The national security and investment bill 2020 is the most extensive overhaul of the law on company takeovers for nearly 20 years. I welcome the bill, as I said to the public bill committee when giving evidence in the House of Commons on November 26th, but it does not go nearly far enough. Britain needs a comprehensive industrial strategy and regulatory framework and laws to prevent predators taking over brilliant companies, especially those laid low by Covid and Brexit.
The present law on company takeovers is governed by the Enterprise Act 2002. Under that Act, the government can serve a public interest intervention notice to call in a takeover on four grounds: national security, media plurality, UK financial stability, and public health emergency. This is far too limited. The public health category was added by statutory instrument only this year in SI 2020 No. 627, as a consequence of the coronavirus pandemic.
The power of government to call in a takeover, whether agreed or hostile, for national security reasons, will now be moved from the EA 2002 to the NS&I bill when it becomes law. A new unit at the Department of Business, Energy and Industrial Strategy (BEIS) will be set up and the jurisdiction removed from the Competition and Markets Authority (CMA) where it now sits.
The bill is useful in that it lowers and widens the threshold for intervention, allowing the government to intervene on national security grounds on a much wider range of companies than presently. The new BEIS unit will carry out an assessment and determine whether they will recommend blocking a company takeover, or whether they will allow it to proceed with better powers than now to police and impose conditions, e.g. job guarantees, investment, location, green policies. Useful, too, is the new regulatory framework for the imposition of penalties and sanctions for non-compliance.
National security is not defined in the bill, but papers issued with the bill identify 17 areas where it is suggested that intervention may be made and these will be covered in secondary legislation brought in at the same time. But those 17 areas surprisingly do not yet include food, telecoms, pharma or biotechnology, so already big gaps are emerging in the coverage of the bill. There is also the fact that the Business Secretary Alok Sharma told the Commons that the new powers would only be used “sparingly”, so what is the point of them?
The remaining powers in the EA 2002 have hardly ever been used in their lifetime, and there are many more areas of public interest than just financial stability, media plurality and public health emergency. Since the government started its consultations on national security in 2017, the UK has suffered two massive economic and social body blows – Covid and Brexit – from which it will take years to recover.
There are many examples of priceless assets and world-beating research and development already being lost to the UK. Some of the family silver has alas already gone. In 2011, US company Nvidia (now buying Cambridge-based Arm for $40bn) bought Icera of Bristol – one of the world’s leading companies in the development of semiconductors and chips. They subsequently closed one workplace in Bristol and 300 staff lost their jobs.
In 2012, Huawei bought the Centre for Integrated Photonics from the government’s own East of England regional development agency. This privatisation lost ground-breaking innovative British photonics research and development to foreign ownership.
In 2014, Google bought DeepMind, the world-class British artificial intelligence company, for a mere $400m. DeepMind has announced just this week a breakthrough in DNA of proteins that has stumped researchers for 50 years. This will have worldwide benefits for public health, as well as lining Google’s balance sheet with billions of dollars.
In 2016, Arm itself with its world-beating British smart phone chip technology founded in Cambridge was sold to Japanese company SoftBank. Japan would never have allowed such a sale of a Japanese company. One of the founders, Herman Houser, is desperately asking the government to intervene to stop the further sale now to Nvidia.
In 2018, Melrose bought GKN with the aid of short-term speculative shareholders in a hostile takeover. Although the 250-year-old major worldwide engineering company headquartered in Redditch in the West Midlands was a customer of the Ministry of Defence, the government refused to block the takeover on existing national security grounds.
In 2019, British satellite and space company Inmarsat was taken over by American private equity firms for a mere £4bn. This British company with its world-beating satellite technology started life as a UN agency and is engaged in bringing communications to billions of people around the world in areas of limited internet access.
In 2020, Cobham Aviation was sold to American private equity although it was a customer of the Ministry of Defence, and the government could have called it in on national security grounds. Lady Cobham of the founding family bemoaned the sale, and said this would lead to a sell-off. The former nine divisions of the company have already been reduced just to four, and the sell-off has begun.
None of these takeovers were blocked on the existing categories of government intervention, so a wider test is needed if government is to protect existing national assets, foster research and development, encourage innovation, and develop an effective industrial strategy. The new NS&I bill should be widened to permit intervention by government in takeovers on the following additional grounds: where it is necessary in the interests of research and development and innovation, or strategic (as just introduced in France), or in the public interest generally.
The idea of intervention in the public interest in the UK is not new. It exists in the Industry Act 1975, which is still on the statute book but not used, and the intervention test under the Fair trading Act 1973 was wider before it was replaced by the EA 2002.
The usual cry will go up that further regulation will stifle investment and encourage entrepreneurs to start or move their companies abroad. But Britain is very much open for business. Foreign direct investment into Britain is already twice that than into France and Germany. And other competitive countries already have protective laws more interventionist that in the UK.
When the Glazer family floated Manchester United on the Stock Exchange in 2012, they chose New York rather than London because a share structure permitted them to retain control although they only had a minority of shares. When Anglo-Dutch Unilever, one of our largest UK quoted companies, managed to escape from being taken over by Kraft in 2017, the then chief executive Paul Polman wanted to move the headquarters from London to Rotterdam to protect the company, because Dutch law has a public interest test defence law that prevents companies being taken over by predators.
Far from discouraging investment in the UK, good regulation will encourage long-term and patient capital and be part of the range of measures to build back better after Covid and Brexit.