Following the government's recent decision to proceed with the Hinkley Point C nuclear power station project (Hinkley Point), ministers are planning a new legal framework for future foreign investment in Britain's critical infrastructure. A Department for Business, Energy & Industrial Strategy press release1 stated that:

"There will be reforms to the Government's approach to the ownership and control of critical infrastructure to ensure that the full implications of foreign ownership are scrutinised for the purposes of national security. This will include a review of the public interest regime in the Enterprise Act 2002 and the introduction of a cross-cutting national security requirement for continuing Government approval of the ownership and control of critical infrastructure."

While not commenting explicitly on this objective, the Competition and Markets Authority (CMA) made some relevant observations on these proposals in its October 2016 submission to the Business, Innovation and Skills Committee's inquiry into the government's industrial strategy. Stressing the need for clarity and certainty in defining any public interest consideration, the CMA highlighted potential concerns about the need for transparency in decision making, risks to competitiveness of UK businesses and potential adverse impacts on the UK's reputation as a place to do business.

Golden shares

A golden share is a share in a company held by the government, which enables the government to exercise special rights. These were popular during various public sector privatisations in the 1980s and early 1990s, particularly in the defence2 and nuclear sectors3.

Typical golden share rights include the right to receive notice of, attend and speak at general meetings4. Golden shareholders consent is usually required to share transfers5 or payment of dividends6. The 2015 articles of Rolls-Royce Holdings Plc (Rolls-Royce) restrict registration of "Foreign-Held shares", imposing a 15 per cent "Individual Foreign Shareholding Limit".

Government has exercised its golden share rights to prevent unwanted takeovers. For example, in 1987, BP sought to acquire Britoil. Britoil's articles stated that, should a person wish to gain control over the Board7, the government could request an extraordinary general meeting to oppose or block any resolution recommending the takeover8. After receiving assurances on BP's post-acquisition strategy, the government decided not to exercise its golden share rights.

Other devices have included "golden share articles" requiring directors and chief executives to be British citizens9.

Golden shares can create issues for companies listed and traded on a stock exchange. A fundamental principle of listing is that shares should be freely transferable10. The ability to control or prohibit the transfer of a listed company's shares on national security grounds contravenes that principle. Such restrictions may also inhibit a vibrant market in the company's shares. However, current Listing Rules allow deviation from the "freely transferable" principle in an "exceptional circumstance"11. For example, while shareholder votes must be taken for matters such as cancelling a listing, or entering into related party transactions12, the FCA may modify the operation of this rule "in exceptional circumstances, for example to accommodate the operation of... special share arrangements designed to protect the national interest"13.

In February 2015, then-Minister of State for Energy Matthew Hancock confirmed that the Department for Energy and Climate Change had "initial discussions with the [European] Commission on the possibility of a special (or 'golden') share for the Hinkley Point C project"14. However, amid press reports of former Chancellor George Osborne vetoing a golden share15, the government chose not to pursue this. The recently signed Hinkley Point agreements included an exchange of letters between the CEO and Chairman of EDF Energy (EDF, majority shareholder in Hinkley Point) and the UK's Secretary of State for Business, Energy and Industrial Strategy (the Secretary of State). In this exchange, EDF confirmed that if, before the second reactor is operational, EDF intends to sell an interest in the Hinkley Point holding company NNBG such that it has no majority voting rights, it will seek the UK government's consent before completing the transaction. Interestingly, it does not say that it will not complete the transaction if that consent is not forthcoming16.

Free movement: a potential challenge by the European Commission?

Whilst it is not unusual for major economies to use controls such as those offered by golden shares their use in EU states has declined in recent years. Apart from concerns such as those highlighted recently by the CMA in its submission on government industrial strategy, the decline in popularity of golden shares may be explained by challenges to their legality by the European Commission (the Commission). The European Court of Justice (ECJ) has found that golden shares can breach EU Treaty prohibitions on restricting freedom of establishment17 and free movement of capital18 between EU member states.

Such restrictions can be justified only in very limited circumstances. The ECJ has held that the following rights attached to golden shares breach these Treaty terms as they are liable to dissuade foreign investment:

  • pre-approval of share acquisitions (usually over 15 per cent) 19;
  • ability to veto asset disposals20;
  • control over appointing directors21; and
  • requirement to approve a company's winding-up22.

These restrictions are particularly unattractive for foreign investors. Consequently, member state governments – including the UK government – have surrendered golden shares held in companies in various sectors23.

However, the ECJ allowed the Belgian government to retain its golden shares in each of Société Nationale de Transport par Canalisations (SNTC) and Distrigaz because of a need to maintain minimum gas supplies in the event of a threat. The shares were structured so the government has to actively intervene when examining a third party investment in the company, rather than having an automatic right of approval. This power is strictly limited in time, and the investor can appeal to the Belgian Conseil d'État (Council of State) for the annulment or suspension of the government's decision24.

