For legal purposes, there are three largely separate jurisdictions in the UK: England and Wales, Scotland and Northern Ireland. All use a common law system, except Scotland, which has a mixed common law and civil law system.
The highest form of law is statute passed by the UK Parliament. Law is also developed by judges in each jurisdiction through cases (“common law”), but this is constrained by the use of precedents (or otherwise principles) from the existing case law. The doctrine of precedent dictates that previous decisions of a senior court must be followed by lower courts. The Supreme Court is the final court of appeal in the United Kingdom for non-criminal cases, and for criminal cases from England and Wales and Northern Ireland. While not bound by precedent, it leaves it to Parliament to settle especially controversial issues.
Statute has incorporated two further sources of law: EU law and the European Convention on Human Rights (ECHR).
Under the European Union (Withdrawal Agreement) Act 2020, the UK was subject to EU law, including any new laws, until the end of the implementation period on 31 December 2020. EU law directly applicable to the UK at that point (principally regulations and decisions) continues to apply under the European Union (Withdrawal) Act 2018. However, the EU Treaties, EU free movement rights and the general principles of EU law have ceased to apply, and UK law no longer tracks changes to EU law as they are made in the EU.
In September 2022, the UK government introduced the Retained EU Law (Revocation and Reform) Bill, which seeks to revoke all remaining EU-derived legislation by the end of 2023. The Bill will give ministers and devolved administrations scope to retain, replace or amend EU-derived legislation.
The UK’s constitution is largely uncodified. Decisions of government ministers that appear to lack statutory justification may be reversed by judges (“judicial review”). Additional regulation of the practice of governance emanates from unwritten practices (“conventions”) developed over centuries.
The UK does not currently have a general foreign investment regime, per se, but investments may be assessed under the merger control and public takeover regimes as well as under the National Security and Investment Act 2021 (the NS&I Act) in respect of investments in certain sectors.
The UK merger control regime is the responsibility of the Competition and Markets Authority (CMA), which has jurisdiction over a merger situation if the UK revenue of the target exceeds GBP70 million or if the combined enterprise will supply or acquire 25% or more of goods or services in a substantial part of the UK. Lower thresholds apply to certain sectors involving the development of military and dual-use equipment and systems, as well as parts of the advanced technology sector; see 6. Antitrust/Competition. The UK government also holds golden shares in a number of UK defence companies.
The UK government has the power under the Enterprise Act 2002 (EA02) to intervene in merger cases qualifying for review by the CMA where the transaction raises a defined public interest consideration. Furthermore, the Secretary of State may intervene in cases where the UK merger control jurisdictional tests are not met but the investment constitutes a “special merger situation”; see 7. Foreign Investment/National Security.
In 2021, the NS&I Act was given royal assent and came into force at the beginning of 2022. The NS&I Act imposes mandatory notifications for investments in specified sectors and is intended to create new powers to scrutinise investments on the basis of national security considerations; see 7. Foreign Investment/National Security.
A UK investment may also qualify for review by the European Commission under the EU Merger Regulation (EUMR) and merger control regimes of other countries. Following the expiry of the Brexit transition period, the EUMR’s “one-stop shop” principle no longer applies to the UK, meaning that investors may need to submit parallel notifications in the UK and EU in order to obtain clearance for an investment; see 8. Other Review/Approvals.
Different rules apply for transactions involving water and sewerage undertakings.
There are also several industry-specific licensing and regulatory regimes in the UK that may require the consent of a UK sector regulator before an investment can be made.
The UK has long attracted net financial inflows. It is likely to continue doing so, given the favourable institutional context for investors compared with many other major jurisdictions, even if assets in sensitive sectors attract greater political scrutiny.
The UK’s balance of payments data consistently shows a financial account surplus and a current account deficit. By implication, there are more ostensibly profitable investment opportunities than can be met by domestic savings. The result has been a net inflow of money from selling assets to overseas investors, from shares to mortgages. The corollary has been a persistent current account deficit, for many decades (driven by the net outflow of money in the form of paying income to foreign owners of UK assets in interest and dividends).
National Security and Employment Implications of Foreign Investment into the UK
There is a growing belief that foreign inflows should nevertheless be monitored for national security implications. In 2021, Parliament passed the NS&I Act to create new powers to impose remedies on, or block, investments that have national security consequences. The government estimated that up to 1,800 transactions may be notified each year, with up to 95 triggering the threshold for full assessment. However, 222 notifications were made in the first three months of the regime with 17 deals called in for full assessment. These figures are lower than the government’s initial estimates on both counts. The government’s second Annual Report due for publication in 2023 will provide a fuller picture of the functioning of the regime. See 7. Foreign Investment/National Security for a more detailed discussion of the NS&I Act.
More broadly, there has also been the concern that a foreign buyer of UK businesses will relocate jobs abroad. This was partly addressed for public takeovers by the introduction of a post-offer undertaking (POU) regime under the UK Takeover Code. POUs are legally binding, and targets can seek to negotiate POUs to safeguard employees or UK business operations if they wish to do so. SoftBank was the first bidder to make use of this, agreeing three undertakings in its 2016 cash offer for ARM in relation to the Cambridge headquarters, UK employees and non-UK based employees. In its 2019 acquisition of Cobham, Advent International made POUs in relation to the registered name, headquarters and research spending.
UK Economic Outlook
Turning to the broader economic outlook, a number of features are relevant to prospective investors. First, Britain’s departure from the European Union is likely ultimately to bring material regulatory changes, and will continue particularly to affect trade in goods. The impact on services may prove to be less severe since the single market in services was less developed.
The second feature relates to financial stability and a high reliance on financial inflows. The Bank of England has warned of a sudden rise in asset yields if overseas investors lose confidence, with leaving the EU being a possible trigger. A longer-term issue is that foreign capital may seek opportunities that lead not to greater productive capacity, but to asset bubbles and unsustainable consumer spending (as with the memory of excessive consumer and real estate lending in the US and southern Europe in the mid-2000s).
Third, there is growing unease about the effects of trade. The UK has seven regions with a GDP per head that is less than three-quarters of the EU average, making them among the poorest in north-west Europe by that metric. The origins of this situation partly related to the fact that net financial inflows into the UK require outflows from countries whose savings exceed their domestic spending. The problem is that this saving is less due to thrift than to depressed wage rates relative to the value of output in these countries. The effect has been under-consumption in these countries and to deflate the cost of their exports relative to the UK. By depressing demand for UK exports, this has driven the deindustrialisation of parts of the UK and turned trade into a source of discontent.
A fourth issue is that the UK inflation outlook is uncertain. Inflation peaked in 2022 at 11%, placing high costs on businesses and consumers. The government’s energy price guarantee helped avoid an even greater rate of inflation at significant cost to the public finances. In response, on 15 December 2022 the Bank of England raised its interest rate to 3.5%, the highest figure since the financial crisis in 2007/8 (although not high by longer-term historical standards). Higher prices and interest rates will impact on investment in the UK.
Meanwhile, a succession of leveraged retail collapses has focused attention on the behaviour of corporates and private equity, for overleveraging balance sheets, and reducing resilience in the face of a market downturn. Average investment as a share of GDP was the second lowest in the EU, ahead only of Greece, between 2010 and 2019, and productivity and real wages have stagnated since the financial crisis in 2007/8.
