Government plans to tighten M&A rules sends out the wrong message

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By Fraser Collingham on

Isn’t the UK meant to be open and ready for business post-Brexit?

The government has proposed new plans to restrict inbound M&A activity. In the interests of national security, the business and energy secretary, Greg Clark, has set out plans targeting businesses in the advanced technology sector, specifically those involved in designing and manufacturing military and dual use products.

At present, the Enterprise Act 2002 allows the government to intervene in takeovers on “exceptional public interest” grounds. The government can block a deal if a business has a UK turnover of more than £70m, or if the UK market share of the merged product would be 25% or more. The proposals would vastly reduce this to a mere £1m, and remove the market share requirement.

Clark said that:

“Britain has always had a proud record of being open to the world as the foremost advocate of free trade. No part of the economy is off-limits to foreign investment and the UK will continue to be a vociferous advocate for free trade and a magnet for global talent.”

The government is wary that having ownership of critical businesses or infrastructure could open the UK up to the risk of espionage, sabotage or leverage, the green paper states.

This protectionist attitude was also seen in the Prime Minister’s reluctance to allow China to invest in Hinkley Point, and when she questioned the Kraft acquisition of Cadbury. It seems that politics and public perception of deals can affect whether they are given the green light (see the AstraZeneca/Pfizer failed deal).

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These proposals, if they become law, could seriously discourage foreign investors from entering into deals with British businesses.

At present, the proposals are vague so there is the concern that the rules could be used by government to halt any deal they don’t like the look of. Foreign companies will not want to invest huge sums of money, only to have their deal cancelled by the UK government.

Even if there is no major impact from the proposals, as Angus Coulter, a partner at Hogan Lovells pointed out, these protectionist new rules are at odds with the ‘UK open for business’ stance the government is trying so hard to convey. Other corporate lawyers echoed the same concerns. Alex Kay, an M&A partner at Herbert Smith Freehills, was concerned that the proposals “could be seen as a deterrent by certain overseas acquirers”.

Nigel Parr, a partner at Ashurst, said that the proposals mean that investment from “certain countries will be looked at much more closely” and will “increase uncertainty and a lack of predictability” as well as raise doubts over transparency.

While it’s right to regulate foreign investment and takeovers to an extent, we already have a Takeover Panel and a public interest test, as well as the Competition and Markets Authority. The UK has a strong history of inbound and outbound M&A activity, is a prime location for business, and right now the weak sterling makes UK assets cheap for foreign buyers. Low interest rates also make deals cheaper and UK companies more attractive.

However, the government’s attitude could lead to companies moving their business away from the UK, a reduction in inbound M&A activity, and Britain’s reputation as a free market economy being tarnished.

National security is of the utmost concern, but at this critical time, where the UK is actively seeking new trade deals and to attract business, these proposals are sending the wrong message to the rest of the world.

Fraser Collingham is a University of Nottingham law graduate and future trainee.

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