According to the government's press release on Hinkley Point, the Office for Nuclear Regulation (ONR) will be "directed to require notice from developers or operators of nuclear sites of any change of ownership or part-ownerships. This will allow the Government to advise or direct the ONR to take action to protect national security as a result of a change in ownership"25. Presumably, this means that the ONR would have the power to assess any risks to national security arising from the change of control and prevent the change of control on these grounds.

Certainly, pre-Brexit, the UK government would need to ensure that this power does not breach the prohibition on restricting free movement of capital between EU member states. Restrictions will be assessed on a case by case basis, but structuring future UK golden shares in a way that gives the government a limited power to intervene where the potential investor can appeal the decision (in a similar vein to how the Belgian government holds shares in SNTC and Distrigaz) could make them less prone to challenge. Whether the UK government can avoid EU constraints post-Brexit will depend on the terms – yet to be agreed – on which the UK will trade with the EU.

Merger control: the public interest test

The Enterprise Act 2002 (EA) gives the CMA jurisdiction to review a "relevant merger situation", i.e. where two enterprises that meet either a turnover or market share threshold cease to be distinct. This occurs when they are brought under common control. Three levels of control are contemplated:

  • material influence, where a shareholder can materially influence the management, strategy and commercial policy of the business;
  • de facto control, where a shareholder can control the company notwithstanding the shareholder does not hold a majority shareholding; and
  • a controlling interest, which usually arises from a shareholding over 50 per cent of a company's voting rights.

Subject to the turnover or market share threshold being met, the CMA can review transactions bringing two or more enterprises under one of these levels of common control and any subsequent material increase from one level of control to another.

Where UK mergers are deemed important to national security, the government may use EA powers to intervene in three circumstances:

  • Issuing an Intervention Notice to the CMA. The CMA must inform the Secretary of State if it believes a merger it is reviewing will raise material public interest considerations. The Secretary of State may then issue an intervention notice on a ground specified in the EA (currently national security (including public security); media plurality (and other media issues); and maintaining the stability of the UK financial system. Further grounds may be specified by Order of the Secretary of State: maintaining the stability of the UK financial system was specifically added as a public interest consideration to give the Secretary of State the ability to intervene in Lloyds TSB's takeover of HBOS in 200826.

While the CMA assesses and reports on the competition aspects of the merger, the Secretary of State takes the final decision to clear (conditionally or unconditionally) or block the merger.

  • Issuing a European Intervention Notice where the Commission is reviewing a merger that satisfies the jurisdictional test in the EU Merger Regulation (EUMR)27. Under the EUMR, only the Commission, and not the CMA, will review and make a decision on the competition aspects of the transaction. However, the Secretary of State may issue a European Intervention Notice to the CMA if the transaction raises concerns relating to public security, media plurality or prudential rules. The CMA will report to the Secretary of State on the public interest issues. The Secretary of State may then clear (conditionally or unconditionally) or block the merger on public interest grounds only.
  • Issuing a Special Intervention Notice to the CMA where the relevant turnover or market share thresholds set out in the EA giving the CMA jurisdiction to review the merger are not met but the Secretary of State considers there are specified grounds for intervention. These are national security/public security, media plurality or maintaining the stability of the UK financial system28. A Special Intervention Notice may only be issued if the activities of at least one of the merger parties are carried on in the UK by or under the control of a UK incorporated company. Further, one or more of the enterprises must be a government contractor29. As the merger does not meet the thresholds for a competition review, the Secretary of State takes the decision to clear or block the merger based solely on national security or public security grounds. The CMA does not report on the competition aspects.

No Intervention Notices have been issued for reasons of public security. However, several European Intervention Notices and Special Intervention Notices have been issued, citing public security concerns, when each of overseas-based General Electric Company, General Dynamics, Finmeccanica, Lockheed Martin and Atlas Elektronik sought to acquire UK defence companies30. The Secretary of State permitted those mergers after receiving undertakings from the acquirer to safeguard classified information and ensure that strategic capabilities were retained in the UK.

Amending the Enterprise Act

Currently, the UK government has no power to intervene in the acquisition of a minority stake in critical infrastructure  that does not confer any influence over its operation or strategy or if an existing shareholder acquires further shares without increasing its level of control.

The issues considered in the context of the Hinkley Point project have caused the government to revisit a "national security requirement for continuing Government approval of the ownership and control of critical infrastructure"31.

The government's press announcement made following the decision to proceed with Hinkley Point suggests that it is aiming to obtain continuous powers of scrutiny where the public interest is at stake32. However, it is unclear whether government intends to amend the EA to ensure that all foreign shareholdings are reviewable by the government, or just those where control (including material influence) is acquired. Further, while the government's intention to take a golden share appears to be limited at present to future nuclear new build projects, the amendments to the EA might apply to the ownership and control of critical infrastructure in other sectors.


