On 11 November 2020, the UK Government (the "Government") published the draft National Security and Investment Bill (the "Bill"), heralding the dawn of a new era through the proposed introduction of the UK's first standalone foreign investment regime ("NSI Regime"). The Bill has a remarkably broad scope, introduces mandatory filings in respect of certain key sectors, and draws the UK closer to the approach taken in the United States and in several EU Member States, such as France, Germany, Italy, and Spain. The Bill is expected to come into force in the coming months, although its power to review and impact transactions closing from mid-November means that deal-makers and their advisers already need to consider and adapt to the new regime. This client alert serves as an initial guide to the proposals and their implications for international investors.
The Bill marks the culmination of a drive towards greater scrutiny of foreign investment into the UK, an evolution that dates back to proposals for reform that were set out in a White Paper in July 2018. The UK has adopted a relatively investor-friendly attitude to foreign investment screening to date, only rarely intervening in investments and business acquisitions exceeding size and market share thresholds determined by the Competition and Markets Authority ("CMA") on limited public interest grounds. The Government has made small adjustments to the regime over time, lowering the thresholds on several occasions, with an increasing emphasis on advanced technologies in addition to its more traditional focus on the military and dual-use space. The most recent adjustments were made in mid‑2020, when stop-gap amendments were made to the Enterprise Act 2002, pending the introduction of the new Bill (please refer to our July 2020 UK Update).
The National Security & Investment Bill
The Bill will overhaul and replace the Secretary of State's powers under the Enterprise Act 2002, severing foreign investment screening from merger control in the process. It consists of features that were anticipated in the original White Paper, such as removing the link to turnover or share of supply, but also unanticipated, such as the introduction of mandatory notifications for transactions touching on sectors perceived to be of the highest national security risk. Unsurprisingly, the NSI Regime incorporates a number of concepts present in existing foreign investment and national security programs, for example as adopted by the German and other EU Member State governments, as well as by the U.S. Government with regard to national security review by the Committee on Foreign Investment in the United States ("CFIUS"). The new mandatory regime is one limb of a three-tiered approach that also caters for voluntary notifications, supported by a right to "call-in" transactions that otherwise have not been notified to the Secretary of State.
The new mandatory notification regime will require investors to notify the Secretary of State of proposed transactions involving "qualifying entities" and, subject to regulation, assets active in the UK in certain "key sectors":
[Insert box: "Key Sectors": civil nuclear, communications, defence, data infrastructure, energy, transport, artificial intelligence, autonomous robotics, computing hardware, cryptographic authentication, advanced materials, quantum technologies, engineering biology, military or dual-use technologies, satellite and space technologies ,and critical suppliers to the Government and emergency services]
There is an ongoing consultation (closing on 6 January 2021) that will refine the UK Government's proposed definitions for the types of entity within each sector that will fall under the mandatory regime. Therefore, in addition to the Bill remaining subject to parliamentary review and debate, some uncertainty remains over the precise scope of the regime, a key point of interest for foreign investors.
Having established whether a proposed transaction includes a "key sector" entity, an investor must turn its attention to whether the transaction is categorised as a "notifiable acquisition", which means that it must involve the acquisition of: (i) 15% or more of shares or voting rights; (ii) more than 25%, 50%, or 75% or more of shares or voting rights; or (iii) voting rights that (alone or with others) enable the investor to secure or prevent the passage of any class of resolution governing the affairs of the entity.
Investors should note that a "qualifying entity" may be formed or recognised under the laws of another country if it carries on activities in the UK or supplies goods or services to persons in the UK. This underpins the broad scope of applicability of the NSI Regime, affecting transactions even if the target company does not have a subsidiary incorporated or branch office located in the UK.
In addition to the introduction of a new mandatory regime, the Bill empowers the Secretary of State to "call-in" transactions that have national security implications. This power has considerable longevity and is exercisable for up to five years after a "trigger event", or within six months after the Secretary of State has become aware of such event. This is very similar, for example, to the existing German foreign investment control regime, where the German Government can initiate investigations ex officio within five years following signing, or within two months after it obtained knowledge of a specific transaction.
