Q&A
There are no restrictions specifically targeting Chinese FDI into the UK companies. The provisions of the new UK National Security and Investment Act 2021 are drafted in a neutral fashion. For a brief overview of the sectors covered by the new UK National Security and Investment Act 2021, see my post here.
In November 2020, the UK Government set up a new Office for Investment to encourage FDI in certain sectors and regions. Foreign investors which align their investment with these encouragements should at least be welcome from an economic perspective. Of course that does not mean the security angle will be overlooked.
The UK Government has stated that national security risks are most likely to arise when acquirers are hostile to the UK’s national security, or when they owe allegiance to hostile states or organisations.
According to a recent policy statement, when considering the acquirer risk, the Secretary of State will consider the entity’s affiliations to hostile parties, rather than the existence of a relationship with foreign states in principle, or their nationality.
A foreign investor who wants to understand the UK’s global priorities should read the UK’s recent report “Global Britain in a competitive age – The Integrated Review of Security, Defence, Development and Foreign Policy”. The report categorises China as systemic competitor rather than a hostile state (like Russia).
Chinese bidders for UK listed companies who need Chinese regulatory clearances (e.g. from MOFCOM or NDRC) should be aware that these conditions may not be permissible under the Takeover Code.
China has been designated as a systemic competitor by the UK Government in its recently published policy paper “Global Britain in a competitive age The Integrated Review of Security, Defence, Development and Foreign Policy.”
The UK approach to Chinese FDI into the UK will be shaped by the general policy of the UK Government towards what constitutes national security risk and how that may be assessed due to China being designated a systemic competitor.
On page 26 of the Integrated Review, the UK Government states that “Open, trading economies like the UK will need to engage with China and remain open to Chinese trade and investment, but they must also protect themselves against practices that have an adverse effect on prosperity and security. Cooperation with China will also be vital in tackling transnational challenges, particularly climate change and biodiversity loss.”
Accordingly, although there are no specific restrictions on Chinese FDI into the UK and the UK has stated that it is open to Chinese investment, recent interventions by the UK Government suggest that Chinese acquirors will be carefully scrutinised if the transactions involve technology or critical infrastructure. Undertakings may be required as a condition of allowing investment.
Examples of recent Chinese FDI into the UK which have been scrutinised, approved or blocked (under the current rules) include:
- Huawei’s involvement in manufacturing components for Britain’s 5G networks being curtailed.
- Government intervention to prevent creeping board control by Canyon Bridge/China Reform Holdings of UK semiconductor chipmaker Imagination Technologies. Following this intervention Imagination withdrew proposals to appoint new directors from China Reform.
- China-based Hytera Communications Corporation being required to give undertakings to get clearance for acquiring Sepura (which operated telecoms systems used by the UK emergency services). Amongst other matters, the undertaking required British citizens with security clearance being appointed to key positions and assurances regarding the protection of sensitive information and technology.
- Sale of Northern Aerospace to Gardner Aerospace (a subsidiary of Shaanxi Ligeance Mineral Resources) which was eventually cleared after investigation.
- CGNPC’s clearance to acquire 33% of Hinkley Point C (a civil nuclear new build) from EDF on condition that EDF confirm in writing that it would not to sell down its voting rights below the majority level (>50%) and to acknowledge that any such sell down would require the consent of the UK Government during construction
Takeover offers by Chinese bidders
A Chinese company (esp. a state-owned enterprise) will generally require Chinese outbound regulatory approvals (e.g. from MOFCOM, NDRC or SAFE) to make a significant overseas investment.
The UK Takeover Panel regards conditions to satisfy these types of approvals as being tantamount to a condition, the “fulfilment of which is in the hands of the directors” – which is not permitted under Rule 13.1 of the Takeover Code. The Panel takes this approach because it considers that such a bidder who no longer wishes to proceed with the offer could engineer a situation where their host government withholds consent, e.g. if a material adverse change has arisen which would not meet the Panel material significance test to invoke a condition and lapse the offer.
Because of this, the UK Takeover Panel takes the view that a Chinese bidder should not make a firm offer announcement under Rule 2.7 if it needs these types of consents. That can cause an issue for a Chinese bidder as it will often need to produce a written contract to seek the Chinese regulatory approvals. In practice, a Chinese bidder will probably have to make a pre-conditional possible offer announcement under Rule 2.5. This type of announcement requires Panel consent and will then trigger a 28-day PUSU period to get all the Chinese approvals and make a fully financed offer. This makes it practically impossible for a Chinese bidder to make a hostile takeover offer for a UK listed company. Even if the Chinese bidder can secure a recommendation, the bidder will still need Panel consent (and target support) to extend the PUSU period beyond 28 days if more time is needed for such consents (which will almost certainly be the case). A Chinese bidder could also use this extended pre-bid period to get any UK FDI approvals.
For more information on the 2021 Takeover Code changes and how these affect offer conditions relating to other material official authorisations or regulatory clearances, please see my post here.
