The UK's new National Security and Investment Regime

The retroactive nature – and potential breadth – of some NSIB provisions, the type of transactions potentially within its ambit (including acquisitions of non-UK companies and assets if they carry on activities in the UK), as well as the potential remedies and sanctions for non-compliance, have already caused huge consternation for businesses and their advisers.  However, the provisions could still change during the NSIB’s final passage through Parliament.  

Importantly, under the NSIB, transactions completing on or after 12 November 2020 may be subject to 'call-in' by the Secretary of State (“SoS”). The call-in powers will apply to any such transactions for a period of 5 years from the NSIB coming into force. This period can be shortened to six months if the SoS is made aware of the transaction.

Key features of the NSIB

The key features of the NSIB include:

• a mandatory notification requirement for transactions involving acquisitions of ownership or control (including minority acquisitions giving rise to shareholdings of 15% or more) over entities active in one or more key sectors in the UK. In contrast to the – soon to be – separate  (voluntary) UK merger control regime, there will be no turnover or share of supply thresholds;
• a voluntary notification system for non-notifiable transactions in any sector of the UK that may raise national security concerns;
• the introduction of a power to ‘call-in’ transactions, enabling the Government to assess deals which may give rise to national security risks (whether or not they have been notified); and
• the power to impose remedies to address risks to national security (including potentially requiring unwinding of transactions) and sanctions for non-compliance with the mandatory notification requirement (including the transaction being deemed void).

If adopted in its current form, parts of the NSIB will have ‘retroactive’ effect. Accordingly, transactions entered into on or after 12 November 2020 have the potential to be called in (after the commencement date of the new legislation) for review by the Government on national security grounds. Notably, however, mandatory notification will not be required for notifiable transactions which complete before the NSIB becomes law (which is not expected until spring this year).

The regime applies to both UK and foreign investors and investments provided the latter entities – or assets – have some connection with the UK (e.g. carry on UK activities or service UK customers). It will sit alongside, but be completely separate from, the existing (voluntary) merger control regime under the Enterprise Act 2002 (“EA”). Transactions will now need to be assessed for both competition and national security investment issues. This is likely to lead to longer deal timetables, reduce deal certainty and add an extra expense on parties to transactions with an impact in the UK. 

Mandatory notification

The NSIB introduces a mandatory pre-notification requirement for transactions in 17 key sectors (see Key sectors subject to mandatory notification). Parties must notify the SoS of notifiable transactions in order to obtain clearance to close the deal. 

Scope of the mandatory notification requirement

The NSIB introduces mandatory notification within key sectors for the following ‘trigger events’:

• the acquisition of an increase in a holding of shares or voting rights in a ‘qualifying entity’ to more than 25%, more than 50% or to 75% or above; and
• the acquisition of voting rights that enable or prevent the passage of any class of resolution governing the affairs of the ‘qualifying entity’.

A ‘qualifying entity’ is any entity that is not an individual (e.g. companies and partnerships). An entity which is formed or recognised under the law of a country or territory outside the UK will also be a ‘qualifying entity’ if it carries on activities in, or supplies goods or services to, the UK. 

In addition, the acquisition of 15% or more of the votes or shares in an entity will also have to be notified in the key sectors. Although this will not be subject to the call-in regime, notification will be required so that the Government can decide whether the acquisition gives rise to a material influence over the entity’s policy.

Notably, asset acquisitions will not require mandatory notification (although this may be provided for in secondary legislation). In such cases, transacting parties should assess the risk of the transaction being called in (see Call-in power) and consider making a voluntary notification (see Voluntary notification). 

Key sectors subject to mandatory notification

The Government expects the following 17 sectors will be subject to mandatory notification:

Sanctions for non-compliance

Transactions that are subject to mandatory notification will not be permitted to complete until clearance has been provided. There are serious consequences for non-compliance with this requirement. Notifiable transactions that are closed without clearance will be legally void, although the SoS is required to either give a call-in notice or a ‘validation notice’ (i.e. validating the transaction) within 6 months of becoming aware of a void notifiable transaction. 

Sanctions for non-compliance include fines of up to 5% of global turnover or £10 million – whichever is the greater. Criminal sanctions including imprisonment of up to 5 years can also apply. 

Voluntary notification

There is a parallel voluntary notification process for otherwise non-notifiable transactions (e.g. in non-key sectors or for certain minority acquisitions in key sectors) if a trigger event that has taken place, or is in progress or contemplation, gives rise to national security concerns. The following acquisitions constitute trigger events for the purposes of the voluntary regime: 

• the acquisition of an increase in a holding of shares or voting rights in a ‘qualifying entity’ to more than 25%, more than 50% or to 75% or above; 
• the acquisition of voting rights that enable or prevent the passage of any class of resolution governing the affairs of the ‘qualifying entity’; 
• the acquisition of material influence over a qualifying entity's policy; and 
• the acquisition of a right or interest in, or in relation to, a ‘qualifying asset’ (see Call-in power) providing the ability to:
  • use the asset, or use it to a greater extent than prior to the acquisition; or
  • direct or control how the asset is used, or direct or control how the asset is used to a greater extent than prior to the acquisition.

