Reed Smith In-depth

  • The new National Security and Investment Bill forms part of a new regime that significantly extends the UK government’s power to intervene in takeovers of UK companies if there is a threat to national security.
  • A mandatory notification regime will be introduced for certain sectors, although its scope has not yet been determined. Parties may face sanctions for failing to notify.
  • The Secretary of State has been given a ‘call-in’ power for transactions deemed to be a threat to national security, with a five-year retrospective application for transactions that are not notified.
  • The CMA no longer has a role to play in national security investigations, which will now be overseen by a new government body.

Authors: Ross Mackenzie Prajakt Samant Simone Goligorsky Marjorie C. Holmes Vaibhav Adlakha Nadia Macci

On 11 November 2020, the UK government published the National Security and Investment Bill (the Bill), a key development in the government’s reforms of its powers to scrutinise, and intervene in, foreign investment. It introduces a standalone foreign investment regime for the first time in the UK, bringing it in line with the world’s major economies, such as the United States, France and Germany, while attempting to maintain the UK’s reputation as an open and attractive market for foreign investment.

The scope of the proposed regime is extremely broad and covers businesses in markets as diverse as telecommunications, energy and transport, meaning that a wide range of transactions will require mandatory notification or may be called in. The government’s impact assessment, which accompanied the Bill, indicates an expectation of 1,000-1,800 mandatory notification events a year, with 70-95 called in for a more detailed examination, and remedies being required in 8-10 cases. For transactions that require notification or are subject to government scrutiny, there will be not only an increased regulatory burden and cost of compliance, but also potential impact on deal timetables, deal certainty and execution risk that will need to be considered.

Background

The government’s powers to intervene in takeovers and mergers on strictly defined national security and public interest grounds, are currently provided under the Enterprise Act 2002 and exercised by the Secretary of State, who may issue a public intervention notice. The UK Competition and Market Authority (the CMA) is responsible for investigating transactions where there is a national security concern and/or the possibility of a substantial reduction of competition as a result of a merger, but does not investigate transactions on national security grounds unless requested by the government. Under the new rules, the CMA will no longer have a role to play in national security investigations, which will now be overseen by a new government body.

In 2017, the government published a Green Paper, which found that the enforcement powers were insufficient to manage and respond to the evolving nature and scope of modern day threats to national security, and suggested reforms to the regime. The limits of the regime are evident from the fact that, since the Enterprise Act came into force in 2003, the government has intervened in only 12 foreign takeovers on grounds of national security. A recent example of such government intervention is last year’s takeover of UK defence aerospace firm, Cobham plc, by the U.S. private equity firm, Advent International, which was cleared subject to undertakings to address national security concerns.

In June 2018, the government amended the Enterprise Act 2002 to enable it to intervene more easily in transactions identified as raising national security concerns, specifically in certain sectors. In such cases, the requirement of the 25 per cent share of supply test to increase the share of supply was removed, thereby removing the requirement for overlap between the target and the acquirer. Furthermore, the threshold for target business turnover in the UK was reduced from over £70 million to over £1 million for these sectors. The relevant sectors to which these amendments applied were military and dual-use technologies, computing hardware and quantum technology (extended in June 2020 to also include artificial intelligence, cryptographic authentications and advanced materials).

The government subsequently published the National Security and Investment White Paper in July 2018 (the White Paper), outlining the blueprint to create the new standalone review system that would operate similar to the CFIUS regime in the United States and forming the basis for the current Bill. The White Paper envisaged a voluntary notification mechanism, whereby parties to a transaction could request review by the government with the option of accompanying informal discussions. The government could also ‘call in’ transactions where they may pose a risk to national security. The call-in test, outlined in the White Paper and subsequent government guidance, already considered ‘trigger events’ and the various ‘risk categories’, both of which are included in the new Bill. See our Client Alert: Government intervention and the Cobham deal: a glimpse into the future?

In July 2020, as a response to the COVID-19 pandemic, emergency reforms were introduced into the Enterprise Act 2002. These measures granted the government powers to intervene in a foreign takeover where a UK target company was considered important to combat public health emergencies. See our Client Alert: COVID-19: impact on foreign direct investment.

The enactment of new legislation to reform the government’s intervention powers has been long awaited since the Bill was announced in the Queen’s Speech in December 2019. The Bill now comes following recent concern over the activities of a number of foreign companies, including plans of Chinese tech companies, to supply the UK’s 5G mobile network.