The Department for Business, Energy & Industrial Strategy (BEIS) of the UK government has published a Green Paper seeking consultation responses on proposals for reforming the provisions of the Enterprise Act 2002 (EA 2002) which deal with scrutiny of investments for the purposes of national security.

The Green Paper acknowledges the key role that foreign direct investment plays in the UK economy, bringing multiple benefits including foreign capital, new jobs, ideas, talent and leadership. However, the Green Paper questions whether the current provisions of the EA 2002 are adequate for assessing the potential national security implications of proposed transactions, illustrated by the Hinkley Point C decision last year. The UK needs to be alert to the risk that having ownership or control of critical businesses or infrastructure could provide opportunities to undertake espionage, sabotage or exert inappropriate leverage, and also have a regime in place to assess and mitigate such a risk. The Green Paper mentions that part of the objective is parity with other developed and open countries in their equivalent regimes.

BEIS proposes a set of short-term and long-term reforms, with the stated objective of seeking measures which only involve necessary and proportionate steps to protect national security.

Short-term steps – change to thresholds for specific sectors

In the short-term, the government proposes to amend the turnover threshold and share of supply tests in the EA 2002. This will allow the government to review and, if necessary, intervene in mergers which exceed the amended threshold. The amended threshold would apply in two areas: (i) the dual use and military use sector; and (ii) advanced technology. For these areas, the government proposes to lower the turnover threshold from £70 million to £1 million and remove the current requirement for the merger to increase the share of supply to, or over, 25%.

In relation to the dual use/military use sector, the government intends to use some of the Strategic Export Control Lists as the basis for which businesses will be subject to the amended thresholds. The lists include goods which have been agreed pose a risk to national security or human rights, or because of internal obligations or foreign policy commitments, and for which UK businesses must currently secure a licence before exporting.

In relation to advanced technology, the Green Paper provides some guidance on what this term is intended to cover. The Green Paper specifically mentions the following key areas to which it is proposed the amended thresholds will apply:

• Multi-purpose computing hardware – the proposed definition is “Enterprises that: (i) own or create intellectual property rights in the functional capability of multi-purpose computing hardware; or (ii) design, maintain or support the secure provisioning or management of roots of trust of multi-purpose computing hardware”; and
• Quantum-based technology –  proposed definition is: “Enterprises that research, develop, design or manufacture goods for use in, or supply services based on, quantum computing or quantum communications technologies. This would include the creation of relevant intellectual property or components”.

BEIS has made clear that it welcomes respondent’s views on these proposed definitions. The Green Paper requested consultation responses on the short-term steps by 14 November 2017.

Long-term reforms

In the longer term, the government intends to make more substantive changes to how it scrutinises the national security implications of foreign investment. The proposed reforms will focus on ensuring adequate scrutiny of whether foreign investment in critical businesses raises any national security concerns and providing the ability to act where this is the case. The potential reforms include:

• an expanded version of the call-in power, based on the existing power in the EA 2002, which will allow government to scrutinise a broader range of transactions for national security concerns within a voluntary notification regime; and/or
• mandatory notification for foreign investment into: (i) the provision of essential functions in key parts of the economy; or (ii) new projects that could reasonably be expected in the future to provide essential functions and/or foreign investment in specific businesses or assets.

The government proposes that mandatory notification may apply, as a minimum, to civil nuclear, defence, telecommunications and the transport sector. The government is also minded to include the types of business identified in relation to the short-terms steps, i.e. the manufacture of military and dual-use items and advanced technology.

Responses to the long-term reforms are sought by 9 January 2018, with further consultation on proposed reforms to be included in a white paper.

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