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Hinkley, golden shares and protectionist time travel?

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Summary: The UK Government’s approval of the development of the Hinkley Point C nuclear power station is welcome. However, the accompanying proposals to increase scrutiny of foreign direct investment may be retrograde.

The UK Government yesterday gave the green light for the long-awaited development of the Hinkley Point C nuclear power station. The £18 billion project, which is to be built by EDF with a £6 billion investment from China, will establish the UK’s 'first new power station for a generation'.

However, the approval, which comes six weeks after Theresa May unexpectedly placed the project under fresh review, has been granted subject to the imposition of 'significant new safeguards' to protect national interest. In particular, the Government said it would “impose a new legal framework for future foreign investment in Britain’s critical infrastructure, which will include nuclear energy and apply after Hinkley”.

In practice this means that the Government will:

  1. take “a special share in all future nuclear new build projects”, thereby ensuring that significant stakes cannot be sold without the Government’s knowledge or consent; and
  2. in the interest of national security, introduce extra scrutiny of “the full implications of foreign ownership” of critical infrastructure, which would include a review of the public interest regime under the Enterprise Act 2002 (“EA02”).

Given that the Government already has significant powers to intervene in transactions which raise security and other public interest concerns, the comments are somewhat puzzling.

The Government may be seeking to close a gap in its powers to intervene in: (i) foreign direct investment which does not confer control over a UK asset (for example if there are no M&A aspects to the investment, or if the non-UK business is acting as a contractor, outsource or technology provider); or (ii) transactions where there the prime motivation for intervention is nationality of ownership. In both these regards, the Government will have to tread carefully so as not to offend EU treaty provisions pre-Brexit which guarantee the free movement of capital and services, as well as not to dissuade overseas investment in UK infrastructure.

The Enterprise Act 2002

Under the EA02, the Government has the power to intervene on public interest grounds on deals which are subject to competition review by the UK Competition and Markets Authority or the European Commission. This includes powers to block a deal to protect the UK’s national security interests (including public security).

The Government can also intervene on deals which fall below the relevant filing thresholds in order to protect security sensitive information in the hands of parties to the transaction.

Closing a gap?

Despite the Government’s extensive influence over deals giving rise to public interest concerns, there is a potential lacuna in relation to activity falling outside the ambit of merger control review, namely where there is no acquisition of material interest (whether through equity or other means) by a foreign owner over UK assets. For example, this could arise in relation to projects undertaken in the UK by overseas contractors where there is no acquisition aspect.

The Government’s proposals may, therefore, be intended to address this “loophole” and strengthen its authority over questions of national security, and this will almost certainly require some changes to primary legislation.

Golden Shares

The Government already holds minority stakes in a small number of UK companies active in the defence or nuclear sectors (e.g. Rolls Royce) which give it the right to veto change of control, or for example, to prevent a foreign investor from acquiring more than a certain percentage shareholding in the company.

The European Commission may well have thought that the fight to eliminate “golden shares” other than those held in the defence sector was largely won. Golden shares aimed at preserving domestic ownership of “national champions” have long been regarded as an illegal obstacle to cross-border investment in the EU, and were largely eliminated in the early 2000s.  More recent attempts at justifying golden share structures in the energy sector have also been successfully challenged by the European Commission in the European Court of Justice. For example, in 2010, the Court found that golden shares held by the Portuguese government in Portuguese electricity company EDP amounted to a restriction of free movement of capital, and rejected the Portuguese government’s argument that there could be an overriding public interest in retaining these shares (e.g. ensuring a secure supply during war).

Pre-Brexit, therefore, the Government would need to tread very carefully in this regard to ensure it does not infringe fundamental EU treaty provisions on free movement of capital and services.

Brexit

At present, the Government’s ability to intervene in overseas investment in the UK on public interest or other grounds is constrained by the EU Merger Regulation and the EU’s fundamental principle of free movement of capital.

Post-Brexit, and if full membership of the single market is foregone – a serious possibility – the Government would have a freer hand to introduce a more extensive foreign direct investment regime which more closely resembles a number of non-EU countries like Canada, Australia and the USA. However, the impact of this on UK inwards investment incentives would need to be closely taken into account.

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