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Cablegate: Uk Seldom Intervenes in Foreign Direct Investment

VZCZCXYZ0005
RR RUEHWEB

DE RUEHLO #3415/01 2491639
ZNR UUUUU ZZH
R 061639Z SEP 07
FM AMEMBASSY LONDON
TO RUEHC/SECSTATE WASHDC 5244
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS LONDON 003415

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: EINV UK
SUBJECT: UK SELDOM INTERVENES IN FOREIGN DIRECT INVESTMENT
TRANSACTIONS

REF: GAO REF NO 120600: FOREIGN INVESTMENT ENGAGEMENT

(U) 1. SUMMARY: FDI is regulated in the UK without regard to
the domicile of the parties in accordance with provisions of
the UK Enterprise Act of 2002 and EU merger control
legislation. Government review is normally focused on the
potential for increased concentration based on a transaction
exceeding established sales or market share thresholds. Such
reviews are conducted by the Office of Fair Trade (OFT). If
deemed necessary, transactions are referred to the
Competition Commission (CC) for detailed investigation.
While rare, intervention in a transaction when no competition
issues are present is possible when the Secretary of State,
Department of Business, Enterprise and Regulatory Reform
(DBERR) deems it is in the public interest. However, such
intervention can only be asserted with regard to transactions
involving national security or the media. Only two such
interventions have ever been initiated: one on national
security grounds that was allowed to proceed with statutory
undertakings and one in the media that is still under review.

(U) 2. The following report is in response to ref request
from the General Accounting Office (GAO). Information is
derived from interviews with Jonathan Cook (protect),
Assistant Director, Mergers and Competition Regime,
Department of Business, Enterprise, and Regulatory Reform and
two partners at the law firm of McDermott Will & Emery, Scott
S. Megregian (protect) and Alasdair Bell (protect). Detailed
report, keyed to questions in the GAO questionnaire follows
in paragraph 3. END SUMMARY


(U) 3. Text of GAO Foreign Direct Investment Engagement
Follows:

Questions for Post - London
GAO Foreign Direct Investment Engagement (120600)


Background

(1.) Are you aware of any particular past events that may
have helped to shape the FDI policy in the UK?

As an island nation, the UK has historically been a trading
economy. Accordingly, it strongly supports free trade and
the elimination of trade barriers. Likewise, the UK has a
long history of welcoming FDI and makes no policy distinction
between domestic and foreign investment apart from the two
exceptions noted below as regards investments in the media
and those affecting national security. With respect to
regulating merger activity, the key event shaping UK policy
on FDI is the EU Merger Regulation that came into affect in
1990. The UK is subject to EU law, and since the EU Merger
Regulation details the legitimate bases to intervene in
mergers, it shapes the UK policy on FDI.


(2.) Has U.S. policy regarding FDI review influenced FDI
regulation in the UK?

UK interlocutors say that U.S. policy regarding FDI review
has not influenced FDI regulation in the UK.


Laws and Policies

(3.) Please generally describe the policies of the UK
government towards Foreign Direct Investment (FDI).
Specifically, we would like to understand the policies that
apply to mergers and acquisitions of British companies by
foreign owned companies.

In general, the UK treats foreign and domestic investments
equally. The Mergers and Competition Regime at DBERR
(formerly called the Department of Trade and Industry)
oversees the UK governments activities related to the review
of mergers and acquisitions and our interlocutors confirm
that the domicile of the parties makes no difference. The UK
is subject to EU law (i.e. the Merger Regulation administered
by the EU Merger Control Commission) and UK law cannot be
contrary to EU law explained Jonathan Cook (protect),
Assistant Director, Merger and Competition Regime, Consumer &
Competition Policy Directorate at DBERR at an August 20, 2007
meeting. He said further that EU law dictates that 1) UK law
cannot be contrary to EU law in this area, and that 2) UK law
cannot discriminate against either EU or non-EU investors.
He explained that both foreign and domestic investors may
seek judicial remedy from either the EU Court of Justice or
the UK High Court if either of these dictates is contravened.

Although the focus of EU merger control regulation is
evaluating the concentration affect of proposed mergers and
acquisitions, EU law gives each EU member state the right to
intervene in a transaction when it is deemed to be in the
public interest to do so. Currently, the UK Enterprise Act
of 2002 specifies only two areas in which the assertion of
public interest gives the UK government the right to
intervene in merger and acquisition transactions that present
no competition issues. The two areas are 1) national
security, and 2) media.

