UK Spotlight: National Security and Investment Policy Under Labour

Episode Summary

This episode of Skadden's “Foreign Correspondent,” hosted by Jason Hewitt, features a conversation on the U.K.'s foreign direct investment (FDI) reviews under the new Labour government. Paddy McGuinness, a senior advisor at Brunswick Group and former U.K. deputy national security advisor, and David Blackburn, a partner at Brunswick Group, are guests on the episode and discuss practical guidance for investors, the evolving national security landscape and the importance of early and informed engagement in the FDI process.

Voiceover (00:01):
From Skadden, you’re listening to Foreign Correspondent: An FDI Podcast, where we discuss foreign direct investment reviews, and the foreign policy, national security and political issues that drive them. The cross-border investment screening insights you need start now.

Jason Hewitt (00:22):
Hi there and welcome to Foreign Correspondent, Skadden’s FDI podcast. So we explore the complex world of foreign direct investment reviews and the national security policy behind them in a series of monthly conversations with leading national security policy experts, regulators, and Skadden’s foreign investment team.

(00:38):
Today I’m joined by Paddy McGuinness, who’s a senior advisor at Brunswick Group. He joined Brunswick, a leading critical issues advisory firm, after an extensive career in the UK government. From 2014 to 2018, Paddy was the UK’s deputy national security advisor for intelligence, security and resilience, advising two successive British prime ministers on UK homeland security policy, including on cyber strategies and managing hostile state activities, as well as the resilience of critical national infrastructure. He chaired the Investment Security Group reviewing FDI and M&A for national security purposes, and advised the UK Parliament’s Joint Committee on National Security Strategy.

(01:18):
Welcome, great to have you with us, Paddy.

Paddy McGuinness (01:20):
And it’s great to be here.

Jason Hewitt (01:22):
We’re also joined by David Blackburn, who’s a partner at Brunswick Group, and advises companies on political and regulatory risks in the UK as well as the European Union, including in relation to merger control and investment screening.

(01:34):
David’s advised on a wide range of high profile transactions here in the UK and abroad, spanning from semiconductors and defense through to supermarkets and the media sector. He formerly wrote for the Spectator on current affairs and politics, where he was the deputy online editor before he joined Brunswick.

(01:50):
Really great to have you with us, David.

David Blackburn (01:52):
Thank you very much. Great to here.

Jason Hewitt (01:54):
So I’m Jason Hewitt. I advise on global foreign investment screening here at Skadden’s London office.

(01:59):
Today’s episode we’re shining the spotlight on the UK and exploring our first almost full year of a Labour government in about 15 years. Exploring how the UK is responding to changing politics across the Atlantic, as well as looking to give some practical guidance for investors trying to cut through all of this political noise.

(02:18):
Paddy, I’ll start with you for a question. What themes are emerging under the first nine months or so of a Labour government here in the UK?

Paddy McGuinness (02:24):
Well, as regards FDI, we’ve got ourselves through what I call the haptic phase. Where a new government comes in, and in this case the political party had been out of office for 14 years, and so they’ve not a lot of experience in running the system. And there’d been new legislation and changes, a National Security Council, a National Security Investment Act. And we’re now out the other side of the phase, where they learned how to drive the car.

(02:51):
And in that time they’ve made some very definite decisions about how they want to run national security interests in foreign direct investment while still maintaining their focus on growth. And I’d say they’ve locked it down and got themselves into a really clear position, where they’re looking at each transaction on its national security merits. And they’ve avoided the national security architecture, which is relatively new and immature, an important point, they’ve avoided that becoming a tool being used for other purposes.

(03:27):
And I think a lot of credit has to be given to the minister overseeing it, Pat McFadden in the Cabinet Office, and the team that’s sitting around him who have kept this very largely technocratic.

Jason Hewitt (03:39):
I mean, I think that really echoes what we’re seeing on the legal advisory side in transactions we’re putting in front of the ISU. And that discipline around national security is really welcome for investors. How do you see that lining up against broader economic development, economic security policy?

Paddy McGuinness (03:56):
The economic security policy is really interesting. The British system is not much given to published definitions. There isn’t a published definition of what is in the interest of national security.

(04:07):
You’re the lawyer, but as far I could see courts have taken the view that a government defines what is in the interest of national security through what it reports to parliament and what its declared strategies and policies are. And it’s subject to parliamentary oversight.

