The Bill, which is expected to be passed this autumn, will reduce transaction certainty and increase deal complexity, but may also introduce a much-needed mechanism for permitting transactions that do not reasonably pose a national security risk.
Since June 2018, transactions where the target is involved in the development or production of items for military or dual military/civilian use, advanced tech or quantum computing have been subject to the lower merger control jurisdictional thresholds.
This has subsequently been extended to other sectors – most recently for those UK businesses critical in public health emergencies such as the Covid-19 pandemic. As we have previously discussed (here, here and here), the changes to thresholds are intended as a short-term measure to mitigate the risk while a more comprehensive set of powers to scrutinise foreign direct investment is prepared.
In January 2020, as part of the Queen's Speech, the government confirmed that the National Security and Investment Bill will form part of its legislative agenda. Since then, the Bill has been caught up as in a wider geopolitical debate, against the backdrop of protectionist actions across the globe and increased political concern with the actions (or potential actions) of certain foreign states.
Nonetheless, it seems likely that the Bill will be passed at some point in the autumn and we understand there will be some important changes to the existing regime overseen by the Department of Business, Energy & Industrial Strategy and the Competition & Markets Authority (CMA). Most significantly it is likely to be decoupled from the merger control regime and therefore away from the CMA's remit into a new standalone regime, probably with a new regulator or overseen directly by government. As part of the decoupling, the triggers for a transaction being reviewed are also likely to more closely resemble the proposals consulted on in 2018 (discussed in more detail here). This includes a more ambiguous test of an 'increase in significant influence or control over an entity or an asset'. If so, this would not give Businesses the same bright-line test we're currently used to.
There is also discussion on whether filing will remain voluntary or become mandatory as it is, for example, in Germany. If the regime remains voluntary then will there be a pre-clearance process? Either way, transaction certainty in the defence sector will be affected. Buyers and investors will need to consider whether they will be required to, or should as a precaution, make a filing. Conversely, sellers and target companies seeking investment will need to be more aware of a counterparty's ownership and therefore their deliverability. This is all likely to result in more conditional transactions with split exchange and completions, which will increase deal complexity.
Osborne Clarke comment
While the defence sector has grown use to the existing regime, where a transaction can be called in, any changes or proposed changes introduces some uncertainty for businesses – particularly international ones.
Change has the potential to be for the better, though. Putting to one side the political discussion around national security being the first concern of any government and how broad these powers should be, the current regime can be improved. As things stand, many transactions fall within it that we do not believe were intended to; it is certainly hard to see how they pose a reasonable suspicion of a national security risk. For example, transactions where UK headquartered and listed public companies are an acquirer are caught if the target's operations fall within the regime.
Improving this area of law to better protect strategic assets – while also providing a mechanism for permitting or excluding transactions that should not be of interest – would be welcomed by many.