New UK FDI Screening Regime May Draw Higher Than Expected Filings, Lawyer Says

The United Kingdom’s new foreign investment screening law may draw more industry filings than first expected, Baker McKenzie lawyer Sunny Mann said. Although the U.K.’s new National Security and Investment Act doesn’t officially take effect until Jan. 4, Mann said many companies are already showing signs they plan to be careful and notify the U.K. before closing investment deals, rather than waiting for the government to intervene.

“We're seeing that parties are wanting to play it a little bit cautious,” Mann, a trade compliance lawyer with Baker McKenzie, said during a Nov. 16 webinar hosted by the law firm. The U.K. has said it expects to receive about 2,000 foreign investment notification filings per year, but Mann said early signs from industry show that number may be low.

“Yes, that's quite a lot,” Mann said of the filings. “But to be fair, I think that may be an underestimate, given the caution that we're seeing operating in this space.” He said companies are wary of the various “consequences of getting it wrong if you don't file,” which include criminal and civil penalties. The U.K. government can also void their transaction. “We are expecting possibly more than those 2,000 filings per year,” Mann said.

The NSIA, which passed earlier this year, will require the U.K. government to screen certain investments on national security grounds in 17 broad sectors, including in the advanced materials, advanced robotics, artificial intelligence, defense and quantum technology sectors (see 2108030045). Although screening won’t begin until January, the government will be able to review deals that were completed since November 2020, Mann said, leading some parties to proactively disclose their investments.

Mann said the firm has already helped companies submit voluntary filings “to get comfort” that the government won’t intervene after Jan. 4. Sometimes the firm received responses from the U.K. government immediately, and other times not for months. “Even though technically the legislation comes into force in a couple of months,” he said, “there are risks for deals now.”

Mann also stressed that the government plans to focus on investments from a range of countries, including those originating in the U.K. “Absolutely China is a focus of the legislation,” he said, “but it would be wrong to assume it’s just about China.” He also said “many” of the deals the firm has worked on have involved U.S. firms acquiring a U.K. business, which is a “real focus” of the U.K. because of potential U.S. export control implications.

“The U.S. acquirer commingles its technology with the target’s [technology] in the U.K., and suddenly the target’s technology becomes subject to extraterritorial U.S. reexport controls or [International Traffic in Arms Regulations] controls,” Mann said. “And that is a concern of the U.K. government as well.”

Although U.S. companies have their own government’s foreign investment screening regime to contend with, that regime has at least grown more predictable recently, said Rod Hunter, a Baker Mckenzie trade and investment lawyer. “While there was a great deal of unpredictability in [the Committee on Foreign Investment in the U.S.] over the last several years, that settled down now that we have new regulatory authority,” said Hunter, who managed CFIUS cases in a previous job as the senior director for international economics at the National Security Council.

The Foreign Investment Risk Review Act, implemented last year, expanded CFIUS authority to review transactions involving certain export-controlled critical technologies (see 2002110042). “I think the key message to take away is the scope is much broader than people typically think of,” Hunter said during the webinar. “Pretty much any foreign direct investment in the United States can trigger CFIUS jurisdiction.”

Although CFIUS’s voluntary disclosure process may have become more “cumbersome” over the last couple of years, Hunter said, industry is adapting. “Sometimes the process is more elaborate,” he said, “but it has become more predictable.”