(04:23):
There isn’t a clear definition, as far as I can see, of economic security. And I have been party to some of the discussions and debates there have been amongst politicians but also officials about how they want to define that.

(04:38):
What is clear is that there’s a very strong driver around national resilience. And that that is causing the ISU and the system as a whole to approach things starting with the asset, what is the thing we’re looking at or that it’s being acquired or invested in, and then looking at the sector, and then frankly then looking at the acquirer.

(05:03):
And there’s a common mistake you’re believing, “Oh, this will be about the acquirer.” Well of course there are many things that frankly almost any investor should be allowed to invest in the United Kingdom, there won’t be a national security aspect. So they don’t start there, they start with the asset.

(05:17):
And I think that throw, which has become very clear, absent a strong voice in parliament like we had under the previous administration, where you had for instance the China Research Group with a very strong view about Chinese investment in the UK. I think that process now, stepping through those phases, is making it pretty straightforward.

(05:39):
The only thing I would say is that many, many, yes, many of the phase two reviewed we found ourselves involved in have not involved the countries of concern that had previously driven the creation and implementation of the regime. And actually had been much more focused on the significance of the asset.

(06:03):
And I think that’s an important distinction to make for clients, the belief that this must be about investment by a competitor state. Or where there’s a loss in confidence China, I mean Russia very clearly, but others too, I don’t think is quite right. It could also be about economic competition, economic security and the nature of the asset.

Jason Hewitt (06:26):
What do you think that means from a mitigation perspective? Does that mean if there’s a greater asset focus rather than country of concern focus that more assets are in frame to be subject to mitigation?

Paddy McGuinness (06:37):
I think it means you need to think at the beginning of a transaction what it is you are doing, and how it will be viewed by the securocrats and the politicians.

(06:46):
And then actually a common gap, there enough thought goes into what would the motivation be for engaging on this? Well, we know about in key technology areas, because they’re listed for us. I mean, there are I think in parliament but also I think amongst national security officials ideas of original sin. Of transactions that were allowed under the old Enterprise Act arrangements, which ideally would not have gone through. They did go through, there we are.

(07:18):
And I think there are many who would say it’s unfortunate that Arm was acquired by SoftBank, and, and, and. And these are opinions that they hold, but that shapes the way in which they think about the asset as it comes forward.

(07:31):
And in both those cases we weren’t talking about an acquirer that came from a state, they came from allied states and they were reputable acquirers, so why wouldn’t you have allowed it? And the answer is it’s because of a particular way of thinking about the asset. I think that way of thinking about the asset is ever more intense in the current period.

Jason Hewitt (07:51):
And let me drill down a little bit on that. You’ve mentioned a couple of high-tech assets there that really are about originally indigenous capability in the UK and continuing to grow that sector. Does that mean those kind of deals will face fundamental challenges? Or does that mean they’ll find their way through but with mitigation that is really focused on maintaining that UK presence capability investment?

Paddy McGuinness (08:17):
Probably the latter. But the question I think for an acquirer is to think about what mitigation would make this problematic as a transaction. And to work through and offer mitigations early, and communicate about intent very early, possibly at the outset of the transaction and not when you’re being triggered and going into a phase two. So then you show that you’re aware of what the concerns may be and you’ve got an economically viable or commercially viable way of mitigating it.

(08:49):
And we’ve seen that. I mean, I know we’ll get into transactions, but let me talk about one now. Look, one which sadly Brunswick did not work on, but it’s a really interesting example for a number of reasons. And that was the acquisition of, and I think actually it went through under Enterprise Act rather than NSIA when I think about it now, but it still bears unpacking.

(09:12):
That was when the US investment fund Advent acquired Cobham. And a portion of Cobham was of very great significance to British naval capability. And Advent spotted this and they put in place an appropriate mitigation in the management of the company. That meant that the Ministry of Defense teams who worked closely with Cobham were confident about the security of the data which they shared and of the asset or the capability which they relied upon. And that was put in place and that made it straightforward, relatively, for the deal to be cleared.

(09:53):
Well, that needed a bit of thought. It needed real awareness about the significance of the asset. I suppose if you say, “Paddy, what do you do for Brunswick Group?” The answer is I’m a long-term national security person. When I used to walk into David Cameron’s office, his great joke was, “Ah, here’s the deep state.”

