The Government is introducing new powers to scrutinise and intervene in investments in the UK through the long-awaited National Security and Investment Bill ("Bill"), which was introduced to Parliament on 11 November.
The Bill will provide the Government with "call in" powers to reverse, block and demand remedies/conditions in relation to investments that it considers a potential threat to national security. It will also introduce new mandatory and voluntary notification and clearance regimes. The mandatory regime will apply to acquisitions of control or threshold interests in entities in specified sectors, and the voluntary regime will apply to other types of transactions. If not notified and cleared, transactions subject to the proposed new mandatory regime will be void. Sanctions for non-compliance with the regime will also include fines of up to 5% of worldwide turnover or £10 million – whichever is greater – and imprisonment of up to five years.
Importantly, the ability to "call-in" transactions for review is currently drafted to apply to transactions that occur after the introduction of the Bill to Parliament. Investors in the UK and UK businesses therefore need to consider both the current law and the application of the Bill as currently drafted to transactions currently taking place or which have taken place since 11 November.
Commenting on the Bill, Partner and Chair of our Corporate Department, Kevin McCarthy, said:
"Given the bill's potential to unwind transactions or render them void, the implications of this legislation are potentially very important for those considering investment in the UK. As currently drafted, it could affect many types of investments through a wide range of entities (including trusts and partnerships) and assets and across many different sectors. For example, investments in entities supplying goods and services to, or carrying on activities in, the UK may be caught, even where the investment is through a vehicle incorporated outside the UK. Acquisitions into IP or land assets may also be in scope. In short, taking early advice - including on current transactions, and even those involving a minority stake – could be very important.
In presenting the Bill, the Government has stated that: "Our economy’s success and our citizens’ safety rely on the Government’s ability to protect national security while keeping the UK open for business with the rest of the world".
As yet we await the final legislation (including delegated legislation) and guidance. It will be interesting to see how well defined and proportionate the regime turns out to be."
We set out more detail below.
Currently, the Government only has limited powers within the merger control regime to intervene in transactions on public interest grounds (including national security). In the Government's view, these powers are insufficient when it comes to the types of threats that the UK faces today. The Bill has been introduced to modernise the UK regime and to bring the Government's powers into line with those of its closest allies.
Overview of the new regime
Under the Bill, a dedicated Investment Security Unit (sitting in the Department for Business, Energy and Industrial Strategy) ("ISU") will be established for the purpose of assessing certain investments in the UK. The analysis carried out by this body will be completely separate from any merger control analysis undertaken by the Competition and Markets Authority to assess the impact on competition. Previously the CMA had been involved in assisting the Secretary of State (currently Alok Sharma) to undertake its assessment of public interest concerns.
The Bill provides for a hybrid notification system: mandatory notification obligations that will attach to certain transactions in specified sectors; and voluntary notifications available for other transactions that otherwise might be capable of being "called in" by the Secretary of State.
The "call-in" mechanism will enable the Government via the Secretary of State to review non-notified transactions for up to five years post-completion, provided it does so within six months of it becoming aware of the transaction. Investors may therefore wish to notify voluntarily in order to secure deal certainty if their transaction may be of interest from a national security perspective.
A key role for the ISU will be market monitoring to ensure that deals that should have been notified are identified and called in. In addition, information-sharing provisions between UK public authorities (including the CMA) and other allied foreign agencies have been relaxed to allow exchanges of relevant information and intelligence to be shared.
The mandatory notification requirement will oblige proposed acquirers of certain rights or interests (see further below) in entities operating in sensitive sectors to seek approval from the Government before completing their acquisition. If such a transaction were closed prior to approval, it would be legally void. The sectors that will require mandatory notification are currently the subject of a Government consultation and, together with other conditions relating to when and in relation to whom an acquisition will be notifiable, will ultimately be defined via secondary legislation.
The Bill applies to a wide range of entities (whether or not having legal personality), including trusts and partnerships, and allows for the possibility of subsequent regulations bringing the acquisition of control over qualifying assets within the mandatory notification requirement.
The sectors covered by the ongoing consultation are: civil nuclear; communications; data infrastructure; defence; energy; transport; artificial intelligence; autonomous robotics; computing hardware; cryptographic authentication; advanced materials; quantum technologies; engineering biology; critical suppliers to Government; critical suppliers to the emergency services; military or dual-use technologies; and satellite and space technologies. The deadline for responses to the consultation is 6 January 2021.
The acquisition of interests in qualifying entities will be notifiable where a person acquires a right or interest which:
- reaches or crosses certain thresholds (15%, 25%; 50%; and 75% of votes or shares) in an entity;
- is a voting right that enables the person to secure or prevent the passage of any class of resolution governing the affairs of the entity; or
- enables the person to materially influence the policy of the entity.
Under the Bill, the Government can only "call-in" transactions where a "trigger event" has taken place. Parties are therefore encouraged to notify a "trigger event" voluntarily where they consider that it may raise national security concerns (but which does not meet the mandatory notification requirement). The "trigger events" defined in the Bill in relation to the acquisition of rights or interests in qualifying entities are the same as for the mandatory notification regime (except that the 15% trigger does not apply). However, they also include the acquisition of control over certain assets, including land, tangible movable property and with respect to intellectual property, ideas, information or techniques that have industrial, commercial or other economic value.
What steps can the Government take?
Following a national security assessment, the Government could decide to approve the transaction, approve the transaction subject to conditions, or prohibit the transaction (or order the transaction to be unwound if already implemented). Possible conditions include altering the amount of shares an investor is allowed to acquire, restricting access to commercial information, or controlling access to certain operational sites or works.
Timing and sanctions
In terms of timing, the Bill provides that where a proactive notification is made (either mandatory or voluntary), the Government has 30 working days to issue a "call-in" notice. Where a "call-in" notice is issued (including for non-notified transactions), the Government will have 30 working days to assess the transaction, which is extendable by an additional 45 working days if the Government reasonably believes that the investment poses a risk to national security. Beyond 75 working days, an additional period may be agreed between the Government and the acquirer. This contrasts with the existing public interest regime, under which the relevant minister sets individual timelines on a case by case basis.
As noted above, there will be sanctions for non-compliance with the regime, which includes fines of up to 5% of worldwide turnover or £10 million – whichever is greater – and imprisonment of up to five years.
The Bill is expected to be wide ranging and capture a large number of transactions/investments. Unlike the current system in the UK, the Bill does not include minimum turnover and share of supply thresholds and so transactions of any size can be caught.
In addition, acquisitions of entities located outside of the UK can also fall within the scope of the Bill if they carry on activities in the UK or supply goods or services to persons in the UK.
The Government's Impact Assessment estimates that between 1,000 and 1,830 transactions will be notified under the new regime per year. This is significant considering that there have only been 12 public interest interventions on national security grounds since 2002.
Importantly, the UK Government has made clear that these new powers will be used exclusively on national security grounds – and not for broader economic reasons - and that this will be written into law. While this is welcome news for investors, it remains to be seen how robustly the new regime will be able to insulate itself from the political pressure (relating to British jobs or headquarters for example) that can often be associated with such transactions.