First published in our Biotech Review of the year – issue 9.
An extensive range of transactions will potentially be caught under the new regime. Whilst the Government could already intervene in certain transactions on national security grounds, this was solely on an ex post ‘call-in’ basis. This new regime covers a wide range of transactions, including the licensing of intellectual property (IP), because qualifying assets include ideas, information or techniques with industrial or commercial value. Overall, the Act is likely to have a significant impact on the life sciences sector.
A transaction is a ‘qualifying acquisition’ if all of the following apply:
- the acquisition is of a right or interest in, or in relation to, a qualifying asset or qualifying entity;
- the entity or asset being acquired is from, in, or has a connection to the UK; and
- the level of control being acquired over the qualifying entity or qualifying asset meets or passes one of these thresholds:
- acquiring shares or votes in an entity which takes the acquirer from 25% or less to more than 25%; from 50% or less to more than 50%; or from less than 75% to 75% or more;
- voting rights that allow the passing or blocking of resolutions governing the affairs of the entity;
- material influence over the policy of a qualifying entity;
- ability to use a qualifying asset, or direct or control its use.
Importantly, the regime is not a ‘foreign investment’ scheme and will include acquisitions by UK entities meeting the above thresholds.
Only the acquisition of qualifying entities in one of seventeen ‘sensitive’ sectors defined by the Government fall under the new mandatory prior notification regime. However, the mandatory notification regime does not apply to the acquisition of assets (regardless of sector), or to the acquisition of qualifying entities outside these sensitive sectors. Transactions that require mandatory notification may not be completed prior to Government approval. Failure to obtain approval can result in a legally void acquisition, fines of up to 5% global turnover or £10 million (whichever greater), imprisonment of up to 5 years and director disqualifications.
Sectors relevant to life sciences
Certain ‘sensitive’ sectors defined by the Government will be of particular relevance to the life sciences sector.
Synthetic biology is defined in the Act as the process of applying engineering principles to biology to design, redesign or make biological components or systems that do not exist in the natural world. This will include “(i) the design and engineering of biological-based parts of enzymes, genetic circuits and cells and novel devices and systems, (ii) redesigning existing natural biological systems, (iii) using microbes to template materials, (iv) cell-free systems, (v) gene editing and gene therapy, and (vi) the use of DNA for data storage, encryption and bioenabled computing.”
There are, however, significant exceptions for certain activities in this sector, notably for:
- gene therapy (if it is used solely for the purpose of replacing missing or defective genes to restore phenotypes to achieve a therapeutic effect);
- cell therapy (if cells are modified by genetic engineering and then introduced into a patient to treat disease);
- diagnostics (except where this involves the storage or ownership of sensitive human genetic information that enables the identification of an individual); and
- industrial biotechnology R&D and production (using enzymes or organisms not modified through the application of synthetic biology).
There is also an important exception for the ownership, IP ownership or development of human/veterinary medicines and immunomodulatory approaches that employ synthetic biology at any stage of development or production. It is likely that many transactions involving therapeutics companies will fall within this exemption. This exemption will not apply, however, where the entity has a synthetic biology technology that uses or could be employed or modified to produce or deliver (i) toxic chemicals to achieve an incapacitating or lethal effect on humans or animals, or (ii) materials restricted under Schedule 5 to the Anti-terrorism, Crime and Security Act 2001 (e.g. various viruses identified as pathogens and toxins).
Essentially, the Government is seeking to identify activities and capabilities that could present a national security concern if they were to fall into the wrong hands. They give as an example the activity of developing antibody-drug-conjugates, which would not be an exempt activity since these products contain highly potent toxins and use a linker technology that enable antibodies to deliver toxins to specific tissues. However, the development of standard monoclonal antibody therapies would be exempt, since there is no such dual-use potential.
This sector definition covers technology enabling the programming or training of a device or software to “(i) perceive environments through the use of data, (ii) interpret data using automated processing designed to approximate cognitive abilities, or (iii) make recommendations, predictions or decisions, in each case with a view to achieving a specific objective.”
Entities will be caught by this sector definition if (i) they are carrying out research into artificial intelligence or developing or producing goods, software or technology that use artificial intelligence, and (ii) they are doing so for the purposes of advanced robotics, cyber security, or identifying or tracking objects, people or events. Examples might include human, object or event identification. This definition seems unlikely to catch life sciences companies using artificial intelligence in drug discovery but could, for example, cover the use of artificial intelligence for certain MedTech applications.
Advanced robotics is defined as a machine that is autonomous or capable of using sensors to carry out sophisticated surveillance and data collection and can carry out multifunctional physical actions. Where there is only partial autonomy, this may be in addition to remote control or tele-operation or though pre-programming of operations or responses. The definition does not include consumer devices or machines for heavy industrial use or basic, static, sensing, imaging or computing devices.
In the life sciences context, this sector could, for example, cover entities involved in the development and production of robots for use in diagnostic, surgical and other healthcare settings.
Call-in powers/voluntary notification
In a significant move, the Government will also have the power to ‘call-in’ any ‘qualifying acquisitions’ that give rise to national security concerns. This includes a person gaining control of a ‘qualifying asset’, such as e.g. land, tangible moveable property or ideas, information or techniques which have industrial, commercial or other economic value. The qualifying acquisitions can be in any sector, but are more likely to be called in for review if they fall within one of the sensitive sectors.
The call-in power is both wide-reaching and has retroactive effect, applying to transactions entered into from 12 November 2020. Once the Government becomes aware of a ‘trigger event’ it will have 6 months to call it in, subject to an overall 5-year limitation period. For deals completed between 12 November 2020 and commencement of the Act, the trigger event to start the 6 month period will be the later of 4 January 2022 or when the Secretary of State became aware of the transaction. This is subject to a 5 year limitation period that runs from 4 January 2022.