With leveraged and under-invested businesses already vulnerable to earning shocks or interest rate rises, coming out of the pandemic and the reduction of government support schemes may bring a corporate debt crisis or at the very least result in material longer term refinancing needs. Overall, the level of debt taken on by UK businesses increased during the pandemic. This was particularly the case for small and medium-sized enterprises (SMEs); between December 2019 and March 2021, the level of debt taken on by SMEs rose 25%. The Bank of England considers the UK financial system to be resilient to risks from higher levels of debt among UK businesses.
Finally, environmental issues are rightly attracting heightened concern, and new rules on climate-related disclosures by listed companies have recently been announced. The tracking of climate change and environmental impacts, and climate change activism attacking some of the largest UK corporates, are here to stay and UK listed companies, in particular, are now responding to those changes more proactively.
Most fundamentally, a transaction may be structured as an asset sale or a share sale. The buyer will acquire the target company with all its assets and liabilities on a share sale, whereas the buyer can generally (as a matter of English contract law) choose the specific assets and liabilities to acquire on an asset sale. However, asset sales are not a means of avoiding the employment obligations transferred on share sales, as discussed in 10.3 Employment Protection. An asset or share sale may require third-party consents as well, like landlord’s consent.
Private companies or assets are typically transferred by a contract: a sale and purchase agreement is executed between the parties. A private company may also be acquired using a “contractual offer” followed by a minority squeeze-out (in accordance with Part 28 of the Companies Act 2006), or using a “scheme of arrangement” (proposed by the company to be acquired, in accordance with Part 26 of the Companies Act 2006).
A UK public company is principally acquired by way of a contractual offer or a scheme of arrangement. A true merger is rare; a contractual offer or scheme facilitates the acquisition of one company by the other. The City Code on Takeovers and Mergers (the Takeover Code) is the main set of rules for public company takeovers. These rules are strictly enforced by a statutory regulator, the Takeover Panel, and must be approached with considerable care.
Structuring a public M&A transaction as a contractual offer under the Companies Act 2006 will compel reluctant minority shareholders to sell their shares once the buyer has acquired at least 90% in value and of the voting rights carried by the shares to which the offer relates. Such an offer may specify an acceptance condition of 50% plus one share, with the consequence that minority shareholders will remain unless the 90% threshold is reached. By contrast, an approved scheme will automatically compel dissenting shareholders to sell; 75% of shareholders (in value, attending and voting) must approve a scheme at a meeting convened by a court. Given these mechanics, it is very rare to use a scheme for a hostile takeover bid since a scheme in practice requires a receptive target company board and for the company itself to shepherd the scheme through the court process.
A contractual offer including shares (or other transferable securities) as consideration will typically require an FCA-approved prospectus (or exempt equivalent document). There is no prospectus requirement for a scheme, even on a share-for-share exchange (unless there is a mix and match election under which shareholders may choose between cash and shares), since it is not an offer to the public; the exception is if consideration shares amount to 20% or more of the relevant class already admitted to trading.
The chances of success of an offer can be increased by market purchases, since they can count towards the acceptance condition. However, if made before the sending of the offer document or for more than the offer price, they will not count towards the squeeze-out level.
Shares already owned by the bidder will not form part of the class approving a scheme.
Private company minority investments will typically be structured as a transfer of shares from existing shareholders or by the issue of new shares by the investee company to the investor. For minority investments in publicly listed companies in the UK, care must be taken to ensure that no mandatory takeover offer requirement is triggered pursuant to the Takeover Code – this would be triggered if the investor together with any concert parties (broadly defined) acquires an interest in 30% or more of the company’s issued share capital.
In order for the new holder of shares to be entered in the register of members, stamp duty must be paid, assuming shares have been acquired through an acquisition rather than by way of a new share issuance. There may also be (usually nominal) fees for the registration of assets.
The UK’s corporate governance regime has a number of principal sources.
The Companies Act 2006 (CA 2006) is the major set of rules for corporate governance. It codifies a number of common law duties of directors: to act within powers; to promote the success of the company; to exercise independent judgement; to exercise reasonable care, skill and diligence; to avoid conflicts of interest; not to accept benefits from third parties; and to declare any interest in a proposed transaction or arrangement with the company. Other important corporate governance provisions are set out in the Insolvency Act 1986, the Criminal Justice Act 1993, the Financial Services and Markets Act 2000, the Bribery Act 2010 and the Financial Services Act 2010.
The listing regime
The Listing, Prospectus, Disclosure Guidance and Transparency Rules (the LPDT Rules) are the main rules regulating UK companies that are listed on the main market of the London Stock Exchange. Companies must also comply with the continuing obligations. The Market Abuse Regulation (MAR), as now incorporated within UK law, sets out requirements on disclosing inside information and dealings in shares by persons discharging managerial responsibilities.
UK Corporate Governance Code (CGC)
The CGC is a set of principles and provisions of good governance (without statutory force). All companies with a premium listing on the London Stock Exchange must comply with the CGC or explain in what respects they do not comply and why, and include a statement in the annual report explaining how the company has applied the “main principles” of the CGC. Failure to comply could affect investors’ confidence and result in shareholder votes against the company and its board at annual general meetings. In July 2022, the Financial Reporting Council (FRC) announced plans to update the CGC with a stronger framework for reporting on internal controls and board responsibilities. The FRC is due to be replaced by The Audit, Reporting and Governance Authority (AGRA). The AGRA will have extended scope to scrutinise the largest private, unlisted companies and robust powers to monitor and regulate the audit market.
Articles of association
These will contain provisions (possibly beyond those required in the CA 2006) on the extent of directors’ powers in respect of the company.
Legal Entity Forms
The main forms of legal entity are as follows.
Private company limited by shares (Companies Act 2006)
Members are liable to pay any amount unpaid on their shares. The company is a separate legal entity. Disclosure must be made to the Registrar of the registered office, company name, accounts, directors, members, Persons of Significant Control, capital and charges over the company’s assets. The provisions of the CA 2006 and articles of association govern meetings of the directors and shareholders. It is an offence to offer shares to the public.
Private companies can be converted into public (plc) companies, which enables them to offer new or existing shares to the public. The minimum share capital required is GBP50,000, 25% of which must be paid up in full. It is also possible, once public, to list the shares. The disadvantages of listing include compliance with significant regulatory requirements under the LPDT Rules, MAR and the London Stock Exchange Admission and Disclosure Standards.
Partnership (Partnership Act 1890)
Partners have joint and several unlimited liability. The partnership does not have a separate legal personality. No disclosure is required. Almost all governance matters are left to the partnership agreement. Finance cannot be raised by issuing shares.
Limited partnership (Limited Partnerships Act 1907)
General partners have unlimited liability; limited partners not involved in day-to-day management are liable for the amount of their contribution to the partnership. The partnership does not have a separate legal personality. There is very limited disclosure required. Almost all governance matters are left to the partnership agreement. Finance cannot be raised by issuing shares.
Limited liability partnership (Limited Liability Partnerships Act 2000)
Individual members’ liability is limited to that they agreed to pay under their LLP agreement. The LLP is a separate legal entity but is tax transparent. Disclosure must be made to the Registrar of the registered office, accounts, members and Persons of Significant Control. Almost all governance matters are left to the partnership agreement.
