The UK Government has announced reforms to its approach to the ownership and control of critical infrastructure to ensure that the full implications of foreign ownership are scrutinised for the purposes of national security.
While the announcement was made in the context of giving the go-ahead for the Hinkley Point C new nuclear project, it has wider implications for investments in UK infrastructure.
Details of the reforms are scarce. But crucially they will include the introduction of a "cross-cutting national security requirement for continuing Government approval of the ownership and control of critical infrastructure". This statement warrants closer analysis:
- It refers to the need for continuing Government approval. That implies more than a one-off approval process triggered by the acquisition of ownership or control. It suggests that the Government may revoke its approval in the event that it considers that control of critical infrastructure by a particular entity is no longer consistent with the national interest. Withdrawal of national security approval would presumably be associated with, at a minimum, a prohibition on exercising control rights and possibly even mandatory divestment.
- The new national security requirement relates to critical infrastructure. The Government has said that this includes nuclear energy but has not otherwise expanded on what comprises critical infrastructure. As well as pipes, wires and telecoms networks, it might conceivably include upstream oil and gas production and non-nuclear generation. Transport infrastructure and operations might also be included.
- The new requirement appears exclusively concerned with national security rather than broader public interest considerations. It is not therefore a vehicle for addressing the wider industrial strategy concerns raised by Theresa May shortly before her appointment as Prime Minister. In a speech on 11 July 2016 she referred to the abortive acquisition of AstraZeneca by Pfizer and noted that a proper industrial strategy would not automatically stop the sale of British firms to foreign ones, but it should be capable of stepping in to defend a sector that is as important as pharmaceuticals is to Britain. There may be greater scope for such an industrial strategy post-Brexit.
- The requirement relates to ownership and control. A key question will be at what level of control the new requirement is triggered. Will it be based on majority control or will a lesser degree of control be sufficient? If the latter, the Government might adopt the relatively low threshold applied in UK merger control ("an ability materially to influence policy", which in some circumstances can be triggered by voting rights of 15% or less). Alternatively, it might consider that a higher – and more clear-cut – threshold is appropriate (e.g. 30% of voting rights).
- The reference to a cross-cutting requirement appears intended to emphasise that it will override any existing consents or approvals. In this context, it is relevant that the reforms announced today include a review of the existing public interest regime in the Enterprise Act, which already permits the UK Government to intervene on national security grounds. The intention may simply be to avoid an overlap or duplication between the proposed new national security requirement and the existing public interest regime in the Enterprise Act.
It follows that much remains uncertain about the nature and scope of this new national security requirement. The Government will be under pressure to clarify its position at an early stage in order to minimise any potentially negative impact of this policy development on transactions in the infrastructure sector.
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© Herbert Smith Freehills 2020