(10:09):
So if you come to me and say, how should we be thinking about this asset? I’ll have some ideas that we can test that may not occur to someone who’s viewing it from a commercial or a legal point of view, because these deep national security aspects are not evident in the mitigations. They’re impassive, they’re not explicit.

Jason Hewitt (10:29):
So David, I wanted to turn to you. How has the actual apparatus within government changed? I know that Paddy has mentioned it’s now Pat McFadden at the helm of the Investment Security Unit, so to speak. Have we seen a shift in how he maintains his office relative to Oliver Dowden?

David Blackburn (10:43):
Well, I think my starting point would be that the government recognizes the importance of this regime and is keen for it to work well. And in that sense its objectives are the same as its predecessors.

(10:55):
As Paddy said, the new government, or not to say the new government now, is through its haptic phase. And we see continuity in key areas throughout this regime, as you’ve mentioned, not just in terms of the minister responsible, but how the ISE operates, and the practical considerations around filings, rules of engagement, et cetera. The stuff that actually makes it work.

(11:16):
I mean, we certainly hear, although I don’t think we necessarily agree with it, some views that this government is more interventionist than its predecessor in terms of substantive remedies. Paddy and Jason, you have debated why the reckless picture is changing, because the environment and the context of which we’re all living is shifting. And I think we would argue that many of those trends long preexisted the change of government here in the UK last July.

(11:41):
Nonetheless, there are some developments that I think are worth following, in case they begin to create new practical considerations around this regime. So for example, how does this government view the role of the National Security Council or the agencies that sit around it, indeed where it gets its advice, and the types of questions it’s asking?

(12:01):
Equally, as Paddy said at the outset, this is still a technocratic, and we hope will remain a technocratic, process. But it’s perhaps worth noting and there are some new technocrats around this government who were last in government when are the Brown administration was in place. What impact is that going to have, if any, on the operation of this regime? The answer to that question may be none whatsoever, but it’s worth posing the question at this stage while those officials bed in.

(12:25):
And then I think finally there’s a manner in which this government at its very top political level conducts business. With conversations between the Chancellor and the PM, for example, or between Pat McFadden and the business secretary.

(12:38):
Now, as Paddy said, this is a technocratic process that is subject judicial review and the decision maker plays a quasi-judicial role. And that’s very important to state. But nonetheless, the way that these senior figures speak to each other and conduct their business and work with each other is slightly different from its predecessors. And that may have a practical impact on some aspects of this regime over time. I’m not saying it will, but it’s something that we should keep in the months ahead.

Jason Hewitt (13:07):
And I think it’s certainly interesting. David, you mentioned the quasi-judicial role. We’ve seen in the last couple of months a few decisions come out of the courts. Really only three NSIA cases have been heard in any form. We’ve seen the LetterOne decision come out, which pretty clearly emphasized the challenges for investors in making a substantive national security argument.

(13:27):
And that really echoes every jurisdiction, right? I think your ability to challenge these decisions and interrogate them is really quite limited to procedural things in practice. The national security policy element, I think courts tend to recognize, is very much the purview of government.

(13:43):
Can you take us through a little bit of how the ISU leadership looks at the moment and how transactions flow through? Is it the case that it is very case officer led? Is there an escalation path internally? Is Pat McFadden and Number 10 seeing every deal? Are they seeing a subset of deals, only political and defense deals floating up to that level?

David Blackburn (14:06):
I mean, I’d be interested in Paddy’s views around this question. Because this is a technocratic process and because it’s subject to judicial review, figures outside the ISU are very cautious about how they engage with it. That’s entirely appropriate, and is broadly consistent with what has come before.

(14:23):
So engagement outside the root of the case officer and the deputy directors within that unit needs to be done with basically significant caution.

(14:37):
In terms of the site of senior ministers outside that scope path of transactions that are under review, I mean, our understanding is that the national security secretariat and others continue to share information on a case by case basis as they see relevant, as they’ve done before.

(14:53):
I think those processes, as far as we can see it from what we hear, remain consistent with what has come before. Paddy, do you add anything to that?

Paddy McGuinness (15:01):
No, I don’t think so. There’s definitely been, well as we’ve seen, an attempt to be responsive. The ISU is never going to be as transparent in terms of personnel and factors and decisions as the CMA. On the other hand, we have noticed in our transaction, and Jason I’m wondering in yours, we have noticed a much greater willingness to have named individuals interact, deputy directors within the ISU be available and deal with more problematic or complex issues, and try and find a way through.

