While most of the attention around the General Election and subsequent Queen’s Speech shortly before Christmas focused on Brexit, an important development that should not be overlooked is the UK Government’s plans to push ahead with stronger powers to be able to intervene in business transactions to protect national security.
Government desire for stronger powers in this regard are not new – this intention was first announced in September 2016, followed by consultations on detailed proposals in 2017 and 2018 and short-term changes introduced to the existing regime in mid-2018. After a recent lull in developments, long-term reforms are now expected to progress with plans for a proposed National Security and Investment Bill outlined in the background briefing notes accompanying the recent Queen’s Speech. Key points to note are:
- The Government intends that the new long-term regime will provide businesses with certainty and transparency, ensuring the UK remains one of the most open countries in the world for innovative and dynamic investment. This is clearly a positive message for business, but will ultimately depend on the detail of the new regime and how it is implemented and applied in practice.
- The new regime will not only capture acquisitions of businesses but also acquisitions of other entities and assets, such as intellectual property, with national security implications. Desired flexibility to review a broader range of different types of arrangements is understandable to prevent parties avoiding scrutiny by adopting particular deal structures. But this creates a potential tension with the Government’s stated aim of certainty for business.
- There will be a notification system for businesses to flag transactions raising potential security concerns for approval. It seems likely notification will be voluntary with the Government also able to call in relevant transactions for review – given voluntary (as opposed to mandatory) notification was the Government’s preferred approach when proposals were last consulted on in 2018.
- Notified transactions will be subject to “quick, efficient screening,” according to the briefing notes. But ultimately it will be in the eye of the beholder as to how quick and efficient any review is in practice. The 2018 proposals envisaged an initial review period of 15 working days, but that a full assessment could involve an overall review period lasting up to 105 working days. If this timetable is retained, even parties whose deals are cleared after 15 working days may not view this as a particularly quick process – let alone those subject to a much longer review period.
- Problematic transactions will be subject to conditions or blocked as a last resort, but with parties having the right to appeal. There will also be sanctions for non-compliance with the new regime.
- There have been 11 interventions on national security grounds since 2002, raising the question whether significant reforms are actually needed, especially given there is already much flexibility in the current rules which can capture relatively small deals. However, much of the benefit of the proposed new national security regime may rest in the greater deterrent effect of a more prominent, standalone regime – plus the ability to scrutinise acquisitions of assets/entities falling short of a business (which the current regime does not allow).
A number of jurisdictions globally have well-established national security regimes allowing scrutiny of foreign direct investment, and many have been strengthening or introducing such powers in recent years, including the US, EU, Germany, France and South Africa. The UK itself has an existing national security regime and recent and proposed UK reforms should therefore be seen as part of a broader global trend, with national security and foreign investment reviews becoming increasingly prominent for M&A deals.
The UK Government first announced its intention to reform its powers in September 2016 to allow greater scrutiny of M&A deals and other arrangements for national security concerns. Following this, the Department for Business, Energy and Industrial Strategy (BEIS) ran an initial consultation, setting out detailed proposals for both short-term and long-term reforms of the UK national security regime in a Green Paper in October 2017.
After consideration of responses to the Green Paper, short-term reforms were implemented in June 2018. These reforms focused on three key sectors (as detailed below) where national security was considered particularly important, and were designed to make it much easier for transactions in these sectors to be scrutinised for national security concerns.
Under the Enterprise Act 2002, the Competition and Markets Authority (CMA) has jurisdiction to review a transaction on competition grounds where a “relevant merger situation” is created. Only where the CMA has established such jurisdiction can the Government also intervene on national security grounds. The short-term reforms implemented in June 2018 significantly reduced the threshold for a relevant merger situation in the following three sectors: (i) the development or production of items for military or dual-use; (ii) the design and maintenance of aspects of computing hardware; and (iii) the development and production of quantum technology.
