Across Europe, governments are seeking to impose increased controls on foreign investment in assets that are important to the security of a country. In a clear example of this trend, the U.K. Government introduced the National Security and Investment Bill 2020 (“the Bill”) to Parliament on 11 November 2020. To date, the focus on the Bill has largely related to its impact on M&A transactions and less so on its implications for secured financings of assets impacted by the Bill. In this note, we look at some of the issues facing secured lenders of these assets.
The Bill, when passed into law, will enable the U.K. Government to protect businesses and assets of strategic importance to national security, including a significant number of infrastructure class assets, from ownership or influence by hostile actors. It introduces new powers to call in qualifying transactions and a hybrid mandatory/voluntary notification regime overseen by a dedicated government unit within the Department for Business, Energy & Industrial Strategy (BEIS).
Key aspects of the new regime as they relate to secured infrastructure financing transactions are as follows:
- A mandatory notification requirement will apply to transactions concerning 17 sectors of the economy, which include Critical Suppliers to the Emergency Services, Data Infrastructure, Defence, Energy and Transport (ports, airports and air traffic control).
- While the water industry is not currently specified, it could be caught under the category of Critical Suppliers to the Emergency Services. In addition, the water sector may still be added to the list during the ongoing consultation on the sectors.
- Prior notification of “trigger events” must be provided to the Secretary of State and its clearance received before the transaction may complete. Relevant examples of trigger events include an increase in the shareholding or share voting rights of 15 percent or more, more than 25 percent, more than 50 percent and more than 75 percent, or a person otherwise “gaining control” of a qualifying asset or entity, including being able to materially influence the policy of the entity.
- The Secretary of State may call in for review any non-notified transactions up to six months from when the U.K. Government became aware of the relevant transaction and otherwise up to five years post completion of the transaction.
- Non-compliance may result in fines of up to the greater of 5 percent of worldwide turnover or £10 million, and up to 5 years’ imprisonment.
Impact on Infrastructure Financing Security Structures
Security over the shares of the top entity in the financing group, allowing creditors enforcement over the business as a going concern, is a key credit feature in secured infrastructure financings.
The Bill has helpfully made it clear that the creation of share security by secured parties will not in itself trigger the application of the Bill. However, enforcement of share security, including the appropriation of the shares or exercise of voting rights, would be subject to the prior notification and clearance requirements of the Bill.
Further, the trigger event in relation to such requirement arises in circumstances which provide the secured party with the right to enforce its security over the shares or to direct the exercise of share voting rights, provided that such circumstances are within the control of the secured party.
Although the Bill carves out rights that are exercisable by an administrator or by creditors while an entity is in “relevant insolvency proceedings,” such proceedings are defined relatively narrowly for the purposes of the Bill and would not, for instance, be wide enough to capture enforcement action being taken by a secured party over shares.
Accordingly, if secured parties have the right to direct share voting rights or appropriate shares on a “declared default,” the notification and clearance regime would need to be completed prior to the secured parties triggering the “declared default”—as the Bill is currently drafted, this is the point at which the security agent is in control of the circumstances which would result in it having control of the shares and the corresponding voting rights. This of course has potentially significant implications for the timeframe required for and simplicity of potential enforcement steps by secured parties.
However, complicating factors in the context of enforcing security over infrastructure assets is not new to debt providers in the sector. The interaction between security enforcement and the licensing conditions in regulated infrastructure is a familiar part of infrastructure creditor considerations. Finance providers lending against less than 100 percent stakes in infrastructure assets have to weigh up complications on security enforcement which can arise on account of shareholder arrangements. Secured finance providers to U.K. businesses with defined benefit pension schemes and associated deficits already have to be mindful of potential liabilities arising when appropriating shares or directing share voting rights.
Nonetheless, the Bill certainly adds an additional layer of complexity to enforcement analysis and finance documentation will need to be drafted to ensure that secured parties are not inadvertently exposed to liability. Pursuant to the customary intercreditor arrangements, the finance providers to regulated infrastructure assets are subject to a prolonged standstill period on any enforcement action (including declaring an event of default) against the regulated entity on account of licensing or special administration considerations. The one exception to a prolonged standstill period is an ability to enforce the share security over the regulated entity. Thus, such finance providers may feel particularly uncomfortable with the further implications of the Bill on that share security.
Finally, consideration should be given both in the context of new and existing transactions as to whether the Bill may impact representations, covenants and events of default relating to the validity and enforceability of transaction security and security documents and, in particular, whether it has a materially adverse effect on the rights or remedies of any finance party under the security documents. This is something that will need to be considered on a case by case basis in the context of the final wording of the Bill as enacted.