On 11 November 2020, the UK Government introduced the National Security and Investment Bill (Bill) into the House of Commons.
The Bill forms part of the Government's continued efforts since 2018 to target what it considers to be new and evolving threats to national security posed by "potentially hostile foreign direct investment". If enacted, the Bill will significantly bolster the Government's existing powers to review, intervene in and even prohibit transactions on national security grounds. It will represent a significant shift from the UK's current regime of limited scrutiny of foreign direct investment.
The Bill is not anticipated to be passed by Parliament until 2021 but it gives the Secretary of State retrospective powers to call-in "trigger events" occurring after 12 November 2020 for up to 5 years after the Bill is enacted if the Secretary of State was not aware of the "trigger event".
Only 12 national security investigations have been conducted under the Enterprise Act 2002 but, according to the Government's Impact Assessment, the new regime is anticipated to result in up to 1,800 transactions being notified and up to 95 transactions being scrutinized every year.
Capturing both UK and foreign investors, the Bill would create a stand-alone national security review regime with the potential to catch a much wider scope of transactions than before. A new "mandatory notification procedure" would apply for "notifiable acquisitions" in as many as 17 sensitive sectors.
This "mandatory notification procedure" will operate alongside a power for the Secretary of State to call-in transactions or investments and a "voluntary notification procedure" for parties to a transaction which is not a notifiable acquisition. While the concept of a Secretary of State "call-in power" and "voluntary notification procedure" are not too dissimilar from the current voluntary regime, both are arguably wider given that "national security" will not be as prescriptive and the "call-in power" will also apply not just to corporate targets but also to the acquisition of strategic assets, such as intellectual property.
The new regime will have implications for deal feasibility, costs, enforceability, timetable and share and asset deal documentation (risk allocation, conditionality and long-stop dates for potential notification and review).
Standalone regime with no turnover or market-share safe harbours
Pre-2018, under the Enterprise Act 2002 (2002 Act), transactions could only be investigated on competition grounds or public interest grounds (national security, media plurality and the stability of the UK financial system) if they involved target companies with a UK turnover of at least £70 million or would result in the creation of or increase in a minimum market share of 25%.
However, concerned about the risks posed by foreign investment in critical national infrastructure and the increasingly critical healthcare and technology sectors, the Government reviewed the current regime in 2017 and changes were implemented.
For mergers involving military and dual-use technologies; computing hardware; quantum technology; advanced materials, artificial intelligence and cryptographic authentication sectors, the Government reduced the thresholds for intervention from £70 million to £1 million, and the share of supply threshold so that the threshold is met if a target has a 25% or more share of supply, with no need for the merger or takeover to increase that. In response to the COVID-19 pandemic, the Government also expanded public interest grounds to include companies involved in combating and mitigating public health emergencies although the previous, higher turnover and market thresholds still apply.
Under the regime set out in the Bill, the Competition and Market Authority's (CMA) existing review of mergers on competition grounds and public interest grounds (media plurality, stability of the UK financial system and combating and mitigating public health emergencies) will remain. However national security will have its own distinct standalone regime which dispenses with all turnover and market share safe harbours (including the reduced thresholds).
"Mandatory notification procedure"
The 2002 Act is based on a voluntary notification process. The Secretary of State is able to investigate mergers but parties might attempt to mitigate that risk by submitting a merger notice to the CMA to notify them about a relevant merger situation.
The Bill would introduce a new "mandatory notification procedure" for "notifiable acquisitions" in sensitive sectors.
"Notifiable acquisitions" are those which result in an acquirer's shares and voting rights climbing from below each of these thresholds to above them (15%/25%/50% or 75%) or the acquirer being able to block or pass a corporate resolution in a corporate structure which carries on activities in the UK or supplies goods and services to persons in the UK, even if outside of the UK.
The acquisition must take place in a sensitive sector - 17 of which have been set out in the Government's Consultation Paper. For now they are: Advanced Materials, Advanced Robotics, Artificial Intelligence, Civil Nuclear, Communications, Computing Hardware, Critical Suppliers to Government, Critical Suppliers to the Emergency Services, Cryptographic Authentication, Data Infrastructure, Defence, Energy, Engineering Biology, Military and Dual-Use Technologies, Quantum Technologies, Satellite and Space Technologies and Transport. The Bill would also furnish the Secretary of State with powers to widen, by Order, the sectors and types of transaction which fall within the mandatory notification system, to capture new national security threats not in the contemplation of the Government at the time the Bill is enacted.
