From 11 November, acquisitions of interests in companies within a range of sectors relevant to the UK’s national security will be subject to a new regulatory regime introduced by the National Security and Investment Bill. The publication of the Bill marks a significant increase in the Government’s powers to intervene in foreign takeovers of UK businesses.
Since 2002 the law in this area has been covered by the Enterprise Act 2002. Although recently revised, in 2018 and earlier this year, the pace of progress in areas such as artificial intelligence, facial recognition technology, advanced materials, quantum technology, and computing hardware has made clear the need for fresh primary legislation.
The UK is not alone in introducing new national security controls, joining a trend seen in other countries including the United States, Australia, Japan, New Zealand, Canada, France, Germany and Spain. In addition to Brexit, the financial impact of Covid-19 has made the need for protection even more acute.
When the Government published its White Paper on this topic in 2018, most respondents favoured it having greater powers to examine investments and protect against the risk of assets of national security importance being acquired by potentially hostile parties. Conversely, concerns were also expressed over the need to maintain the UK’s reputation as a place to invest and do business. The Bill aims to strike a balance between both these interests.
Under the Bill, Government intervention, or the need for clearance, can depend upon a number of trigger events, some requiring compulsory notification, although voluntary notification is also possible if there are concerns that a trigger event may have occurred, be in progress or contemplated. It will also be possible to hold informal non-binding discussions with the Government ahead of any voluntary notification decision.
Compulsory notification is required for relevant companies where any of the following acquisition thresholds are to be crossed:
- 25% of votes or shares (at which level, special resolutions can be blocked);
- 50% of votes or shares (at which level, ordinary resolutions can be passed);
- 75% of votes or shares (at which level, special resolutions can be passed);
- the acquisition of voting rights that enable or prevent the passing of any class of resolution governing the affairs of the qualifying entity.
Mandatory notification is also required in certain high-risk sectors for the purchase of an interest as low as 15%. In such circumstances the Government will be considering whether such acquisition would confer on the acquiror “material influence” over the qualifying entity; factors such as normal voting patterns, shareholder voting apathy, veto powers, and board constitution will be relevant to such an assessment.
The restrictions can also be triggered by the grant of rights to use, control or restrict the use of a particular asset – for example, taking a minority stake in a technology asset where the terms of the agreement provide access to use that asset, or confer controls over how or when the asset may be used by others.
Transactions requiring mandatory notification must be notified and cleared before they can take place. Failure to do so will render the transaction legally void and may also lead to fines of up to 5% of total worldwide turnover, or £10 million (whichever is higher), and up to 5 years’ imprisonment.
Notification (whether voluntary or mandatory) triggers a 30-working-day time limit within which the Government must reach a decision whether to clear the deal or call it in for a full national security assessment. The clock will be temporarily stopped, though, if the Secretary of State makes a request for further information, or for the attendance of a specified person. In addition, in exceptional cases, a further period of 45 working days may apply where the initial assessment period is insufficient to fully assess the risks to national security.
For deals falling outside the mandatory notification areas, the Secretary of State will be able to call in the transaction within six months of becoming aware of it at any time within five years of the occurrence of the relevant transaction event.
The list of specified sectors is yet to be set out in legislation and will be kept under review, but it will initially cover at least the following areas:
- Advanced materials
- Advanced robotics
- Artificial intelligence
- Civil nuclear
- Electronic communications networks or services, or associated facilities
- Computing hardware
- Critical suppliers to Government
- Critical suppliers to the emergency services
- Cryptographic authentication
- Data infrastructure
- Energy (including renewables and new technologies such as battery storage)
- Engineering biology
- Military and dual use
- Quantum technologies
- Satellite and space technologies
- Transport (maritime (including major ports and harbours), aviation (major passenger or freight airports) and air traffic control)
The restrictions also cover land, tangible or moveable property, and ideas, information, or techniques which have industrial, commercial or other economic value.
The intention behind the new rules is not to fetter or limit foreign investment in UK businesses (which has recently averaged around $75bn pa) and the Government has acknowledged: “It is crucial for business and investors that the Government acts expeditiously to meet the statutory timescales for screening notifications and carrying out national security assessments”.
The key test under the new legislation will be whether Secretary of State has a reasonable suspicion that a risk to national security may arise. What will be of relevance is the practical ability of a party to use an acquisition to undermine national security. Factors to be taken into account will include who ultimately controls the acquiror entity, previous track record, what else the acquirer controls, and any relevant criminal offences or known affiliations.
In contrast to the clearance regime under competition laws, the new proposals do not envisage the possibility of clearance being obtained by giving undertakings or assurances. There is also no minimum deal size threshold.
The Secretary of State’s rulings under the new legislation will be open to challenge in the courts, representing an important check and balance on the new powers. We will have to wait and see whether this leads to any instances of deals becoming embroiled in court battles between the Secretary of State and the would-be foreign acquiror.