It is also possible to set up an unlimited company, where the shareholders have unlimited liability for the debts of the company in certain circumstances, but these are relatively rare.
Under sections 994 to 999 of the CA 2006, non-controlling shareholders have the right to petition the court for a remedy if their rights are unfairly prejudiced by controlling shareholders voting in their own self-interest. They may also bring a claim on the company’s behalf against controlling shareholders if the latter commit an act of fraud on the non-controlling shareholders. Otherwise, the rule in Foss v Harbottle applies, whereby only the company is the proper claimant in an action for a wrong done to it.
Shareholders with at least 5% of the voting rights may require the directors to call a general meeting under CA 2006. If the directors fail to do so, the members may themselves call a general meeting.
Given the limits of these statutory rights, minority shareholder protections must generally be negotiated into separate shareholders’ agreements with the relevant company which, depending on the size of the minority’s holding, could cover board appointment or observer right, reserved matter veto protection on transactions, strategic changes, share issuances and other matters significant to the company, and anti-dilution protection.
The FCA’s Transparency Rules (DTR 5) stipulate an announcement if the voting rights held, directly or indirectly, in a listed company exceed or fall below 3% (or 5% for certain types of professional investor). If a stake of at least 3% is already held, then it is also necessary to notify any percentage point change in that stake.
Under the Takeover Code, if an announcement of an offer or possible offer is made for a public company, the target, the bidder and anyone who is interested in 1% or more of any class of relevant securities must disclose their shareholdings in the target and any dealings in shares in the target throughout the offer period.
For schemes or contractual offers, the Takeover Code sets out disclosure requirements for offer documents and circulars. For the bidder, these include how the bid is to be financed, material contracts entered into in the previous two years, dealings in target shares and intentions concerning the future business of the target and the employees.
From January 2022, in-scope companies and LLPs are subject to new mandatory climate-related reporting requirements in line with the recommendations of the Taskforce on Climate-related Financial Disclosure.
The debt capital markets, rather than banks, have financed the majority of the significant rise in corporate debt over the last decade. This has been associated with securitisation and the rise of direct lending by non-bank financial firms, including insurance, pension, private-credit and hedge funds. More than two-thirds of the debt outstanding for larger UK companies in 2019 was market-based, with GBP540 billion being debt securities and GBP159 billion being non-bank loans, according to the Bank of England. Bank lending to large companies was split roughly evenly between large UK banks, cross-border lending and other UK-based banks (including foreign subsidiaries).
The equity capital markets have a public-private divide. Many public companies refrain from issuing new equity, as they generate enough cash to meet their investment needs. The FTSE 100 is generally characterised by mature companies returning value to shareholders. The last two decades have therefore seen a significant decline in the ratio of capex and research and development to dividends and buybacks. Public shareholders have also been receptive to returns of value through acquisitions for cash, as with SoftBank’s acquisition of ARM and Comcast’s acquisition of Sky.
While it has been common to return cash to shareholders, for cash that is needed the trend has been to use debt over new equity, and if possible to reduce the existing equity through buybacks, to enhance shareholder returns. The effect of buybacks and high leverage has been to place considerable demands on cashflows to service debt. During the COVID-19 pandemic crisis, though, the equity capital markets were used heavily to raise new money for UK issuers, including through overnight structured non-preemptive placing transactions, rights issues or open offers. There is an accelerating trend to try to involve retail shareholders in even overnight placing transactions, using new platform technology, to minimise their dilution.
By contrast, an increasingly large pool of venture and growth capital is seeking businesses which are not yet cash-generative and not yet interested in a public market listing. Private companies are staying private for longer, and in the UK 25 businesses achieved unicorn status in 2021. Start-ups and scale-ups in the UK attracted GBP29.4 billion of investment in 2021, significantly more than the equivalent figures raised in Germany and France. Growth outside of London was particularly strong; in 2021 seed-stage investment outside of London rose by 88%. The UK continues to attract investment in the tech and fintech sectors.
The UK is currently undergoing a period of capital markets reform that seeks to encourage the listing in London of more high-growth, founder-led businesses. New rules permit the use of dual class share structures, with embedded founder/director protections, for premium-listed businesses. Furthermore, there is a consultation process underway to seek to liberalise and speed up the process for listed companies raising secondary funds in the public markets. The FCA published Consultation Paper 22/12 “Improving equity secondary markets” in July 2022 and is in the process of reviewing responses.
The UK Financial Services and Markets Act 2000 (FSMA) is supplemented by the LPDT rules (see 4.1 Corporate Governance Framework) and is the principal piece of domestic legislation governing offers of securities in the UK. Communications of an invitation or inducement to engage in investment activity (“financial promotions”) are strictly regulated (with criminal penalties).
EU regulations will depend on the terms of the future relationship between the UK and the EU. At present, the main regulations are the Prospectus Regulation and MAR, which are enforced by the Financial Conduct Authority.
Exchange requirements: the London Stock Exchange’s Admission and Disclosure Standards apply to issuers admitted to the Main Market of the LSE.
Secondary issues (by placing, open offer or rights issue) are subject to the requirements of the Companies Act 2006 and investor guidelines, principally those of the Investment Association and the Pre-Emption Group.
A prospectus will be required if the company makes an offer of transferable securities to the public in the UK. Exemptions include where the offer is addressed solely to qualified investors or to fewer than 150 persons.
A prospectus will be required if the company applies for the securities to be admitted to trading on a regulated market in the UK. Exemptions include where the securities are fungible and already admitted to trading and represent less than 20% of the securities already admitted to trading over a period of 12 months.
A foreign investor structured as an investment fund would not be subject to any additional regulatory review, unless, as part of the investment, interests in the relevant fund are offered to UK persons (marketing restrictions would apply).
The UK’s merger control regime is established by the EA02, and the relevant authority is the CMA. The regime applies to a “relevant merger situation” – ie, where two or more enterprises have ceased to be, or will cease to be, distinct. An enterprise is defined as “the activities, or part of the activities, of a business”. The transfer of physical assets alone may constitute an enterprise, for example, where facilities or premises transferred allow for a particular business activity to be carried on by the purchaser.
Two enterprises will cease to be distinct if they are brought under “common ownership or common control”. Common ownership involves the acquisition of an enterprise so that two previously distinct enterprises become one. The EA02 recognises the following three levels of common control; moving from each level of control creates a new relevant merger situation.
De jure or legal control
This is the case when more than a 50% shareholding is acquired.
De facto control
This is the determination of which will depend upon an examination of the particular facts. It is generally considered that de facto control arises upon the acquisition of a shareholding of around 30% if other shareholdings are widely dispersed.
This is the ability materially to influence commercial policy, which is determined based on the particular facts. As a rule of thumb, material influence will be regarded as being conferred by a shareholding of more than 25%. The CMA’s current draft guidance notes that, although shareholdings of below 25% will typically be less likely to confer material influence, the CMA may examine any shareholding to determine whether the holder might be able materially to influence the company’s policy. The CMA will consider factors such as the distribution of shares, voting and attendance patterns, board representation, the status of the acquirer, the level of influence they have over shareholders and the existence of any consultancy agreement between the parties.
