New powers will allow UK government to block buyers over security concerns

The UK government has finally published its much-anticipated National Security and Investment Bill, which creates a new stand-alone regime for it to intervene in a broad range of transactions on national security grounds.

This new law puts the UK on a par with other countries around the world that have similar rules, including the USA, Australia, Germany and France. It represents a substantial change from the current system which is linked to the UK's merger control laws where only about a dozen transactions have been reviewed on national security grounds in nearly 20 years.

What are the key features?

The new law has a number of key features that need to be considered, including its effect on current deals, mandatory notification for high-risk sectors, the wide range of actions within its scope and that the business secretary will be the ultimate decision maker and that substantial sanctions will apply.

• The effect on current deals. The Bill includes look-back powers, so any acquisition that takes place between 12 November 2020 and the date the Bill becomes an Act is potentially in scope and could be called in for a national security assessment. In order to give some certainty, the government is open to informal representations about potentially in-scope transactions in advance of the Bill being implemented.
• Mandatory notification for high-risk sectors. When the Bill becomes law, transactions in 17 sectors will face mandatory notification. These transactions will not be able to complete until clearance has been given; any that do will be legally void (of no legal effect). Voluntary notifications will be available for all other acquisitions.
• Wide range of acquisitions will be in scope. The rules cover acquisitions of any type of entity (for example, companies, partnerships and trusts) and acquisitions of many types of assets (for example, land, moveable property and intellectual property).
• Business secretary will be the ultimate decision maker. The Investment Security Unit within the Department for Business, Energy and Industrial Strategy will handle notifications and questions.
• Substantial sanctions will apply. An acquirer who without reasonable excuse completes an acquisition subject to mandatory notification before clearance is given will commit an offence punishable by imprisonment for up to 5 years plus potential fines. Civil administrative penalties can also be imposed of up to 5% of total worldwide turnover or £10 million (whichever is higher). In addition, the transaction will be void, so legal title will not pass to the acquirer. Other civil and criminal sanctions apply to other offences.

The government's own figures estimate that over 2,200 acquisitions a year would need to have some early dialogue with government and 1,800 acquisitions a year would need to be notified – though only 70-95 acquisitions are likely to be called-in for a formal national security assessment with only around 10 estimated to have any remedies imposed. The crucial question is therefore how the system will work for the vast majority of acquisitions which are of no concern to the government.

The remainder of this insight explores how the new regime will work and the likely impact on deals.

What events trigger national security risk?

The core power under the new rules is for the business secretary, in the event of these triggers, to call-in acquisitions (that is, undertake a full national security review on them) and if necessary impose restrictions on the parties or even block the transaction.

The call-in power arises if any of the following trigger events occur or are in progress or contemplation, where that event may give rise to national security risks:

• the acquisition of the votes and shares in a qualifying entity that go through thresholds of more than 25%, more than 50% or 75% or more;
• 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 (this is a familiar concept in existing UK competition law);
• the acquisition of a right or interest in, or in relation to, a qualifying asset providing the ability to use the asset (or use it to a greater extent than prior to the acquisition) or to 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).

There is a broad definition of a qualifying entity that includes companies and other body corporates, partnerships and trusts from any jurisdiction so long as it has a nexus to the UK by carrying on activities or supplying goods or services here.

There is also a broad definition of a qualifying asset that includes land, moveable property and "ideas, information or techniques which have industrial, commercial or other economic value". So, for example, real estate transactions and transfers of intellectual property that give rise to national security concerns would potentially be caught

How will a decision be made on whether to call-in an acquisition?

The government has published a loose Statement of Policy Intent on how the business secretary expects to use the call-in powers. Broadly speaking, they will consider each of:

• the target risk – the nature of the target and whether it is in an area of the economy where the government considers risks 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 rules are not targeted at any jurisdiction and there is no white list or black list of safe/hostile states or organisations.

Which sectors will be subject to mandatory notification?

