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Britain to tighten foreign takeover rules amid China worries

* Britain plans to tighten foreign takeover rules

* Government will be able to intervene in any industry

* China hopes Britain will provide fair investment environment

* Ministers will be able to target deals involving small companies (Adds Chinese foreign ministry comments)

By Andrew MacAskill and Ben Martin

LONDON, July 24 (Reuters) - Britain is planning the biggest change to takeover rules in almost two decades, giving the government new powers to block deals in all sectors of the economy to prevent UK companies in sensitive industries from falling into foreign hands.

The business minister, Greg Clark, wants to tighten the existing rules, which are limited to large transactions, to cover all British companies including small firms.

The changes mark a new era of government oversight of business activity in the world's fifth-largest economy which has traditionally been one of the most open markets to global mergers and acquisitions.

It comes amid a boom in global merger and acquisition activity in which Britain has remained the second most popular target nation for deals behind the United States. About $277 billion of offers for UK firms were announced in the first six months of the year, according to Thomson Reuters (Dusseldorf: TOC.DU - news) data.

The changes mirror efforts in the United States, Germany, France and Australia, where there are concerns that China and other rivals are gaining access to key technologies.

Chinese foreign direct investment into Britain reached a record level last year with firms acquiring a slew of energy, technology and property assets. Its foreign ministry said on Tuesday China hoped Britain would provide a fair investment environment for foreign firms.

Britain, which wants to reinvent itself as a global trading nation after deciding to leave the European Union, is seeking to balance the demands of safeguarding its strategic industries while continuing to court foreign investors.

Prime Minister Theresa May, who is struggling with a rebellion in her party over her Brexit plans, has struck a more cautious tone on deals since becoming prime minister in 2016.

"These proposals will ensure we have the appropriate safeguards to protect our national security whilst ensuring our economy remains unashamedly pro-business and open to high levels of foreign investment in the future," Clark said.

Under the new rules, the government will have the power to intervene when a company wants to acquire an asset such as a particular piece of technology or intellectual property rather just when they are seeking to buy or take control of a firm.

At present the government can only intervene if a deal creates a group with 25 percent of the market or with turnover of over 70 million pounds ($91.7 million). That has already been reduced to 1 million pounds for companies that make technology with military or dual-use applications.

Scrapping the revenue and market threshold targets illustrates the perceived threat to national security if smaller companies with advanced technology are acquired by foreign governments.

For the first time, breaches of the government's recommendations over such deals will also be classified as a criminal rather than a civil offence.


The Department for Business, Energy and Industrial Strategy expects to review around 50 deals a year on national security grounds, compared to one so far this year and one last year.

Last year, the government approved the sale of Sepura (Frankfurt: 3SE.F - news) , which makes walkie-talkies for London's police, to China's Hytera (Shenzhen: 002583.SZ - news) Communications after a probe.

Government officials say the changes will be the most significant to takeover rules since the 2002 Enterprise Act, which allowed a merger to be blocked if it hurt media plurality, national security or public contracts.

On becoming prime minister in July 2016 May delayed the multibillion-pound Hinkley Point nuclear power plant project, which is being built by French state-controlled utility EDF (Swiss: EDF.SW - news) and part-financed by China.

She (Munich: SOQ.MU - news) ultimately approved the deal but said her government would take a more cautious approach over similar foreign investments in the future.

The rule change comes as Britain seeks to demonstrate a more positive approach to foreign direct investment as it prepares to negotiate trade deals after leaving the European Union.

Under U.S. President Donald Trump, the Committee on Foreign Investment in the United States, which assesses potential foreign investment to ensure it does not harm national security, has made it harder for Chinese firms to buy U.S. assets. ($1 = 0.7632 pounds) (Editing by Guy Faulconbridge; Editing by Jon Boyle)