A Q&A with Veronica Roberts

As UK regional head of Herbert Smith Freehills' competition, regulation and trade practice, Veronica Roberts has secured conditional clearances for several deals under the UK's National Security and Investment Act. She spoke about increased scrutiny of non-notified transactions, the possibility of an outbound FDI regime and the likelihood of new technologies being added to the UK's specified sectors list.

Seven years on from Kuka/Midea, has the market adjusted to this new age of government intervention – or are we still in a state of flux?

I think the market is starting to adjust. Over that time we've seen a number of new FDI regimes being introduced and the existing ones being used a lot more actively by the relevant agencies. It’s taken a while but companies now generally see FDI as a really important part of the analysis when considering the deliverability of their transaction.

I think the situation will continue to evolve quite quickly. The main themes that we’re likely to see over the coming months and years will be more sectors being added to the regimes that already exist so that FDI agencies have broader scope to intervene. I also think we will see the regimes being used even more actively – with more deals being prohibited. In addition, I don't think that sensitivity will be limited just to acquisitions or investments from China, which is where the debate has tended to focus to date. Instead, we’ll see other countries and regions potentially being on the other end of a prohibition or more commitments decisions as geopolitical tensions continue to evolve.

Do you think the EU and UK will follow the US in introducing an outbound FDI regime? And if so, what would this look like?

This is another area that is going to evolve and I think in terms of whether or not the UK will produce something – I think the European Commission has said that it will table any proposal it wants to make by the end of the year. Again it will really depend on how geopolitics evolves. If there is strong encouragement from the US, for example, then we're likely to see the UK following suit and introducing something; it will probably be quite limited at the outset and follow the pattern of the proposal set out in the US executive order, which is limited to three technology sectors and is less restrictive than some had thought. But again, like inbound FDI regimes, once you've got the basics of an outbound regime in place, it will be easier to add more sectors in order to increase the scope of the control.

The UK government recently released its annual report on the first full year of NSIA enforcement. Beyond concerns about transparency, what do you think the next 12 months look like?

So, I think over the next 12 months, we're going to see more voluntary filings than are listed in the first full annual report. The government said it received 180 voluntary filings (together with 671 mandatory filings). I think that the way the landscape is shifting means that we will see more companies wanting to and insisting on doing voluntary filings under the regime. To date, sellers usually only agree to a buyer doing an NSIA filing where it's a mandatory filing. But what's happened in recent months is that the Investment Screening Unit (ISU) has set up its own transactions intelligence team, and we've seen more questions being raised about non-notified transactions.

And of course, that's a pattern that the CMA has been following for years. But now that investors are seeing that the ISU may raise queries about any transaction that goes unnotified in some circumstances – for example, where they're making other filings on transactions – they may well insist that there is a voluntary filing made in the UK so that they have complete transaction certainty there. So that's the first thing: I think the number of voluntary filings will increase. I also think that we will see the government, over time, add new technologies into the specified sectors list. But my view is that this means that mandatory filings will probably remain largely static because I expect the government to clarify over time that other technologies are not covered by mandatory filings, or even take certain types of technology out of the mandatory filing sectors. As the national security landscape evolves I think we will probably continue to see the same very low rate of prohibitions, but a larger number of commitments decisions.

What the report doesn't show, of course, is the impact of the NSIA regime on decisions that investors are making behind the scenes. We've been involved in a number of discussions where investors have deliberately not acquired a shareholding that triggers any of the mandatory filing thresholds because they didn't want to make a filing. I'm also aware of transactions that have not proceeded because a filing would have been required and the investor, for whatever reason, felt that it wasn’t worth it for a particular transaction. Of course, it's difficult to track this disincentive mechanism that the NSIA regime has effectively introduced but I think it will continue to be really quite a force behind the scenes.

What impact do you think the European Court of Justice's preliminary ruling in the Xella Magyarország case will have on foreign investment regimes across member states and beyond the EU?

I think that this case really served as a reminder that FDI regimes shouldn't in principle go further than protecting the interest that they are meant to protect.

In this EU ruling, they've been quite clear that FDI regimes are about protecting public and national security, and in the context of the EU's free movement rules that purpose is going to be interpreted narrowly. What's especially interesting there is that the court's role in upholding those freedoms means there will be cases like this that actually test and establish limits on what can legitimately be asserted as a national security concern, whereas other regimes might lack such an obvious route for challenge.

But I think it's a continual tension even without the free movement aspect, and I can't think of a single FDI regime that actually defines what a threat to national security or public security is in any comprehensive way. There's certainly guidance provided for some of the FDI regimes and so there is this tension between what investors think it should mean and what the agencies are able to interpret it as. So it didn't surprise me in many ways that we saw a case like that, but I think we will continue to see this tension and I think we will continue to see examples of agencies being held accountable really for whether or not they're protecting the interest that the relevant legislation enables them to protect.

Roberts chaired the GCR FDI Roundtable in July 2023, which analysed many of the current hot topics and key issues for businesses and practitioners arising from the ways that the FDI landscape continues to transform. Listen to or read the roundtable here.