The UK government has today published a far-reaching Bill which envisages the most significant changes to the treatment of mergers and acquisitions in the United Kingdom in several decades.
The National Security and Investment Bill (the "Bill") provides for mandatory notification and prior approval of acquisitions in a broad range of sensitive sectors. The notification obligation will apply to acquisitions of businesses, assets and intellectual property including “ideas, information or techniques with industrial, commercial or other economic value”. The breadth of "acquisition" in this context is striking: for example, it could involve the ability to use "ideas" possessed by the target to a greater extent than pre-transaction.
The notification obligation in the Bill will be backed by criminal penalties for individuals, including imprisonment, and heavy fines on companies. Transactions subject to mandatory notification that are implemented without clearance will be void.
The Bill also provides for retrospective review of certain other transactions for up to five years, with the possibility of voluntary notification to provide businesses with legal certainty. If the legislation is adopted in its present form, the retrospective call-in power will apply to transactions entered into from today.
The new provisions will apply alongside the provisions of UK competition law but will effectively take precedence over it.
The mandatory notification obligation will apply to acquisitions in the following sectors:
- Civil Nuclear
- Data Infrastructure
- Artificial Intelligence
- Autonomous Robotics
- Computing Hardware
- Cryptographic Authentication
- Advanced Materials
- Quantum Technologies
- Engineering Biology
- Critical Suppliers to Government
- Critical Suppliers to the Emergency Services
- Military or Dual-Use Technologies
- Satellite and Space Technologies.
The specific products and services to which the new regime applies will be determined following a consultation on the scope of the draft legislation which was launched today.
The notification obligation will apply to specified "trigger events" involving certain acquisitions of control of a "qualifying entity" or "qualifying asset". These will include increases from:
- 25% or less to more than 25%
- 50% or less to more than 50%, or
- less than 75% to 75% or more
of the percentage of shares or voting rights that the acquirer will hold in the relevant entity. It will also apply to the power to secure or prevent the passage of any class of resolution governing the affairs of the entity. There is an exception to the notification obligation where notification would be "impossible"; the scope of impossibility in this context is not entirely clear.
The definition of a qualifying asset is particularly broad, and applies to:
- tangible movable property; and
- ideas, information or techniques which have industrial, commercial or other economic value, including:
- trade secrets;
- source code;
- plans, drawings and specifications; and
In relation to assets, gaining control will include acquiring a right or interest as a result of which the acquirer is able:
- 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 to direct or control how it is used to a greater extent than prior to the acquisition.
References to use of an asset include references to its "exploitation, alteration, manipulation, disposal or destruction".
Joint and indirect acquisitions of control
Schedule 1 to the Bill includes additional information concerning trigger events and the holding of interests or rights, which can be held jointly or indirectly, as well as joint arrangements; an arrangement is stated to be something that has "at least some degree of stability about it". The concept of an indirect holding is broad and liable to give rise to uncertainty in practice. It includes circumstances involving:
- majority stakes (including by reference to chains of control, voting rights, membership of boards or equivalent bodies, voting agreements, and the existence of "dominant influence");
- rights held by a person who controls their excise;
- rights exercisable only in certain circumstances;
- rights attached to shares held by way of security;
- connected persons; and
- the existence of a common purpose.
Voluntary notification and call-in power
Voluntary notification will be possible where a trigger event has taken place or arrangements are in progress or contemplation which if carried into effect would result in a trigger event taking place in relation to a qualifying entity or asset, and where the mandatory notification obligation does not apply. This will apply in particular to acquisitions whereby the percentages of shares or voting rights held by the acquirer increases from less than 15% to 15% or more, and also to acquisitions of material influence arising as a result of other interests or rights.
The government's "call-in" power in respect of acquisitions falling outside the mandatory notification regime will create uncertainty for businesses and is likely to result in a significant volume of notifications of transactions on a voluntary, precautionary basis; such transactions would otherwise face the risk of scrutiny, and potentially of being unwound or subjected to the imposition of remedies, for up to five years.
The Bill provides for the possibility of retroactive validation of a notifiable acquisition that is completed without approval of the Secretary of State and that would otherwise be void. The Secretary of State will have six months from becoming aware of a non-notified but notifiable acquisition to issue a call-in notice or a validation notice.
Legal uncertainty and disputes, including with third parties, might arise in individual cases in relation to the legal status of particular arrangements pending issuance of a validation notice in the light of the temporary nullity of transactions. Persons materially affected by a notifiable acquisition may apply for a validation notice, and retroactive validation may also occur where the Secretary of State has issued a call-in notice.
The regime will be enforced by a new unit within the Department for Business, Energy and Industrial Strategy ("BEIS"). Regulations will be published setting out the form of the mandatory notification notice and providing additional guidance.
