After almost three years from initial reforms to the UK Foreign Direct Investment (FDI) regime,1 the National Security and Investment Act 2021 (Act) received Royal Assent2 on 29 April. The new regime is expected to come into force towards the end of 2021, together with secondary legislation that will define more precisely the scope of the new regime. Until that secondary legislation is brought into force the current (voluntary) regime applies.
The new FDI regime will impose a mandatory pre-notification requirement and separate the UK government's FDI review from the CMA's review under UK merger control rules. Whilst lower thresholds for the UK merger control rules will continue to apply for certain sectors of particular relevance to national security,3 the UK government will have the power to suspend the CMA's review if necessary to address national security concerns. The Act also establishes a separate unit within the Department of Business, Energy and Industrial Strategy (DBEIS) to scrutinise such deals.
Here are the five key points you need to know.
- Mandatory pre-notification requirement
M&A deals involving UK targets in certain specified sectors (see below) will be subject to a mandatory and suspensory approval regime by a new dedicated government unit within the DBEIS – the Investment Security Unit. The timeline for review will be 30 working days from filing. This period may be extended by an additional 45 working days (or other period agreed with the parties). Un-notified transactions will be subject to a "call in" power by the UK government to be exercised within the earlier of six months of becoming aware of the transaction or within five years of closing. Outside the specified sectors, the UK government will have the power to "call-in" for review, and parties may voluntarily notify, acquisitions in the wider economy that may raise national security concerns.
- Wide ranging application for transactions in specific
- Acquisitions of companies or assets: Covered entities include UK entities (defined as entities formed under UK law or that carry out activities/supply goods or services in the UK) or UK assets (defined as land, tangible property, as well as ideas/information/techniques with industrial or commercial values, e.g., trade secrets, databases, algorithms, software).
- Stake building:It will catch (i) the acquisition of, or increase to, more than 25% (as well as any increase to more than 50% and to more than 75%) of the shares or voting rights in the target, (ii) acquisition of rights to secure or prevent passage of resolutions governing the affairs of the target, or (iii) acquisition of material influence over the policy of the target.
- Specific sectors: 17 sectors fall within the new regime – the majority of which are tech-related and very broadly defined.4
Advanced Materials Data Infrastructure Advanced Robotics Defence Artificial Intelligence Energy Civil Nuclear Military and Dual-Use Communications Quantum Technologies Computing Hardware Satellite and Space Technologies Critical Suppliers to Government Synthetic Biology Critical Suppliers to the Emergency Services Transport Cryptographic Authentication
- Retrospective application to deals closed after 11 November
Deals in the specified sectors that closed after the proposal was first introduced in November 2020 will also need to be notified if they complete after the regime becomes operational. Deals that completed after November 2020 and before the regime becomes operational will be subject to the "call in" power (described above).
- Wide ranging powers and sanctions
- Following FDI review. The UK government has the power to impose conditions and, as a last resort, block transactions that it believes pose risk to UK national security.
- Failure to notify. A deal completed without, or not in accordance with, mandatory government approval is void. The details of how this will work in practice are still unclear but the UK government has confirmed that it may issue orders forbidding or requiring certain actions to be taken by relevant parties, which in the extreme could include unwinding transactions. Failure to notify may also result in fines of up to the higher between five percent of the company's global turnover and £10 million. In addition, individuals might be subject to criminal sanctions, including fines and imprisonment.
- Much of the scope is still to be defined
Secondary legislation will finalise the precise scope of the new regime, including final definitions of the mandatory sectors, extraterritorial application, form and content of mandatory and voluntary notice, as well as details concerning the calculation of the penalties under the new regime. Secondary legislation will finalise the precise scope of the new regime, including final definitions of the mandatory sectors, extraterritorial application, form and content of mandatory and voluntary notice, as well as details concerning the calculation of the penalties under the new regime.
Implications for Current Transactions
Parties currently negotiating a share or asset purchase should assess the risk of their transaction being retrospectively called in for review, and potentially made subject to remedies, for up to five years from the date that the new FDI regime comes into force.
On deals that have already been signed but are unlikely to complete before the new FDI regime comes into force, the parties should consider whether a condition precedent is required to cover the application of the notification regime to the transaction post-exchange
2 Royal Assent means the bill has now received the Queen's approval needed to make it statutory law.
3 Quantum technology; computer processing units; military or dual-use goods which are subject to export control; artificial intelligence; cryptographic authentication; and advanced materials.
4 More detail on how these sectors are defined is available in the consultation response published on 2 March 2021.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.