This "call-in" power is relevant to any transactions closing on or after 12 November 2020; even if the Secretary of State becomes aware of the transaction before the bill becomes law (the "Commencement Date"), it retains the right to "call-in" the transaction until the end of the period of six months beginning with the Commencement Date.
In the context of the voluntary regime and "call-in" powers, a "trigger event" occurs where an investor has acquired, or will acquire: (i) more than 25%, 50%, or 75% or more of shares or voting rights of a qualifying entity; (ii) voting rights that enable or prevent the passage of any class of resolution governing the affairs of a qualifying entity; (iii) a material influence over the policy of a qualifying entity (which could catch relatively small investments); or (iv) use or control (or use or control to a greater extent) over a "qualifying asset".
[Insert box: "Qualifying assets": Land; tangible moveable property; ideas, information, or techniques that have industrial, commercial, or other economic value, which include trade secrets, databases, source code, algorithms, formulae, designs, plans, drawings and specifications, and software]
Land or moveable property located outside of the UK or any ideas, information, or techniques that have industrial, commercial, or other economic value are "qualifying assets" if they are used in connection with activities carried on in the UK or in connection with the supply of goods and services to persons in the UK.
Where an investor considers that a transaction may be "called-in" for a national security assessment, the Bill's voluntary regime comes to the fore, with the potential to notify a trigger event in order to obtain comfort that there will not be a "call-in" at a later date, including after the transaction has closed. A statutory statement will be released in order to help businesses assess the likelihood of a "call-in" and inform decision-making regarding a potential voluntary notification. Once a voluntary notification has been submitted to the Secretary of State, the procedure mirrors the mandatory regime.
Parties to transactions have already been invited to share information about "trigger events" and enter into informal discussions with the newly formed "Investment Security Unit" within the Department for Business, Energy, and Industrial Strategy ("BEIS"). This is intended to provide some comfort as to the Secretary of State exercising its "call-in" power in respect of ongoing transactions.
Once a notification has been submitted to BEIS, it will undergo initial review to determine whether it complies with content requirements and contains sufficient information. Following acceptance of a notification, the Secretary of State has 30 working days to undertake its preliminary screening. At this stage, a decision will be taken as to whether the transaction can proceed or should be "called-in" for further investigation on national security grounds. Where a "call-in notice" is issued either following a mandatory or voluntary filing, or ex officio, a (further) 30 working day assessment period will commence, which can be extended by 45 working days if the Secretary of State reasonably considers it required, or longer if agreed with the investor. In addition, interim orders may be issued if the Secretary of State is concerned that the effectiveness of the national security assessment or subsequent remedies may be prejudiced by certain actions, such as the completion of a transaction.
Outcomes and Sanctions
Following an assessment, if the Secretary of State concludes that a risk to national security would arise from the completion of the proposed transaction, it has the power to impose "proportionate remedies" in a final order to prevent, remedy, or mitigate that risk. A final order may include provisions requiring persons to do or not do particular things in order to be able to proceed with a transaction. When the Secretary of State makes, varies, or revokes a final order, a notice will be published to that effect.
The Bill is supported by civil and criminal sanctions, including fines of up to the greater of 5% of global turnover or £10 million in the event of completing a notifiable acquisition without clearance, or failing to comply with interim orders, final orders, or information requests. Any transactions that are subject to the mandatory notification requirement will be void and of no legal effect if they close without clearance.
The Bill is without doubt one of the most significant developments in UK M&A in recent years and will result in significant UK Government involvement in transactions, both within the UK market and with a cross-border UK nexus. Consequently, it will join a growing list of key process and timing considerations for investors, following in the footsteps of CFIUS and the new or expanded foreign investment regimes adopted by many of the UK's European neighbours. Given this global shift towards more comprehensive screening, multijurisdictional national security analysis must be conducted at an increasingly early stage in global M&A transactions.
The Impact Assessment published alongside the Bill estimates that there will be 1,000 – 1,830 notifications each year, resulting in 70 – 95 detailed national security assessments and 8 – 10 remedies each year. Therefore, while the number of notifications is high, it is clear that the intervention rate is designed to be relatively low. After all, it remains important for the UK to be perceived as "open for business" in the post-Brexit era, with an efficient and fair regime that remains friendly to international investors, while addressing legitimate threats to national security.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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