Relevant Merger Situation
A “relevant merger situation” will qualify for review by the CMA if the UK turnover of the target exceeds GBP70 million or if the merger creates an enlarged business supplying 25% or more of goods or services of any reasonable description or enhances a pre-existing share of supply of 25% or more. For certain defined sectors involving the development of military and dual-use equipment and systems, as well as parts of the advanced technology sector, the turnover threshold is lowered from GBP70 million to GBP1 million, and the share-of-supply test is met if the pre-merger share of supply of the target is 25% or more (irrespective of whether that share is increased).
Investments in the UK may also meet the thresholds for review under other merger control regimes, including the EUMR (see 8. Other Review/Approvals).
Notification, Review and Clearance
Notification under the EA02 is voluntary in the sense that there is no obligation to apply for CMA clearance before completing a transaction. The CMA may, however, become aware of a transaction and call in the merger to be notified. In addition, the CMA has significant powers to suspend or reverse all integration steps and prevent pre-emptive action. Severe financial penalties may be imposed for breaching these orders.
An application for clearance is made using the formal Merger Notice. The CMA strongly encourages parties to make contact in advance of notification to seek advice on their submission.
The 40 working-day period within which the CMA must decide whether the test for a Phase 2 reference is met will commence on the working day after the CMA has confirmed that it has received a complete Merger Notice. In general, a completed merger will no longer qualify for a Phase 2 reference four months after the date of implementation of the merger. Time will not begin to run, however, until the “material facts” of the merger have been made public or are given to the CMA. Time will also not run where undertakings in lieu of reference are under negotiation or where an information request from the CMA is outstanding. The four-month period may be extended by agreement.
The CMA has a duty to refer a transaction for a Phase 2 investigation if it believes that there is a realistic prospect that a relevant merger situation will result in a “substantial lessening of competition” (SLC). Where the SLC test is met, the CMA can accept undertakings in lieu of a reference. The parties can propose undertakings at any stage up to five working days after the communication of the SLC decision. If the CMA deems the undertakings acceptable in principle, a period of negotiation and third-party consultation follows. The CMA is required to decide formally whether to accept the undertakings within 50 working days of providing the parties with the SLC decision, subject to an extension of up to 40 working days.
The CMA’s duty to refer may also be discharged in other circumstances, namely where the merger arrangements are insufficiently advanced, the market is not of sufficient importance to warrant a reference or the merger is likely to lead to customer benefits.
If the transaction is referred to Phase 2, the CMA must issue its decision within 24 weeks (extendable up to eight weeks). When a reference is made in relation to an anticipated merger, share transfers are prohibited until the Phase 2 investigation is finally determined. For completed mergers, the EA02 prohibits any further integration of the businesses from the point of reference.
At Phase 2, the CMA must decide on the balance of probabilities whether an SLC has resulted from the transaction, or may be expected to do so. Ultimately, the CMA may issue a prohibition decision, a decision that the transaction should be allowed to proceed subject to undertakings, or an unconditional clearance. If remedies are required, the CMA has a statutory period of 12 weeks (which may be extended by up to six weeks) following the Phase 2 review to make a decision on remedies offered by the parties.
The Secretary of State may intervene in investments where the jurisdictional tests of the UK merger control regime are not met but the investment constitutes a “special merger situation”; see 7.1 Applicable Regulator and Process Overview.
In assessing whether the transaction has resulted in an SLC or is likely to do so, the CMA will identify the relevant counterfactual and one or more theories of harm to use as a framework for the substantive merger analysis. For horizontal mergers, the CMA will consider whether it may give rise to unilateral effects (where the merged firm would find it profitable to raise prices or reduce output or quality following the merger) or co-ordinated effects (where market participants are more likely to co-ordinate). For non-horizontal (vertical or conglomerate) mergers, the CMA will consider whether it may lead to the foreclosure of rivals or co-ordinated effects. The CMA will also consider other factors that may affect the competitive impact of the transaction, including efficiencies, barriers to market entry and expansion, and countervailing buyer power.
The CMA will select the least costly and intrusive remedy that it considers to be effective. This may be structural (eg, divestment of a business) or behavioural (eg, a commitment to observe a price cap for a period of time). Where the CMA considers the risks associated with a proposed package of divestments to be high, it will require the parties to find an upfront buyer.
The CMA may prohibit a transaction or require undertakings to remedy an SLC either before or after the investment is made. Any person aggrieved by the CMA’s decision may apply to the Competition Appeal Tribunal (CAT), which will apply judicial review principles to the application. An appeal lies, on points of law only, from a decision of the CAT to the Court of Appeal (CA) and requires the leave of either the CAT or the CA.
While there is no obligation to apply for CMA clearance before completing a transaction, the fact that the CMA is currently calling in many un-notified deals and imposing strict enforcement orders means that many companies elect to notify their transactions.
For the EUMR, see 8. Other Review/Approvals.
Public interest and special public interest mergers
The UK government has the power under the EA02 to formally intervene in merger cases qualifying for review by the CMA where the transaction raises a defined public interest consideration. These are currently limited to media quality and plurality, accurate presentation of news and free expression in newspaper mergers, national security, the stability of UK financial system, and public health emergencies. The Secretary of State may issue an intervention notice whilst simultaneously seeking Parliament’s approval for the recognition of a further category of public interest consideration.
In addition, the Secretary of State may intervene in cases where the jurisdictional tests of the UK merger control regime are not met but the investment constitutes a “special merger situation”. This is where the investment would otherwise be considered to be within the scope of the UK merger control regime and one of the parties is a relevant government contractor or a supplier of 25% of all newspapers or broadcasting in a substantial part of the UK.
In 2021, Parliament passed the NS&I Act which created new powers to scrutinise and impose remedies on, or block, investments that have national security consequences. The NS&I Act only provides for intervention in cases that pose a risk to national security and not, for example, in cases of foreign investment in the UK that pose other political or economic concerns, such as the retention of UK jobs. In addition to investments in the UK, the NS&I Act catches investment in non-UK companies if they carry on activities or supply goods and services to people in the UK. The Act came into force at the beginning of 2022 and applies retrospectively to all transactions taking place from 12 November 2020.
The new regime entails mandatory notifications for certain core sectors and voluntary notifications for transactions in other sectors that may nonetheless raise national security concerns. The mandatory notification requirement captures acquisitions resulting in shareholdings of 15% or more (with the government then deciding whether the acquisition gives rise to “material influence” – the test mirroring that in the UK merger control regime), or shareholdings of 25% or more regardless of whether there is material influence, whereas the voluntary regime is triggered by acquisitions resulting in shareholdings of 25% or more, or of a right or interest in an asset that results in an ability to use or control that asset. While the mandatory regime is restricted to companies, the voluntary regime catches investment in assets and even “ideas, information or techniques which have industrial, commercial or other economic value”.
As a result of the NS&I Act, the public interest ground of national security has been removed from the EA02 regime, along with the lower turnover and share of supply intervention thresholds that were introduced for certain defined sectors.
Where the jurisdictional tests are satisfied, the EA02 and NS&I Act rules will apply. However, the NS&I Act provides (generally) an exception to the call-in power where an asset is acquired by an individual for purposes that are mainly outside the individual’s trade, business or craft.
Requirements, Process and Timeline for Notification, Review and Clearance
Public interest and special public interest mergers
If the Secretary of State issues an intervention notice in respect of a case that qualifies for review by the CMA, the CMA will invite representations on the public interest consideration. The CMA will then produce a public interest report for the Secretary of State, along with the CMA’s findings on the competition and jurisdictional issues.
