UK to introduce foreign investment rules for critical infrastructure 1

Briefing note September 2016

UK to introduce foreign investment rules for critical infrastructure The UK Government will significantly reform its approach to the ownership and control of critical infrastructure to ensure that the national security implications of foreign ownership are scrutinised. This will include a review of the public interest regime in the Enterprise Act 2002 and the introduction of a national security requirement for the continuing Government approval of the ownership and control of critical infrastructure.

Chinese President Xi Jinping in nuclear power stations. The The fall-out from October 2015. implications for other types of critical Brexit continues In the aftermath of the UK referendum vote, the new Prime Minister Theresa Following the EU referendum vote, May announced a review of the Theresa May suggested that the project. The Government has now Key issues UK should pass legislation giving decided to proceed with the project on  The Government plans to the Government greater powers to the basis of confirmation that the review the public interest block or impose conditions on Government will be able to prevent regime under the Enterprise mergers on public interest grounds the sale of EDF’s controlling stake Act 2002 unrelated to competition. The prior to the completion of construction,  This allows the Secretary of Government has now announced without the prior notification and State to intervene in mergers plans to introduce new foreign agreement of ministers. ownership rules in the on certain specified public infrastructure sector. By the time the HPC plant is interest grounds. operational, the Government plans to  In future these grounds will be The announcement was made in the have a new foreign investment regime expanded to include national context of the Government's decision in place, under the Enterprise Act security in relation to critical to proceed with measures to support 2002, which would provide the infrastructure the construction of the new nuclear Government with the powers to  Apart from nuclear power power station at Hinkley Point C intervene in the sale of EDF's stake. stations, it is unclear what (HPC). Specifically in relation to future new infrastructure will be covered The HPC plant will be constructed by nuclear power stations, there will also and which countries will give EDF together with its partner, China be special share arrangements and rise to national security issues General Nuclear (CGN). The new requirements will be introduced  The new rules will need to strategic partnership between EDF to require developers or operators of comply with EU and WTO and CGN, which also covers two nuclear sites to provide notice of rules, as well as any trade further nuclear power stations, changes of ownership to the Office for agreements which the UK Sizewell C and Bradwell B, was Nuclear Regulation (ONR). may enter into in future  announced by the previous UK Prime These new arrangements appear to A formal consultation on the Minister, David Cameron, and place multiple overlapping approval proposed changes is requirements on developers of new expected in early 2017.