As a result of the short-term reforms, where a business being acquired is active in one of these three sectors, there is now a relevant merger situation – and therefore the possibility of a national security review – if the business being acquired has:
- UK turnover of over £1 million (rather than £70 million as applies for all other sectors); or
- An existing share of supply of the relevant goods or services in the UK of at least 25 per cent before the merger (whereas for other sectors there must be an overlap between the purchaser and target, to create or strengthen a 25 per cent share).
Shortly after these short-term reforms were implemented, BEIS launched a new consultation on plans for long-term reforms, publishing a White Paper in July 2018 together with an accompanying draft Statutory Statement of Policy Intent. However, since that consultation closed in October 2018, the focus on Brexit, together with the Government’s reduced majority in Parliament, had seemingly slowed momentum in driving forward long-term reforms.
What is now proposed?
Now buoyed by a significant Parliamentary majority, the UK Government clearly has confidence in taking forward its plans for a new long-term national security regime – that is apparent from the announcement of the proposed new National Security and Investment Bill in background briefing notes accompanying the Queen’s Speech on December 19, 2019. Similar proposals were also included in briefing notes accompanying the Queen’s Speech delivered on October 14, 2019, but were overtaken by the Brexit timeline being extended beyond the end of that month and plans for the General Election.
Less clear-cut for the time being, given the limited information provided in the briefing notes, is how closely the new long-term regime will follow the proposals consulted on in 2018. The July 2018 White Paper contained a refined version of the proposals first set out in BEIS’s Green Paper of October 2017, taking into account comments received on the Green Paper. In some respects the White Paper appeared to reflected a settled position whereas in other regards further views were requested from relevant stakeholders.
The Green Paper, for example, had sought views on whether the Government should retain a voluntary notification regime but with an expanded call-in power (i.e. allowing a broader range of transactions to be called in for review/voluntarily notified), or should instead introduce a mandatory notification regime or possibly have a combination of both types of regime. The subsequent White Paper settled on a voluntary regime with expanded call-in power, meaning it would be surprising if the final regime were now to require mandatory notification.
However, there were a number of other aspects of the proposals in the White Paper where specific feedback was sought from interested parties. One of the key issues was the proposed tests for “trigger events” that could be scrutinised. The trigger events envisaged at that time were, in particular, the acquisition of: (i) more than 25 per cent of the votes or shares in an entity; (ii) “significant influence” or “control” over an entity; (iii) further significant influence or control over an entity beyond the above thresholds; (iv) more than 50 per cent of an asset; and (v) significant influence or control over an asset.
Taking into account these trigger events, as well as the level of risk associated with a particular target, acquirer and trigger event, the Government expected to receive around 200 notifications each year at the time of the White Paper, with half of these likely be quickly screened out as unproblematic within 15 working days (but possibly extended by another 15 working days). Transactions not screened out at that initial stage would proceed to a full assessment lasting up to 30 working days, but potentially extendable by 45 working days. The White Paper noted that these proposed time periods would be kept under review based, in part, on responses received to the consultation – including views about the number of trigger events that would be notified.
200 national security notifications, with around 100 needing a full assessment, seems relatively high and likely to require significant resources – especially when compared to the number of transactions that the CMA reviews each year on competition grounds. For example, in its 2018-19 financial year, the CMA completed 56 Phase 1 reviews and 11 Phase 2 reviews (including three deals that were abandoned at Phase 2). This would seem to suggest that the scope of the new national security regime as envisaged in the White Paper may be ambitious and the review periods challenging.
However, it remains to be seen whether the proposed National Security and Investment Bill will include a more limited set of trigger events or different timelines for review. The briefing notes accompanying the Queen’s Speech provided limited information in this regard, although the indication that screening under the new regime will be quick and efficient would seem to suggest that review periods are unlikely to be significantly longer than proposed in the White Paper.
One detail that was confirmed by the recent briefing notes is the inclusion of intellectual property arrangements within the scope of the new regime. This had been a controversial aspect of the earlier proposals – and may be a sign that the Government intends to pursue a relatively broad scope for the new regime. We will wait to see more when the National Security and Investment Bill is published.