If the Secretary of State concludes that public interest issues are material, they will have broad discretion to decide whether the transaction ought to be cleared or referred to Phase 2, or whether to seek undertakings in lieu from the parties.
Where the CMA advises that the merger should be referred to Phase 2 on substantive competition grounds as well, the merger will be referred on both grounds in tandem. The CMA will then make findings at Phase 2 on the overall public interest, but these are advisory only; the Secretary of State determines the adverse public interest finding and remedial action.
For special public interest mergers, the Secretary of State must issue an intervention notice specifying the public interest consideration. The CMA will provide a report on whether a special merger situation has arisen; the Secretary of State will then decide whether or not to refer the merger for a Phase 2 investigation based on the specified public interest consideration only.
Where the Secretary of State refers the merger to Phase 2, the CMA has to prepare a report and give it to the Secretary of State within 24 weeks (subject to a possible eight-week extension) from the reference. The Secretary of State will then decide within 30 days on remedial action.
For public interest mergers and special public interest mergers, the Secretary of State has up to four months after the transaction completes or is made public (whichever is later) to refer a merger to a Phase 2 investigation.
The NS&I Act creates a mandatory notification regime for “core” sectors in which the government considers that national security concerns are most likely to arise – these include defence, AI and certain telecoms and internet infrastructure sectors, amongst others. Government approval will be required before a transaction in these sectors can complete; otherwise, the deal will be legally void and a penalty of up to five years’ imprisonment may be imposed. Alternatively, individuals may be fined up to GBP10 million and companies either GBP10 million or 5% of global revenue, whichever is higher. The government can call in the deal in these core sectors whenever it is discovered; there is no deadline. If a deal completed between publication and passing of the Bill that led to the NS&I Act, the deadline is five years, or six months from the government becoming aware.
For non-”core” sectors, notification is voluntary but encouraged if the investment raises national security issues. Unlike the CMA, which can call in a merger up to four months from closing, the government will be able intervene up to five years from completion for investments in a voluntary notification sector. However, this call-in power can only be used for six months after the government becomes aware.
From notification, the government will have 30 working days to call in the deal. If it does, there is a further 30 working-day review period (which may be extended by 45 working days or, if agreed with the investor, indefinitely).
Public Interest and Special Public Interest Mergers
The test for public interest and special public interest mergers is whether the transaction may be expected to operate against the public interest, taking into account the relevant public interest considerations.
The test applied under the NS&I Act is whether the transaction gives rise to a risk to national security, or would give rise to such a risk if carried into effect.
Public Interest and Special Public Interest Mergers
The Secretary of State can take such action as is considered reasonable and practicable to remedy, mitigate or prevent any of the adverse public interest effects, including blocking the transaction if necessary.
The NS&I Act gives the government the power to impose such remedies as it considers necessary to protect national security – including blocking the transaction and imposing conditions such as limiting the amount of shares an investor is permitted to acquire, putting access controls on sensitive or commercial information, or limiting access to certain operational sites. Interim orders during the course of the review may also be issued to prevent any change to the status quo until its final decision.
Public Interest and Special Public Interest Mergers
An intervention notice by the Secretary of State would not prevent the transaction completing. However, if an adverse public interest finding is made, the Secretary of State can take such action as is considered reasonable and practicable to remedy, mitigate or prevent any of the adverse public interest effects, including blocking the transaction. Any person aggrieved by the Secretary of State’s decision may apply to the CAT, which will apply judicial review principles. An appeal lies, on points of law only, from a decision of the CAT to the CA and requires the leave of either the CAT or the CA.
The NS&I Act allows the government to impose remedies, as discussed above. An application for judicial review of the government’s decision can be made to the High Court (the Court of Session in Scotland).
After the Brexit transition period, the EUMR’s “one-stop shop” principle no longer applies to the UK, meaning that purchasers may need to submit parallel notifications in the UK and EU.
The EUMR applies to “concentrations” with an EU dimension. An EU dimension depends on the satisfaction of jurisdictional thresholds based on revenue. If satisfied, the transaction must be notified to the European Commission and the parties must generally suspend completion until clearance is provided. Substantial fines of up to 10% of the aggregate worldwide turnover of the parties may be imposed for failure to notify or for completion prior to clearance.
The investigation is usually completed within a Phase 1 period of 25 working days. If a Phase 2 investigation is needed, this will typically take a further six months.
The Commission will assess whether the concentration would “significantly impede effective competition, in the internal market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position.” This entails similar factors to those listed in 6. Antitrust/Competition for the UK merger regime.
The Commission may accept commitments from the parties instead of a Phase 2 investigation. Following a Phase 2 investigation, the Commission will either clear the deal (often with conditions) or prohibit it.
If the Takeover Code is relevant, the public companies concerned must submit a firm offer announcement to the Takeover Panel. See 3.1 Transaction Structures and 4.3 Disclosure and Reporting Obligations for more details.
The main taxes are as follows.
This is payable by UK resident companies, non-UK resident companies that carry on a trade of dealing in or developing UK land or have a UK property business or income, and non-UK resident companies that carry on a trade in the UK through a permanent establishment in the UK. A company will generally be tax resident in the UK if it is either incorporated or centrally managed and controlled in the UK.
From 1 April 2023, there will no longer be a single corporation tax rate. The corporation tax main rate will increase from 19% to 25% for profits above GBP250,000, and a small profits rate of 19% will apply to companies with profits of GBP50,000 or less. Companies with profits between GBP50,000 and GBP250,000 will pay tax at the main rate, reduced by a marginal relief.
A company will be taxed at the company level. A UK resident company will be chargeable to corporation tax on all profits wherever arising (subject to exemptions).
For partnerships, limited partnerships and limited liability partnerships, the partners are generally taxed on their share of the profits; the partnership itself is mostly tax transparent.
This is payable on the transfer on sale of stock or marketable securities. The standard rate is 0.5% of the amount or value of the consideration. Stamp duty has little relevance if the issuer is not a UK-incorporated company.
Stamp Duty Reserve Tax (SDRT)
This (also 0.5%) is charged on an agreement to transfer chargeable securities (principally shares issued by a UK-incorporated company). However, where stamp duty is paid within six years from the SDRT charge arising, there is provision for the cancellation of the SDRT charge.
Stamp Duty Land Tax (SDLT)
This is a tax on transactions involving immovable property and is payable by the purchaser. The top rate of SDLT on commercial property is 5% and applies to the extent that the consideration exceeds GBP250,000. The standard charge on the rental element of a new non-residential lease is 1% on the portion of the net present value of the rent over GBP150,000, rising to 2% above GBP5 million.
Value-Added Tax (VAT)
This is charged on taxable supplies:
This is recoverable by a taxable person (subject to conditions).
In most cases, no withholding tax is imposed on dividends paid by a UK resident company.
The UK imposes withholding tax at the rate of 20% on “yearly” interest that has a UK source. Applicable double tax treaties can reduce or eliminate this.
Various domestic exceptions may also be available, including the following:
The UK imposes withholding tax (at 20%) on royalties paid for intangible assets. Double tax treaties can reduce or eliminate this.
The Finance Act 2019 introduced a new income tax charge on offshore receipts for intangible property, including royalty payments, received in low- or no-tax jurisdictions in connection with sales to UK customers.