2 UK to introduce foreign investment rules for critical infrastructure

infrastructure are as yet unclear. strategic partnership, this has been . three intervention notices on done on the basis of competition media plurality grounds2 and Dawn of a new industrial considerations. . one intervention notice in the strategy? This approach has been strongly interest of maintaining the The UK Government has stated that supported by the UK Competition and stability of the UK financial the planned changes will bring the Markets Authority (CMA), which has system.3 UK's rules on the ownership and argued that the foundations of a The majority of intervention notices in control of critical infrastructure into sound merger control regime consist public interest cases have, therefore, line with other major economies. of a rules-based system that: been issued in respect of national It is not yet clear how far ranging the . provides legal certainty, security considerations. In most of changes will be in practice. The these cases, the SoS was advised by . limits itself to minimal, Government already has the power to the Ministry of Defence and the economically justified distortions, intervene in merger cases on national acquirer was required to give and security grounds, however, this power undertakings to maintain the UK's has to date only been used in . inspires business confidence. strategic capabilities in certain areas mergers involving defence companies. and to protect classified information The Government has golden shares Existing powers to and the intellectual property rights of in a number of companies active in intervene in mergers the Ministry of Defence. the nuclear, defence and The UK Government already has There is also a foreign ownership infrastructure sectors. powers to intervene in mergers on component to the media public It is also unclear whether the new specified public interest grounds. The interest test. The SoS has previously arrangements will be limited to Government has also maintained reserved the right to intervene in national security issues. The new special shares in a number of cases where media ownership rules Prime Minister has previously companies. were removed by the suggested that the UK should have a Intervention notices under the Communications Act 2003. These "clear industrial strategy" which would Enterprise Act 2002 include mergers involving owners not automatically stop the sale of from outside the EEA. To date, these British firms to foreign ones, but The Secretary of State (SoS) has the rules have not been used. would provide the UK Government power under the Enterprise Act 2002 The SoS has the power to add new with powers to step in to "defend a to issue an intervention notice in public interest considerations to the sector" that is strategically important cases raising certain specified public list by order. For example, in the to the UK. interest issues, namely, context of the proposed acquisition of . An expansion of foreign investment national security AstraZeneca by Pfizer in May 2014, rules beyond national security issues . newspaper public interest issues the Government explored whether the would be a significant departure from (e.g. plurality) public interest grounds could be current merger policy, creating expanded to include the impact on . uncertainty for business and potential broadcasting and cross-media conflict with EU law. public interest issues . At the EU level, the European the stability of the UK financial Commission assesses mergers solely system. on competition grounds and has To date the SoS has issued: 2004, Finmeccania/ BAE Systems 2005, consistently rejected calls for it to take Lockheed Martin UK Holdings . six intervention notices based on Limited/Insys Group Limited 2005, account of industrial policy or other 1 non-competition considerations. national security grounds General Electric/Smiths Aerospace Division 2007, and Atlas While the Commission has carefully Elektronik/QinetiQ 2009 scrutinised Chinese investments in 2 BSkyB/ITV 2007, Global/GMG Radio 1 the EU, including the CGN / EDF Alvis Plc/General Dynamics Corporation. 2012, Newscorp/BskyB 2010 2004, Finmeccanica/AgustaWestland 3 Lloyds/HBOS, 2008

UK to introduce foreign investment rules for critical infrastructure 3

research and development in the UK. binding undertakings or to make voluntary winding-up. In addition to Ultimately no decision was taken, as statements of intention to address the nuclear power sector, golden the transaction did not proceed. potential public interest concerns. shares are held by the UK Government in a small number of It is likely that the Government will Bidders may give post-offer companies active in the defence or implement the new rules on foreign undertakings, which are commitments infrastructure sectors, such as BAE, ownership of critical infrastructure to take (or not take) certain action in a Rolls-Royce and NATS. through an expansion of the public specified period of time given under interest considerations under the Rule 19.7 of the Takeover Code. The EU Courts have considered Enterprise Act 2002. It is, as yet Alternatively bidders may make post- golden shares to be: (i) a restriction unclear how the new public interest offer intention statements, which on the principle of free movement of test will be defined and which specify actions that the party intends capital; and (ii) justifiable only on the government department will advise to take (or not take) under Rule 19.8 grounds of public security or public the SoS on national security issues in of the Takeover Code. policy (such as continuity of supply of relation to critical infrastructure. services in the public interest or These provisions have been used to strategic services), or overriding The UK Government has in the past address potential public interest requirements relating to the general been reluctant to issue guidance on concerns arising from the Softbank interest. A golden share will not be how it will assess national security acquisition of ARM Holdings, the first considered to be justified unless it is a concerns. This is likely to be a major foreign takeover transaction proportionate way to protect the particularly sensitive issue, given the since the Brexit referendum. relevant interest and the measures Government's desire to enter into new In July 2016, Softbank announced its prescribed are based on precise trade agreements with countries intention to acquire ARM Holdings by criteria which are known in advance, outside the EU. way of a scheme of arrangement. are open to review by the Courts and The Industry Act 1975 – relic of a Under the terms of that scheme, cannot be attained by less restrictive bygone era? Softbank made post-offer measures. undertakings to: In addition, the SoS also has the A potential source of power under the Industry Act 1975 to . double the total number of UK make an order prohibiting a change of employees within 5 years; conflict with the EU? control of an important manufacturing Given the powers already available to . increase the total number of non- undertaking where it would be the SoS to intervene in foreign UK employees within 5 years; contrary to the interests of the UK. A takeovers and the historical prohibition order takes effect . maintain ARM's global reluctance of the UK Government to immediately but expires after 28 days headquarters in Cambridge; and exercise these powers, a real unless subsequently approved by a question is whether the . maintain the number of technical resolution of both houses of announcement heralds a shift in and non-technical employees. Parliament. government policy towards foreign While this power was introduced by In addition, Softbank made a number investment. of statements as to its post-offer the Wilson Government at a time The Government has been at pains to intentions. The Softbank bid has when the UK sought to pursue an point out that "the UK will remain one been welcomed by the Government active industrial strategy, it has never of the most open economies in the on this basis. been relied upon to block an world" but has sought to provide acquisition of a UK business. Golden share arrangements reassurance to the public that foreign Recent reforms to the Takeover A golden share is commonly a single direct investment "works in the Code special rights redeemable preference country’s best interests". It is, as yet share in a company held by a unclear how this will be objectively Following recent reforms to the assessed. Takeover Code, bidders in public government minister, whose consent transactions have the ability to give is required for, among other things, While the UK remains part of the EU, material disposals, share issues or a foreign investors will be able to take a

