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.
An overview of the Bill
The Bill will expand and strengthen the government’s powers to scrutinise, investigate and intervene in investments and transactions that could threaten UK national security. Importantly, the thresholds have now been completely removed, which allows the government to intervene where there has been a change in control. Although the Bill is reportedly targeted towards “hostile foreign investment”, the Bill itself does not require the investment to be foreign. Furthermore, the sector coverage for mandatory notification as currently drafted is extremely broad, covering aspects that have not historically been considered as having a national security risk. The definitions are still under consultation, with responses due by 6 January 2021.
Mandatory notification
One of the more far-reaching aspects of the Bill, beyond the initial proposals of the White Paper, is the introduction of a requirement for mandatory notification of transactions in certain sectors identified as sensitive.
The following 17 sectors are subject to the mandatory notification: civil nuclear, communications (e.g., electronic communication networks), data infrastructure, defence, energy (e.g., gas and electricity networks, the oil sector, power generation including renewables and battery storage), transport (e.g., major ports and airports, air traffic control), artificial intelligence, autonomous robotics, computing hardware, cryptographic authentication, advanced materials, quantum technologies, engineering biology, critical suppliers to government, critical suppliers to the emergency services, military or dual-use technologies, and satellite and space technologies.
The mandatory notification requirement will not apply to all parts of these sectors and the scope of application may possibly be defined in secondary legislation after the consultation has concluded. The exact extent of these definitions is expected to be an area of intense lobbying between now and when the Bill is enacted. However, what is clear from the consultation is that the government’s current intention is to cast the net widely, reflected in the estimate contained in its impact assessment that 1,000-1,800 transactions a year will require mandatory notification, an increase from 200 notifications expected at the time of the White Paper in 2018. More information on the consultation process can be found at Gov.uk.
Qualifying entities and assets
The scope of transactions under the Bill is considerably wider than that under the Enterprise Act 2002, and will cover not only mergers and acquisitions of entities (including companies, limited liability partnerships and other corporate bodies), but also significant investments and acquisitions of certain assets including land, tangible moveable property and intellectual property.
Acquisitions of relevant entities in the 17 sectors indicated above will be subject to mandatory notification, whereas acquisitions of relevant assets or land will not require notification, but could be called in.
Voluntary notification
The Bill also creates a voluntary notification system where there is no requirement to notify, in an attempt to encourage parties to self-assess transactions and subsequently notify the government if they consider that a trigger event may raise national security concerns. The benefit of the voluntary notification is that the Secretary of State will have 30 working days from the date of the notification to decide whether or not to call in the transaction.
Trigger events
The Bill allows the government to call in a transaction for detailed review if trigger events take place when a person gains control of a qualifying entity or asset. Gaining control of an entity for the purposes of the Bill will include an increase in shareholding or voting rights from 25 per cent or less to more than 25 per cent, from 50 per cent or less to more than 50 per cent, or from less than 75 per cent to 75 per cent or more. Alternatively, if the shares, voting rights or any other interests enable “the person materially to influence the policy of the entity” (an established concept used in UK merger control), then such a transaction will also be classified as a trigger event. With regard to control of an asset, this will be the case if the transaction enables greater use of the asset or allows a party to direct or control how the asset is used.
The Bill proposes that the following transactions will not be within the scope of the call-in power:
- transactions involving stakes of below 15 per cent in entities unless the holding (alone or in combination with other rights or interests) “enables the person materially to influence the policy of the entity”;
- transactions involving: (i) an existing holding in an entity of over 25 per cent moving to a new level of 26-50 per cent; (ii) an existing holding in an entity of over 50 per cent moving to a new level of 51-74 per cent; or (iii) an existing holding in an entity of 75 per cent or more moving to a new level of 76-100 per cent; and
- assets bought by consumers, such as personal computer software, mobile phones, or GPS.
The Secretary of State’s “call-in” power
The Bill is centred on the Secretary of State’s power to call in transactions for a more detailed examination and, ultimately, to impose remedies upon the acquirer. Importantly, the call-in power applies regardless of whether a transaction has been notified or not, therefore covering both mandatory and voluntary notifications.
The draft Statement of Policy Intent (the Statement), which was published at the same time as the Bill, sets out the factors that the Secretary of State will take into account in considering whether to exercise their power to call in a transaction for a detailed review.
