City urges caution over tougher scrutiny of foreign takeovers

The UK government has introduced regulation enabling greater scrutiny of foreign takeovers of British companies, to ensure such deals do not hamper the country’s ability to tackle public health emergencies.

The reforms to the 2002 Enterprise Act were brought before parliament earlier this week and will allow the government to scrutinise foreign takeovers of companies involved in pandemic response, such as tech firms, vaccine research companies or those producing personal protective equipment.

The new powers specify three sectors the UK government considers central to national security and in which it could intervene in the event of a takeover: artificial intelligence, cryptographic authentication technology and advanced materials.

According to the government, the economic disruption triggered by COVID-19 has left such critical businesses at greater risk of hostile takeovers, potentially by “malicious parties”.

Business Secretary Alok Sharma stated: “These powers will send an important signal to those seeking to take advantage of those struggling as a result of the pandemic that the UK government is prepared to act where necessary to protect our national security.”

“These measures will strike the right balance between the UK’s national security and resilience while maintaining our world-leading position as an attractive place to invest. The UK is open for investment, but not for exploitation”.

The government is said to have been put on alert after an aborted Chinese takeover of Imagination Technologies, a Hertfordshire-based chip designer, in April resulted in a emergency commons inquiry into potential asset-stripping of UK tech firms.

However, City figures have warned that the measures could discourage foreign investment in British companies and impact the UK economy. CMS partner Alasdair Steele said: “Anything that starts making people think twice about how easy it is to do a deal [...] is going to put some people off because you've now got uncertainty.”

Steele warned that, without advance government clearance, bidders could see the time and cost of deal negotiation wasted when takeovers are later blocked. He added: “A politician standing up and answering to voters and press campaigns is not necessarily as rules driven as a competition authority.”

Veronica Roberts, a competition lawyer at Herbert Smith Freehills, felt the reforms were balanced but cautioned against powers being taken too far when the National Security and Investment Bill is introduced later in the summer: “That's where they could step over into potentially deterring foreign investment if they give themselves powers that are too wide-ranging,” Roberts said.

The reform follows the introduction of similar screening measures in the EU. The European Union has introduced tougher scrutiny in an effort to strengthen “strategic autonomy” from the USA and China and to defend European firms from subsidised foreign takeovers.

The powers add to legislation introduced in 2018, which enabled the government to intervene in takeovers of companies working in military products and technologies.

To read our recent piece on how government coronavirus loan schemes could lead to corporate bankruptcies, click here.

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