Availability of Treaty Benefits
The UK has avoided wide limitation on benefits articles and prefers specific provisions in particular articles. For example, the Dividends, Interest or Royalties article may provide that the UK will not give up its taxing rights if, broadly, the main purpose or one of the main purposes of the creation or assignment of the relevant shares, loan or right to royalties is to take advantage of the article.
The UK’s General Anti-Abuse Rule (GAAR – see 9.5 Anti-evasion Regimes) can, in principle, apply if there are abusive arrangements seeking to exploit provisions in a double tax treaty or the way these interact with other UK tax law.
A purchaser may choose to acquire shares or business assets; which is more attractive from a tax perspective will depend on the circumstances.
The tax liabilities of a target company carrying on the business will remain with the target company following an acquisition of shares in that company; a purchaser will seek protection from the seller for pre-completion tax liabilities of the target. Any tax losses continue to be available to set off against future profits (there are restrictions on how carried-forward losses can be used, as well as anti-avoidance rules that can deprive a company of carried-forward losses after a change of control of that company).
A disadvantage of a share sale is that the target company’s historic base cost in its assets is generally unaffected by the transfer of ownership of its shares and is likely to be lower than the base cost the purchaser would have acquired if it had instead purchased the assets from the target company. The amount paid for such assets will generally constitute the purchaser’s new base cost in such assets for the purpose of calculating its chargeable gain on any future disposal (subject to connected parties rules). Another advantage of an asset sale is to claim capital allowances for expenditure incurred on plant and machinery, and to obtain tax relief for expenditure on intangible assets.
While a UK company benefits from relief from UK corporation tax for interest payments, this area is subject to continually increasing restrictions (including under the UK’s thin capitalisation regime, the corporate interest restrictions rules, the unallowable purpose rules, targeted anti-avoidance rules and the anti-hybrid rules).
Capital gains realised on the disposal of assets by non-residents are not generally subject to corporation tax unless the assets were used for the purposes of a trade carried on through a UK permanent establishment.
Corporate sellers within the scope of UK corporation tax on any gain may benefit from the Substantial Shareholding Exemption (SSE), which exempts from corporation tax any chargeable gain on the disposal of shares, if certain conditions are met.
If SSE is not available and the UK company stands to make a chargeable gain on the disposal, it may be able to defer paying tax on that gain if the consideration comprises shares or loan notes. If a UK company disposes of business assets, tax on any chargeable gains arising from the sale of land, buildings and fixed plant and machinery can, in certain circumstances, be deferred by claiming business asset rollover relief, provided the proceeds of the sale are reinvested in qualifying assets.
Significant Exceptions to the Exemption
First, with limited exceptions, corporation tax will apply to gains arising on direct and indirect disposals of UK land by a non-resident. This covers disposals of shares in entities that derive at least 75% of their value from UK land (if the person making the disposal holds a substantial indirect interest in the land, generally at least 25%). Disposals of shares that derive at least 50% of their value from UK land may also be subject to tax, under certain anti-avoidance rules, if the main purpose of the acquisition of the shares was to realise a profit or gain.
Second, non-residents may be subject to tax on gains arising on direct or indirect disposals of petroleum production licences for exploration in UK waters.
The UK has a General Anti-Abuse Rule (GAAR), which contains two tests: are there arrangements whose main purpose is securing a tax advantage; and, if so, are they arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action?
The UK has disclosure rules which are designed to provide HMRC with information about potential avoidance schemes. The UK has also implemented the EU intermediaries disclosure rules (known as DAC6), which provide for the mandatory disclosure of cross-border “potentially aggressive tax planning arrangements”.
Transfer Pricing Rules
Transfer pricing rules govern transactions between connected companies, either within the UK or cross-border. HMRC may tax the transaction as if it had been made at arm’s length, not its actual value, if the terms of the transaction would not, in HMRC’s view, have been agreed by independent parties. It is possible to make an application for an advance transfer pricing agreement (APA) that is accepted as arm’s length. In cross-border transactions, the double taxation caused by a transfer pricing adjustment can be mitigated by a tax treaty.
The UK also has a diverted profits tax, to protect the UK tax base. It has two main targets: where there is a substantial UK operation but sales to UK customers are made by an affiliate outside the UK, in such a way that the UK operation is not a permanent establishment of the non-UK affiliate; and where the UK operation makes deductible payments (eg, IP royalties) to a non-UK affiliate, these are taxed at less than 80% of the rate of corporation tax and the affiliate has insufficient “economic substance”. As a deterrent, the rate applicable to the “diverted” profits is 25%. This rate will rise to 31% from 1 April 2023 to maintain the current differential between the diverted profits tax rate and the corporation tax rate.
The UK has also implemented a very broad “anti-hybrids” regime designed to eliminate instances of tax arbitrage in international corporate tax structures. Third-party, commercially motivated transactions are potentially within scope.
The relationship between employer and employee is governed at common law by the contract of employment. Statute and statutory instruments also confer minimum rights on employees (and “workers”, who are entitled to a more limited range of statutory protections).
UK law implies certain terms into employment contracts, including obligations on the employee to exercise reasonable skill and care in performing their duties, and obligations on the employer to take reasonable care of the health and safety of the employee.
All employees are entitled to receive notice of termination (unless the employee has committed a repudiatory breach of contract justifying summary dismissal). There is a statutory minimum of (broadly) one week’s notice for each complete year of service, up to a maximum of 12 weeks.
An employee who has been continuously employed for two years has a statutory right not to be unfairly dismissed. An employee is unfairly dismissed unless an employer can establish that one of the five statutory reasons for dismissal applies. The employer must also act reasonably in treating that reason as sufficient. This will require a fair and reasonable dismissal process.
Employees have the right to join an independent trade union. In 2021, 23.1% of UK employees were trade union members (Department for Business, Energy and Industrial Strategy, 25 May 2022).
An employer must consult collectively with elected employee representatives if it proposes to dismiss as redundant 20 or more employees within a period of 90 days or less. If an employer fails to comply, compensation of up to 90 days’ pay per affected employee may be payable.
From April 2023 the National Living Wage will be GBP10.42 an hour (rates updated annually), which applies to all workers aged 23 or over. Younger workers and apprentices are entitled to the National Minimum Wage.
All workers have the right to 5.6 weeks’ paid holiday each year. This can include public holidays. Employers are required to pay statutory sick pay (SSP) to employees who are off work due to illness or injury (subject to certain qualifications).
Employers must enrol eligible employees automatically into a qualifying pension scheme and contribute to it. The minimum employer contribution is 3% of the employee’s annual salary.
Some employers use bonuses and share schemes or similar variable remuneration arrangements as a means of rewarding employees (generally a matter of contract).
An employee who has been continuously employed for two years is entitled to a statutory redundancy payment.
Employee Compensation in an Acquisition, Change-of-Control or Other Investment Transaction
Where the acquisition is by way of a share sale, there is no direct effect on employment contracts, as there is no change of employer.
Where the acquisition is by way of an asset sale, the rights of employees will depend on whether the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) apply (see 10.3 Employment Protection).
TUPE operates to automatically transfer the employment of all those employees assigned to the business being sold, or the function being in/outsourced, to the purchaser or new service provider. The terms and conditions of employment are protected, and there are restrictions on dismissals. There are obligations on both parties to inform and, in appropriate circumstances, consult with elected representatives of affected employees.
