Government set to pare back M&A screening powers

The UK government is set to pare back its investment screening powers in an effort to make regulation more “business friendly”. In an interview with the Financial Times, Deputy Prime Minister Oliver Dowden said that he would launch a review this week that will focus on “narrowing and refining” the National Security and Investment Act.

The National Security and Investment Act, which was only introduced in January 2022, gives the government power to scrutinise and block (including retrospectively) foreign investment in UK businesses on national security grounds.

The consultation will run for nine weeks and will invite the views of international and domestic companies, investors, advisory firms and academics. Dowden said that the government is seeking for rules to be “proportionate and well-targeted" and to minimise “the burdens it places on companies and investors”.

The act enforces mandatory notification of proposed deals in 17 sectors considered to potentially have important national security implications, including energy, computing, military technology, quantum technologies, synthetic biology, AI and civil nuclear.

The rules were brought in in response to concerns that overseas powers did not face sufficient scrutiny when acquiring UK companies that have national significance. Major deals, such as Nvidia and SoftBank’s agreed takeover of chip manufacturer Arm (subsequently terminated in February 2022 following the introduction of the rules) and US private equity firm Advent’s takeover of defence firm Cobham, had come in for widespread criticism.

Since January 2022, the rules have been used by the government to block the takeover of Welsh semiconductor manufacturer Newport Wafer Fab by Chinese-owned Nexperia and the sale of electronic design company Pulsic by Hong Kong firm Super Orange HK.

The government also faces a legal challenge to retrospectively block the takeover of broadband firm Upp by LetterOne, an investment group backed by Russian oligarchs hit by sanctions following the war in Ukraine. The proposed merger of the UK business of telecoms giant Vodafone with Hong Kong-based CK Hutchison Holdings.

However, since they were introduced, many have criticised the rules as being excessively broad and too vague, with some, for example, arguing that Newport Wafer Fab is not significant to national security. The legislation has been linked to a slowdown in UK M&A.

In the last audited year, the government received notifications relating to 866 acquisitions. 65 of these were subject to further investment and 14 were acted upon by the government – 40 per cent of these involving buyers or investors from China.

Dowden said that the government would propose removing internal restructures from the rules, review which areas of the economy should be subject to mandatory notification and bring greater clarity to the categories of “sensitive areas” of the UK economy, with the categorisation of areas such as AI, semiconductors and critical materials having attracted criticism.

He said that the review would seek give businesses “more signal” about areas the government would scrutinise, saying that if the government is “absolutely clear about where risks lie, then we’re reducing business uncertainty”.

Overall, Dowden said he expects the remit of the rules to be “net smaller” following the review and added that “if I can get things outside the scope of the legislation, I will do”.


Find out more about the National Security and Investment Act in this in-depth analysis

Despite the impact of the rules on dealmaking, the UK remains the top destination in Europe for inbound and domestic M&A investment

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