Foreign takeovers of British companies could be subjected to added scrutiny under new legislation proposed by the UK government.
The government would be allowed retroactively to stop pending acquisitions beginning Wednesday, rather than when the bill passes, to prevent a rush of activity in the interim. It also has potential impacts for cross-border deals that have not yet closed, such as Nvidia‘s $40 billion acquisition of semiconductor business Arm, announced in September.
The bill, which has been in the works since 2018, is widely seen as a reaction to increasing fears over foreign companies gaining access to sensitive technology and infrastructure, with China being an area of particular concern. Tech giant Huawei, for example, has made several acquisitions in the UK in recent years. In July, the government reversed course on a plan to use Huawei equipment to help build the country’s 5G mobile network; Huawei has since been banned from the UK’s networks, following US sanctions.
“The government is at pains to stress that this [bill] is not addressed to a particular country, but the Huawei situation is not delinked from this,” said Giles Warrington, an M&A lawyer with Pinsent Mason in London. “What also led the UK to bring forward some sort of legislation quite aggressively is the coronavirus pandemic and the concern that certain domestic industries are suffering financially and therefore potentially vulnerable [to takeovers].”
The bill, which is under review until Jan. 6, is separate from competition regulation. It would focus not only on financial thresholds such as market share, but also the types of entities being targeted. Computer hardware is one of the so-called “key sectors” outlined in the bill. In addition to established sectors such as defense, the list covers emerging technology like advanced robotics, quantum computing and cryptographic authentication.
Under the rules, the government would be able to impose conditions and restrictions on deals determined to pose a threat to national security. Companies that don’t comply could be fined at least £10 million (about $13 million) or 5% of their global revenue and face sanctions—or even prison time.
In a statement, business secretary Alok Sharma said the UK wants to remain one of the most attractive investment destinations, but he added, “Hostile actors should be in no doubt—there is no back door into the UK.”
Cross-border M&A activity in the UK and Ireland was, unsurprisingly, relatively sluggish in the first nine months of 2020, with 509 deals worth a total of €128 billion, according to PitchBook’s Q3 2020 European M&A Report. Last year, on the other hand, was a record year in terms of total value, with €226 billion across 932 deals, one of which was Advent International‘s controversial £4 billion acquisition of British aerospace company Cobham.
Cross-border M&A in the UK and Ireland
There are concerns the new bill could encourage British protectionism and therefore have a chilling effect on future M&A activity—especially once the UK reaches the end of the Brexit transition period in January and is looking to forge new trading relationships both within the EU and outside it. Warrington says those fears are likely overblown.
“The UK, in many ways, has lagged behind other jurisdictions in this respect, particularly the US and Australia,” he said. “The mandatory notification process is going to add a bit of a sort of procedural hurdle. But the number of deals that will be the subject to substantive interference are likely to be fairly low.”
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