Parties have been encouraged to notify transactions that may raise national security concerns voluntarily (even if the transaction is not subject to mandatory notification). Voluntary notification is likely to be a useful tool for companies unsure of whether their transaction fits the mandatory notification thresholds who wish to avoid the risk of a subsequent call-in review. Notification is simple and requires the provision of relevant information concerning the transaction to a BEIS email address (investment.screening@ beis.gov.uk).
Risk of notification being reviewed
If a transaction triggers a mandatory notification, the legal obligation for notifying falls on the investor/acquirer. Notifications are made via the submission of an online form containing information on the structure and share ownership of the qualifying entity, the acquirer and the acquisition.
Once a complete notification has been accepted, the Government has 30 working days to review the acquisition and either provide clearance or call-in the acquisition for a national security assessment (the “Review Period”). The Government may issue information or attendance notices where a notification is not sufficiently detailed. It is expected that most notifications will be cleared at the end of the Review Period.
Once a mandatory notification has been submitted, an acquisition cannot be completed until clearance has been obtained. If a voluntary notification has been submitted, the acquisition can continue to be progressed unless the Government has imposed any form of interim order.
If an acquisition is called-in, the Government has 30 working days to complete its national security assessment review (the “Assessment Period”), although this can be extended by a further 45 working days if more time is needed. After this, any further extensions must be agreed by the investor/acquirer. If the Government clears the transaction, it cannot investigate it again, unless false or misleading information has been provided.
If national security concerns are identified following an assessment review by the Government, remedies may be required to allow to transaction to continue. These could 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. There may also be further information or attendance notices issued during the Assessment Period, which have the legal effect of ‘stopping the clock’.
The Government has made clear that it will only use its new powers to block (and potentially unwind) transactions as a last resort where there is a significant national security concern and remedies are not appropriate. It is worth noting that, to date, no transactions have been blocked by the Government on national security grounds under its existing powers (i.e. under the current public interest merger regime).
The ‘statement of policy intent’ published by the Government sets out risk factors for transactions that are more likely to be reviewed:
- Target risk: whether it is in an area of the economy where the Government considers risks more likely to arise e.g. advanced technology, military and dualuse technologies, and direct suppliers to Government and the Emergency Services.
- Trigger event risk: the type and level of control being acquired and how this could be used as disruptive ability.
- Acquirer risk: whether the acquirer is in control of other entities within a sector or owns significant holdings within a core area, as this increases their potential leverage
Impact on life sciences sector
As noted, the definitions impacting the life sciences sector (artificial intelligence and synthetic biology) are broad and are likely to cover a wide range of transactions in the sector. The sector has certainly been in the frame with regards to national security and following COVID-19 there is inevitably a political aspect to the review of future life sciences transactions.
The definition of synthetic biology, whilst remaining broad, is significantly narrower than the definition of ‘engineering biology’ initially proposed and remains narrower than many other European regimes. The Office for Life Sciences has commented that the final definition is consistent with the intent of the Act; protecting national security whilst limiting the impact on the sector. However, the fact that the transfer or licence of IP is subject to review by call-in/voluntary notification makes the UK slightly unique. The broad reach of the Government call-in power of asset transactions is likely to require a consideration of the Act in connection with many licensing and collaboration deals.
The Government has also set out guidance which provides detail on transactions in higher education and research-intensive sectors that are likely to be subject to a mandatory or call-in notification. In the higher education and research-intensive sectors, a qualifying entity could include a foreign or UK university, university spin-out or subsidiary, research organisation or private company doing contractual work with a higher education institution or research organisation. The guidance sets out that activities of these companies that may be subject to review include developing or forming research centres, developing university or research organisation spin-out companies and involvement in university research.
Notifications: the new normal?
The Government has attempted to reassure businesses that the UK National Security regime will be less burdensome than the US CFIUS and that the large majority of notifications made will be reviewed and cleared within 30 working days. Whilst the Government anticipates around 1,000 – 1,800 notifications to be made per year, less than around 90 of these notifications are likely to require any form of in-depth review and only around 10 deals are likely to require remedies per year. Nevertheless, this demonstrates a significant departure from the current national security review provisions under the Enterprise Act, which have only resulted in 12 transactions being reviewed since 2003.
The Government is planning to continue consulting on various aspects, including sector definitions. The Government has also created the Investment Council to work with its recently formed Office for Investment on the Government investment strategy. The Council will be made up of various sector leaders and will ensure that there is representation from a wide range of industries.
In one statement, that will be reassuring to the sector, the Government has said: “The call-in power will not be used to interfere arbitrarily with investment. The UK has a proud record as one of the most open economies in the world and the Secretary of State’s use of the call-in power will not change that. The UK remains firmly open to investment and the government wants the UK to be the best place in the world to work and do business.”
The introduction of the new regime undoubtedly creates a complex process of review for companies to work through, but it is hoped that as the Government provides further practical guidance, the process itself will be straightforward. There is no doubt that the change to a mandatory prior notification regime for qualifying acquisitions in the prescribed sectors represents a fundamental shift in UK merger control policy and the ability to process non-problematic notifications.
 In its published guidance, the Government has clarified that, in the case of minority veto rights, the voting rights only count where they provide the holder with a right to vote on all or substantially all matters governing the affairs of the entity.
 In published guidance, the Government has indicated that it will apply the same concept of “material influence” as that which is used by the CMA for the purposes of operating the merger control regime under the Enterprise Act 2002. This focuses on the acquirer’s ability materially to influence policy relevant to the behaviour of the target entity in the marketplace. The policy of the target in this context means the management of its business, including its strategic direction and its ability to define and achieve its commercial objectives.