The National Security and Investment Bill - The Basics
On 11 November 2020, the National Security and Investment Bill (the “Bill”) was put before Parliament. If (read, when…) the Bill is enacted into law, its terms will vastly amend the UK Government’s powers to scrutinise certain transactions prior to their completion. But, what transactions will be affected and how will the scrutiny work in practise?
Although various questions remain to be answered about the number and type of transactions which will, realistically, be reviewed, it’s worthwhile being aware of the Bill’s main points; it could affect your business and transactions more than you expect. Here, we set out a basic guide.
What does the Bill do?
Essentially, the Bill allows the UK Government to review (and potentially prevent) any transaction which involves a “national security interest”.
What is a “national security interest”?
Rather surprisingly, the phrase “national security interest” is not defined within the Bill and in the name of flexibility, there appears to be some reluctance on the part of government to do so. That said, some guidance has been provided by the government in a Statement of policy intent (last updated 2 March 2021) (the “Statement”) as to the risk factors which will be considered in any transaction:
- Target risk. What risk does the target pose? Think about the sector/industry of the target and its nature. For example, an acquisition of property adjoining land owned and used by the Ministry of Defence could pose a risk to national security, although query whether this would even be known prior to completion in some cases.
- Acquirer risk. Who is acquiring the asset? Think about the person or entity that has ultimate control of the acquirer. Does this give rise to a cause for concern? As a result of this risk factor, thorough due diligence will be needed in respect of the acquirer before a transaction has even begun although the Statement does acknowledge that due diligence may not always pick up on potential issues. Concern has also been raised that this risk factor may lead to issues where a transaction involves an entity affiliated with certain foreign states although the government has stated that the concern here is more about an entity’s affiliation with hostile parties, rather than other countries.
- Trigger event risk. What is behind the transaction? Could the acquirer use the transaction to undermine national security in some way, for example, by obtaining control of a significant supply chain?
Does the Bill only cover transactions involving foreign investment?
No. Any transaction which has a national security interest is caught by the Bill in one way or another.
Although commentary about the Bill refers to it tightening foreign investment rules, domestic transactions may also fall within its remit. In addition, where activities are carried on within the UK, or goods or services are supplied to the UK, the Bill may also apply even where none of the actual parties to the transaction are onshore.
How will the notification requirements work?
Notification of a relevant transaction will be made to the Secretary of State (the “SoS”). The Bill currently provides for three notification options:
1. Mandatory notifications
A transaction will trigger the mandatory notification requirement if it involves certain sectors and if it results in a “trigger event”. The duty to notify falls on the acquirer.
The 17 sectors in question have been the subject of a consultation exercise, the response to which was published earlier this month, and comprise advanced materials, advanced robotics, AI, civil nuclear, communications, computing hardware, critical suppliers to the emergency services or government, cryptographic authentication, data infrastructure, defence, energy, military and dual-use technologies, quantum technologies, satellite and space technologies, synthetic biology (prior to the consultation this was engineering biology) and transport. Although the consultation has clarified and, in a few cases, narrowed the definition of these sectors, no material changes appear to have been made. That said, the government has stated that further discussion with stakeholders will take place in respect of the sector definitions.
A trigger event will have taken place if the transaction results in the acquisition of:
- 15% or more of the votes or shares (where the acquirer previously held less than 15%); or
- more than 25%, more than 50% or 75% or more of the votes or shares (or voting rights which enable the acquirer to pass or block resolutions; according to the Bill’s Explanatory Notes an example of this would be where the relevant entity’s voting thresholds differ to those of English limited companies).
- The mandatory notification requirement will be applicable to the acquisition of voting rights or shares in an entity, including companies, limited liability partnerships, other body corporates, partnerships and trusts. It is not applicable where the transaction is simply an asset purchase.
2. Voluntary notifications
If the transaction may involve a national security interest (notwithstanding the sector/industry involved) and will result in a “trigger event”, notification to the SoS can be made on a voluntary basis by any of the acquirer, seller or the entity itself.
For the voluntary notification process, a trigger event will have taken place if the transactions results in the acquisition of:
- 15% or more of the votes or shares (where the acquirer previously held less than 15%).
- More than 25%, more than 50% or 75% or more of the votes or shares (or voting rights which enable the acquirer to pass or block resolutions).
- “Material influence”.
The SoS may choose to call-in a transaction which has not previously been notified if there is a reasonable suspicion that it may give rise to a national security risk. This call-in right can be exercised up to five years post-completion of the transaction in question, although once the SoS has been made aware of a trigger event, the transaction must be called-in within six months.
Importantly, this call-in right will have retroactive effect. So, any relevant transaction entered into since 12 November 2020 could be called-in once the Bill has passed into law.
