When the UK government gave itself new powers to screen takeovers for threats to national security, there were concerns that they could be used as a cover for politically motivated interference and economic protectionism.
In fact, it could be worse. Through Threat to apply national security legislation In order to persuade Japanese SoftBank to list chip designer Arm in London, the government is not only politicizing this system for industrial policy purposes, but is also doing so in an area over which it clearly has no jurisdiction.
It is true that Arm falls into one of the sectors that are described as being of particular interest to the government. But using the National Security and Investment Act, which went into effect in January, to scrutinize a Japanese-owned company’s listing on a US stock exchange would be stretching the scales, to say the least.
The legislation focuses on acquisitions where ownership or control exceeds thresholds set at 25 percent, 50 percent, or 75 percent. That would be highly unlikely in a normal IPO. While the Treasury has separately stated that it would like the power to block listings in the UK on national security grounds, the NS&I rules do not specifically cover where companies choose to list.
Could the government argue that a listing abroad would create a situation which it “reasonably suspects . . . . . may result in a risk to national security”? Maybe. But it would blur the lines of what was beyond meaning already an expansive set of powers. It’s not entirely obvious how this perceived concern for the future could be addressed by a secondary listing in London, which seems to be the goal here.
It would also ridicule the myriad guidance provided by the Secretary of Commerce about how the law would be applied (leaders that might be reviewed by a future government with a different view of the national interest).
These included highlights such as – it is not used “to arbitrarily interfere with investments” and that it exists “solely to protect the UK’s national security and not to further any other objective”. Take promoting the London Stock Exchange’s reputation as a place for tech listings, for example.
The thing is, the Government was quite right to say that the UK’s screening procedures needed to be overhauled. As Ashley Lenihan, Professor of International Affairs at Georgetown University, said at a parliamentary committee to review legislation Global sentiment had shifted this week, prompted by “increasing uncertainty as far more strategic investment takes place. . . for politically motivated reasons”.
But the plan of a government unhappy with notions of industrial strategy and state interference was to create a narrow, technocratic process focused on national security, modeled on the US Committee on Foreign Investments in the US, Cfius.
In the first three months of the law, 222 transactions were reported to the government, of which 17 were called for closer scrutiny – in line with or slightly below forecasts. Lenihan, who stressed the importance of separating national security from economic concerns, noted that the UK process and use of expertise appears to be less transparent than in other jurisdictions.
There are also rumors that the government is using the process to secure pledges of jobs in these deals, although it has insisted the law would not be implemented in this way. In fact, Nicole Kar, a partner at Linklaters, said at this week’s hearing: “What might surprise investors is that the government is making economic commitments as well as national security commitments. . . these are very important signals.”
The notion of a “deterrent” effect on investment is overused. There may be sectors, particularly in emerging technologies, where economic interest and national security are difficult to separate. Frankly, if a government admits it has one and has done so openly, there can be reasons to intervene in defense of strategic sectors or an industrial strategy. Arm’s sale to SoftBank in 2016 is the original issue here.
But a national security front for an impenetrable process covertly pursuing economic goals feels worst of all worlds, especially when legislation is being misused to pressure matters where they obviously don’t apply.
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