4 UK to introduce foreign investment rules for critical infrastructure

significant degree of comfort from the While there is currently no multilateral investor of the other party, by reason fact that EU law restricts the UK's agreement on competition in the WTO of nationality, to sell or otherwise ability to limit free movement of and merger control rules are only dispose of an investment existing at capital and foreign direct investment, dealt with briefly (if at all) in most the time the measure or series of both from other EU countries, but also FTAs, there are a range of other measures become effective. countries outside the EU. provisions which limit the ability of The UK Government will, therefore, governments to discriminate against However, while EU law imposes be expected to offer investment foreign investors. significant constraints on the ability of protection provisions in the FTAs it EU member states to adopt foreign For example, market access negotiates following the UK exit from investment rules, it does not preclude commitments in FTAs will typically the EU. As such, the Government's it. cover the rights of businesses to aim of becoming a "global leader in establish a presence in the other free trade" will place important limits In particular, EU member states may country. These commitments are, on its ability to control foreign direct adopt and maintain such rules however, generally limited in scope. investment coming into the UK. provided that they do not: Commitments on establishment may . impinge on the EU's exclusive Conclusions (depending on the FTA) include: competence in the areas of Given the broad range of powers foreign direct investment and . the removal of certain limitations already available to the UK competition or on the participation of foreign Government and the sparing use of capital, . contravene the rules on freedom such powers, it is unclear whether this of establishment or free . the right to establish or expand a announcement marks a major change movement of capital. commercial presence within the in UK government policy on foreign territory of the other party, ownership. Further details will In addition, such rules may not be including through the acquisition become available when the applied in a manner which would of existing enterprises, Government publishes its review of infringe the Treaties or, where it the public interest regime in the applies, the EU Merger Regulation. . national treatment obligations for Enterprise Act 2002. We understand establishments and investors. As such, there are a number of EU that a formal consultation on the countries (e.g. Germany, France, These obligations generally apply to proposed changes is expected in Austria and Italy) which have specific specific sectors and are subject to early 2017. rules governing foreign investment, qualifications. Under the proposed particularly in cases related to EU-Canada trade agreement, for national security. example, Canada will continue to apply its foreign investment rules to Author The impact of future trade EU investors, albeit with more relaxed agreements? thresholds. In introducing new foreign investment Modern FTAs contain investment rules the UK Government will need to protection provisions which provide consider WTO rules and other additional protection to investors, international treaties which apply to particularly where they are the UK, such as the Energy Charter accompanied by provisions for Treaty and bilateral investment investor-state dispute settlement. treaties. It will also need to consider In addition to provisions on the likely terms of any future trade Jenine Hulsmann expropriation, investment protection agreements (FTAs) it enters into with Partner, London provisions may restrict the ability of a the EU and other countries. T: +44 20 7006 8216 government to adopt measures which E: jenine.hulsmann require, directly or indirectly an @cliffordchance.com

