UK SELDOM INTERVENES IN FOREIGN DIRECT INVESTMENT

UNCLAS LONDON 003415 SIPDIS SIPDIS E.O. 12958: N/A TAGS: EINV UK SUBJECT: UK SELDOM INTERVENES IN FOREIGN DIRECT INVESTMENT TRANSACTIONS REF: GAO REF NO 120600: FOREIGN INVESTMENT ENGAGEMENT (U) 1. SUMMARY: FDI is regulated in the UK without regard to the domicile of the parties in accordance with provisions of the UK Enterprise Act of 2002 and EU merger control legislation. Government review is normally focused on the potential for increased concentration based on a transaction exceeding established sales or market share thresholds. Such reviews are conducted by the Office of Fair Trade (OFT). If deemed necessary, transactions are referred to the Competition Commission (CC) for detailed investigation. While rare, intervention in a transaction when no competition issues are present is possible when the Secretary of State, Department of Business, Enterprise and Regulatory Reform (DBERR) deems it is in the public interest. However, such intervention can only be asserted with regard to transactions involving national security or the media. Only two such interventions have ever been initiated: one on national security grounds that was allowed to proceed with statutory undertakings and one in the media that is still under review. (U) 2. The following report is in response to ref request from the General Accounting Office (GAO). Information is derived from interviews with Jonathan Cook (protect), Assistant Director, Mergers and Competition Regime, Department of Business, Enterprise, and Regulatory Reform and two partners at the law firm of McDermott Will & Emery, Scott ¶S. Megregian (protect) and Alasdair Bell (protect). Detailed report, keyed to questions in the GAO questionnaire follows in paragraph 3. END SUMMARY (U) 3. Text of GAO Foreign Direct Investment Engagement Follows: Questions for Post - London GAO Foreign Direct Investment Engagement (120600) Background (1.) Are you aware of any particular past events that may have helped to shape the FDI policy in the UK? As an island nation, the UK has historically been a trading economy. Accordingly, it strongly supports free trade and the elimination of trade barriers. Likewise, the UK has a long history of welcoming FDI and makes no policy distinction between domestic and foreign investment apart from the two exceptions noted below as regards investments in the media and those affecting national security. With respect to regulating merger activity, the key event shaping UK policy on FDI is the EU Merger Regulation that came into affect in ¶1990. The UK is subject to EU law, and since the EU Merger Regulation details the legitimate bases to intervene in mergers, it shapes the UK policy on FDI. (2.) Has U.S. policy regarding FDI review influenced FDI regulation in the UK? UK interlocutors say that U.S. policy regarding FDI review has not influenced FDI regulation in the UK. Laws and Policies (3.) Please generally describe the policies of the UK government towards Foreign Direct Investment (FDI). Specifically, we would like to understand the policies that apply to mergers and acquisitions of British companies by foreign owned companies. In general, the UK treats foreign and domestic investments equally. The Mergers and Competition Regime at DBERR (formerly called the Department of Trade and Industry) oversees the UK governments activities related to the review of mergers and acquisitions and our interlocutors confirm that the domicile of the parties makes no difference. The UK is subject to EU law (i.e. the Merger Regulation administered by the EU Merger Control Commission) and UK law cannot be contrary to EU law explained Jonathan Cook (protect), Assistant Director, Merger and Competition Regime, Consumer & Competition Policy Directorate at DBERR at an August 20, 2007 meeting. He said further that EU law dictates that 1) UK law cannot be contrary to EU law in this area, and that 2) UK law cannot discriminate against either EU or non-EU investors. He explained that both foreign and domestic investors may seek judicial remedy from either the EU Court of Justice or the UK High Court if either of these dictates is contravened. Although the focus of EU merger control regulation is evaluating the concentration affect of proposed mergers and acquisitions, EU law gives each EU member state the right to intervene in a transaction when it is deemed to be in the public interest to do so. Currently, the UK Enterprise Act of 2002 specifies only two areas in which the assertion of public interest gives the UK government the right to intervene in merger and acquisition transactions that present no competition issues. The two areas are 1) national security, and 2) media. While the assertion of public interest in these two areas may result from the takeover of a British firm by a foreign investor and could therefore be considered a means of regulating foreign investment, our interlocutors point out that the assertion of public interest can also occur when all parties of a transaction are British. They note further that the burden is on the member state to justify intervention on the basis of public interest, and that DBERR considers the potential for judicial action by the merger and acquisition parties when considering intervention on the grounds of public