Lululemon has flooded our Instagram feeds for years. Influencers don their leggings following a sweaty pursuit, armed with their NutriBullet smoothies and ‘#ads’. But soon enough, Lululemon may be flooding the Secretary of State with notifications regarding proposed transactions which pose a threat to national security. Amongst 16 other sectors, “advanced materials” (potentially including Lululemon fibres[1]) fall within the scope of mandatory notification under the UK’s new National Security and Investment Bill (’NS&I Bill’). It follows that, somewhat bewilderingly, Lululemon could be a threat to national security and not just our Instagram feeds. Athleisure brand aside, the NS&I Bill seeks to radically overhaul the regime involving Foreign Direct Investment (‘FDI’) in the UK. This article seeks to (i) very briefly outline the structure of the NS&I Bill and (ii) assess the impact that the Bill will have on the attractiveness of the UK regarding FDI and whether the Bill is positive course of action to be pursuing.

Structure of the National Security and Investment Bill

On the surface, the NS&I Bill is an intimidating piece of work. It proposes a major overhaul of the existing regimes regarding the ability of the government to scrutinise and intervene in business transactions that might raise national security concerns. In an attempt to combat potentially hostile foreign investment, the Bill creates a "bifurcated notification" system. There is a mandatory requirement for investments in certain sectors identified as sensitive (including advanced materials, defence, energy and AI), as well as a voluntary notification mechanism for investors wanting to guarantee the security of their investment [2]. Therefore, where foreign investors are seeking to get involved in business related to a sensitive sector, they are legally obliged to reveal themselves to the Government. Failure to abide by the mandatory notification requirement runs the risk of a £10 million fine and/or five years’ imprisonment. This is a marked difference to the current regime governing foreign investment, which has no such requirement.

Moving Forward: Attractiveness of the UK to Foreign Investors

The UK has maintained an erudite narrative in past years: it is an open and attractive destination for FDI. Its OECD FDI restrictiveness index (which measures the statutory restrictions on FDI across OECD and G20 countries), for example, is 0.04 compared to the US’ 0.09[3]. The NS&I Bill could threaten to deconstruct this position. The extensive scope of the NS&I Bill inevitably leads some to argue that it “signals the end of [the UK’s] open-door policy” [4] for foreign investors. Tightening the rules for foreign investment, in a period characterised by its mainstream economic fragility, is potentially the wrong step for the government to be taking. By increasing the scope of its regulatory framework and closing the curtain on open FDI, the UK could be threatening its attractiveness to foreign investors. With uncertainty in the air, do we truly want to subject foreign investors to more rigorous procedures? The Government admits the UK has a high FDI flow, creating around 56,000 jobs[5]. To potentially sacrifice such valuable foreign investment is a bold move from a Government dealing with a fragile economy.

Despite the risks that the NS&I Bill poses, if we turn our focus to international trends relating to the regulation of foreign investment, it appears that the UK is finally catching up to the international community. Australia recently introduced a similar approach to FDI (which came into effect on January 1st 2021), modernising its existing legislative framework to include an enhanced national security test[6]. Similar to the NS&I proposals, Australia no longer sets a minimum value threshold and requires all transactions falling under the ‘notifiable national security action’ to be reported to the Foreign Investment Review Board. Both the Australian and (proposed) UK frameworks import a similar approach taken by the US with CFIUS (established in 1975). On a supranational level, the EU has established its own enhanced FDI screening mechanism. Regulation 2019/452 does not harmonise Member States’ approach to FDI, but it does promote good practice regarding foreign investment and guarantees a minimum requirement for screening mechanisms across Member States [7]. Clearly, there is an international resurgence regarding regulation of foreign investment. Country by country, more intricate and extensive measures are introduced to regulate FDI. Therefore, the UK’s decision to implement the NS&I Bill is hardly anomalous. Rather, it represents a move by the UK to fall in line with other successful economies who remain attractive to foreign investment, yet safeguard domestic interests.

However, the justification for such an expansive regulatory framework cannot rest solely on an argument that others are doing it. A more substantive justification ought to be available if the Bill is to be considered a necessary addition to the law.One of these substantive justifications lies at the root of any framework seeking to regulate foreign investment: the threat posed by such investment. FDI undoubtedly plays a beneficial role in the UK market, as noted above, yet there must be a negative side to it to warrant a resurgence in investment protectionism. A popular criticism of foreign investment is that it allows foreign investors in politically sensitive countries to gain immense influence in the jurisdictions where their companies operate, particularly in industries related to national security. Much of the impetus for recent change is Chinese investment in European companies. During the financial crisis in 2008-2009, China ramped up FDI in Europe and established an upwards trend of investment[8]. Whilst it may have been beneficial at the time, as Chinese investment softened the blow of the crash, a recovered economy is able to realign its political and economical perspective. As Chinese and European relations grow more hostile, and China is en route to becoming the world’s largest economy[9], Chinese investment becomes less attractive.  As the economy enters a fragile period, there is potential for Beijing to engage in another buying spree and snap up acquisitions across different industries. Given that the UK is embarking on a new economic adventure post-Brexit, it makes sense to rebalance the scales between its domestic market and Chinese investment. This naturally tugs at a sensitive balance. On the one hand, foreign investment is a positive force within the UK economy. On the other hand, allowing Beijing to invest in the industries identified within the NS&I Bill has potential for negative effects, especially when we consider that 30% of Chinese foreign investment found its home in the UK in 2019[10]. Indeed, part of the goal in introducing the NS&I Bill was to prevent hostile actors finding any “back door” into UK industries[11]. Therefore, the UK’s move to a broader screening mechanism is an attempt to strike this balance.