(15:38):
And so I think there’s definitely been a wish to... Oliver Dowden charged the leadership of the ISU with making it more straightforward to deal with transactions, even if ultimately that didn’t mean that the decision would go your way, but it would just be more straightforward to posit what you need to do. Beyond the interface, which often you have to deal with as a lawyer. And there definitely was recourse in phase two and ability to have conversations. And I think the ISU is taking on more of those conversations, which is really helpful.

(16:09):
It remains true, and I’m afraid to say in some sense I am responsible because I originally took the proposal that there should be an NSIA to the National Security Council, and said, “In our strategy this is one of the things we should do. And it should do this kind of thing,” to make good the Enterprise Act powers, which effectively become unusable because they’re not been used. And if subject to judicial review probably would’ve melted away.

(16:36):
So as David said, there’s a great wish to preserve that, those NSIA powers, and make sure that they remain effective and don’t melt away in the way that the Enterprise Act ones did.

(16:49):
It remains true, however, in the design, and this is the way I would’ve designed it, in fact in some sense did, that the purpose of the ISU is to prevent you from getting to the national security materials and judgment. It’s designed to keep you at arm’s length.

(17:07):
Now, trying to subvert that you run the risk. David and I have actually worked a case which did not result in a final order, but was effectively forced to withdraw. Because it was explained what the final order would be, where it was held by the ISU that in some sense they had been misled or they weren’t being dealt with in a straightforward fashion. We could debate whether or not they were in that particular case.

(17:33):
But it isn’t helpful to try and push through a machine that’s designed to do one thing to do things it’s trying to prevent you to do. So we don’t advise clients to do that.

(17:42):
It is true that what you’re doing in the ISU and then the NSIA transactions is a regulatory clearance. It is not doing national security. And so when you’re operating in a national security context, if you time it right, if you have the right connections and messages, and I don’t mean putting things into the media, which is rarely a wise thing to do, but if you can have the right conversations in order to make sure that the full context of your transaction and your intent is properly understood by seniors who will be consulted behind the ISU, if you do that at the right time that can help with your transaction.

(18:31):
That isn’t the same thing as saying you can go around the side and fix it. That’s not what I’m saying. But I’m saying that you want to have a think beyond the direct ISU route about what needs to be known for your deal to be properly understood. And known by who.

Jason Hewitt (18:47):
Yeah. And I think I’d really agree with those observations, Paddy, that we’ve seen the ISU become more open to meaningful conversations on complex deals, including at a senior level.

(18:58):
The challenges remain around what I describe as that uninteresting bulk of deals that are never going to have an interesting national security angle, but from an investor’s perspective are more of a process issue, where you need to get the approval. And in those straightforward deals, somewhat ironically, it is more difficult to get engagement, because in the phase one period it’s just not as high on the list, so to speak, as a phase two deal that’s going to get more engagement.

(19:24):
But what’s been really helpful is that the ISU has been quite good in sticking to its phase one timetables. It’s been disciplined in moving things to phase two.

David Blackburn (19:34):
And Jason, we see fewer of those, of the types of transaction that you’ve described. Which I suppose in a sense sort of underlines your point, that actually the system is working more effectively now than it was at its inception.

(19:49):
That when we do work on transactions like that, we’ve also seen evidence that the ISU, and Paddy sort of talked about it, that [inaudible 00:19:58] the case officer, debt directors, and ultimately those senior, are able to engage in all those process matters, if you can explain adequately what those process matters are.

(20:09):
I think the ISU, like many regulations, is we need to understand some of these issues in more detail, more experience over time.

Jason Hewitt (20:16):
We’ve moved quite naturally into this topic of practical tips, so maybe I’ll press on those a little bit. Stepping back, at the outset how should investors think about approaching the ISU and government? We’ve talked about the areas of focus and identifying those assets are going to be of concern.

(20:32):
If you’re a, I’ll call it a typically benign investor, global private equity kind of investor, US trade kind of investor, who isn’t necessarily going to present a country of concern issue, but is potentially acquiring an asset that has sensitivity attached, how do you advise those kind of clients to think about their approach to government? Is it go in all guns blazing early on and lobby everyone? Is it go in very low-key and wait for government to raise issues? Or perhaps more sensibly somewhere in between?