interest. In summary, the Enterprise Act of 2002 lays out the grounds for intervention in UK mergers and acquisitions regardless of the domicile of the partners. The grounds are principally based on the potential for increased concentration. Qualifying transactions are defined as any where 1) the turnover (sales) exceeds GBP 17 million annually or 2) the relevant market share exceeds 25%. Additionally, the UK may intervene in a merger and acquisition transaction of any size in the areas of national security or the media if the government deems it is in the public interest to do so and the Secretary of State issues a Special Intervention. Note that there is no pre-notification requirement for a merger and acquisition transaction. The parties are free to close without consulting with the government, but they are taking a risk if government intervention is possible/likely based on the criteria cited above. The government has 4 months post closure to decide whether to intervene in a transaction. How the process works: If a transaction is a qualifying transaction, (see above), then the OFT is the first department to review it. If the OFT determines that there is potential for anti-competitive consequences from the transaction it refers it to the CC for further review. The CC may consult with the merger and acquisition parties and normally issues decisions in 30 days. Its review is based on the established principles of the EU Merger Commission. The CC can OK a qualifying transaction, it can reject it, or it can negotiate statutory undertakings with the parties as conditions for the CC approving the transaction. Once a transaction is approved, the decision is final. It cannot be reopened, modified or reversed. In the event a transaction involves the media or might reasonably be expected to raise concerns of national security, then it is normal to consult informally with the interested UK agencies and negotiate statutory undertakings in order to avoid post-closing government intervention on the basis of public interest. DBERR's Jonathan Cook (protect) gave an example of a proposed foreign takeover of a British defense contractor subject to the Official Secrets Act. The parties would normally consult in advance with the UK Ministry of Defense (MOD) and negotiate acceptable statutory undertakings so that the issue of intervention would not arise. In the event that the MOD was not consulted or could not negotiate acceptable statutory undertakings, then the prospect of intervention on the basis of public interest arises. DBERR is the department charged with recommending intervention on the basis of public interest. If intervention is recommended, then it is the UK Secretary of State at DBERR that issues a Special Intervention that refers the matter to the CC for further review. Regarding the potential for political pressure being brought to bear on DBERR to intervene in a transaction, Cook said that political pressure is greatest to ensure that government actions conform to the law. He sees little potential for political pressure on DBERR to intervene in individual transactions or in areas other than national security or the media. (4.) Does British law provide a legal framework designed to monitor FDI for national security reasons? (See 3. above) (5.) The following laws have been identified as relevant to managing FDI in the UK: " The Industry Act of 1975 " The Enterprise Act of 2002 " The Finance Act of 2004 " The Competition Act of 1998 Are there any others that are directly relevant to FDI? According to DBERR, the Enterprise Act of 2002 is the law relevant to managing FDI in the UK. (6.) It is our understanding that the Secretary of State has the authority to intervene in certain mergers and refer them to the Office of Fair Trading and the Competition Commission on the grounds of "public interest", defined in the Enterprise Act of 2002 as national security, or if the merger involves classified defense contracts. a. Please explain the reviews conducted by the Competition Commission, and how that intersects with a review for public security related concerns. See 3. above b. Please explain the roles/responsibilities that the Secretary of State, the Office of Fair Trading, and the SIPDIS Competition Commission have in initiating and conducting a review of FDI. See 3. above Also, the OFT is the department that reviews all merger and acquisition transactions in the UK above the sales (turnover) and market share thresholds specified in the Enterprise Act of 2002. If a transaction does not exceed a threshold, then the OFT has no authority to refer a transaction to the CC for review. Further, the OFT's authority is restricted to assessing the potential for anti-competitive consequences of a transaction. When the OFT finds a basis for anti-competitive consequences, its sole authority is to refer the transaction to the CC for review. Reviews by the CC must be completed within 6 months, although many are completed in as little as 30 days. c. To your knowledge are mergers or acquisitions involving UK defense contractors reviewed prior to completion of the deal? See 3. above Also, our interlocutors indicate that effectively all mergers or acquisitions involving UK defense contractors are discussed informally with the MOD to identify and resolve government