There is a possibility that the Secretary of State's wide powers of review may be curtailed slightly as the Government has opened a public consultation that will refine the proposed definitions for the types of entity within each sector which is scheduled to close on 6 January 2021.
Failure to obtain clearance from the Secretary of State for a "notifiable acquisition" will render the arrangement legally void unless retrospectively validated. Parties can also be fined up to 5% of the business' turnover or £10 million, whichever is greater and their officers can receive prison sentences of up to 5 years.
This new regime therefore shifts transaction risk onto the Seller who, under the previous regime, might have been able to benefit from the consideration and a clean-break, while the acquirer bore the risk of partial or full divestment orders following a post-closing investigation.
"Call-in power"
As mentioned, the Secretary of State will also have a power to call-in transactions up to 5 years after a "trigger event" (reduced to 6 months if the Secretary of State was aware of it) which the Secretary of State reasonably suspects has given rise or may give rise to a national security risk.
"National security" is not defined in the Bill but a "trigger event" takes place when the acquirer gains control of a "qualifying entity". This is the same share and voting rights criteria for the "mandatory notification procedure" but also includes a situation where the acquirer can materially influence the policy of the entity to pass resolutions. Unlike the "mandatory notification procedure" which applies to corporate entities, a "trigger event" can also occur where an acquirer will acquire a right or interest in an asset used in connection with activities carried on in the UK, or the supply of goods and services to persons in the UK giving them the ability to use or to direct or control how the asset is used to a greater extent than they were before (gaining control of a "qualifying asset"). "Qualifying Asset" is defined very widely to capture not only the obvious land and tangible moveable property, but perhaps less obviously any idea, information, or technique with industrial, commercial or other economic value (trade secrets, source codes, algorithms, designs, databases, formulae, plans drawings and specifications and software).
According to the Statement of Policy Intent, the Secretary of State will consider the "target risk" (the nature of the target entity/asset including whether the entity or asset is in a core area such as national infrastructure sectors (defined by the Centre for the Protection of National Infrastructure), advanced technology, military and dual-use technologies, direct supply to the Government and the Emergency Services or involved with core activities primarily within these core areas) and 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 identity of the acquirer raises national security concerns). To assist with any assessment under the new regime, the Secretary of State also has certain powers to request information and require the attendance of a witness (subject to limits of proportionality).
The Secretary of State can approve a transaction that has been called in through a "final notification order", prevent parties from taking pre-emptive action and appoint someone to conduct activities or supervise under an "interim order" or make a "final order" directing the parties to do or not do certain things, appointing someone to conduct activities or supervise their conduct or, in connection with that "final order", direct the CMA to do or not to anything under Part 3 of the 2002 Act which is necessary and proportionate for the purpose of preventing, remedying or mitigating a risk to national security (prohibiting and unwinding a transaction or imposing conditions).
"Voluntary notification procedure"
Under the Bill, if parties consider the transaction may constitute a "trigger event" that has or could give rise to national security risks, but is not a "notifiable acquisition", they can mitigate the risk of a post-closing call-in by the Secretary of State through the "voluntary notification procedure".
The discretionary periods for review under the previous regime will be superseded with the relevant statutory deadlines imposed under the "mandatory notification procedure", "call-in power" and "voluntary notification procedure". This review period is 30 working days but the Secretary of State controls when the clock starts ticking by delivering a notice kick-starting this period. It is only in the case of the "call-in power" that this 30 day period can be extended by an additional period of 45 working days and a voluntary period agreed in writing between the Secretary of State and acquirer if certain conditions are met. This review period will no doubt have ramifications for deal timetables and long-stop dates in deal documentation.
Summary
If passed into law in its current form the Bill represents a major shift away from the more permissive approach that has pervaded Government policy for more than a decade to a more protective approach. Both buyers and sellers will need to be familiar with it and make this an early part of due diligence investigations.
