UK’s Arm-twisting confirms critics’ worst deal-vetting fears
When the UK government gave itself new powers to vet takeovers for threats to national security, there was concern they would be used as a cover for politically motivated interference and economic protectionism.
In fact, it could be worse than that. By threatening to use the national security legislation to convince Japan’s SoftBank to list chip designer Arm in London, the government is not only politicising this system for industrial policy ends but is also doing it in an area where it doesn’t obviously have jurisdiction.
True, Arm falls into one of the sectors designated as particularly of interest to the government. But using the National Security and Investment Act, which came into force in January, to scrutinise the listing of a Japanese-owned business on a US exchange would be a stretch, to put it mildly.
The legislation is focused on acquisitions where ownership or control passes thresholds set at 25 per cent, 50 per cent or 75 per cent. That would be highly unlikely in a normal initial public offering. While the Treasury has separately said it wants the power to block listings in the UK on national security grounds, the NS&I rules don’t explicitly cover where businesses choose to list.
Could the government fashion an argument that an overseas listing would create a situation that it “reasonably suspects . . . may give rise to a risk to national security”? Perhaps. But it would blur beyond meaning the boundaries of what was already an expansive set of powers. It’s not entirely obvious how this imagined future concern might be addressed by a secondary listing in London, which appears to be the aim here.
It would also make a mockery of the reams of guidance issued by the business secretary about how the act would be used (advice that could be reviewed by a future government with a different view of the national interest).
That included highlights such as — it will not be used “to interfere arbitrarily with investment” and that it exists “solely to safeguard the UK’s national security and not to promote any other objectives”. Say, for example, the furtherment of the London Stock Exchange’s standing as a venue for tech listings.
The thing is that the government was absolutely right to say that the UK’s vetting procedures needed an overhaul. As Ashley Lenihan, professor of international affairs at Georgetown University, said at a parliamentary committee reviewing the legislation this week, the global mood had changed, prompted by “increasing uncertainty with far more strategic investments taking place . . . for politically motivated reasons”.
But the plan, from a government ill at ease with notions of industrial strategy and state meddling, was to create a narrow, technocratic process focused on national security in the mould of the US’s Committee on Foreign Investment in the US, Cfius.
In the act’s first three months, notifications to the government were made on 222 transactions, with 17 called in for greater scrutiny — in line with or slightly below predictions. Lenihan, who underlined the importance of separating national security from economic concerns, noted that the UK process and use of expertise seemed less transparent than in other jurisdictions.
There are also rumblings that the government is using the process to extract promises on jobs in these deals, despite being adamant the act would not be deployed in that way. Indeed, Nicole Kar, partner at Linklaters, said at this week’s hearing: “What might surprise investors is that both economic commitments are being taken by the government as well as national security commitments . . . these are very important signals.”
The notion of a “chilling” effect on investment is overused. There may be sectors, particularly in emerging technology, where economic interest and national security are hard to delineate. Frankly, there may be reasons to intervene in defence of strategic sectors or an industrial strategy, if a government admitted to having one and did so openly. The 2016 sale of Arm to SoftBank is the original problem here.
But a national security front for an impenetrable process that is pursuing economic goals on the sly feels the worst of all worlds, especially if the legislation is being seized upon to exert pressure in matters where it doesn’t obviously apply.