In November 2020, the United Kingdom Government published its long-awaited National Security and Investment Bill, which establishes a new screening regime for transactions that might raise national security concerns.
Several countries have long-standing investment screening regimes, such as the Committee on Foreign Investment in the United States. The Government has long been able to intervene in deals on grounds of national security and certain other limited grounds, but it was almost unique among major Western economies in not having a stand-alone investment regime. The National Security and Investment Bill changes that and will have a significant impact on transactions.
The new rules require mandatory notification and clearance of transactions involving the acquisition of shares or voting rights above certain thresholds (so-called “trigger events”) in a number of sensitive sectors.
The 17 sensitive sectors are:
- advanced materials;
- advanced robotics;
- artificial intelligence;
- civil nuclear;
- computing hardware;
- critical suppliers to government;
- critical suppliers to the emergency services;
- cryptographic authentication;
- data infrastructure;
- engineering biology;
- military and dual use;
- quantum technologies;
- satellite and space technologies; and
The Government has been consulting on the proposed definitions for each of the sectors listed above and the activities undertaken by entities within each sector. In due course, refined definitions will be published, which will enable parties to self-assess whether they need to notify a transaction.
The British Venture Capital Association (BVCA) has responded to the latest consultations issued by the Government, which closed on 6 January 2021, calling for the scope of the sensitive sectors requiring mandatory notification to be narrowly and clearly defined. Whilst supporting the National Security and Investment Bill in principle, the BVCA is concerned that a lack of clear guidance and precise definitions will delay and increase the costs of venture capital transactions which do not otherwise pose a genuine threat to national security.
In sectors not subject to mandatory notification, transactions will be subject to a voluntary regime where there is an impact on national security.
What transactions are caught by the rules?
The new rules will not just capture an acquisition of a controlling interest but also a number of other “trigger events”, including:
- the acquisition of more than 25%, 50% and 75% of the votes or shares in an entity;
- the acquisition of voting rights that enables or prevents the passage of any class of resolution governing the affairs of the entity being acquired; or
- the acquisition of “material influence”, that is the ability of the acquirer to influence policy relevant to the behaviour of the target entity in the marketplace.
Material influence can be found with a shareholding as low as 15%.
It’s important to note that the new regime applies to transactions regardless of the identity or nationality of the acquirer of any target that has UK activities or customers. This means that that non-UK targets will potentially fall within its scope.
Making a Notification
Once a notification is made to the Secretary of State for Business, Energy and Industrial Strategy, the Secretary of State will have 30 working days to decide whether to clear the transaction or undertake an in-depth review, in which case it will have a further 45 working days to assess the transaction.
The Government will also have the power to 'call in' transactions that were not notified but which raise national security concerns. This right applies for a period of five years following the date of the transaction as long as the Secretary of State acts within six months of becoming aware of the transaction (for example from a press announcement). For acquisitions subject to mandatory filing and that were not notified, the five-year limit does not apply, and transactions cannot be completed until approval has been given.
What is the outcome following a notification?
Following notification, several outcomes are possible: (i) approval; (ii) approval subject to conditions; or (iii) prohibition (or unwinding of the transaction).
Ultimately the Government will have the power to block deals, or to require transactions that have taken place to be divested or unwound. The Government also has wide powers to impose conditions to address national security concerns. These may include reducing the number of shares an investor is allowed to acquire, the transfer of intellectual property or restricting access to commercially sensitive information.
What are the consequences of non-compliance?
The new regime will be backed-up by significant penalties. Transactions requiring mandatory notification which are implemented without approval will be legally void unless later validated.
Non-compliance may result in civil and criminal sanctions, including fines of up to 5% of worldwide turnover or £10 million, whichever is higher, and imprisonment of up to five years.
Impact on venture capital deals
The National Security and Investment Bill is part of a wider trend in which many countries have implemented strengthened national security rules. The new regime will result in a wide range of deals in cutting-edge sectors – including venture capital investments – being reviewed by the Government. The Government estimates that up to 1,800 deals a year will be screened each year with perhaps as many as 100 being reviewed in greater detail.
Here are a few key takeaway points:
- Application to Minority Investments – A key take away is that the new regime applies not just to traditional M&A deals but also potentially to minority investments, as well as acquisitions of or transactions giving control over certain assets such as land or intellectual property. The regime will also apply to follow-on transactions, including further funding rounds or secondary acquisitions.
- Due Diligence – Acquirors/investors will need to undertake more detailed due diligence to understand whether a company operates in a sensitive sector, thereby triggering a notification requirement.
- Time – Where notification is required, companies will need to allow additional time in order to complete their transactions while the Government reviews the proposed transaction.
- Act Now – The power to call in transactions applies retroactively, and so covers transactions in process now even though the Bill has not yet been enacted. So, investors should start requesting advice even before the Bill becomes law, in order to avoid issues later on.