While the assertion of public interest in these two areas may
result from the takeover of a British firm by a foreign
investor and could therefore be considered a means of
regulating foreign investment, our interlocutors point out
that the assertion of public interest can also occur when all
parties of a transaction are British. They note further that
the burden is on the member state to justify intervention on
the basis of public interest, and that DBERR considers the
potential for judicial action by the merger and acquisition
parties when considering intervention on the grounds of
public interest.

In summary, the Enterprise Act of 2002 lays out the grounds
for intervention in UK mergers and acquisitions regardless of
the domicile of the partners. The grounds are principally
based on the potential for increased concentration.
Qualifying transactions are defined as any where 1) the
turnover (sales) exceeds GBP 17 million annually or 2) the
relevant market share exceeds 25%. Additionally, the UK may
intervene in a merger and acquisition transaction of any size
in the areas of national security or the media if the
government deems it is in the public interest to do so and
the Secretary of State issues a Special Intervention.

Note that there is no pre-notification requirement for a
merger and acquisition transaction. The parties are free to
close without consulting with the government, but they are
taking a risk if government intervention is possible/likely
based on the criteria cited above. The government has 4
months post closure to decide whether to intervene in a
transaction.

How the process works:

If a transaction is a qualifying transaction, (see above),
then the OFT is the first department to review it. If the
OFT determines that there is potential for anti-competitive
consequences from the transaction it refers it to the CC for
further review. The CC may consult with the merger and
acquisition parties and normally issues decisions in 30 days.
Its review is based on the established principles of the EU
Merger Commission. The CC can OK a qualifying transaction, it
can reject it, or it can negotiate statutory undertakings
with the parties as conditions for the CC approving the
transaction. Once a transaction is approved, the decision is
final. It cannot be reopened, modified or reversed.

In the event a transaction involves the media or might
reasonably be expected to raise concerns of national
security, then it is normal to consult informally with the
interested UK agencies and negotiate statutory undertakings
in order to avoid post-closing government intervention on the
basis of public interest. DBERR's Jonathan Cook (protect)
gave an example of a proposed foreign takeover of a British
defense contractor subject to the Official Secrets Act. The
parties would normally consult in advance with the UK
Ministry of Defense (MOD) and negotiate acceptable statutory
undertakings so that the issue of intervention would not
arise.

In the event that the MOD was not consulted or could not
negotiate acceptable statutory undertakings, then the
prospect of intervention on the basis of public interest
arises. DBERR is the department charged with recommending
intervention on the basis of public interest. If
intervention is recommended, then it is the UK Secretary of
State at DBERR that issues a Special Intervention that refers
the matter to the CC for further review.

Regarding the potential for political pressure being brought
to bear on DBERR to intervene in a transaction, Cook said
that political pressure is greatest to ensure that government
actions conform to the law. He sees little potential for
political pressure on DBERR to intervene in individual
transactions or in areas other than national security or the
media.

(4.) Does British law provide a legal framework designed to
monitor FDI for national security reasons?

(See 3. above)


(5.) The following laws have been identified as relevant to
managing FDI in the UK:
" The Industry Act of 1975
" The Enterprise Act of 2002
" The Finance Act of 2004
" The Competition Act of 1998
Are there any others that are directly relevant to FDI?

According to DBERR, the Enterprise Act of 2002 is the law
relevant to managing FDI in the UK.


(6.) It is our understanding that the Secretary of State has
the authority to intervene in certain mergers and refer them
to the Office of Fair Trading and the Competition Commission
on the grounds of "public interest", defined in the
Enterprise Act of 2002 as national security, or if the merger
involves classified defense contracts.

a. Please explain the reviews conducted by the Competition
Commission, and how that intersects with a review for public
security related concerns.

See 3. above


b. Please explain the roles/responsibilities that the
Secretary of State, the Office of Fair Trading, and the

SIPDIS
Competition Commission have in initiating and conducting a
review of FDI.

See 3. above Also, the OFT is the department that reviews
all merger and acquisition transactions in the UK above the
sales (turnover) and market share thresholds specified in the
Enterprise Act of 2002. If a transaction does not exceed a
threshold, then the OFT has no authority to refer a
transaction to the CC for review. Further, the OFT's
authority is restricted to assessing the potential for
anti-competitive consequences of a transaction. When the OFT
finds a basis for anti-competitive consequences, its sole
authority is to refer the transaction to the CC for review.
Reviews by the CC must be completed within 6 months, although
many are completed in as little as 30 days.


c. To your knowledge are mergers or acquisitions involving
UK defense contractors reviewed prior to completion of the
deal?