concerns prior to completion of a deal. d. Please provide any examples of cases reviewed because of "public interest" or security reasons. Has the authority to block such investments ever been used? There have only been two transactions that raised no competition issues in which the Secretary of State issued a Special Intervention in the public interest. Neither has resulted in a transaction being blocked, although one is still under review by the CC. The first is in the defense industry and government intervention was based on grounds of national security. The transaction was the proposed acquisition by Lockheed of Insys in 2005. The Special Intervention came as a surprise to the parties that had been in discussions with the MOD. The transaction had not closed when the Special Intervention was issued, but did close once satisfactory statutory undertakings had been negotiated. Our interlocutors said that issuance of the Special Intervention gave the government greater influence over the outcome, and that the existence of statutory undertakings gives the government a clear judicial course of action in the event that the undertakings are not followed. The second Special Intervention in the public interest was in the media field. It involves the acquisition by Rupert Murdock of 17.9% of the shares of the media company, BSkyB. The review by the Competition Commission and the UK Office of Communications is ongoing. A decision is expected in November. This intervention came as a surprise to the UK government that learned about it in the newspapers. Note that the Special Intervention in this case first required that the OFT rule that the share purchase was a "merger". Purchase of more than 20% of the shares of a company is generally understood to be a "merger" under UK and EU regulations and the purchase of less than 10% of the shares is understood to not be a merger. The BSkyB transaction fell between these parameters. Without the determination by the OFT that the transaction was a merger, the Secretary of State would have had no basis to issue a Special Intervention. n.b. there were no competition issues raised by the share purchase. (7.) In addition to the laws/policies already mentioned, are there other laws/policies that are relevant for FDI regulation? Are there any other investment reviews or restrictions? There are no other laws/policies relevant to FDI regulation. (8.) What, if any, differences exist in FDI laws/policies by level of government? (Federal vs. provincial vs. local, etc.) There are no differences in FDI laws/policies by level of government. (9.) What types of barriers / incentives does the UK have in place to restrict / encourage FDI? (e.g. corporate taxation rates.) As discussed in 3. above, Cook at DBERR says that any UK barriers/incentives to restrict/encourage UK investment must: 1) comply with EU law, 2) not be contrary to EU law, and 3) not discriminate against either an EU or non-EU investor. Accordingly, the treatments of foreign and domestic investments are the same. Practices (10.) Outside of what is written in the laws/policies, what factors in practice contribute to how FDI regulation decisions are made? (national security, local politics, economic protectionism, etc.) See 3. above (11.) To the extent you are aware, is there any implicit or explicit political influence involved in the FDI regulation process? See 3. above. (12.) What is the UK government's attitude toward or policy on the investment of state-owned enterprises in the UK? Alistair Darling, Chancellor of the Exchequer, reiterated the UK policy toward sovereign funds' investing in the UK in his first speech as Chancellor. The UK welcomes all FDI, including that of state-owned enterprises. (13.) Can you provide any specific examples of recent FDI attempts (both successful and/or failed) that are representative of the way the system actually works in the UK? See 6 d. above Future Changes (14.) Are you aware of any particular current events or concerns in the UK that may have an effect on current FDI policy/process? (e.g. political elections) Post is not aware of any particular current events or concerns in the UK that may have an effect on current FDI policy/process. (15.) Please describe any changes that may be considered to modify the current laws, policies or practices for FDI regulation in the UK. DBERR explained that the matter of what grounds constitute an EU member state's national interest is still an evolving area. Cook said that his office expects that the grounds for a state's intervening on the basis of its national interest will continue to narrow as a result of the need to justify intervention in the face of judicial remedies open to investors impacted by intervention based on national interest. Contact Requests (16.) Can you suggest other experts we should consult on FDI in the UK? a. For example, individuals in Washington D.C. that we should speak with including: i. U.S. businesses with experience directly investing in the UK, especially those that have undergone government review and approval. ii. Investment banks iii. Academics and/or think tanks Post can facilitate introductions to its interlocutors but has no suggested contacts in the U.S. Visit London's Classified Website: http://www.state.sgov.gov/p/eur/london/index. cfm LeBaron