The UK has published a draft of its new National Security and Investment Bill, together with explanatory notes, heralding the introduction of a new regime for reviewing investments in the UK. The new regime would introduce, for the first time, a mandatory pre-screening mechanism for deals involving investments in sensitive sectors. This new regime represents a substantial expansion of the existing investment review mechanism in the UK in terms of both its scope and its powers, and is likely to result in more cases being reviewed – and conditions imposed, or deals blocked – where they are deemed to pose a national security risk
The UK Department for Business Energy and Industrial Strategy ("BEIS") has published its new National Security and Investment Bill ("NSIB"). This comes after a long period of consideration by the Government, which announced its intention to tighten up the UK's national security rules in 2017.1 The new NSIB foresees a comprehensive overhaul of the existing foreign investment review powers in the UK creating a standalone regime for the first time that is completely separate from competition law oversight. Transactions will now need to be assessed for both competition and (foreign) investment issues, which will run on separate timetables. This is likely to add complexity (and cost) to transactions with an impact in the UK. Key features of the NSIB include:
- the introduction of a review mechanism designed to assess the extent to which transactions could pose a risk to UK national security based on mandatory notification of certain investments in UK companies, assets and intellectual property in designated 'sensitive sectors' set to include communications, defence, transport, artificial intelligence as well as critical suppliers to government;
- no minimum thresholds for review based on either turnover or share of supply;
- broad jurisdictional scope when any target company carries out activities in the UK;
- potential fines of up to 5% of global turnover or £10 million (whichever is greater) for non-compliance; and
- the introduction of a five-year retrospective power to call in transactions deemed to raise national security concerns.
The proposed NSIB regime
The NSIB foresees the introduction of a mandatory pre-screening mechanism for investments in the designated sensitive sectors. This is a significant change from the status quo under the Enterprise Act 2002 ("EA"), which is based on a voluntary notification process. The UK's general merger control regime will remain voluntary. The Government appears to consider that as the new regime for monitoring investment in sensitive industries is sufficiently different from the general merger control regime the introduction of a mandatory notification requirement is just one aspect of the new regime to which companies will have to adapt.
Scope of the new notification requirement
As drafted, the NSIB will apply to mergers and acquisitions by investors involving companies active in certain sectors, as well as the acquisition of assets including land, tangible property and intellectual property.
Where the existing regime under the EA has minimum thresholds limiting its scope to target companies with UK turnover of at least £70 million or transactions that would result in a minimum share of supply of 25%, the NSIB does not include any minimum review thresholds.2
The NSIB mirrors aspects of other countries' foreign investment regimes, including the US and Germany, but notably is not limited to 'foreign' investments – although BEIS has made clear that the prospect of "malicious foreign investments" are indeed the reason for the new regime's introduction. Also notable is that the NSIB is not restricted to review of UK companies alone. Companies registered elsewhere that carry on activities in the UK, for example supplying goods or services to UK customers, will fall within its scope.
- Acquisitions will be notifiable where an investor: gains control or a qualifying entity or asset due to an increase in either shares or voting rights by exceeding and of the following thresholds:
- going from a percentage of less than 15% to 15% or more (however small the increment); or
- exceeding, for the first time, a threshold of 25%, 50% or 75%; and/or
- gains material influence over the company (whether alone or together with other interests or rights that the investor may already hold.
Powers of review and sanctions for non-compliance
Notified transactions will be scrutinised to evaluate the extent to which they may pose 'a threat to national security'. In such cases, the UK will have the ability to impose conditions on parties, such as altering the equity level that an investor is allowed to acquire, restricting access to certain commercial information and/or controlling access to certain operational sites or works. There will also be an option to block a deal in any sector that is deemed to pose an unacceptable national security risk. BEIS has made clear that it expects that the 'vast majority' of transactions will require no intervention and will be cleared quickly.
Transactions that require mandatory notification that are closed without clearance will be legally void. The NSIB anticipates sanctions for non-compliance of up to 5% of global turnover or £10 million – whichever is the greater. Criminal sanctions including imprisonment of up to 5 years are also foreseen. This is a major change from the existing position where, due to the voluntary nature of UK merger control, there are no sanctions for completing deals without clearance although such transactions can be investigated post-closing and remedies imposed (including partial or full divestment) if required to address any competition, or indeed, national security issues.
Retrospective review of existing transactions
A significant feature of the NSIB is the anticipated five-year 'retrospective power' to review completed transactions that are deemed to raise national security concerns. This power was foreseen in the government's consultation on legislative reform of foreign investment review in July 2018, but the anticipated period of review was expected to be six months.3
This power will become effective for deals concluded from 12 November 2020. However, for all deals concluded after 12 November (whether before or after the new Act comes into force) if the Secretary of State is 'aware' of the transaction the 'call in' power only extends to six months (rather than five years). This means that there will be strong incentives for purchasers to either voluntarily approach BEIS even when a mandatory notification is not required, or otherwise make sure details of the transaction are sufficiently publicized to ensure the Secretary of State is 'aware' of them.
Sensitive sectors subject to mandatory notification
The NSIB foresees the introduction of mandatory notification in the following sensitive sectors:
These mirror all of the sectors already within the review scope of the EA, but expand upon them quite significantly. The inclusion of sectors as general as communications, transport and energy, for example, is a notable new expansion of scope.
BEIS has launched a consultation on the precise scope of these definitions with the intention of refining them "so they provide enough clarity to allow parties to self-assess whether they need to notify". The consultation remains open until 6 January 2021.
To handle notifications a new 'Investment Security Unit' has been created within BEIS. The Secretary of State will have exclusive competence to 'call in' deals for review and make a determination on potential national security concerns. Statutory deadlines will be introduced, which is not the case under the current regime, with a target review period of 30 working days from the date a notification is made. The Secretary of State will therefore have 30 working days to either confirm no further action will be taken or issue a 'call in notice'.
If a call-in notice is issued, either in respect of notified transactions or because the Secretary of State has elected to issue such notice for un-notified or completed transaction (including under the retrospective powers), there will be an initial period of review of 30 working days, extendable by a further 45 working days where required.
For otherwise non-notifiable transactions, the NSIB also contemplates voluntary notification both in terms of completed and anticipated deals. This will be an option that some investors will wish to explore to avoid the prospect of call-in notices being issued by the Secretary of State at a later date under the retrospective review powers. If a voluntary notification is made, the Secretary of State must decide "as soon as reasonably practicable" to either reject the notification, confirming to the parties in writing the reasons for that rejection, or accept it. If it is accepted then the Secretary of State will have 30 working days to issue a call-in notice or confirm no further action will be taken.
The NSIB will need to make its way through Parliament and is expected to enter into force in early 2021. The EA will continue to apply as the NSIB completes its passage through Parliament but given the new retrospective power foreseen by the NSIB, transactions closed after 12 November 2020 that do not meet the EA thresholds may still be affected.
1 National Security and Infrastructure Investment Review: The Government’s review of the national security implications of foreign ownership or control, 17 October 2017.
2 As an interim step, pending the new rules, the Government had reduced these thresholds to £1 million and the target alone being able to satisfy the 25% test for target companies active in military and dual-use goods, quantum technologies, computing hardware, artificial intelligence, advanced materials and cryptographic authentication.
3 National security and investment: consultation on proposed legislative reforms, July 2018, para. 6.32.
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