Foreign Direct Investment...to be, or not to be, that is the question

After years of adopting a relatively relaxed approach to foreign direct investment (“FDI”), the ongoing political tensions with China, notably in relation to the anti-government demonstrations in Hong Kong and the steps to remove all Huawei equipment from the UK’s 5G networks by 2027, has lead the UK government to consider steps that will enable it to intervene in FDI in UK companies either pre or post-completion where that investment would give the foreign entity at least a 25% shareholding in the UK entity.

In June’s explanatory memorandum to the Enterprise Act 2002, it is proposed that UK government can intervene where either UK annual turnover of the target company is in excess of £70 million or the combined enterprises of the buyer entity and target entity would, as a result of the merger, have a market share that is in excess of 25% of the UK market or of the market in a substantial part of the UK for the supply of particular goods or services.

Although by UK definition SME’s (turnover of up to £25 million) are unlikely to be covered by the explanatory memorandum, a number of ‘smaller large’ organisations (turnover of £25 million - £500 million) would and the UK government has suggested organisations that have significant impact on the UK economy, (such those in the financial services sector, or are mitigating against the impact of the Covid-19 pandemic, such as businesses in the healthcare sector, providers of personal protective equipment (“PPE”), internet service providers (“IPS’s”) or food supply chain companies) should be protected by new control laws.

Mark Williams, Business Law Associate Solicitor at Glenville Walker and Partners questions whether the timing of the proposed control laws are in best interests of the UK economy, “With Covid-19 an ongoing threat to our economy and Brexit looming at the end of the year, placing additional scrutiny on FDI may stifle job creation, productivity and prevent our economy from being one of the largest and most open in the world.

The UK government is right to review its ability to protect its citizens during pandemics, however, the lack of stockpiled PPE was a reflection of government’s inability to plan not a consequence of dubious FDI and there are numerous accounts of UK organisations being willing to supply PPE only for government to turn to overseas entities of which it has no investor control.

The security of UK citizens is of paramount importance, however, additional scrutiny on FDI targeted towards the financial services sector or ISP’s at a time when good UK companies need an injection of capital could be a competitive handbrake when there is no Covid-19 vaccine and we are 4 months away from the unknown consequences of Brexit.

It is clear the UK government’s short term focus is on a return to pre-Covid ways of working over a push for companies to embrace “new norms” given calls for people to return to the workplace which will benefit city centre businesses, commercial landlords and transport operators over the successes of home working, reduced carbon footprints and work-life balance, therefore it is questionable why government would place an obstacle in the way of FDI when the global economy is so fragile as opposed to dealing with that matter when we are stronger as a nation.”

Denise Walker, Director and Head of Business Law at Glenville Walker and Partners believes the combination of Covid-19 and Brexit provides an opportune moment for the UK to reflect on how its companies are structured and, what their strategies for growth should be. Denise sees some attraction in the proposed FDI restrictions, not only from the angle of “public security” or “preservation of local supply” but also because such restrictions would go some way to protecting the UK and its businesses from being “picked over” and thus falling into the hands of large and wealthy foreign entities, something which Denise has had some concerns about for some time, believing that foreign acquisitions of prime UK businesses could be to the overall detriment of the UK business community and also to the detriment of the UK tax payer and the country in general.

As a corporate transactional lawyer, Denise has been involved in many transactions where UK companies have been acquired by overseas buyers and as a result of such transactions UK sellers/shareholders have often been paid large “healthy” sums of money for the sale of their businesses.

All of these transactions are good for the individual seller, good business for Glenville Walker and Partners, and, enjoyable transactions to be involved in, and so it seems rather incongruous for Denise to voice a personal reluctance to allow sales to overseas entities to continue in the future without some restriction/checks and balances, however, there is a balance to be had and many other factors to be considered. Apart from the financial services sector, is the UK business sector generally as strong as it has been in the past?

In the last 30 or so years it has become “the norm” for shareholders of businesses, that are at all successful, to be encouraged to be bought out at the earliest “valuable opportunity” in order to enable a third party (private equity) or a larger trade buyer to take that business “to the next level”.

This is partly because it is generally thought that family businesses often “run out of steam” and that to enable a business to realise its full potential it may need to change hands and become more sophisticated in its business processes/managerial processes.

If you look at some businesses that could be called “family dynasties” you will often find that those businesses that remain in the hands of “the family” for a long period of time can grow powerful and can become a force to be reckoned with in their own right.

In Denise's view, this could be because the family have the luxury of time to think about the business and to put in place strong foundations. “If you look at other countries such as Germany, there are many such businesses and the concept of corporate finance and private equity investment is less prevalent.

It is fair to say in such countries that successful businesses that have not changed hands frequently have achieved a high degree of stability and have grown into formidable organisations, but to be able to do that successfully, there needs to be “focus on stability” rather than on increased market stimulation to achieve business churn (through sales) in order to achieve profit for others.

So, it may be better for the UK (apart from the issues of national security/locality of availably supply of goods) to encourage business leaders not to put their businesses on the market and certainly not to foreign buyers (where the natural result is long term wealth extraction from the UK) but instead to concentrate on better business growth strategies.

By doing this, business wealth and strength would be retained in the UK and more taxes would be paid in the UK resulting in a stronger and more established business community. A University of Liverpool business law professor once said to Denise, in the middle of a seminar that her law firm was providing for the benefit of clients…… “where have all the family dynasties gone? Where are all the homegrown airline companies now?”

What do you think?Is additional scrutiny on FDI a suitable check and balance to protect UK companies and UK citizens or a risky strategy when so many UK companies are in a precarious position and the livelihood of employees is dependent on whether those companies survive? Should we re-think what it means to run and grow a company in the UK, and is now the right time to do so given the immediate challenges of Covid-19 and Brexit? Let us know your thoughts.

For more support and advice on any business law needs please contact our team:

Denise Walker Director and Head of Business Lawdenise.walker@glenvillewalker.comT: 0151 305 9652 | M: 0777 566 006

Mark WilliamsAssociate Solicitor - Business Lawmark.williams@glenvillewalker.comT: 0151 305 9656

Alex McGuckinSolicitor - Business Lawalex.mcguckin@glenvillewalker.comT: 0151 305 9663