Wednesday, December 2, 2020
Politics

Foreign direct investment – The law on foreign takeovers is being tightened | Britain

Foreign direct investment - The law on foreign takeovers is being tightened | Britain
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IN SEPTEMBER 2016, Theresa May approved a plan allowing a state-owned Chinese company to take a minority stake in a project to build Hinkley Point nuclear power station, but her government was uncomfortable with the decision. It carried out a review of its power to control foreign investments from a national-security standpoint, and found it wanting.

On November 11th Boris Johnson’s government introduced legislation stemming from that review process to Parliament. The bill would require companies to tell the government about any planned transactions within 17 areas of the economy, focused on technology, including categories as broad as “computing hardware”, “artificial intelligence” and “data infrastructure”. The government will also have the power to unwind any transaction completed within the last five years if it deems that transaction to be a matter of “national security”.

Chinese investment is the principal concern. Britain’s new rules look very similar to America’s Foreign Investment Risk Review Modernisation Act (FIRRMA), passed in 2018. Both rely on the application of the rather loose term, “national security”, and have sweeping remits over broad categories of technologies. Chinese inbound investment to the United States has plunged in the two years since FIRRMA was passed. Australia, France and Germany all have similar laws.

Although Alok Sharma, the business secretary, says that the new legislation will ensure that Britain remains attractive to foreign capital, problems loom. The biggest is an open question over the extent to which the law would give the government control over any economic activity involving the flow of data, which underpins most of the 17 categories targeted.

It is unclear whether deals like Ctrip’s £1.4bn purchase in 2016 of Skyscanner, a flight-booking service based in Edinburgh, would be caught. James Palmer of Herbert Smith Freehills, a London law firm thinks that they would. The proposed purchase of a stake in Nanopore, a genetic-sequencing company based in Oxford, by Tencent, a Chinese messaging and gaming app, is now in question.

If the government insists on reviewing all foreign transactions involving data flows, that would discourage firms from basing themselves in Britain. Why would a tech startup subject its future, and any potential sale, to the national-security determinations of the British government when it could just as easily set up shop in freer jurisdictions in Ireland or the Netherlands? The American government has defined national security so broadly that both a New York Times story on spying and Joe Biden’s criticisms of immigration policy fall into it. If Britain were to follow the same path it would bode ill for foreign investment.

The government has set up an Investment Security Unit which will be the first port of call for notifications when the bill becomes law. Corporate lawyers are in the business of reducing risk, and so will notify it when there is any doubt. At present, there is plenty of it. Foreign control of vital technologies is a serious issue, with genuine national-security risks. But the government must be sure that the damage it does the tech sector in dealing with them does not outweigh the benefits.

This article appeared in the Britain section of the print edition under the headline “For your protection”

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