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Coronavirus sparks a new wave of foreign direct investment review powers
Published by linker 5
Posted on August 3, 2020
8 min readLast updated: January 21, 2026
Global Banking and Finance Review
Company
Published by linker 5
Posted on August 3, 2020
8 min readLast updated: January 21, 2026
By Marc Israel, partner and Kate Kelliher an associate at global law firm White & Case
In the wake of the coronavirus outbreak, governments across the world have seen the pandemic as a reason to review, and in many cases strengthen, the circumstances in which they will intervene in instances where ‘foreign’ entities are seeking to invest in critical domestic industries. Countries across Europe have tightened up their rules, as have many other jurisdictions including Australia and India. The European Commission has urged Member States “in a time of public health crisis and related economic vulnerability” to carefully assess foreign investment to protect the EU’s critical assets and technologies from potential hostile takeovers. The cited aim is to “preserve EU companies and critical assets, notably in areas such as health, medical research, biotechnology and infrastructures that are essential for our security and public order”.
Coronavirus-critical companies in the UK
In the United Kingdom, the government has expanded the existing regime that gives it the option to intervene in mergers that are important for public interest considerations. Pre-pandemic, the Enterprise Act 2002 already allowed the UK government to review mergers based on certain “public interest” considerations, namely national security, media plurality and financial stability. In recognition, however, that the COVID-19 outbreak has left many companies in a vulnerable position, the UK government added a fourth category to this list – the ability to combat and mitigate a public health emergency.
This amendment allows the UK government to intervene in foreign (or domestic) investments being made into businesses that are directly involved in the coronavirus response. This expansion of the circumstances in which the UK government can intervene in deals is to allay concerns that resources that may be pivotal to responding to the pandemic could find their output diverted to mitigation strategies outside the UK, or to action by entities linked to hostile states to undermine the UK’s response to the outbreak. Examples include vaccine research and development or production, personal protective equipment manufacturing, or food supply chain. The need for these new powers to protect the national interest concerning coronavirus-critical companies is two-fold. First, a recognition that liquidity shortages arising from the economic impacts of the virus have made a myriad of companies vulnerable to potential takeover. Secondly, a recognition that such companies are critical to responding to the pandemic and helping to spur economic recovery.
When one of the four public interest considerations is invoked, the UK government has the final word on whether the deal can go ahead, and if so, whether any conditions are needed (e.g. to keep manufacturing or R&D facilities in the UK).
Commenting on the new measures Secretary of State for Business, Alok Sharma said:
“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.
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.”
Introducing new “public interest” measures in response to a crisis is not new. In fact, the addition of financial stability as a relevant public interest was introduced as a result of the global financial crisis in 2008 and was the basis on which the UK government approved the takeover of HBOS by Lloyds (despite the UK’s Competition and Markets Authority finding that the transaction would be harmful to competition).
New national security measures
COVID-19 has also exposed some geo-political fault lines, heightening awareness of potential vulnerabilities in supply chains and technological dependencies. As the world becomes more polarised, (see, for example, the UK’s recent actions to reverse the decision to allow Huawei to supply parts of the UK’s 5G network and comments about Russian influence in Britain), the UK Government has also proposed expanding the scope of activities that can be subject to intervention in mergers on national security grounds.
Therefore, as well as expanding the scope of the public interest considerations to include the protection of public health, the UK government is also proposing to expand the list of activities that may be considered to present national security concerns. This follows changes in June 2018, under which the thresholds for intervention in mergers on national security grounds were lowered for target companies active in the development or production of military or dual use goods, the design and maintenance of computing hardware, and the development or production of quantum technology.
The new changes propose to expand this list of activities to which the lower thresholds apply to include artificial intelligence, advanced materials and cryptographic authentication. Under these lower thresholds, the government is able to intervene in cases where the target is active in these specific activities if the target had UK turnover of only £1 million in its last financial year (instead of £70 million), or alone accounts for over 25% share of supply of any goods or services in the UK (instead of both parties having to overlap and have a combined share of supply of 25%). These rules allow the government to intervene more easily in cases that it considers most likely to raise concerns and notable for their heavy technology focus.
The latest proposed changes to the Enterprise Act 2002 are only interim changes ahead of the adoption of the new National Security and Investment Bill (“NSIB”), due to be presented before Parliament later this summer. These proposals were first mooted in 2017 but have not been progressed (partly as the government had more pressing issues to address such as Brexit), but are expected to introduce a comprehensive new foreign direct investment (“FDI”) control regime in the UK. Whereas the Enterprise Act’s powers rely on turnover and market share thresholds (as described above) and apply only if a transaction is caught under the UK merger control rules, the NSIB is expected to create a standalone FDI review regime based on a target’s business activities or the purchaser’s identity without reference to the merger control regime.
Once in force, the government is expected to use these powers much more often than has been the case to date. Even though the existing powers are already quite extensive, they have only been used on average less than once a year. In fact, since the Enterprise Act came into force in 2003, the government has only intervened in mergers on national security grounds twelve times (three in the last year) and no transaction has ever been blocked, although conditions have been imposed in some cases.
However, under the new legislative proposals the government has said that it expects to conduct around 100 detailed reviews each year, of which around half may be expected to result in some sort of remedy (or possibly even prohibition). This suggests that transactions will be subject to greater scrutiny and that parties (especially acquirers from jurisdictions perceived as hostile to the UK) will need to plan for a possible FDI assessment, especially if the target is active in a sector covered by the new public health protection category, or the technology fields covered by the recent (and proposed) additions to the national security activities of interest. Similarly, financial sponsors of targets in these areas will need to be aware of the potential implications when investing and thinking ahead to identifying possible counterparties when they consider future exits.
Strengthening FDI: a global trend
These new measures are part of a general trend towards stricter foreign direct investment scrutiny around the world. This has escalated in the wake of the COVID-19 outbreak to ensure that governments can protect key industries and ensure that the debilitating impact of the virus on business operations does not enable foreign investors to ‘snap up’ companies weakened by the pandemic.
Other jurisdictions that have expanded their foreign direct investment review powers to tackle the impacts of COVID-19 include France, Germany, Hungary, Italy, and Poland amongst others. In the EU, it is notable, if not surprising, that national security issues remain under the jurisdiction of Member States and not the European Commission. Therefore, to try and ensure a more consistent and holistic approach to FDI assessments, a new FDI Screening Regulation comes into effect in October 2020.
Under this Regulation, Member States have to coordinate their FDI assessments more closely and notify each other and the European Commission when they are conducting an FDI assessment. The Regulation also allows the European Commission to issue opinions when an investment poses a threat to the security or public order, and whilst the ultimate decision will rest with the Member State(s) concerned, they will need to give “due consideration” to the European Commission’s opinion. In practice therefore, Member States are likely to need good reasons to reach a decision which is not consistent with the European Commission’s opinion.
In this publication, White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.
This publication is prepared for the general information of our clients and other interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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