The Bill provides that the SoS has 30 working days to decide whether to look into the transaction further. If further scrutiny is deemed necessary, a detailed assessment should be completed within another 30 working days, although this period can be extended by another 45 working days (i.e. 75 working days in total). Any further extension required must receive the acquirer’s consent.
During the review period, the SoS may issue interim orders in respect of the transaction.
During the review period, the SoS has broad information-gathering powers and can request from any person any information which is required to conduct its assessment. A request for information will stop the review timetable “clock”, which will restart once the information has been provided to the SoS.
Once the SoS has completed its review, there are three possible outcomes:
- Approval of the transaction.
- Approval of the transaction subject to any conditions that the SoS deems necessary.
- Prohibition of the transaction. If the transaction has already completed, it may be deemed void and consequently, may have to be unwound.
It is worthwhile noting that the SoS has the power to take any action that is thought proportionate and necessary to deal with any national security risk arising from the transaction. A fairly hefty stick to wield, which, where national security is really at stake, may be entirely necessary, but given the wide range of transactions that fall within the Bill, business and deal makers would probably appreciate a little more certainty around the point.
Failure to comply with the provisions of the Bill can have rather dire consequences, with both civil and criminal sanctions being possibilities. For example, non-compliance with any order (final or interim) or completing a transaction which is subject to the mandatory notification requirement without receiving clearance from the SoS, could result in fines of up to the greater of £10 million or 5% of worldwide turnover (in respect of a business) and up to five years’ imprisonment. Failing to comply with information requests or other obligations pursuant to the provisions of the Bill may also have civil and criminal repercussions.
In addition, failure to make a mandatory notification could result in the transaction being declared void and potentially having to be unwound.
Unwinding a transaction?
The ability of the SoS to order the unwinding of a transaction begs the question how this will be achieved in practice. Corporate acquisitions are usually complex affairs and unpicking the detail may well be costly, time-consuming and in some cases, well-nigh impossible. For example, the original shareholders will need to be found, fundamental changes may have been made to the target business since completion (for instance, what happens if there has been a subsequent disposal of part of the target business?), tax liabilities arising from the transaction may have already been paid and so on. How, in reality, would these be unwound fairly and promptly?
Also consider the position where the target’s value has decreased since completion or the business has been split across the purchaser’s group. In the case of an acquisition for tech know-how, the IP acquired may have been further developed or used in a new product. The potential issues go on.
Does the Bill only apply to share acquisitions?
No, all types of transactions may be caught if they give rise to a national security risk and result in a trigger event.
Mandatory notifications only apply to share acquisitions (note that enforcing security may be caught if a trigger event occurs as a result) but voluntary notifications and call-in rights may affect asset purchases, such as property (including residential transactions) and in some cases, financing transactions (for example, if, as a result, the lender acquires control/influence).
Given that the Bill is currently wending its way through Parliament, it could very well be amended before it becomes law and this may provide further certainty about the proposed regime and how it will work in practise. However, potentially, a wide range of transactions across all sectors and industries could be caught by the regime either on a mandatory or “call-in” basis. If enacted, the number of filings pursuant to the Bill is likely to be sizeable, particularly in the first few months when advisors are still finding their way through the process and requirements and are more likely to suggest making a notification “to be on the safe side”.
In addition, whether the Bill will affect foreign investment in the UK is a crucial question with, as yet, an unknown answer but what is clear, is that another layer of bureaucracy is about to be added to the transaction process as both principals and advisors will be well-advised to consider any new transaction in the light of the Bill before racking up much time and effort on a deal.
On that basis, there are steps which you can take now which may smooth the path in the long-run…
- Don’t fall into the trap of assuming that the new regime will only affect share acquisitions or “corporate-type transactions”. In some cases, asset acquisitions and possibly financing may be caught and relevant entities include limited liability partnerships, partnerships and trusts, as well as companies.
- Consider any transactions which have been entered into since 12 November 2020. If any could fall within the Bill’s remit, an informal representation to the SoS should be made as soon as possible. Although no official decision will be made yet about the transaction, it will mean that the call-in period in respect of the relevant transaction will be reduced to six months following enactment of the Bill.
- Consider new transactions in light of the terms of the Bill. Take into account the acquisition as a whole, together with an assessment of the target and the acquirer; this may require more detailed compliance checks at the start of any discussions or negotiations.
- Make any notification as early as possible in the transaction lifecycle. This will mean that any clearance required will be given without (hopefully) causing too much disruption to the transaction timetable or that any conditions imposed can be factored into the transaction process as soon as possible. If the worst comes to the worst and the transaction is not permitted to continue, it’s better to know this sooner rather than later.
- Consider whether certain transactions should include an element of conditionality in respect of clearance being granted.
Stuart Hatcher is a Partner and Lianne Baker is a Knowledge Development Lawyer in the Corporate team.
This note reflects our opinion and views as of 23 March 2021 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.