UK Prime Minister Theresa May will back a new system that gives her government more powers to intervene in ‘sensitive’ foreign investments.

There have already been indications of Mrs May’s approach to overseas acquisitions, with France’s EDF not permitted to sell its controlling stake in Hinkley Point without state approval and Japan’s SoftBank agreeing to protect jobs and investment as part of its deal for UK chip designer ARM Holdings.

At present the Government can intervene only where it deems there is a public interest in doing so. ‘National security’ for example is typically cited for deals involving strategically important industries such as defence, water and power generation.

However, a consultation on changes to the takeover rules is due next year. Until this is complete, we won’t know what the reforms might look like, but there are three potential scenarios:

  • widening the public-interest provisions in the current merger regime – perhaps by clarifying the ‘national security’ test or the definition of ‘critical infrastructure’;
  • allowing the government greater use of special shares in companies operating in strategically important industries; or
  • introducing a new foreign investment regime as in the US, Canada or Australia.

The timing is crucial. While the UK is still part of the EU it must comply with rules on freedom of establishment and free movement of capital. But if, post-Brexit, the UK is no longer part of the single market, the government will have more freedom to act.

Having said this, Mrs May will need to tread carefully. At a time when businesses crave certainty, reform could make the merger regime less predictable and deter foreign companies from investing in the UK.

Overseas takeovers have been increasingly in the spotlight since the global financial crisis. In 2010, following US food giant Kraft’s acquisition of Cadbury, the independent Panel on Takeovers and Mergers changed the takeover code so targets could more easily defend themselves .

And in 2014 Pfizer’s bid for AstraZeneca failed in part due to the government’s concerns over potential job losses. But the ARM deal represents the first time a bidder has given binding post-offer undertakings under the UK regime introduced in January 2015.

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