The Statement sets out three risk categories that will be important in considering the exercise of the call-in power:
a. the target risk – whether the target is active in an area of the economy where the government considers risks are more likely to arise, with specific ‘core areas’ being more likely to raise concerns, and core activities within those areas being the most likely to give rise to intervention;
b. the trigger event risk – the type and level of control being acquired and how this could be used in practice; and
c. the acquirer risk – the extent to which the acquirer raises national security concerns, and in particular any affiliations of the acquirer to hostile parties.
The call-in power is retrospective
The Secretary of State will be able to call in transactions that were not notified, but which may nevertheless raise national security concerns. Importantly, this power will apply retrospectively to transactions between the date on which the Bill was published (i.e., from 12 November 2020) and when it is enacted. The Secretary of State will be able to intervene in non-notified transactions for up to five years from their completion, or six months from the date on which the Secretary of State becomes aware of the trigger event, whichever is shorter.
This call-in power will apply to an extremely wide range of transactions across all sectors of the economy and includes acquisitions of not just entities, but also qualifying assets (for example, a design for an aircraft component, or machinery previously used for manufacturing a military component).
The five-year limit does not apply to the 17 mandatory notification sectors listed above, for which the call-in power can be exercised at any time. Therefore, while the mandatory notification is not an obligation on these sectors until the Bill is enacted into law, it is clearly within the government’s contemplation to be able to retroactively investigate transactions already undertaken in these sectors if there is thought to be a threat to UK national security. This retrospective application was designed to avoid a rush to complete transactions following the announcement of the Bill and before it had completed its passage into law. Once the Bill is enacted, where a trigger event that is subject to mandatory notification is notified (which it ought to be given the penalties for non-notification), the Secretary of State must reach a decision on whether to call it in within 30 working days of notification, as discussed below.
The government is encouraging parties closing transactions between the announcement of the Bill and its passage into law to informally discuss their transactions with the Department for Business, Energy and Industrial Strategy (BEIS), so that they can understand and potentially gain some comfort that their transaction will not be called in at a later stage.
Investment Security Unit
When the Bill comes into law, it will create a new Investment Security Unit (ISU) within BEIS, headed by the Secretary of State. The ISU will consider both mandatory and voluntary notifications, as well as trigger events that were not notified.
The notification shall be made to the ISU via an online portal, following which the government will have up to 30 working days to issue a call-in notice. The government will then have a further 30 working days’ screening period (which may be extended to 45 working days) to determine the course of action, i.e., whether to impose penalties or remedies, or take no further action. During the screening period, the government may issue interim orders to prevent parties taking any further steps in the relevant transaction.
Penalties and remedies
Where a party fails to notify the ISU of a trigger event that is subject to the mandatory notification requirement, the government may apply civil and criminal sanctions for non-compliance. These will include fines of up to 5 per cent of worldwide turnover (capped at £10 million) and up to five years’ imprisonment for individuals.
Transactions covered by the mandatory regime that are completed without obtaining clearance from the government will be deemed legally void.
The government will have the power to block and unwind transactions if deemed necessary for UK national security. Other remedies or conditions that the government may impose on transactions could include restricting share percentages or access to confidential information, operational sites or works.
Merger thresholds and the CMA
It is worth noting that the Bill has gone beyond the 2018 amendments to the Enterprise Act 2002, which reduced the turnover threshold requirements. The Bill now provides that the government does not need to comply with any turnover or market share thresholds to justify intervention. The only requirement is that the target carries on activities or supplies customers in the UK.
Furthermore, as envisaged by the White Paper, the Bill creates a standalone regime for the assessment of transactions from a national security perspective and separates the competition and merger control assessment that is carried out by the CMA. It will be interesting to see how the competition analysis of transactions in sensitive sectors will interact with the new process conducted by the ISU. The Bill already envisages coordination between them, and a requirement that the CMA not do anything that might jeopardise the national security review and remedies.
Concluding thoughts
The Bill is currently being scrutinised, line-by-line, by a Public Bill Committee and will undergo debate and amendment before being passed into law next year. Until then, investors in the UK should be aware of these planned reforms and take advice on how to mitigate risk, especially since the government will have the power to retrospectively call in transactions for investigation, and to curtail, block or unwind transactions, where these concern UK entities or assets that may be considered a threat to national security.
For more information on the government’s announcement of the Bill, visit Gov.uk, and for live updates on the status of the Bill, visit Parliament.uk.
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