David Blackburn (21:06):
Well yes, I mean, picking up your point about more sensibly, somewhere in between. I think I certainly agree with that. With the added point that I don’t think that there is a sort of playbook, as it were, to deal with these things. Because, as Paddy’s articulated earlier on, the landscape is very dynamic, particularly at the moment. Perhaps we’ll put that in more detail in due course.

(21:34):
And of course not only is the landscape dynamic but the sort of conflict, I suppose especially with tension issues between [inaudible 00:21:40] risk and target risk are certainly moving on a case by case basis to a slightly more complicated position than they may have been to three years ago.

(21:45):
I think we see activity that’s worth avoiding and types of activity that one sees. So if I pick up the what to avoid, perhaps Paddy you cover the what do side of things. In terms of actions to avoid, we see a lot of mistakes made at the due diligence phase of transaction. Perhaps even earlier fundraising rounds, where counter parties and ultimate beneficiaries, who may cause problems further down the line, are not appropriately identified at that stage. And that creates really significant execution risks much later on.

(22:22):
I think there are some interesting things that one can do with data in order to reduce some of those risks during a fundraising stage.

(22:28):
Equally, during the due diligence phase, because the landscape is so dynamic, we often find clients and advisors relying on out-of-date precedents. Or an outdated understanding of not only the wider landscape of a specific target risk or acquirer risk, and Paddy’s talked about that in a little bit of detail, we imagine that that process will continue [inaudible 00:22:54] and will get more complicated. The risks of relying on out-of-date precedents will grow exponentially with that.

(22:59):
Then when you were in the sort of pre-announcement phase, rather than, as you put it, Jason, running around doing everything all at once, speaking to all sorts of people, I think that carries the same sort of risk as trying to land messages to the media, which Paddy referred to earlier.

(23:12):
Quite often though we encourage companies rather than to take that kind of action, is to think really carefully about the deal rationale. And how they can align the rationale and even perhaps some of the structures that are attached to it with government objectives where possible. And then we see this less but it’s still something we often watch for, is you’re relying on non-national security related issues to try and solve a national security problem. I think that’s less of an issue than it was five or six years ago, but it’s still something that is worth considering.

(23:42):
And then I suppose kind of post-announcement and post-filing there are very obvious practical tips, like ensuring that you didn’t go and engage whilst the shutters have come down or going in ineptly at the political level, as Paddy’s described. You need to understand how the ISE operates, how it reports up. And if you have the ability to engage on some of those structures and to create relationships, then that’s something one should take.

(24:07):
But Paddy, it’s something you [inaudible 00:24:12] how to do that and when to do it. Paddy McGuinness (24:14): [inaudible 00:24:15] kind of you. I’d like just to emphasize a couple of things that David has said. And he’d said them positively, but I want you to just emphasize them again.

(24:22):
So national security, a bit like geopolitics, and dare I say it, health, do you remember during the beginning of COVID where suddenly everybody became an immunologist somehow? And they all just stood up [inaudible 00:24:37] how the hell do you know? The key message to a client is don’t think because you read the papers, because you know some people who worked in the military or maybe intelligence or have been officials, that you understand current national security and concerns. Stop, get some advice.

(24:56): But one of the reasons not just to do your classic investor fund due diligence, which is largely around balance sheet, has a little bit of security in it but not really, one of the reasons not to do that is you then don’t understand what you look like to the people whose approval you need. And if you look malformed, however wrongly, you then have a decision to make about whether you restructure your deal. And we have a recent example where a client did exactly that, late in the stage two restructured the financing of it to exclude a particular party. That removed the difficulty for the ISU, and lo and behold they got their approval in the way that they sought.

(25:41):
One of the really difficult things about national security work is the issue of highly classified materials or insight, which you are not going to have access to. Frankly, if there’s a very strong line of intelligence reporting about a party or an individual involved in your transaction, who may be doing something which you don’t have the ability of, or has a background that you don’t know about because it isn’t easily identified through commercial due diligence, that can be fundamentally problematic.

(26:17):
And we have had instances with clients who have found themselves in something like that position, where there is something hidden to them which is of concern to the national security apparatus in the UK. And we’ve had to gently build connectivity to have a conversation about whether and how to resolve that.

