The National Security and Investment Bill (the “Bill”) was introduced in Parliament on 11 November 2020, and provides the UK Government (the “Government”) with updated powers to intervene and review transactions that give rise to national security concerns. The introduction of the Bill gives rise to the first mandatory notification regime in the UK for transactions in key sectors.
The UK is unique in not having standalone foreign investment legislation; currently the public interest and security provisions are set out in the Enterprise Act and involve the Competition and Markets Authority as well as the Secretary of State. The new regime will be separate from competition regulation.
Crucially, the regime is capable of catching a large number of transactions as the Bill does not set out any turnover-specific thresholds or safe harbours. The new regime forecasts around 1,000 notifications per year with 70-95 being called in for review (compared with the 12 national security cases that have been reviewed by the CMA under the existing public interest rules). The notifications will be dealt with by the Investment Security Unit, a new body established within the Department for Business, Energy and Industrial Strategy, and notifications will be submitted for review via a unique digital portal.
The government has set out three areas which it has specifically strengthened after 20 years of the previous public interest regime:
- Thresholds: the Government has removed turnover thresholds to catch more transactions;
- Process: the existing process is complex and involves both the Competition and Markets Authority and the Secretary of State;
- Scope: the new regime extends to cover asset acquisitions which were not covered under the Enterprise Act (e.g. under the previous regime, an acquisition of intellectual property alone would have been unlikely to create a relevant merger situation whereas it could now amount to a ‘trigger event’).
The Government has insisted that the new review process will remain targeted and proportionate, and states that most transactions will be cleared without any intervention.
The Bill establishes an obligation for companies operating in ‘sensitive sectors’ to seek approval for certain types of transactions. There are currently 17 sectors outlined in the draft proposals (the Government has launched a consultation until 6 January 2021, after which “robust and proportionate” definitions will be set out under the Bill):
- Advanced materials
- Advanced robotics
- Artificial intelligence
- Civil nuclear
- Computing hardware
- Critical suppliers to government (this includes the processing or storage of personally identifiable information of 5000 or more individuals in the aggregate as part of provision of goods or services to Public Sector organisations)
- Critical suppliers to the emergency services
- Cryptographic authentication
- Data infrastructure
- Engineering biology
- Military and dual use
- Quantum technologies
- Satellite and space technologies
A transaction will be notifiable when a person gains control or acquires a right or interest in a qualifying entity. A ‘qualifying entity’ is any entity that carries on activities in the UK, or supplies goods or services in the UK. In other words, acquisition of non-UK businesses will be caught where that business provides relevant goods or services to UK customers. A person gains control of a qualifying entity if the person acquires a right or interest in the entity and one or more of the following arises as a result:
- the percentage of the shares or voting rights that the person holds in the entity increases:
- 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;
- the acquisition is of voting rights in the entity that enable the person to secure or prevent the passage of any class of resolution governing the affairs of the entity;
- the acquisition enables the person materially to influence the policy of the entity.
Once notified, these transactions will be reviewed within a period of 30 working days. In any case, the Secretary of State must decide whether to reject or accept the notice as soon as reasonably practicable. If a mandatory notifiable transaction is completed before approval, it will be legally void.
Call-in powers/Voluntary notifications
The Government will also have the power to ‘call-in’ certain transactions that give rise to national security concerns if a ‘trigger event’ has taken place or is likely to take place in relation to a qualifying entity or asset. These triggering events are the same as those set out above, but include a person gaining control of a ‘qualifying asset’, described as land, tangible moveable property or ideas, information or techniques which have industrial, commercial or other economic value. These far-reaching powers are significant and mean that acquisitions of designs and software or intellectual property could be caught for review.
Most importantly, this call-in option may be used retrospectively by the Government, meaning that a transaction could be called in for review up to 5 years post-completion (but transactions cannot be called in for review more than 6 months after the Government becomes aware of the transaction once it is made public). This retrospective power applies to transactions completed on or after 12 November 2020.
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 dual-use 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.
Parties are also encouraged to voluntarily notify transactions that may raise national security concerns (if the transaction is not subject to mandatory notification). Voluntary notification may prove useful for companies unsure of whether their transaction fits the mandatory notification thresholds who wish to avoid the risk of a subsequent call-in review.
As set out above, mandatory notifiable transactions will be void if completed before clearance. Companies also face severe sanctions for non-compliance with the regime, including fines of up to 5% of worldwide turnover or £10m (whichever is higher), imprisonment of up to 5 years and director disqualifications.
- The Bill represents a significant extension to the previous national security provisions in the UK;
- Foreign investors should be aware that their transactions can be caught under the new regime, as long as the entity or asset being acquired has activity or supplies services in the UK;
- The Government will have significant powers to call-in transactions up to 5 years post-completion for transactions completed on or after 12 November 2020;
- The Bill remains subject to debate and amendments, but parties should consider the provisions in terms of deal feasibility and adjusting conditions and long stop dates to cover any necessary clearance;
- The new regime is likely to be of most relevance for many tech mergers, but less so for pharma acquisitions, except to the extent caught by the ‘critical suppliers to government’ sector;
- Parties are encouraged to engage with the Government if they believe their transaction could be subject to review, and the Department for Business, Energy and Industrial Strategy has already provided email addresses to encourage engagement from an early stage.