There are various means by which the UK government can influence the future of strategically important companies, whether by using golden shares or by exercising its EA powers. In a pre-Brexit landscape, the government will need to be careful not to breach TFEU provisions, or risk challenge by the Commission and European Courts. Once the UK has left the EU, the government may have more freedom and flexibility to apply its policies. Nevertheless, it will still no doubt be concerned to ensure that the UK remains an attractive prospect to foreign investors.


  1. first published: 15 September 2016
  2. E.g. BAE Systems plc
  3. E.g. British Energy plc and EDF Energy Nuclear Generation Limited
  4. Golden shareholders typically cannot vote at general meetings. Some golden share articles permit golden shareholders to vote on matters that relate to the amendment or removal of certain key provisions (see for example amendments to the Golden Share; Appointment and Removal of Directors by Crown Representatives; Creating, issuing, purchasing, redeeming or repaying any of its shares; and the Winding up of the company, in Art. 10.4 of NATS Holdings Limited and Art 10 (D) of CDC Group Plc)
  5. Art 35.6 of EDF Energy Nuclear Generation Limited and British Energy Generation (UK) Limited
  6. Art 10 (F) of Postal Services Holding Company Limited. Another broader variation of this right is to require written consent from golden shareholders before the company can create, issue, purchase, redeem or repay any of its shares or reduce or reorganise its share capital or any rights to it in any way (see for example Art 10 (C) of CDC Group Plc and Art 10.3 (a) of NATS Holdings Limited)
  7. Art. 71 (A) of Britoil Public Limited Company (previous Art dated 1986)
  8. Art 71 (A) to (C), ibid
  9. Arts 111 (a) (n) and 111 (d) (m) of Rolls-Royce's 2015 articles also place restrictions on foreign directors becoming CEOs. See also Art 72 (A) BAE Systems Plc and Art 10 (M) (iii) of Postal Services Holding Company Limited. In the latter, in addition to the nationality requirement for a CEO, the appointment to, or removal from office of any director of the company designated or redesignated at any time as CEO of the company requires prior written consent of golden shareholders. Art 13.1 (b) Inter-Capital and Regional Rail Limited permits the Secretary of State to refuse the transfer of any shares unless the transferee is a reputable financial institution
  10. Listing Rule (LR) 2.24 R (1) (see
  11. LR 2.2.5 G
  12. LR 9.2.21 R
  13. LR 9.2.22
  17. Article 49 Treaty on the Functioning of the European Union (TFEU)
  18. Article 63 TFEU
  19. For example, C-483/99 Commission v. France [2002] ECR I-4785, C-98/01 Commission v UK [2003] ECR I-4641, C-463/00 Commission v Spain [2003] ECR I-4606, C-171/08 Commission v Portuguese Republic [2010] ECR I-6817
  20. For example, C-483/99 Commission v. France [2002] ECR I-4785 and C-98/01 Commission v UK [2003] ECR I-4641
  21. For example, C-171/08 Commission v. Portuguese Republic [2010] ECR I-6817
  22. For example, C-212/09 Commission v. Portuguese Republic [2011] ECR I-10889
  23. The Commission has found golden shares held in oil companies Elf-Aquitaine (France) and Repsol (Spain), utilities companies Endesa (Spain), Energias de Portugal and Galp Energia (Portugal), British airport operator BAA and Spanish airline Iberia, Spanish tobacco manufacturer Tabacalera, telecoms operators Telefónica (Spain), KPN (Netherlands) and Portugal Telecom, and Dutch postal operator TNT Post incompatible with the freedoms enshrined in the TFEU
  24. C-503/99 Commission v. Belgium [2002] ECR I-4812
  25. See note 1
  26. S58 Enterprise Act 2002; ME/3862/08 Lloyds TSB plc / HBOS plc
  27. S67 Enterprise Act 2002 and Article 21 (4) of Regulation 139/2004 of 20 January 2004 on the control of concentrations between undertakings. For the purposes of the EUMR, control is defined as "the possibility of exercising decisive influence".
  28. S59 Enterprise Act 2002
  29. S59 Enterprise Act 2002. Additionally, a Special Intervention Notice may be served on media plurality grounds only where the conditions relating to government contractors are not met but the merger involves a supplier or suppliers of at least 25 per cent of newspapers or broadcasting in the UK
  30. European Intervention Notices: ME/2940/07 General Electric Company / Smiths Aerospace, ME/1531/05 Finmeccanica S.p.A. / BAE Systems plc, ME/1235/04 Finmeccanica S.p.A./ AugustaWestland N.V., ME/1029/04 General Dynamics / Alvis plc; Special Intervention Notices: ME/1472/05 Lockheed Martin / Insys Group and ME/4130/09 Atlas Elektronik GmbH UK / QinetiQ's UWs Winfrith Division
  31. See note 1
  32. See note 1

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