David Blackburn (26:36):
I think that raises a really interesting question that picks up something that, Jason, you and Paddy debated a little bit earlier. Is how the ISU is being more open in its communication through the process with the parties to explain why things, for example, might be moving to a phase two.

(26:56):
One of the things that we’ve also seen is that they are being clearer. If you look at published final audits, for example, there is a short explanation about [inaudible 00:27:05] indicating what the national security risk is. I think that’s a welcome step that’s now being regularly taken to explain why action has been taken. And the implicit message in that to the international market and to other potential counterparties of the company that’s affected by this final order, it’s not necessarily about this acquirer, it’s about the asset. And it’s about our approach to national security.

(27:28):
I think that’s a really welcome step. But often I don’t think you would be able to get to that if you weren’t able to engage more openly with the ISU and ultimately with wider government where it’s appropriate, as you say.

Jason Hewitt (27:40):
I think you’ve both touched on the really good point, that early on when you’re fundraising it really merits careful thought. You want to preempt those issues before you’re building a fund with LPs that are going to present issues for the kind of investments you may be making.

(27:56):
It’s also really challenging, because they’re your source of capital. And you don’t necessarily know what you’re going to be targeting and you don’t know what government might have concerns about. As you say Paddy, by definition all of this is not known to private investors outside government.

Paddy McGuinness (28:09):
Well Jason, you raise a really, I think, important point. And David and I, had experience of this in transactions. And no disrespect to civil servants and securocrats more generally, they don’t live in the world of private capital and they’re not familiar with proceedings that go on in other jurisdictions and what the implications of them are. And therefore, they’re not going to be responsive to your needs. So they’re not going to necessarily understand the distance that there is between, I don’t know, an LP and the management of an asset through the portfolio company through a fund.

(28:50):
We had a transaction earlier this year where the acquirer was acquiring a business that was in several jurisdictions, including in the UK. Was a bit snagged up in the UK and was under Chapter 11 in the US. And they were in that phase in Chapter 11 where a judge was reasonably tolerant of the proposals of the interim management of the company, was acting in good faith for the debtors, but was beginning to think, “Well, actually maybe I need to insist on staffing headcount being reduced and spend being reduced.”

(29:29):
So the asset they were trying to buy was going to kind of melt. And the reason it was going to melt is because the ISU was not processing their thing fast enough, because once they’ve done that the funds could flow and everything will be fine.

(29:40):
And it was necessary to go and have a conversation about what is Chapter 11? What actually happens? What does the judge do? I mean, I’m not been patronizing to our colleagues and in some cases friends who work in national security, but of course it’s all they do for a living. This happens a bit and we need to be aware of that.

Jason Hewitt (30:01):
It’s a great example and really interesting insight on the LP passive role is a well understood thing generally in the private capital market. And I think that FDI regulators in Europe, including the UK, have really gone in their heads around it well and quickly relative to how new these regimes are in a lot of cases.

(30:20):
But the Chapter 11 example you give is such a fantastic one in illustrating this point. Not involving the NSIA, but we’re involved in a civil nuclear transaction where there was a Chapter 11 component. And having conversations with regulators on the role of court supervision and how it to a degree gives a custodial role that is divorced from equity holders is actually really valuable in enabling transactions. So I think that sort of sensible education piece is always really valuable. David Blackburn (30:52): It’s difficult to do within a process that’s underway. But nonetheless I think interesting examples. Jason Hewitt (30:58): So I wanted to pivot somewhat to more current policy issues. So let’s pick on the easy topic of the day, UK-US relationship. I mean, Paddy, as of now, and I say we’re talking in the middle of March, so when this podcast goes out in a couple of weeks I’m sure the geopolitical environment will change on us again. But as of now Starmer seems to be striking a relatively good tone with Trump. What seems to be the driver of the UK strategy? How is it going?

Paddy McGuinness (31:28):
In the context of how it impacts FDI, or more generally?

Jason Hewitt (31:32):
I suppose a little bit of both. And where I’m most interested is how might it impact FDI in terms of how does the UK view US investors?

Paddy McGuinness (31:42):
So I think the fundamentals of national security partnership of the United States, we shouldn’t overstate what has changed in those. And the sense in which their shared collection of data that is then turned into intelligence and that then drives regulatory processes, of which the National Security Investment Act and CFIUS are examples. And that the habit of partnership across between CFIUS, and ISU, and FERB, et cetera, et cetera, is likely to continue. Not least because they sit on a common base of collection and understanding.

