Laying out its proposals on 11 November in the new National Security and Investment Bill, the UK government stressed it does not want to discourage foreign investment. The new regime, applicable to domestic and foreign investors alike, is intended to catch only transactions raising national security concerns, and aims to ensure that the UK remains an “attractive place to invest”. With these proposals, the UK joins a growing band of countries that are strengthening or introducing national security screening regimes, including the U.S., Australia, France and Germany.
But the potentially far-reaching measures will certainly add a new level of administrative burden and potentially also transaction risk to M&A activity in the UK.
Mandatory notification
Under the proposed legislation it will be mandatory to notify any qualifying transaction in 17 so-called “sensitive” sectors:
- Civil nuclear power
- Data infrastructure
- Artificial intelligence
- Cryptographic authentication
- Engineering biology
- Critical suppliers to the government
- Communications
- Energy
- Autonomous robotics
- Advanced materials
- Military or dual use systems
- Suppliers to the emergency services
- Defence
- Transport
- Computing hardware
- Quantum technologies
- Satellite and space technologies
Acquisitions that involve the acquirer taking 15% or more of the target’s votes/shares (and subsequent specified step increases), or gaining the ability to influence resolutions governing the target’s affairs, will be caught by the mandatory regime.
“Call-in” powers
The Bill also introduces both a “call-in” power and a voluntary notification system for an extremely wide range of transactions that qualify as trigger events across all sectors of the economy. Minority acquisitions, asset purchases, IP licences, loans and conditional deals are among the transactions that could be caught.
Voluntary notification of deals that potentially raise national security concerns will be through an online portal to a new Investment Security Unit, set up in the Department for Business, Energy and Industrial Strategy.
The government will have the power to call-in any qualifying transaction completed on or after 12 November 2020 for up to five years, or within six months of the government becoming aware of it.
This retrospective power will not be exercisable until the Bill becomes law, probably early in 2021, but is not anticipated to affect a large number of transactions.
There are no turnover or market share thresholds attached to either the mandatory scheme or the call-in powers. The target only needs to operate or supply customers in the UK to fall into the net.
Enforcement
As with the current system, the UK government will be able to impose remedies or even halt a transaction completely.
But there will be tough new sanctions for non-compliance, including:
- fines of up to 5% of global turnover or GBP10 million, whichever is greater
- up to five years’ imprisonment for individual offenders
Transactions subject to the mandatory notification requirement will be void if they take place without clearance.
National security vetting will be separate from, and may run in parallel with, review under the merger control regime by the Competition and Markets Authority (CMA). But the proposals effectively mean that national security issues can ‘trump’ competition concerns (although the CMA will still be able to review deals on other public interest grounds such as financial stability and media plurality).
The government predicts that the proposed measures will potentially generate over 2,000 “early engagements” with it, resulting in over 1,800 notifications each year, with up to 95 transactions called in for detailed review and ten involving remedy decisions.
It remains to be seen if that is an accurate estimate. The Bill is far more radical than a mere tweak to existing procedures as it establishes an entirely new regime with teeth.
