How will new EU and UK rules foreign investment rules affect tech deals?

With host of world-leading universities and access to strong venture capital scenes, Europe continues to produce cutting-edge tech start-ups that are attractive to overseas investors and acquisitive corporates. Those looking for opportunities in the region will have to navigate new rules, introduced by governments keen to protect perceived national interests in areas of strategic importance.

The EU recently introduced its Foreign Direct Investments (FDI) Regulation, which establishes a framework for the screening of foreign direct investments into the EU. The FDI Regulation, which took effect in October 2020, creates a cooperation mechanism within the EU for the exchange of information in relation to foreign direct investments that may affect the security or public order of EU Member States.

New UK rules

In the UK, the National Security and Investment Bill (NSI Bill), which is currently progressing through parliament, will create a new stand-alone regime for the government 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.

The NSI Bill has a number of key features that investors need to consider:

• The effect on current deals. The NSI Bill includes look-back powers, so any acquisition that takes place between 12 November 2020 and the date the law comes into force is potentially in scope and could be called in for a national security assessment.
• 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.
• A 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).
• The 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 five years plus potential fines. Fines 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 sanctions apply to other offences.

Mandatory notification narrowed

In a welcome recent development, following consultations, the UK government has narrowed the definition of the sectors that that will come under the mandatory notification regime. For example, the definition of artificial intelligence technologies has been narrowed to those that have as their purpose the identification of objects, people and events, advanced robotics and cyber security. Cryptographic authentication technologies, meanwhile, will not be included if they are intended for use by consumers, rather than by governments.

The intention in revising the scope is to give greater certainty to investors and to streamline the clearance process – and the list may be refined further following additional consultation with industry.

Comment

The NSI Bill is a substantial change to the UK merger and acquisition landscape. Businesses will need to adjust processes to incorporate an assessment of whether a transaction is subject to mandatory notification. If not, if it otherwise is reasonably likely to give rise to a national security risk, it may be worth tactically making a voluntary pre-completion notification. This could 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 the UK's new relationship with the EU, 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: "New laws will not only protect the UK from potential risks, but bolster our status as an attractive place to invest by providing more efficient clearance processes and more certainty and transparency for investors and businesses." The government must make sure that it meets this threshold.