Government must walk 'tightrope' on new M&A rules, partners say

The UK government must tread a fine line between scaring off potential investors and protecting the UK’s national security when formulating new takeover rules, according to partners.

M&A and infrastructure partners warn that the government faces a difficult balancing act as it formulates new the takeover rules that are intended to give the government more power to intervene in M&A deals.

Their warnings come after a government green paper published earlier this month by the Business and Energy Secretary Greg Clark set out plans to increase the government’s ability to intervene in takeovers, particularly in areas that are deemed a national security risk, such as critical infrastructure, technology and defence.

Addleshaw Goddard corporate partner Simon Wood, who returned to the firm from a two-year stint at the Takeover Panel earlier this month, says: “The tightrope they are trying to walk is ensuring that Britain remains open for business but also increasing the degree of protection around national security. That includes not just the defence sector but energy, communications and utilities, which are an important fabric of the UK’s infrastructure.”

Freshfields Bruckhaus Deringer infrastructure partner Richard Thexton broadly welcomes the proposals but calls for more guidance as to where the government should be notified of a deal on national security grounds, in order to avoid cases where the government intervenes in transactions at a late stage.

“Under the voluntary regime, the government will have power after a non-notified deal is closed to go back and set it all aside, which from a seller‘s perspective would be a disaster. Clear guidance on which deals should be notified under the voluntary regime is therefore critical,” he says.

Ashurst infrastructure partner Jason Radford meanwhile cautions that the threat of increased governmental oversight could spark a sell-off among UK infrastructure investors.

“The ramifications for the market are difficult to assess at this stage,” he says. “It could notionally prompt a sell-off such that owners are looking to take advantage of good market conditions before the risk of increased government oversight becomes a reality.”

The UK’s upcoming exit from the European Union further increases the importance of avoiding protectionist measures, particularly as the present government’s Brexit policy has been based around positioning the UK as what International Trade Secretary Liam Fox calls a “proud champion in the cause of global free trade”.

There is also increasing scepticism about the UK’s future as a recipient of foreign direct investment (FDI), with 31% of investors responding to a 2017 EY survey saying they expect the UK’s attractiveness as an FDI destination to decline, compared with just 16% in 2016.

Wood says: “Being open for business worldwide post-Brexit will be very important – the government recognises the risk that too much interference could produce a regime that deters inward investment.”

Law firms have benefited from investor appetite for UK infrastructure assets in recent years, with key deals this year including National Grid’s £13.8bn sale of its gas distribution business to an international consortium including Australian bank Macquarie and Qatari sovereign wealth fund the Qatar Investment Authority.

Linklaters led for National Grid on the deal, while Clifford Chance, CMS and Cleary Gottlieb Steen & Hamilton advised the winning consortium.

A plethora of other firms played roles including Eversheds, Addleshaw Goddard, DLA Piper, Irwin Mitchell, Shakespeare Martineau and Dentons, underlining the importance of infrastructure deals to the legal sector.

However, while there are concerns among partners that unclear rules could dampen investor appetite to make acquisitions in the UK, Thexton argues that the UK remains an appealing place for deals.

He concludes: “The UK will always be an attractive place for people to invest; it has a stable regulatory and legal environment and that won’t change as a result of these proposals, provided the government gives the necessary clear guidance. Yes, it is a hurdle to making the investment in the first place, but frankly, it’s a hurdle that well-informed buyers are already thinking about and engaging with government on, so I don’t see why it should put people off.”