The National Security and Investment Act 2021, which introduces new powers to scrutinise and intervene in investment transactions in the UK, has received Royal Assent. The legislation is part of a global trend towards introducing foreign investment laws which has seen a number of other countries introduce similar protections.
The Act will provide the Government with "call in" powers to reverse, block and impose remedies (including conditions) and sanctions 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. 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, while most of the Act is not likely to take effect until later this year, the ability to "call-in" transactions for review will apply to transactions that have occurred after the introduction of the legislation to Parliament on 11 November last year. Investors in the UK and UK businesses are therefore already needing to consider the application of the Act to transactions currently taking place, in addition, where relevant, to the more limited existing powers under the Enterprise Act (see background below).
Commenting on the Act, Partner and Chair of Mishcon de Reya's Corporate department, Kevin McCarthy, said:
"Given the Act'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. The regime 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 could be caught, even where the investment is through a vehicle incorporated outside the UK. Acquisitions of certain IP or land assets will 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 legislation, 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 further detail in the form of secondary legislation and guidance. It will be interesting to see how well defined and proportionate the regime turns out to be."
Currently, the Government only has limited powers within the merger control regime under the Enterprise Act 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 Act has been introduced to modernise the UK regime and to bring the Government's powers into line with those of its closest allies. It will replace the national security aspects of the Government's current powers under the Enterprise Act, once fully in force.
Overview of the new regime
Under the Act, a dedicated Investment Security Unit in the Department for Business, Energy and Industrial Strategy (ISU) will assess 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 (CMA) to assess the impact on competition. Previously the CMA had been involved in assisting the Secretary of State for Business, Energy and Industrial Strategy to undertake its assessment of public interest concerns.
The Act 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.
There is no definition in the Act of 'national security' for the purpose of the notification and call in regimes. Instead, the factors that the Secretary of State expects to take into account when deciding whether to exercise the call-in power will be set out in a "Statutory Statement of Policy Intent" on which it will consult.
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 were the subject of a Government consultation, to which the Government's response was published on 2 March 2021. Together with other conditions relating to when and in relation to whom an acquisition will be notifiable, the sectors will ultimately be defined via secondary legislation.
The sectors and activities within them that are expected to be subject to the mandatory notification regime are:
- advanced materials;
- advanced robotics;
- artificial intelligence;
- civil nuclear;
- computing hardware;
- critical suppliers to the government;
- critical suppliers to emergency services;
- cryptographic authentication;
- data infrastructure;
- military and dual use;
- quantum technologies;
- satellite and space technologies;
- synthetic biology (formerly known as engineering biology and renamed following the consultation);
- and transport.
The Government's response to the consultation noted that many of the proposed sector definitions were very broad in scope and so the definitions of the sectors have been refined and narrowed. The response document also indicates that the Government will engage with stakeholders as it continues to develop and refine the definitions.
The Act 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 acquisition of interests in qualifying entities will be notifiable where a person acquires a right or interest which:
- reaches or crosses certain thresholds (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.
In an earlier iteration of the Bill, before it became an Act, the acquisition of a right or interest crossing a threshold of 15% was included within the scope of the mandatory notification regime triggers, but this has been omitted from the Act. Care will need to be taken, however, as even a shareholding of less than 15%, when accompanied by other factors indicating the ability to exercise material influence over policy, may be considered to result in the ability to exercise material influence and require notification.
Under the Act, 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 Act in relation to the acquisition of rights or interests in qualifying entities are the same as for the mandatory notification regime. 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 Act 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 Act has the potential to capture a large number of transactions and investments. Unlike the current system in the UK, the Act 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 Act 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. 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.
A formal consultation on the Government's draft Statutory Statement of Policy Intent is expected to be launched and draft secondary legislation is awaited. The Government's press release announcing the granting of Royal Assent stated that the regime is expected to commence "towards the end of this year". In advance of commencement, the Government has been encouraging parties to contact the ISU for informal advice regarding the implications of the new regime for their transaction.