See 3. above Also, our interlocutors indicate that
effectively all mergers or acquisitions involving UK defense
contractors are discussed informally with the MOD to identify
and resolve government concerns prior to completion of a deal.


d. Please provide any examples of cases reviewed because
of "public interest" or security reasons. Has the authority
to block such investments ever been used?

There have only been two transactions that raised no
competition issues in which the Secretary of State issued a
Special Intervention in the public interest. Neither has
resulted in a transaction being blocked, although one is
still under review by the CC.

The first is in the defense industry and government
intervention was based on grounds of national security. The
transaction was the proposed acquisition by Lockheed of Insys
in 2005. The Special Intervention came as a surprise to the
parties that had been in discussions with the MOD. The
transaction had not closed when the Special Intervention was
issued, but did close once satisfactory statutory
undertakings had been negotiated. Our interlocutors said
that issuance of the Special Intervention gave the government
greater influence over the outcome, and that the existence of
statutory undertakings gives the government a clear judicial
course of action in the event that the undertakings are not
followed.

The second Special Intervention in the public interest was in
the media field. It involves the acquisition by Rupert
Murdock of 17.9% of the shares of the media company, BSkyB.
The review by the Competition Commission and the UK Office of
Communications is ongoing. A decision is expected in
November. This intervention came as a surprise to the UK
government that learned about it in the newspapers. Note
that the Special Intervention in this case first required
that the OFT rule that the share purchase was a "merger".

Purchase of more than 20% of the shares of a company is
generally understood to be a "merger" under UK and EU
regulations and the purchase of less than 10% of the shares
is understood to not be a merger. The BSkyB transaction fell
between these parameters. Without the determination by the
OFT that the transaction was a merger, the Secretary of State
would have had no basis to issue a Special Intervention.
n.b. there were no competition issues raised by the share
purchase.


(7.) In addition to the laws/policies already mentioned, are
there other laws/policies that are relevant for FDI
regulation? Are there any other investment reviews or
restrictions?

There are no other laws/policies relevant to FDI regulation.


(8.) What, if any, differences exist in FDI laws/policies by
level of government? (Federal vs. provincial vs. local, etc.)

There are no differences in FDI laws/policies by level of
government.


(9.) What types of barriers / incentives does the UK have in
place to restrict / encourage FDI? (e.g. corporate taxation
rates.)

As discussed in 3. above, Cook at DBERR says that any UK
barriers/incentives to restrict/encourage UK investment must:
1) comply with EU law, 2) not be contrary to EU law, and 3)
not discriminate against either an EU or non-EU investor.
Accordingly, the treatments of foreign and domestic
investments are the same.


Practices

(10.) Outside of what is written in the laws/policies, what
factors in practice contribute to how FDI regulation
decisions are made? (national security, local politics,
economic protectionism, etc.)

See 3. above


(11.) To the extent you are aware, is there any implicit or
explicit political influence involved in the FDI regulation
process?

See 3. above.


(12.) What is the UK government's attitude toward or policy
on the investment of state-owned enterprises in the UK?

Alistair Darling, Chancellor of the Exchequer, reiterated the
UK policy toward sovereign funds' investing in the UK in his
first speech as Chancellor. The UK welcomes all FDI,
including that of state-owned enterprises.


(13.) Can you provide any specific examples of recent FDI
attempts (both successful and/or failed) that are
representative of the way the system actually works in the
UK?

See 6 d. above


Future Changes

(14.) Are you aware of any particular current events or
concerns in the UK that may have an effect on current FDI
policy/process? (e.g. political elections)

Post is not aware of any particular current events or
concerns in the UK that may have an effect on current FDI
policy/process.


(15.) Please describe any changes that may be considered to
modify the current laws, policies or practices for FDI
regulation in the UK.

DBERR explained that the matter of what grounds constitute an
EU member state's national interest is still an evolving
area. Cook said that his office expects that the grounds for
a state's intervening on the basis of its national interest

will continue to narrow as a result of the need to justify
intervention in the face of judicial remedies open to
investors impacted by intervention based on national interest.


Contact Requests

(16.) Can you suggest other experts we should consult on
FDI in the UK?
a. For example, individuals in Washington D.C. that we
should speak with including:
i. U.S. businesses with experience directly investing in
the UK, especially those that have undergone government
review and approval.
ii. Investment banks
iii. Academics and/or think tanks

Post can facilitate introductions to its interlocutors but
has no suggested contacts in the U.S.

Visit London's Classified Website:
http://www.state.sgov.gov/p/eur/london/index. cfm
LeBaron

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