Patient (capital) or not - time to PUSU
Particularly after this week, one might draw the conclusion that Westminster is in thrall to Brexit negotiations, starving all other policy areas of oxygen. But, in fact, there is activity taking place elsewhere in Whitehall, though the topic of this column does indeed carry a whiff of political interference and has a familiar nationalistic tinge. It’s the National Security and Investment White Paper, published in July by the Department for Business, Energy & Industrial Strategy, setting out the means by which BEIS would like to strengthen UK national security merger rules, with a focus on technology, innovation and intellectual property.
Business Secretary Greg Clark is right to say that the “UK has a proud and hard-won reputation as one of the most open economies in the world”; ever since the UK was forced to sell its golden share in BAA, the Daily Mail has wrung its hands at the ability of “Johnny Foreigner” to come over here and buy up our best chocolate companies (ok – they may have had a point there).
The last big change to takeover rules was the introduction of the quaintly-named PUSU or “put up or shut up” rule in 2011, which requires bidders to make a formal offer for a target within 28 days of its intentions becoming public. At the time, there was much fretting over the impact on deal-making and on the UK economy’s openness, quite possibly driven by bankers worried about diminished bonuses should deals be concluded too quickly and tidily. (Unsurprisingly, few tears were shed for them.) The new rules came into effect with little ballyhoo, and in the intervening years have saved target company management teams the months of uncertainty caused by prolonged bids.
So what’s the issue here? While deals can already be blocked on the grounds of national security, undoubtedly technology has moved on since the Enterprise Act of 2002, and recent threats to our national security or interference in the democratic process have been of the cyber variety.
The objections fall broadly into two camps. Firstly, and perhaps more predictably, are concerns over political interference. John Vickers, the former director-general of the Office of Fair Trading, has warned of the “wide scope for political intervention in business transactions”, while his fellow ex-OFT colleague John Fingleton, the former chief executive, warned last month of the “enormous potential to harm the UK economy, and to draw politicians into decision-making on a huge number of acquisitions and investments”. Further concerns about the investment impact on the UK economy came from the Global Infrastructure Investor Association.
Political interference is surely the point: the UK is unusual in its openness and the drift to economic nationalism makes such intervention perhaps inevitable. (One hopes that our senior politicians will have the headspace, notwithstanding Brexit, to consider the potential 200+ cases a year forecast to require review if the changes come in.)
Intended consequences aside, the proposals have the potential to thwart the success of the government’s own Patient Capital Review, which considered how to help innovative firms to access finance. The practicalities of compliance could restrict investment in our most promising science and technology companies to a limited pool of domestic capital. There is no minimum size of transaction, acquisitions of as low as 25% of a company are affected, and “significant influence” is loosely defined; unhelpful in an area where board seats are often usefully occupied by experienced hands. The so-called list of “core areas” is extensive and wide ranging, with broad definitions – for example, ‘nanotechnology’ – whether or not they have the potential to threaten national security. For early stage technology companies which seek multiple rounds of investment and require close confidentiality to protect their intellectual property, uncertain timetables and reliance on civil service resourcing could be critical to their very survival. David Petrie, head of corporate finance at ICAEW, called it “politically motivated economic protectionism”: a white paper with a laudable aim but a missing sense of proportionality.
The government will publish responses to the consultation in the new year – assuming it’s still there.
Written by Martha Walsh, Partner
16 November 2018