As noted above, on a share sale there is no direct effect on employment contracts.
There is no general obligation to notify a works council or trade union when an investment transaction is to take place. However, this will depend on whether there is an applicable works council agreement or collective bargaining agreement.
The NS&I Act gives the UK government new powers to review transactions that give rise to national security concerns. Previously, acquiring intellectual property of itself was unlikely to be of concern, but now it could constitute a “trigger event”.
The NS&I Act obliges companies operating in 17 “sensitive sectors” to obtain approval for certain types of transactions. The new regime is likely to affect many technology-related transactions. Pharmaceutical-related transactions are less likely to be affected, unless they involve “critical suppliers to government”.
The UK is considered to have a robust intellectual property regime. Protection for patents, designs and trade marks can be applied for and registered with the UK Intellectual Property Office. For unregistered rights, UK law recognises and protects rights in copyright, databases, trade secrets, unregistered trade marks and unregistered designs. Intellectual property rights can be enforced via the court system, where there are specialist intellectual property judges and (for lower value claims) an Intellectual Property Enterprise Court. The main civil remedies are damages or an account of profits, permanent or interim injunctions, and delivery up or destruction of any stocks of the infringing product. Criminal sanctions can be imposed in certain situations.
There are some very specific circumstances in which IP rights may be compulsorily licensed or prevented from being used – for example, patents (non-exploitation or licensing on reasonable terms, post-CMA Review, Crown use, biotechnological inventions and public health grounds) and trade marks (adoption of plain packaging for tobacco products, which may be extended to other “sin” products).
The EU General Data Protection Regulation (EU GDPR) became applicable in the UK in May 2018. The GDPR left some areas to national governments to legislate on, with the UK enacting the Data Protection Act 2018 (DPA). After 31 December 2020, the UK’s version of the GDPR (the UK GDPR) came into force to (broadly) replicate the EU GDPR in the UK.
Organisations in the UK that process personal data will have to comply with the UK GDPR and the DPA in relation to how they handle such data. They will also need to demonstrate “accountability” by keeping records of processing activities, implementing data protection policies and training staff.
The EU and UK GDPR both have extra-territorial effect. A non-UK organisation will be subject to the UK GDPR if it offers goods or services (eg, an e-commerce website) to data subjects in the UK or monitors their behaviour within the UK. This is the case even if the goods or services are not charged for.
The independent supervisory authority for the UK is the Information Commissioner’s Office (ICO). Many of the EU data protection authorities, including the ICO, are very active.
The ICO has a range of enforcement powers at its disposal. The maximum fine for controllers and processors is either GBP17.5 million or 4% of annual global revenue in the previous year, whichever is higher. There is no formal multiplier on penalties linked to economic loss but the ICO has published guidance on how it calculates fines and the mitigating and aggravating factors it will take into account. Individuals who suffer “material or non-material damage” (such as distress) as a result of non-compliance by an organisation can also claim compensation from that organisation.
The DPA contains the criminal offences of unlawfully obtaining personal data, re-identifying de-identified data and altering personal data.
In October 2021, the government published plans to develop a “green” taxonomy and new Sustainability Disclosures Requirements (SDR) under its “Greening Finance: a Roadmap to Sustainable Investing” policy paper. The proposed taxonomy, which is intended to operate in a similar vein to that in place in the EU since 2020, will set out the criteria which specific economic activities must meet to be considered environmentally sustainable and therefore, taxonomy-aligned. The proposals would help investors and companies make informed sustainability-related investment decisions.
The government intended legislation to come into force in late 2022. In December 2022, plans to introduce a taxonomy were put on hold. The government will provide a further update on the proposals in early 2023.
The FCA is currently consulting on the SDR until 25 January 2023. It intends to consider the impact of a taxonomy on its SDR and investment labels once the proposed taxonomy comes into force.
Setting a Long-Term Strategy for UK Growth in the Wake of Brexit and COVID-19
Following a tumultuous 2022, the UK continues to find itself at a crossroads with an economic outlook more uncertain than at any point over the last decade. It will only be able to choose a path for the future once it is able to move out of crisis mode and set a long-term strategy for (i) handling its position in the world and its approach to business and regulation post-Brexit, and (ii) building back better after the COVID-19 pandemic and its inevitable economic after-shocks are weathered. Rising inflation and economic instability caused by the global energy crisis and political decision-making at home has badly knocked consumer and business confidence. Reducing inflation and resolving the current wave of industrial action are a vital short-term priority for the government. Long-term, the UK must safeguard itself against shocks to global energy supply. In terms of its strategy for business, the UK needs to choose its direction between – on the one hand – maintaining its successful reputation, earned over several decades, of being a liberal, open economy in which to do business, a market that typically facilitates and does not impede inward investment, and – on the other – becomingly increasingly protectionist, and more heavily but more nationalistically regulated in an attempt to defend national businesses and control M&A activity. A clear business-friendly strategy would help to build back credibility with global businesses, amongst which the UK’s reputation for predictability and entrepreneurial pragmatism has taken a few knocks in recent years.
Greater protectionism and more stringent regulation of foreign investment
There have been signs pointing towards a more protectionist and regulated, more political, direction emerging in recent years. The Competition and Markets Authority (CMA) in the UK has increasingly been flexing its muscles and intervening in merger cases – in particular in the tech space – where previously it would have had no interest. It has stretched its usual interpretations of jurisdiction and developed new theories of harm for that purpose, and many mergers have become more difficult (sometimes near impossibly difficult) as a result. The CMA is at the top table of global competition regulators and has its own policy priorities; as a result, mergers with any actual or potential UK nexus need to be approached with greater caution. With the Chair of the Federal Trade Commission in the USA, Lina Khan, being extremely interventionist and with Margrethe Vestager still in post as the EU’s Commissioner for Competition, tech continues to have a hard ride with what is an increasingly co-ordinated and tough set of competition regulators.
Similarly, the National Security and Investment Act that came into force at the beginning of 2022 will continue to cause a reasonable amount of uncertainty as to the executability of UK inward investment in certain sectors. The legislation created a new regime that mandatorily requires the notification of transactions in certain, broadly defined sectors, on grounds of national security, and the government now has the power to call in other transactions, for which mandatory notification was not required, for a period of five years after their announcement. The government’s second Annual Report due for publication in 2023 will provide a fuller picture of the functioning of the regime. The Department for Business, Energy and Industrial Strategy (BEIS) that oversees the regime has the power to render void, ab initio, transactions which it believes offend the national security principles of the regime. This regime is still in its infancy and will continue to cause material uncertainty to investors into the UK in certain sensitive sectors before guidance and precedent is established to enable market participants to judge what kinds of transactions may be at risk and how those risks may be avoided.
Such broad regulatory tools need to be used with great care. It is understandable why the government thinks that it may need them, since its global industrial strategy and the strength of its wider international relations are currently unclear and may in the end depend on being able to exercise some additional powers domestically. However, one of the most attractive features of the UK market for inward M&A or other investment transactions has been not only the relative strength and size of the domestic economy (which may itself be impeded by our national acts of self-harm) but the ease, transparency and predictability, of local M&A regulatory regimes. Advisers have been able to be confident on the way that regulators will approach their review of merger transactions – if this ceases to be the case, the size of the UK economy may not of itself be attractive enough to compensate and investors may look elsewhere. At least, they may think twice. It is therefore to be hoped that the UK’s national security regime quickly beds in and becomes predictable so as to remove this potential barrier to deal activity. In any case, it creates a risk that transactions become politicised and are held up as a result of intense media or specific local political interest.