In line with this balancing argument, it is important that we do not undervalue the tangible benefits that the NS&I Bill could have on FDI. The current regime, governed by the Enterprise Act 2002 (‘the 2002 Act’), is fraught with inconsistency and has arguably become politicised. Its rather piecemeal approach (such the changes made in 2020 to deal with the pandemic[12]) is much less attractive than the considered structure of the NS&I Bill. For example, the 2002 Act became heavily politicised, captured in the Advent-Cobham acquisition [13] and has been used 5 times in the last 3 years (despite there only being 12 interventions since 2002)[14]. The changes that the NS&I Bill makes, despite going much further than its predecessor, will provide much-needed consistency and predictability to foreign investors. These principles cannot be dismissed in business. By providing a clear and established framework for notification of foreign investment, the UK will provide investors with clarity and avoid the potential for retrospective investigations (although this power is retained under the NS&I Bill, it will likely not be engaged if investors hire the right lawyers). Assessing the potential for decreased FDI, the UK government did note that an enhanced screening procedure is not, in fact, a barrier to entry for genuine foreign investors (so long as such regime does not become political)[15]. Therefore, whilst the NS&I Bill seemingly presents obstacles to foreign investment, it may encourage the strategic investor to invest with the peace of mind that their investment has clearance from the outset.

Conclusion

The NS&I Bill undoubtedly makes significant changes to the UK’s current approach to foreign investment. However, the Bill is long overdue. FDI has a huge potential to contribute positively to economies, yet this ought to be balanced with recognition that foreign investment is fraught with politics. Thus, a sensitive balance must be struck between retaining a free, open plane for investment and ensuring that economies do not become reliant on, and vulnerable to, excessive (potentially hostile) foreign investment. Where Lululemon falls into this, one cannot be so sure. But their ‘advanced materials’ could soon fall on the desk of the Government and not our social medias.

[1] Department for Business, Energy & Industrial Strategy, 'National Security And Investment: Sectors In Scope Of The Mandatory Regime' (2020) <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/935774/nsi-consultation.pdf>. Notifiable acquisitionswill include those which concern “technical textiles”. These are defined as textiles which are “manufactured primarily for their technical performance” and are “made of smart polymers to protect and prevent injury”. It is of the author’s and practitioner’s opinion that such a wide approach to “technical textiles” would involve businesses operating in the same sphere as Lululemon, for example.

[2] National Security and Investment Bill 2020. Available at https://publications.parliament.uk/pa/bills/cbill/58-01/0210/20210.pdf

[3] Department for Business, Energy and Industrial Strategy, 'National Security And Investment Bill Impact Assessment' (2020). <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/934276/nsi-impact-assessment-beis.pdf>

[4] Financial Times, 'The UK Must Guard Against Protectionism' (2020)<https://www.ft.com/content/6987daf0-bd52-451f-996b-00499962b0fb>accessed 10 January 2021

[5] fn 3

[6] Chan J, 'Australia's Foreign Investment Regime' (Pinsent Masons, 2020)<https://www.pinsentmasons.com/out-law/guides/australias-foreign-investment-regime>accessed 10 January 2021

[7] European Commission, 'EU Foreign Investment Screening Mechanism Becomes FullyOperational' (2020) <https://ec.europa.eu/commission/presscorner/detail/en/ip_20_1867>accessed 10 January 2021

[8] Reaching New Heights: An Update On Chinese Investment In Europe (Baker & McKenzie 2015)<https://www.bakermckenzie.com/-/media/files/insight/publications/2016/03/reaching-new-heights/ar_emea_reachingnewheights_mar16.pdf?la=en>accessed 10 January 2021

[9] Elliott L, 'China To Overtake US As World's Biggest Economy By 2028, Report Predicts' TheGuardian (2020)<https://www.theguardian.com/world/2020/dec/26/china-to-overtake-us-as-worlds-biggest-economy-by-2028-report-predicts>accessed 10 January 2021

[10] Timsit A, 'The UK Government Wants New Powers To Block Chinese And Other ForeignTakeovers' (Quartz, 2020) <https://qz.com/1932426/national-security-and-investment-bill-prevents-foreign-takeovers-of-uk-firms/>accessed 10 January 2021

[11] fn 4

[12] Department for Business, Energy & Industrial Strategy, 'Enterprise Act 2002: Changes To The Public Interest Grounds For Intervention In Merger Cases' (2020) <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/924368/enterprise-act-2002-guidance-merger.pdf>

[13] Hollinger P, 'UK Government Set To Approve Cobham Takeover By Advent' Financial Times (2020)<https://www.ft.com/content/6d1738a2-0aa5-11ea-b2d6-9bf4d1957a67>accessed 10 January 2021

[14] Burgess G and others, 'UK National Security And Investment Bill' (Debevoise & Plimpton LLP, 2020)<https://www.debevoise.com/insights/publications/2020/11/uk-national-security-and-investment-bill>accessed 10 January 2021

[15] fn 3

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