The government anticipates receiving a large number notifications and envisages clearance of most acquisitions that are subject to mandatory notification within 30 days (the "review period"). If the Secretary of State issues a call-in notice, the transaction will be examined during an "initial period" of 30 days, which can be followed by an "additional period" of 45 days; this may be followed in turn by a "voluntary period" agreed between the Secretary of State and the acquirer.
The Secretary of State will have extensive powers to require the provision of information ("information notices") and to require the attendance of witnesses ("attendance notices"). The issuance of information and attendance notices will have the effect of stopping the clock pending issuance of a notice confirming that the requirements of the information notice or attendance notice have been met.
The Secretary of State will also be entitled to issue interim orders, to prevent "pre-emptive action" or mitigate its effects, and final orders to prevent, remedy or mitigate any risks to national security. Such action might include blocking a transaction, requiring it to be unwound, or imposing remedial measures.
It is an offence to complete a notifiable acquisition without approval in the absence of reasonable excuse. If an offence is committed with the consent or connivance of an officer of the body or is due to any neglect on the part of such an officer, both the body corporate and the officers will be liable. "Officer" for this purpose is broadly defined and includes a director, member of the committee of management, CEO, manager, secretary or similar officer, as well as partners (or a person purporting to act as a partner) in a partnership.
The Bill provides for the imposition of fines of up to 5% of worldwide turnover on a company for completing a notifiable acquisition or failing to comply with an order; the imposition of daily penalties in respect of the latter; and fines of up to £10m on individuals.
Criminal penalties will also apply in the event of failure without reasonable excuse to comply with a requirement of an information notice or attendance notice; the intentional or reckless alteration, suppression or destruction or information; or the provision of false or misleading information. The provision of such information may also result in revocation or modification of a decision by the Secretary of State.
The Bill contains a novel provision allowing the Secretary of State to provide financial assistance (including loans, guarantees or indemnities, or any other kind of financial assistance, actual or contingent) in consequence of making a final order. Pre-Brexit, such a provision would have been subject to the EU State aid rules. Post-Brexit, it may be subject to the terms of any "level playing field" commitments between the United Kingdom and the European Union to be contained in a Free Trade Agreement between them; it will potentially also be subject to the proposed EU regime on foreign subsidies contemplated in a White Paper published by the European Commission in earlier this year.1
Disclosure of information
The Secretary of State may disclose information received under the provisions of the Bill to public authorities for a range of purposes including detection of crime, criminal investigations and criminal proceedings and the protection of national security, as well as to overseas public authorities for the exercise of corresponding functions.
Competition & Markets Authority ("CMA")
The Secretary of State may direct the CMA to do or not to do anything under the merger control provisions of the Enterprise Act 2002 that the he/she reasonably considers is necessary and proportionate for the purpose of preventing, remedying or mitigating a risk to national security. The provisions of the Bill therefore effectively take precedence over the merger control provisions in the event of a conflict, subject to an obligation to consult the CMA. The CMA is also required to assist the Secretary of State.
In parallel, the CMA is preparing for a significant increase in its merger case load from the end of the Brexit transition period on 31 December 2020. New Draft Merger Guidance published earlier this month highlights the growing complexity of multi-national transactions and encourages merging parties to engage with officials at an early stage in order to discuss the alignment of the investigation with other regulatory processes, as well as merger control proceedings in other jurisdictions. In appropriate cases, this will entail liaison with BEIS.
Consequences for businesses
By any standards, the proposed new regime is draconian. The combination of a mandatory notification obligation, criminal penalties for companies and individuals for failure to notify, nullity of transactions and the far-reaching enforcement powers in the Bill, represents a high watermark in terms of the review of mergers and acquisitions and foreign investment review globally. The new regime will mark a major change in the review of mergers and acquisitions affecting UK businesses, and this is further accentuated by the inclusion of assets in the new regime, the breadth of the sectors covered by it, and the wide definition of trigger events.
Although elements of the regime, for example in relation to material influence and certain information gathering and enforcement powers, are familiar from UK merger control, much will remain to be clarified during the consultation on the Bill and in the proposed regulations. To handle the volume of notifications that the government anticipates receiving, the new unit in BEIS will require significant resources. The breadth of the notification obligation and call-in power is likely to give rise in practice to the need for early informal consultation with BEIS and potentially other government bodies including the CMA.
The existence of wide information sharing powers will assist the UK government in playing an increasingly prominent role in the review of international transactions post-Brexit, and will facilitate co-ordination between authorities.
Market participants familiar with the prospective UK regime’s US cousin – the Committee on Foreign Investment in the United States – will find important similarities in scope and process. Just as the CFIUS process has recently taken on an increased focus on sensitive, export-controlled technology, so does UK Bill. The UK regime also adopts the US approach to mandatory notifications and severe consequences for failures to notify.
The new UK legislation will represent a major addition to the burgeoning array of foreign investment regimes globally and further emphasises the need for early consideration of foreign investment review in transaction planning.