News / 04.01.2022

New foreign direct investment regime in the UK: what foreign investors need to know

Author(s) Simen Klevstrand & Karoline Narvestad Maurtvedt

On 4 January 2022, the UK’s new foreign direct investment regime entered into force. The mandatory filing rules set out in the National Security and Investment Act 2021 (“NSI Act”) may apply not only to investments in UK companies but also in non-UK businesses.

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The UK follows the global trend towards closer oversight and scrutiny of foreign investments and acquisitions. The national security provisions of the Enterprise Act 2002 provided the government with quite limited powers to intervene on the grounds of national security. The introduction of the NSI Act is intended to broaden and modernize the government’s powers, as well as to bring them into line with recent developments in other countries.

Unlike the old regime, there are no financial thresholds for notification and no exemptions for de minimis transactions. Instead, the government has a broad power to scrutinize acquisitions of control over entities or assets where there is or could be a potential risk to national security. An extensive call-in power has also been introduced in order to catch unnotified transactions.

The broad nature of the new regime makes it likely to affect a large number of transactions. Indeed, the government’s impact assessment estimated that up to 1830 transactions will be notified and up to 95 transactions will be called in, every year.[1] It is the newly established Investment Security Unit (“ISU”), sitting within the Department for Business, Energy and Industrial Strategy (“BEIS”), that will carry out the reviews.

Parties to a transaction that are unsure about the potential national security implications are invited to submit voluntary notifications in order to increase legal certainty. The ISU has indicated a willingness to help parties get to grips with the new regime and stated that advice will generally be provided within 30 days after receiving a request.

The following guide introduces the new regime by setting out questions and elements investors should consider during the transaction process.

[1] NSI Impact Assessment (publishing.service.gov.uk)

1. Early stages and due diligence: determining whether or not to notify the transaction

Show more 1. Early stages and due diligence: determining whether or not to notify the transaction

2. Review process and standstill

Show more 2. Review process and standstill

3. Call-in powers and non-compliance

Show more 3. Call-in powers and non-compliance

Implications in practice

The NSI Act introduces a much more comprehensive regime that will affect that way in which transactions are carried out. Some implications that parties to M&A transactions should be aware of are:

  • The potentially extra-territorial scope of the law. Foreign investors should pay particular attention to the fact that a transaction taking place outside of the UK may nevertheless be subject to the mandatory notification requirement if the target supplies goods or services to the UK or if the target asset is used in connection with activities in or to the UK.
  • Impact on the transaction timeline. The need to consider FDI filing in the UK and potentially submit a mandatory or voluntary notification may affect the timeline of the transaction process.
  • FDI filing analysis to be carried out at an early stage. Any target entity’s subsidiaries and sales, as well as any target asset’s connections, must be mapped out during the early stages of planning the transaction in order to determine whether the UK has jurisdiction.
  • Minority acquisitions. The new regime covers all transactions where the investors acquire control of a qualifying entity or asset, meaning that stakes of less than 25% might be sufficient to trigger mandatory filing. Smaller transactions are no longer protected by financial thresholds or de minimis exemptions.
  • Structured sales processes. A vendor preparing the sale of a business which falls within one of the 17 specified sectors should consider at an early stage whether any of the bidders could face national security concerns. Although outright prohibitions or conditional clearances are likely to be rare, buyers from certain countries may be more likely to face a call-in order or an extended review process.