The government has identified 17 sectors where it considers national security risk to be highest. The list of high-risk sectors is subject to review and change.

Currently, the sectors where mandatory notification will apply are: civil nuclear, communications, data infrastructure, defence, energy, transport, artificial intelligence, autonomous robotics, computing hardware, cryptographic authentication, advanced materials, quantum technologies, engineering biology, critical suppliers to government and the emergency services, military or dual-use technologies, and satellite and space technologies.

Not all parts of these sectors will be in the scope of the mandatory regime; the government is currently consulting on its sector definitions. You can read its proposals here.

What is the threshold for mandatory notification?

In the specified sectors, a notification will have to be made if the acquirer is acquiring:

• the acquisition of the votes and shares in a qualifying entity that go through thresholds of more than 25%, more than 50% or 75% or more;
• the acquisition of voting rights that enable or prevent the passage of any class of resolution governing the affairs of the qualifying entity; and
• the acquisition of 15% or more of the votes or shares in an entity (but only in order for the government to determine whether the acquirer will acquire material influence over a qualifying entity’s policy)

Acquisitions of assets in the specified sectors will not be subject to mandatory notification, but acquirers will have to assess whether they should make a voluntary notification where a national security risk is likely to arise.

Who will have to make the notification?

The government believes that the acquirer will be best placed to make the notification and so the legal obligation to notify will rest on it.

What information will it have to provide?

The full suite of information required for notifications will be set out in secondary legislation but the requested information is likely to include details of the entity affected, the transaction and the ownership/control being acquired, the rights this would bring, the identity of the acquirer and their background and existing holdings.

When will it have to make the notification?

For mandatory notifications, the acquirer must notify prior to the acquisition taking place. The government recognises that this will cause difficulties in some scenarios – for example, auction processes where the identity of the acquirer may not be confirmed until quite late in the process. However, the government is open to dialogue with parties early in the auction process prior to notification.

How will the clearance process work?

All notifications (mandatory or voluntary) will be subject to a screening process for a maximum of 30 working days after which time the transaction will be cleared or called-in. In the case of a mandatory notification, the transaction must not be completed until clearance is given.

If the transaction is called in, the government will have up to 30 working days to do a detailed national security assessment. It will be able to extend this by a further 45 working days if more time is needed.

The government will have powers to require that the target and acquirers provide any information relevant to the transaction.

During the assessment period, the parties will be able to continue to progress the transaction (unless the government orders otherwise).

At the end of the assessment period, the government will make a decision about whether it wishes to impose any remedies. The government will not be able to revisit its decision unless it can establish that false or misleading information was provided to it during the process. The government's decisions will be challengeable by way of judicial review.

Osborne Clarke comment

The National Security and Investment Bill is a substantial change to the UK merger and acquisition (M&A) landscape. Businesses will need to adjust M&A processes to incorporate an assessment of whether a transaction is subject to mandatory notification or whether it otherwise is reasonably likely to give rise to a national security risk and so tactically, a voluntary pre-completion notification should be made. This may lead to an increase in the number of split exchange and completion deals.

As a new regime, it could take some time to build up confidence and understanding as to which types of transaction sail through to clearance quickly and those that are treated as a genuine threat to national security. We would encourage the government to publish whitelists and greylists to give businesses a clear signal as to which transactions will be subject to a higher level of scrutiny.

Against the backdrop of Brexit, inevitably there will be questions over whether this is likely to impact the level of foreign direct investment into the UK. As many leading economies have similar foreign investment controls already, this should not be viewed as a major barrier to foreign investment into the UK. In some instances, this new system may positively reduce legal uncertainty in the UK compared with the rather Byzantine way in which national security concerns may be invoked under the Enterprise Act 2002.

The government states: "Evidence suggests that national security regimes do not play a major role in informing the investment decision-making process, provided that the regime is clear and predictable." The government must make sure that it meets this threshold.