While this process is voluntary, transacting parties may wish to submit a voluntary notification to avoid the prospect of a call-in at a later date under the Government’s retrospective review powers (see Call-in power). 

Call-in power

The SoS will also have the power to ‘call-in’ transactions that:

• have not been notified (either under the voluntary or mandatory regime); 
• have given rise to or may give rise to one of the trigger events described in Voluntary notification above; and
• have given rise to or may give rise to a risk to national security.

Notably, the call-in power extends to asset acquisitions, including acquisitions of land, tangible moveable property and, with respect to intellectual property, “ideas, information or techniques which have industrial, commercial or other economic value” such as trade secrets, databases, source code, algorithms, formulae, plans, drawings and specifications and software. Land or moveable property situated outside of the UK can also be caught if it is used in connection with activities taking place in the UK or the supply of goods or services to persons in the UK.

The Government could call-in a non-notifiable transaction (i.e. a transaction subject to voluntary notification) up to five years after it completes. However, the Government’s call-in power is limited to six months after it becomes aware of a non-notifiable transaction (subject to an overall deadline of five years). If a voluntary notification is given, a 30-working day 'review period' applies during which the SoS must either call-in the transaction or give notice that no further action will be taken under the NSIB.

Where the transaction was subject to mandatory notification, the five-year time limit does not apply. If parties fail to notify a notifiable transaction, the Government can call it in whenever it is discovered (unless it completes between 12 November 2020 and when the NSIB is passed, in which case the call-in deadline is five years from the commencement date of the new legislation, or six months from the Government becoming aware). 

Risk factors

The SoS will consider the following three risk factors when deciding whether to call-in a transaction for review:

• the target risk – the nature of the target and whether it is in an area of the economy where the Government considers risks are more likely to arise;
• the trigger event risk – the type and level of control being acquired and how this could be used in practice; and
• the acquirer risk – the extent to which the acquirer raises national security concerns.

The Government has also published a Statutory Statement of Policy Intent describing how the SoS will consider the three risk factors when deciding whether to use the call-in power and listing a number of helpful examples. For example, for asset acquisitions relating to land, transactions are more likely to be called in where the asset is in, or is proximate to, a sensitive location (examples of which include critical national infrastructure sites or government buildings).

Information gathering powers

The NSIB will grant the SoS wide-ranging information gathering powers to request any information, from any person, to help inform its assessment of the national security risks of a transaction.  These powers also extend to requiring information from acquirers outside the UK.

Information may be requested by way of an information notice or an attendance notice requiring the attendance of witnesses to give evidence. Failure to comply, without reasonable excuse, with an information or attendance notice could result in fines and/or imprisonment.

Retroactive application

A significant feature of the NSIB is the 'retroactive power' to review transactions (including those outside the 17 key sectors identified in Sectors subject to mandatory notification) that close on or after 12 November 2020 but before the commencement date of the new legislation. Any transaction constituting a trigger event (either under the voluntary or mandatory regime) will be open to review at any point in the five years running from the commencement date (or six months if the Government becomes aware of the transaction). 

The retroactive powers of the Government are likely to create significant uncertainty for parties engaged in live and recently completed transactions. Parties should therefore be acting now to consider whether their transactions raise potential national security issues under the new NSIB regime and whether to proactively engage with the Government in the coming weeks.

Remedial powers

The SoS will have the ability to impose remedies on transactions both during the assessment period and following the completion of a full national security assessment. For example, the SoS can issue orders forbidding or requiring certain actions to be taken by the transacting parties, which could include unwinding a deal.

Next steps

The NSIB is progressing through Parliament and had its first reading in the House of Lords on 20 January 2021. 

However, given the new retrospective powers foreseen by the NSIB, businesses and investors aiming to complete their transactions prior to the commencement date of the NSIB should proactively consider whether their transactions will be caught by the new regime (as well as the existing regime under the EA). Informal advice to assist businesses and investors is now available from the Government and will continue to be available following formal commencement of the NSIB regime.

In addition, once passed, the NSIB will provide the Government with unprecedented jurisdiction over acquisitions of businesses, land and assets with some connection to the UK. As such, UK ‘foreign’ investment rules will invariably become a significant issue for businesses and investors when assessing investment strategy, deal feasibility and transaction timings on any deal with a potential national security impact in the UK.

Andrew Bretherton
Partner
Freeths LLP
E: andrew.bretherton@freeths.co.uk

For all issues concerning this topic you can also contact Bernhard Rehbein, Partner at Baker Tilly Germany.