The UK Government published the National Security and Investment Bill on November 11, 2020. This is the culmination of a number of years of discussion of the UK’s approach to national security matters, including a White Paper in 2018. It reflects a global trend for more intervention in and scrutiny of national security issues (as demonstrated, for example, by the new EU FDI Regulation).
Headline points to note are:
- A significant expansion of the types of transactions covered by national security reviews – moving beyond mergers and acquisitions to include a much broader range of deals including minority investments, acquisitions of voting rights and acquisitions of assets including land and IP.
- The UK Government has the power to review (call-in) relevant deals that take place from any point after the date the Bill was published (i.e. deals entered into or that complete on or after November 12, 2020) although the full regime will only be in place once the Bill enters into force (expected to be by the end of 2021 – possibly in Q3).
- Failure to comply may result in heavy sanctions including turnover-based fines and criminal liability, as well as the risk of transactions subject to mandatory notification being void.
The expectation is that the Government will be more likely to intervene in transactions under this new regime than has been the case under the national security provisions of the Enterprise Act 2002 (which will fall away when the Bill comes into effect) – but one critical area where there remains little clarity is what circumstances might be considered to give rise to national security concerns justifying Government intervention.
It remains to be seen whether the Bill will undergo significant changes during the Parliamentary process before it is approved, which could include softening of the notification requirements, or broadening of the scope of the new regime. However, significant changes are currently thought unlikely.
The Bill as it stands introduces a significant change in approach in terms of the requirement on companies to notify deals under mandatory elements of the new regime, which are very broad and which are backed by the power to impose significant financial and criminal penalties for failure to comply.
The immediate points for companies to consider are: (a) the need to alert the Government of any transactions entered into on or after November 12, 2020 (or conditional deals entered into prior to that date but where a “trigger event” might still occur) to manage the risk of those deals being “called-in” for retrospective review once the Bill comes into force; and (b) how this new regime will need to be factored into future deal timelines and documentation to manage the risks of delay or Government intervention.
We summarise the key points of the new regime in more detail below. You can also download our decision tree to help identify transactions falling within the scope of the new regime.
What does the new regime cover?
The new regime falls into two parts: a mandatory regime and a voluntary regime. The new mandatory regime will require qualifying transactions to be notified for approval before they take place once the Bill comes into force. The voluntary regime will allow parties to submit transactions for approval – and also allow the new Investment Security Unit to call-in deals retrospectively.
The test for a mandatory notification is broadly in two parts: (a) there needs to be a trigger event; and (b) the transaction needs to involve a target entity active in a qualifying sector.
The 17 qualifying sectors and proposed definitions for these sectors were set out in a consultation paper in November 2020. The Government published its response to that consultation paper on March 2, 2021, including (narrower) revised draft definitions – with the final definitions to be set out in regulations in due course. As well as obvious sectors such as defence, energy and transport, there is a significant focus on technology and innovation – e.g. advanced robotics and quantum technologies.1
The trigger events for mandatory notification are:
- The acquisition of more than 25 per cent, more than 50 per cent, or 75 per cent or more of the votes or shares in a qualifying entity.
- The acquisition of voting rights enabling or preventing the passage of any class of resolution governing the affairs of the qualifying entity.
In addition, an acquisition of 15 per cent or more of votes or shares in a qualifying entity will be a “notifiable acquisition” – not a trigger event in itself, but one which must be notified so that an assessment can be made of whether a trigger event has taken place.
The trigger events described above also apply to target entities that are not active in a qualifying sector – however, in those cases the notification is voluntary rather than mandatory.
In addition, whether or not the transaction involves a target entity in a qualifying sector, there are trigger events which apply under the voluntary regime (i.e. which do not require mandatory notification). These are as follows:
- The acquisition of material influence over a qualifying entity’s policy.
- The acquisition of a right or interest in, or in relation to, a qualifying asset providing the ability to use or control the asset (either entirely or to a greater extent).
“Material influence” in this context has the same meaning as established in the UK merger control case law. In these cases, parties will need to consider whether a voluntary notification is advisable.
A key take away is that this new regime is wider than traditional M&A deals. The trigger events set out above could be minority investments, as well as (in the context of the voluntary regime) acquisitions of or transactions giving control over assets such as land or IP.
The Government’s draft statement of policy intent2 sets out more guidance on the sorts of issues it will consider when considering whether to call a transaction in – and hence how parties might assess whether to make a voluntary notification.
We understand the UK’s Department for Business, Energy and Industrial Strategy (BEIS) believes there will be around 1,000 to 1,830 transactions notified each year with 70 to 95 transactions called in for a full national security assessment. However, we think the number of transactions notified and reviewed could be even higher given the broad scope of the new regime.
When does this take effect?
The retrospective call-in power applies from the date after publication of the Bill. This means that parties to deals that take place on or after November 12, 2020 (or conditional deals that were entered into before that date but where a “trigger event” might occur later), and that might meet the tests for notification should consider whether it is advisable for them to approach the Government. A Government email address has been set up for notification of such deals. The advantage of doing so is that the Government’s ability to retrospectively call-in a deal for review once the Bill comes into force will be limited to six months, instead of five years if the deal is not brought to the Government’s attention. This early engagement may also provide an indication of whether the Government is actually likely to exercise its call-in power when the new regime is in force.
The mandatory notification requirements will take effect when the new regime is up and running (including in relation to any deals that have signed previously but where a relevant trigger event takes place after the Bill comes into force). This is expected to be before the end of 2021 (possibly in Q3). Accordingly, parties to any deals that might require mandatory notification should be starting to factor the process into their deal planning now.
What is the process/timetable?
There will be a separate unit, the Investment Security Unit, within BEIS dealing with notifications. They will conduct an initial review within 30 working days of notification, after which they will either clear the transaction or call it in for a full national security assessment. A full assessment will itself take up to 30 working days, subject to an initial extension of 45 working days, and further potential voluntary extension if agreed with the parties. The clock can be stopped on the review if further information is required.
For mandatory notifications, clearance must be received before the transaction takes place. Where a mandatory notification has not been made, the Government may call-in the deal at any future point.
For voluntary notifications, the parties will have the option to notify, but the Government will be able to call-in a deal for up to six months after it becomes aware of it, any time up to five years after the deal takes place. The Government’s draft statement of policy intent indicates that coverage of a deal in a national news publication may be sufficient for the Government to be deemed to be aware of the deal.
Are there sanctions for failing to notify?
Yes. If a deal requiring mandatory notification is not approved the transaction will be legally void. In addition, there are civil and criminal penalties, including potential daily penalties for ongoing breaches. Completing a transaction that is subject to mandatory notification without approval will risk a penalty of up to 5 per cent of group worldwide turnover or £10 million (whichever is higher), and imprisonment for individuals for up to five years.
The Government may retrospectively validate a transaction that failed to gain approval, with the process for this to be confirmed.
What are the remedies?
The Government will have the power to impose remedies to address any national security concerns. These may include, for example, conditions restricting access to sensitive sites, access to confidential information and intellectual property transfers.
Ultimately the Government will have the power to block deals, or to require acquisitions that have taken place to be divested or unwound.
The new regime is far-reaching with serious consequences for non-compliance. Although some details are still to be ironed out, it is clear that it will require parties to transactions in a much wider range of situations to engage with a potential national security review, and for that engagement potentially to start immediately.
Glenn Hall was previously Special Adviser to Greg Clark MP, Secretary of State for BEIS at the time the Government issued the initial proposals leading to the Bill.