The UK remains an attractive destination for foreign investment
The UK retains many advantages, though, which should continue to make it a highly attractive destination for inward investment. It will surely remain the premier capital market in its time-zone, home to bigger pools of capital and a broader range of investor types than elsewhere in Europe. Despite some analysts arguing to the contrary, the London Stock Exchange is well placed to maintain its advantages over the Euronext in Paris, with (in normal times) more IPOs, higher dividends and more shares changing hands. As a place to live and work, London will retain its pre-eminence and the wider regions in the UK should increasingly prosper from former City of London workers finding, following the COVID-19 pandemic, that they can more easily and more frequently work from home outside of London. It has not so far been the case that substantial numbers of employees have relocated from London to other parts of Europe as a result of Brexit and nor does it seem likely that this will occur in the short to medium-term at least. Political headwinds and local interests in a range of EU member states continue to make it relatively harder to do business, for global players, in those jurisdictions than, in many cases, is the position in the UK. The UK must ensure it continues to attract international students to its world-leading universities which remain a rich pool of talent for recruitment.
It is also to be hoped that, as well as the national protections introduced by a more interventionist competition policy and a national security assessment regime, the UK government will find ways to encourage and facilitate entrepreneurism in sectors where there are real opportunities for the country. There has long been a thriving technology sector ecosystem that has been home to some very substantial tech businesses, including a number of exciting fintech unicorns taking advantage of the combination of that environment and a consumer base that is relatively mature in its understanding of financial products. In fact, the UK technology sector, which ends 2022 as a major global player and the third country to surpass the USD1 trillion in value milestone after the USA and China, has been a notable success story of recent times. During 2022, fast-growing UK tech companies have continued to raise at near-record levels (GBP24 billion), more than France (GBP11.8 billion) and Germany (GBP9.1 billion) combined. This takes the total raised over the past five years to nearly GBP100 billion (GBP97 billion). The UK also has rich scientific communities that are producing significant biotech opportunities in a range of therapeutic areas – its pharmaceutical R&D capability is world-leading and should continue to be promoted. Furthermore, its financial services sectors remain the most sophisticated and substantial in Europe and should absorb the frictional costs of Brexit with relative ease. Financial services businesses are the engine room of the UK economy and that will continue to be the case, and there will be more substantial fintech businesses growing as a result of that thriving financial services ecosystem. There is also demand for substantial private infrastructure investment – including in the energy sector as part of the transition to clean energy – which will accelerate during the 2020s.
The country has the opportunity now to throw off some of the shackles of what has become a generally gold-plated capital markets regime and to create a proper growth segment within the ambit of the London Stock Exchange, still one of the world’s foremost exchanges, to further support this entrepreneurism. Ongoing capital markets reform should seek to encourage companies to come to the market in London, perhaps sooner than they hitherto might have done, and to compete more effectively with New York for growth – in particular, tech – listings. Recent developments in dual-share listings – with substantial ongoing founder rights – are perhaps an interesting glimpse of some future trends. The nature and rules of FTSE-indexation will need to keep pace with those reforms to ensure the attractiveness of UK markets.
The UK’s market infrastructure remains highly attractive and facilitative of business. The professional advisory market of investment banks, law firms and accountants is world-leading in terms of expertise and experience; the quality of the process and the judicial standard of the commercial courts is peerless and the High Court remains the forum of choice for contracting parties across the globe. We do not see that changing, nor English law declining as the global legal standard. The public M&A (takeovers) regulation, in the form of the City Code on Takeovers and Mergers and the extremely sophisticated Takeover Panel regulator, is of the highest order and the UK is fortunate in having courts that are not interested in hearing litigation that seeks to second-guess the commercial judgements of directors in the context of M&A transactions. Nonetheless, there are reasons to remain cautious over the development of the nascent collective proceedings regime at the Competition Appeals Tribunal (CAT), which has so far taken a liberal approach to certification. The country leads the debate on corporate governance, stakeholder engagement and responsible business and has set the international standards on environmental, sustainability and governance (ESG) reporting. These features of the market are all vital in sustaining the highest standards of business and transparency from which investors benefit.
Global factors and political decision-making has caused unease for business
Notwithstanding the UK’s strong position in attracting inward investment, recent global and domestic developments have caused a degree of concern for business. The energy crisis of 2022 precipitated by Russia’s invasion of Ukraine has hit UK households and businesses hard. Indeed, the IMF has assessed UK households to be among the worst hit by rising energy costs in western Europe. In response, the government has implemented an interventionist Energy Price Guarantee, which sets a maximum price that energy suppliers can charge consumers for energy used. The government will largely foot the bill for the policy at significant cost to the public finances, although there is a consensus that failure to act would have resulted in a far worse outcome.
The “mini-budget” of September 2022, which included a number of tax cuts funded by borrowing, was received disastrously by the markets. The day of the budget saw the third-worst daily performance for sterling against the dollar since Black Wednesday in 1992. The mini-budget triggered a surge in the yield on ten-year UK gilts, leading to a huge rise in the cost of borrowing for the government. London stocks fell sharply following the announcements, although following the government’s U-turn on substantially all the announcements had risen back to pre-budget levels by late October 2022. Perhaps most importantly of all, the mini-budget knocked the reputation of the UK as being guided by sound and competent economic policy. The government has sought to reverse much of the damage caused through a return to a more orthodox approach to the public finances, restoring business confidence.
The mini-budget in conjunction with global factors saw inflation peak at 11% in 2022, placing high costs on businesses and consumers. The government’s energy price guarantee helped avoid an even greater rate of inflation. In response, on 15 December 2022 the Bank of England raised its interest rate to 3.5%, the highest figure since the financial crisis in 2007/8 (although not high by historical standards). Higher prices and interest rates will negatively impact on investment in the UK.
As the UK moves into 2023, it is experiencing a wave of industrial action across a vast number of public sectors. The government should seek to minimise turmoil to business caused by strike action in the short-term, whilst addressing the recruitment and retention problems relative to the wider labour market which the strikes have highlighted. The government must think creatively about how to address public sector workers’ concerns with the cost-of-living crisis whilst remaining conscious of averting a wage-price spiral.
So, whilst there are some developments that will empower UK regulators to batten down the hatches in certain circumstances (whether driven by sector priorities or foreign investment concerns), in the author’s opinion the UK will trend towards supporting and encouraging its most entrepreneurial sectors and further liberalising access to its capital markets in order better to compete with increasingly popular European exchanges and also with New York. It is vital that the country gets past the nationalist rhetoric of Brexit, and focuses on the opportunities that its world-leading businesses can create in commercial partnerships across the globe. It will undoubtedly be more successful by ensuring that investors remain attracted to everything that the UK has to offer and have substantial freedom to operate here, rather than by throwing up hurdles in the form of regulatory or macroeconomic uncertainty. Concerningly, there has rarely been greater uncertainty in post-war Britain with regard to the UK’s economic outlook. However, there continue to be significant opportunities for investors in the UK, both to take advantage of what is already here but also to help forge the nation’s future.