UK Foreign Investment Law Will Lead to 'Significant' Increase in Transaction Reviews, Lawyers Say
A foreign investment review bill being considered by the United Kingdom will significantly expand the number of transactions subject to reviews and create greater due diligence requirements for U.K. companies, trade lawyers said. As more countries aim to increase their foreign investment screening, particularly the U.S. (see 2005200032), the U.K. is hoping to better protect its industry from trade theft and national security threats, the lawyers said.
The U.K. is specifically concerned about Russia and China. Despite signals that the U.K. would be comfortable using certain Huawei telecommunication infrastructure (see 2002040056), Prime Minister Boris Johnson may harden his stance on Beijing due to its infringement on Hong Kong’s autonomy (see 2006040038), said Daniel Lund, an Akin Gump trade lawyer. Johnson has recently employed “a slightly more distant behavior towards China,” Lund said during a June 8 webinar hosted by the law firm. “And we wonder whether that will feature within the government's final output on this bill.”
The foreign investment bill would increase government reviews on investments and transactions involving “hostile states” that represent “the most significant acquirer risk,” such as China and Russia, Jasper Helder, a sanctions and export control lawyer with Akin Gump, said during the webinar. It would also place a greater due diligence burden on companies that may mirror compliance requirements for sanctions and export controls on military and dual-use items, Helder said. He added that companies will likely need to look “very specifically” at transactions in “highly regulated industries,” such as those involved in defense production or dual-use items that require export licenses.
The proposed review mechanism would lead to a “significant increase in the number of transactions that are subject to government intervention in the U.K.” and extend the government’s Intervention powers, Helder said, including the power to block or unwind transactions. The U.K. could cause companies to unwind an investment “up to six months after it occurs,” said Cassandra Padget, a trainee solicitor with Akin Gump. But she said the U.K. will be far more likely to impose “conditions” on investments or transactions before they are approved. These could include “monitoring conditions” that require the company to submit “periodic reports” to a government official to prove it is complying with U.K. law, Lund said.
“The government is going to have a broad sweep … on conditions to approval that it could apply on any sort of trigger event,” Lund said. Helder recommended that companies start preparing to conduct a risk assessment “in the early stages of all anticipated transactions to [determine] whether your transaction may or may not be subject to this review mechanism.”
The U.K. expects to receive 200 investment review notifications per year, Lund said, with about half progressing to the “full national security assessment” stage. Lund said the U.K. expects “a relatively large number of submissions when you compare it to” the Committee on Foreign Investment in the U.S., “despite being a smaller jurisdiction and smaller economy than the U.S.” If there is an initial spike in notifications, it may be caused by overly cautious companies that do not want to accidentally violate the law. “You will see investors [err] on the side of caution, especially early on in the investment process,” Lund said.
After Brexit, the U.K. will have more flexibility to review investments and transactions and penalize bad actors, said Isabel Foster, an Akin Gump sanctions lawyer. The U.K. could even create its own “entity list,” she said, similar to the one operated by the U.S. Commerce Department. “There’s nothing on that to date.” she said. “But it is something that could be developed.”