The UK Government has recently published proposals for a regime to review certain transactions that may pose a threat to the UK's national security. The news headlines have focused on the merger control elements, that is, the potential for hostile states to invest or take an interest in entities (including their assets) that are in the UK's national interest. They are broadly in line with similar steps taken by other European Union states, Australia and Japan. However the proposed range of transactions is wider than merger control and may extend to real estate finance transactions.
First it is worth understanding the mischief that the government wishes to avoid. That is, the potential for hostile foreign states or entities to use transactions as a means of:
- Disrupting critical infrastructure (e.g. power, healthcare and emergency services, transport, armed forces).
- Enabling an unacceptable degree of geo-political or commercial power to the detriment of the UK's national interest.
Clearly certain sectors are inherently more susceptible, namely infrastructure, critical service providers and emerging and advanced technologies (information and communication technology, pharmaceutical, aerospace) etc. However real estate finance may be drawn into the net because the scope of the proposals captures loans and asset acquisitions, including land.
For example, a loan provided by a hostile foreign lender (or a lender effectively controlled by a hostile foreign state) or where the security for a loan includes potentially sensitive entities or assets. This includes transactions that may also be artificially structured as loans in an attempt to avoid government scrutiny.
Asset transactions may include purchases of land that are in close proximity to sensitive sites such as critical national infrastructure or government facilities. For example, this may capture the acquisition of a real estate asset (directly or indirectly, perhaps by way of gaining significant influence or control), which is adjacent to or may overlook a site that is in the UK national security interest.
Asset, as defined goes further, to include property situated outside the UK (noting that assets physically located outside the UK may still have the capacity to undermine national security, e.g. the supply of energy to the UK that is provided, in part, by assets such as deep-sea cables located outside its geographical borders).
In simple terms the proposed regime aims to prevent certain investment (with criminal or civil penalties), based on a notification and review process, allowing the government to scrutinise the national security consequences in relation to the acquisition of ownership or significant influence or control over land and buildings and other physical assets, for example, infrastructure sites.
This would replace the current public interest review scheme. The proposed notification regime would not be mandatory but the government would have the power to call in transactions for review. Alternatively parties could voluntarily notify their transaction for review. It does not mean that cases will necessarily result in transactions being prohibited (for example, in the case of 'proximity risk' the government may simply require additional security checks for access to a government facility or otherwise mitigate the effect of the transaction).
At this stage the length of time taken for any review is clearly unknown but it is unlikely to be swift and painless, if experience in other jurisdictions is anything to go by.
Although they are currently not in the form of tabled legislation, the proposals have the potential to add time, complexity and inevitably cost for some transactions.
The government consultation ends on 16 October 2018.