On 11 November 2020, the UK Government introduced the National Security and Investment Bill (NSI Bill) to Parliament. Once enacted, the NSI Bill will introduce significant legislative reforms which will overhaul the review and regulation of M&A activity on national security grounds in the UK.
The regime envisaged in the draft NSI Bill follows the establishment and extension of similar regimes in other jurisdictions both in Europe (eg, Germany, France – noting also the framework under the EU Investment Screening Regulation which became operational on 11 October) and other Western countries (eg, the Committee on Foreign Investment or CFIUS regime in the US, the Investment Canada Act and the Foreign Investment Review Board regime in Australia), noting that draft legislation introducing an FDI regime in Ireland is also currently being prepared. Similar to those other regimes, the NSI Bill provides for expansive powers in respect of transactions with a UK nexus with considerable flexibility as to how it will be administered, noting the mandatory notification requirements for a long list of sensitive sectors as well as a voluntary or “call-in” regime for all other sectors.
As such, both Irish and multinational investors currently contemplating any transaction with a UK nexus should consider the application of the new regime.
1. Broad scope of the proposed new UK regime
The key elements of the proposed new UK regime are as follows:
- Mandatory notification in 17 sensitive sectors: Transactions in a prescribed list of ‘sensitive sectors’ will require mandatory notification (via a digital portal) to a newly dedicated government unit within the Department for Business, Energy and Industrial Strategy (BEIS) (which will administer the regime, with the Secretary of State as the final decision-maker). Deal completion is prevented until clearance has been received. The 17 sensitive sectors are as follows: “Civil Nuclear; Communications; Data Infrastructure; Defence; Energy; Transport; Artificial Intelligence; Autonomous Robotics; Computing Hardware; Cryptographic Authentication; Advanced Materials; Quantum Technologies; Engineering Biology; Critical Supplier to Government; Critical Supplier to the Emergency Services; Military or Dual-Use Technologies; and Satellite and Space Technologies”.
- Voluntary or “call-in” regime for all other sectors: Notification is voluntary for transactions in all other sectors. However, given the five-year retrospective “call-in” power (see below), in practice, this seems likely to lead to a significant number of pre-emptory notifications being made in respect of transactions with a UK nexus and would appear to dilute the voluntary nature of the notification requirements.
- Retrospective reviews: a 5-year retrospective “call-in” power is provided for transactions completed from 11 November 2020 that were not notified but which may raise national security concerns. This has been touted as being intended to deter parties from seeking to push through sensitive transactions prior to the NSI Bill coming into force. However, the NSI Bill will not have retrospective effect on investments that completed prior to 11 November 2020.
- No threshold or jurisdictional limitations: The new UK regime will apply to investors from any country, with no minimum target turnover or market share thresholds. The key question is simply whether there is an acquisition of “material influence” in a company, assets or intellectual property which potentially gives rise to national security concerns (subject to certain exceptions for transactions involving an increase in an existing shareholding). “Material influence” is a broadly defined concept that already exists in the UK merger control regime and is expected to be interpreted in a similar manner such that a shareholding of 25% or more would likely be caught, as well as the acquisition of a shareholding of 15% or even lower depending on the existence of other factors (eg, whether the investor will obtain a seat on the target’s board).
- Review timelines: The review period is stated to be 30 working days from the date of notification. Where the Secretary of State issues a “call-in” notice, the government has a further 30 working days to complete the review, extendable by 45 working days and potentially longer where warranted. This is significantly shorter than the usual timeframe for review under the existing UK public interest merger regime. The Statement of Policy Intent accompanying the draft NSI Bill envisages that investors will be able to have “pre-notification” conversations with the newly established team within BEIS on a confidential and informal basis to understand the application of the regime to their investments.
- Potential for remedies: Clearance may be subject to conditions such as limits on the amount of shares an investor is permitted to acquire or restrictions on access to sensitive data. Decisions by the Secretary of State may be appealed to the UK courts.
- Potential sanctions: Non-compliance may result in fines of up to 5% of the annual global turnover of the acquirer or £10 million, whichever is greater, and up to 5 years’ imprisonment for responsible directors. Notifiable transactions that proceed without clearance will be legally void.
- Information sharing with other regulators: The NSI Bill permits information sharing with other UK agencies, including the Competition and Markets Authority (CMA), and potentially with overseas regulators conducting parallel reviews. Details of investments reviewed by the Secretary of State will be published only if the investment is prohibited or if clearance is subject to conditions.
2. Parallel developments in other jurisdictions – Ireland and beyond
The UK reforms can be set against the backdrop of other major jurisdictions broadening their powers to review transactions that raise national security concerns. For example, Germany expanded its regime again earlier this year to capture all shareholdings above 10% in certain sensitive sectors. The EU Investment Screening Regulation – which establishes a cooperation and information sharing framework amongst the European Commission and EU Member States – became fully operational across the EU on 11 October 2020, including in Ireland. Further reforms to the Australian FIRB regime are also expected early in 2021.
In Ireland, draft legislation is underway to introduce powers for the Irish Government to review investments by non-EU investors in sensitive industries that may give rise national security concerns. According to an Irish Government press release, the proposed legislation will empower the Department of Enterprise, Trade and Employment to investigate, authorise, condition, prohibit or unwind foreign investments into Ireland by non-EU investors, based on a range of security and public order criteria. However, the draft legislation has not yet been published and so the exact scope of the future Irish FDI regime is not yet clear – in particular, it is not clear what type of transactions are likely to be subject to review (and the extent of that review), if the legislation is introduced. For now, Ireland is to comply with the cooperation and information sharing requirements under the EU Investment Screening Regulation (see here).
3. What does the new UK regime mean for investors contemplating deals with a UK nexus?
The breadth of the NSI Bill indicates that the regime will impact a significant range of investments involving businesses with a UK nexus. Acquisitions of minority stakes and of assets are firmly within its scope, and while the mandatory notification requirement is limited to certain sectors of the economy, these are still numerous and broadly defined. Furthermore, parties investing in any sector falling outside the mandatory regime will have to weigh the burden of a voluntary notification against the risk of a post-closing “call-in” if they choose not to notify. While the regime is ultimately targeted at the small number of investments that could harm national security, the jurisdictional scope of the regime will clearly have an impact on a significantly greater number of investments.
Identifying notification requirements and developing clear engagement strategies with regulators in the UK and elsewhere is increasingly critical to ensure a smooth pathway to deal closing. Deal teams are therefore encouraged to take account of these UK and other global reforms at an early stage of deal planning for any transaction with a UK nexus in order to mitigate adverse timing and other execution risks, including the risk of a retrospective review by the UK Government.