(32:20):
Now, it may get a little bit frayed. There’s always been UK eyes over me, there’s always been no foreign material. Forgive me for talking securocrat gobbledygook. But that’s always been the case. So I think there’s a bit of a risk that we overstate what the implications are for foreign direct investment and the national security clearance of it.

(32:41):
My sense is that the UK is being very careful not to miscommunicate with the Trump administration. We’re not currently involved in a transaction of this nature, but I think if we saw American funds or an American company buying into an asset in the UK which had national security significance, I think there would be a very heavy technocratic focus on exactly what the issue was and how you communicate it. And I don’t think there’ll be any broad use of powers too because of changes in the United States, because the risk of miscommunication is too great.

David Blackburn (33:21):
I think we can see that HMG is treading a very careful line. And to sort of echo the point that Paddy has made, I think you can see that as some with communication that government is putting out in respect to final orders recently.

(33:38):
So for example, the deal involving advanced manufacturing and basically the Taiwanese entity has a really clear explanation about why this final order was necessary. You could also see that in the two final orders in respect of the [inaudible 00:34:00] deals recently as well.

(34:03):
I think what’s interesting with sort of other cases, I suppose more high-profile and potentially sensitive certainly politically cases involving BT and Royal Mail, there’s also a positive comment from ministers, including on a floor of the Commons, or any committee one should say, which demonstrates that the government is very cautious about the types of signal that are being sent through this process.

(34:31):
And that caution will be extended to American investors as and when they return to the UK en masse [inaudible 00:34:40] market conditions, but right now they may not be favorable to that. Shortly all of it will return, that trend will return sooner rather than later.

Jason Hewitt (34:48):
Great. Well, I think what I’ve heard over the course of this conversation is really a few things. That under this new Labour government we’re seeing a good level of continuity in approach to the ISU, and a good level of, I think, discipline around keeping it to the national security issues. And have heard some really great practical tips for engaging with that, and understanding the role of diligence. And how a lot of the things you might want to discover are perhaps not known or not obvious from outside in. And they’re really things within the purview of government. So I think some really interesting takeaways for investors.

(35:23):
Maybe I can ask both of you to give me your 30 second last word on the topics we’ve talked about. Paddy?

Paddy McGuinness (35:32):
[inaudible 00:35:31] David to give me 30 seconds, to give me the time to think about it.

(35:33):
Look, and I’m sure you do too, Jason, we really like to have an early conversation with people, even if it doesn’t result in business. We really like to have people are puzzling over what it is they’re doing and how it fits together and what the risks are. We love to have a conversation.

(35:50):
Because the most uncomfortable thing is to have a valued client and businesses that investors and a quiet asset, that you can see are fine businesses, late in a phase two and in a mess. And it’s hellish then to sort it out. And very touch and go, and it’s entirely unnecessary.

(36:10):
So we’d love to have an early conversation. And then normally we can think of some pointers, not least with our legal friends, and say, “Look, well, let’s look for these. And if we see these then we’ll have to direct [inaudible 00:36:21] and think about what we do.” But we like to have those conversations to really understand how a deal may go.

(36:27):
David?

David Blackburn (36:28):
I would agree with that. The only thing I’d add to it is that when having those conversations, we find we get best results when you’re doing it alongside lawyers and also the financial advisors. When you’re having that coherent picture around the whole of a transaction, particularly if you’re in the due diligence phase, it can be very effective. Obviously when you’re trying to do that after findings have been made and the shutters are up, it’s a very difficult place to be.

Jason Hewitt (36:53):
Absolutely. And I think target engagement on things is so critical. Well, Paddy, David, it’s been such an interesting conversation that we could carry on forever. And hopefully investors find it a helpful set of guidelines as they approach these kind of transactions. So thank you so much for your time today joining us.

Paddy McGuinness (37:09):
Yeah. Great, Jason, thank you.

David Blackburn (37:10):
Thank you so much.

Voiceover (37:14):
Thank you for joining us for today’s episode of Foreign Correspondent: An FDI Podcast. If you like what you’re hearing, be sure to subscribe in your favorite podcast app so you don’t miss any future conversations. Additional information about Skadden can be found at Skadden.com.