UK to introduce foreign investment rules for critical infrastructure 5

Global Antitrust Contacts

Chair: Thomas Vinje Indonesia Spain Linda Widyati Miguel Odriozola Australia +62 212988 8301 +34 91 590 9460 [email protected] Dave Poddar [email protected] +61 28922 8033 [email protected] Italy Miquel Montañá Luciano Di Via +34 93 344 2223 Belgium +39 064229 1265 [email protected] [email protected] Tony Reeves +32 2 533 5943 Thailand [email protected] Japan Andrew Matthews Masafumi Shikakura +66 2 401 8800 Dieter Paemen +81 3 5561 6323 [email protected] +32 2533 5012 [email protected] [email protected] Turkey Morocco Itir Çiftçi Thomas Vinje Franck Coudert +90 212339 0077 +32 2 533 5929 +212 52013 2082 [email protected] [email protected] [email protected] United Arab Emirates China The Netherlands Mike Taylor Richard Blewett Frances Dethmers +971 43620 638 +32 2 533 5043 +86 10 6535 2261 [email protected] [email protected] richard.blewett @cliffordchance.com United Kingdom Yong Bai Poland Alex Nourry +86 10 6535 2286 Iwona Terlecka +44 20 7006 8001 [email protected] +48 22 429 9410 [email protected] [email protected] Czech Republic Jenine Hulsmann Alex Cook Romania +44 20 7006 8216 +420 222 555 212 Nadia Badea [email protected] [email protected] +40 21 66 66 100 [email protected] Elizabeth Morony France +44 20 7006 8128 Patrick Hubert Russia [email protected] +33 1 4405 5371 Torsten Syrbe [email protected] +7 495 725 6400 Greg Olsen [email protected] +44 20 7006 2327 Michel Petite [email protected] +33 1 4405 5244 Saudi Arabia [email protected] Omar Rashid Matthew Scully +966 11481 9720 +44 20 7006 1468 Germany [email protected] [email protected] Joachim Schütze +49 211 43555547 Singapore Luke Tolaini +44 20 7006 4666 [email protected] Harpreet Singh +65 6661 2028 [email protected] Marc Besen [email protected] United States +49 211 43555312 Timothy Cornell [email protected] Nish Shetty +65 6410 2285 +1 202 912 5220 [email protected] Hong Kong [email protected]

Emma Davies Robert Houck Valerie Kong +1 212878 3224 +852 2825 8828 +65 6410 2271 [email protected] [email protected] [email protected]

Angie Ng +852 2826 3403 [email protected]

This publication does not necessarily deal with every important topic Clifford Chance, 10 Upper Bank Street, London, E14 5JJ

or cover every aspect of the topics with which it deals. It is not © Clifford Chance 2016 designed to provide legal or other advice. Clifford Chance LLP is a limited liability partnership registered in England and Wales under number OC323571 Registered office: 10 Upper Bank Street, London, E14 5JJ

We use the word 'partner' to refer to a member of Clifford Chance LLP, or an employee or consultant with equivalent standing and qualifications www.cliffordchance.com If you do not wish to receive further information from Clifford Chance about events or legal developments which we believe may be of interest to you, please either send an email to [email protected] or by post at Clifford Chance LLP, 10 Upper Bank Street, Canary Wharf, London E14 5JJ Abu Dhabi ■ Amsterdam ■ Bangkok ■ Barcelona ■ Beijing ■ Brussels ■ Bucharest ■ Casablanca ■ Doha ■ Dubai ■ Düsseldorf ■ Frankfurt ■ Hong Kong ■ Istanbul ■ Jakarta* ■ London ■ Luxembourg ■ Madrid ■ Milan ■ Moscow ■ Munich ■ New York ■ Paris ■ Perth ■ Prague ■ Riyadh ■ Rome ■ São Paulo ■ Seoul ■ Shanghai ■ Singapore ■ Sydney ■ Tokyo ■ Warsaw ■ Washington, D.C.

*Linda Widyati & Partners in association with Clifford Chance. Clifford Chance has a best friends relationship with Redcliffe Partners in Ukraine.