 2002 Enterprise Act, the government can regulate and block acquisitions in key strategic sectors, such as media and defence, or to preserve the stability of the financial system. Details of changes are likely to emerge in the coming months. Yet the expected new framework could be much wider in scope than the current regime, and in our view, recent government comments suggest a clearance based regime closer to the CFIUS or Australian Foreign Investment Review Board regimes.
The soft consultation seen on recent deals is unlikely to be required for the majority of transactions, and will likely make way for a more robust, and hopefully clear and simplified, framework in the coming months as revisions to the current regime are announced.
This post was prepared with the assistance of Calum Warren in the London office of Latham & Watkins.