On 11 November 2020, the National Security and Investment Bill (NSIB) was introduced to Parliament. It sets out a new statutory regime which will radically overhaul the scrutiny of transactions and investments on national security grounds in the UK.
The NSIB exceeds the initial proposals set out in the white paper published in July 2018 and represents the most significant shake-up of the UK M&A regime in a generation and a radical shift in the country’s approach to foreign investment. If passed the Bill will create a distinct regime and standalone powers for the review of FDI in the UK. The new regime emerges amidst rising concerns about the vulnerability of sensitive UK assets to international acquirers – particularly as the COVID-19 pandemic has triggered falling prices.
The NSIB marks the culmination of a process started by the publication of a green paper in 2017 which concluded that in an increasingly complex and interconnected international landscape the government’s powers needed updating.
Under the UK’s existing rules (contained in the Enterprise Act 2002 (EA)) the government is able to intervene in transactions on certain specific public interest grounds relating to media plurality, financial stability or national security (public health was added recently as a result of the pandemic).
Once the Bill is passed the public interest intervention ground of national security in the EA will be removed whilst the other intervention grounds will remain.
The principal features of the NSIB include:
It applies to acquisitions of non-UK companies if they carry on activities in the UK (e.g. a US company looking to buy 15% of a US entity which has a UK subsidiary active in the defence sector will be required to submit a mandatory notification)
The new regime will not include turnover or share of supply jurisdictional tests applicable under the EA
A hybrid notification system with mandatory and voluntary notifications
The power for the UK government to "call in" any deal not notified voluntarily which it considers merits scrutiny, for up to 5 years after closing. This applies to transactions completed from 12 November onwards (but not before)
The government will have a 30 working day window to decide whether to call-in the deal for closer scrutiny (whether the notification has been submitted voluntarily or mandatorily)
In assessing whether to call-in a transaction the government has identified 3 risk factors: target risk (nature of the target and whether it is in an area of the economy the government considers risks more likely to arise; trigger event risk (the type and level of control being acquired - this will include the acquisition of 25%, 50% or 75% of the votes or shares in a qualifying entity and the acquisition of material influence over a qualifying entity (regardless of the size of interest)) and acquisition risk (extent to which the acquisition raises national security concerns)
The creation of a mandatory notification regime for transactions in specified sensitive core sectors (17) (see box blow) where the government considers national security risks are most likely. Investors in these sectors must obtain government approval before completing their deals. The definitions will be kept under review to reflect any changes in the risks facing the UK. The list of sectors is subject to consultation which ends in early January 2021
The mandatory notification regime captures a wide range of acquisitions including:
where a “trigger event” occurs in a transaction in the specified sectors
acquisitions in the specified high-risk sectors of shareholdings of 15% or more where the government decides the acquisition gives rise to “material influence”
The penalties for completing a deal in a mandatory notification sector without government approval are severe: for directors fines of up to £10m and up to 5 years imprisonment and for companies fines of up to the higher of £10 million or 5% of global turnover. Transactions falling within the mandatory notification regime which are not reported will be void
Power for the government to impose such remedies as it considers necessary to protect national security including:
blocking a deal
imposing conditions e.g. limiting the amount of shares an investor is permitted to acquire or limiting access to certain operational sites
issuing interim orders during the course of its review e.g. to preserve the status quo until a final decision
The government has indicated that it expects to be notified of between 1,000-1,830 transactions per year and to review as a many as 95. It is worth noting that under the existing legislation the government has intervened in transactions on security grounds on 12 occasions in the previous 18 years.
The initial key takeaways for investors include:
if a deal has not completed there is nothing to be gained by hurrying it through. The legislation will have retrospective effect and apply to any transaction completed on or after 12 November 2020
acquirers or investors would be well advised to include appropriate conditionality in their M&A documentation
where the deal falls within the voluntary notification regime but may pose national security issues consider notifying the government (which will reduce the government’s call-in period to 6 months instead of 5 years)
the deadline for consultation on the list of sensitive sectors closes on 6th January 2021
Sensitive "core" areas
In conclusion
As Brexit fast approaches and the UK government looks to attract foreign investment from beyond the EU “an open for business” will be a key message. The juxtaposition of that mantra with another clear government message accompanying the NSIB that “there is no back door into the UK for hostile actors” is an interesting one.
Please contact Johnathan Rees if you would like to discuss any of the issues raised in this article.
