Unlock the Editor’s Digest for free

The UK’s investment screening powers are to be pared back to make them “more business friendly”, the deputy prime minister has said, less than two years after they were introduced.

Oliver Dowden will launch a review this week aimed at “narrowing and refining” the National Security and Investment Act, which allows the government to scrutinise and ultimately block takeovers.

In an interview with the Financial Times, Dowden said he wanted to ensure “government regulation keeps up with the dynamism of the private sector” and that the state applies “as little regulatory burden as necessary”.

The government’s position has shifted from a laissez-faire approach that led it in 2016 to celebrate the acquisition of Britain’s biggest tech company, Arm, by Japan’s SoftBank to adding the new screening powers in January last year, to now relaxing them.

“We can’t have yesterday’s regulation for tomorrow’s world,” said Dowden.

It is the second time in a month that the government has signalled it will water down its own corporate rules, having taken the rare step of ditching governance legislation after it had been laid before parliament.

The UK brought in the new screening powers in January 2022 to address security concerns that overseas powers such as China were too easily able to buy UK companies with national significance in technology and other industries. 

Last year ministers used the act to block the sale of Newport Wafer Fab — one of Britain’s few semiconductor companies — to Chinese-owned Nexperia despite questions over how significant the Welsh business was to the industry. 

The proposed merger of the UK businesses of Vodafone and CK Hutchison Holdings — a Hong Kong-based group — will also attract scrutiny under the act.

The government is also facing a legal challenge to its use of the act to retrospectively block the acquisition of broadband business Upp by LetterOne, the investment group backed by sanctions-hit Russian oligarchs.

Companies considering British deals, and their advisers, have criticised the legislation as being opaque and excessively broad; they argue it has contributed to the slowdown in UK M&A.

It enforces the mandatory notification of proposed acquisitions — by any entity, from any country, including the UK — in 17 sensitive areas of the economy, spanning defence, quantum technologies, civil nuclear and synthetic biology.

Peter Lu, a partner at law firm McDermott Will & Emery, said: “Narrowing and refining the scope of the NSIA will reduce the burden it places on investors and promote a more open and transparent frame under which advisers can give more definitive advice to their clients. Legal certainty is one of the main attractions for investment.”

As Chancellor for the Duchy of Lancaster, Dowden is the legal decision maker under the Act, advised by the investment security unit that sits within the Cabinet Office.

In the latest audited year, the government was notified of 866 acquisitions, of which 65 were subject to further assessment and 14 were subject to final orders from Dowden intervening on specific deals, 40 per cent of which involved companies or investors from China.

He will propose removing internal restructures from the regime. “Ultimately the beneficial owner [of the company] remains the same, so I’m looking at whether to take those out of scope of the regulation,” he said.

He is also set to shrink the scope of the legislation by reviewing which areas of the economy are subject to the notification regime.

At present all deals involving artificial intelligence are covered by the Act. Dowden will look at narrowing this remit. “AI is becoming ubiquitous across the entire economy. An awful lot of that is going to have very little national security implications,” he said.

He will look instead at focusing the regulations on certain “high-end” AI that may have a military “dual use”, or AI technologies that could be purchased by an entity to “enhance an adversary’s capabilities or diminish ours”.

The deputy prime minister also intends to bring greater clarity, including making semiconductors and critical minerals standalone categories in the list of sensitive areas of the economy that are subject to the regulation. At present they are subcategories of other sectors.

The move was designed to give “more signal” to business about the areas the government is interested in on security grounds, Dowden said.

On Monday, Dowden will launch a nine-week consultation, inviting domestic and international businesses, investors, academics and advisory firms to provide feedback.

If the government “can be absolutely clear about where risks lie, then we’re reducing business uncertainty”, he said.

He expected the remit of the regulation would be “net smaller” at the end of his review. “I always want to adhere to this principle of a small yard or garden and a high fence. So if I can get things outside the scope of the legislation, I will do,” he said.

Wendy Saunders, head of financial services regulatory at Lewis Silkin, said: “Any ‘narrowing and refinement’ of the scope of the NS&I regime would boost certainty and confidence in the UK as an investable jurisdiction.”

Leave a Reply

Your email address will not be published.