In Her Majesty’s December 2019 speech, the Queen revealed that a new bill would be introduced which will allow the government greater oversight into M&A in order to protect national security. This Bill will be entitled the National Security and Investment Bill, and will be based upon a White Paper published in July 2018.
While national security risks may arise in relation to solely UK based M&A, the 2018 White Paper highlights that the majority of national security risks will be posed from investment into the UK from abroad. As such, this Bill will have an impact on international investment into the UK.
Although the Queen’s Speech only reiterated that the Bill will be introduced, the 2018 White Paper provides additional details as to what the Bill will entail, and its contents should be revisited to ensure understanding of what is required. The contents of the 2018 White Paper demonstrate that overall, the government does not want to hinder investment from abroad, but feels the need to increase its oversight to ensure that investments are not jeopardising national security.
Scope of the Bill
According to the 2018 White Paper, the Bill will bring the UK in line with other jurisdictions with regards to the protection of national security to coincide with the expansion of potential risks. As such, the 2018 White Paper admits that the scope of the government’s powers under the Bill will be expansive, as it will relate to any form of M&A, investment, or other commercial activity, regardless of the sector, revenue and market share. There is therefore no minimum threshold under which the Bill will not apply. It should, however, be noted that the 2018 White Paper does limit its provision to national security concerns only as opposed to national interest or public interest concerns, and is therefore intended to be an objective security mechanism without political agenda.
Process and powers under the Bill
The 2018 White Paper suggests that the Bill will introduce a voluntary notification system, under which parties to a relevant transaction can notify the government of potential national security concerns. While the 2018 White Paper does list out three broad risk assessments under which national security concerns can be determined, the government suggests that an informal discussion process between themselves and the parties may be used to consider each individual circumstance. Despite being entitled voluntary, the government “encourage” parties to partake in the notification system, which suggests that it is advisable to make a notification to avoid potential sanctions.
If the government deems a notification to reasonably give rise to national security concerns, it has the ability to call-in the matter for further consideration and analysis. An initial assessment will be carried out by a senior minister within 15 business days with the potential for a full national security assessment which may take up to a maximum of 75 business days.
Additionally, the government will maintain a call-in power in relation to transactions where it believes there is reasonable suspicion that the transaction may give rise to a risk to national security despite no voluntary notification being made. This power can be exercised before or after a proposed transaction completes, although there is a suggestion of a limitation period following completion. As the 2018 White Paper indicates, national security risk will likely arise from investment from hostile nations, and consideration should be given as to the source of funds for any potential investor, as the Bill may invoke uncertainty on a transaction until the limitation period for a government call-in has expired, which may be a significant period after completion.
It should be highlighted that if the transaction has not yet completed, it cannot do so until such time as the national security assessment has been finalised and the transaction approved or appropriate conditions applied. This is of particular importance, especially if a transaction is tied to tight timescales, as parties may need to incorporate time for an assessment period when establishing the timeframes.
The Bill will afford the government an array of potential remedies in the instance the national security assessment concludes a transaction cannot proceed as proposed. Any remedy imposed must be necessary and proportionate to the circumstances.
There will be a list of non-exhaustive conditions that can be imposed by the government included within the Bill; they have not been listed within the 2018 White Paper, but it is revealed that there will be two forms of conditions, the first being behavioural conditions and the second being structural conditions.
Behavioural conditions relate to the parties doing or restraining from doing certain activities which are detailed by the government. Structural conditions are more intrinsic to the nature of the transaction itself, and may even involve the blocking of the transaction. Any remedies imposed will be constantly reviewed by the government and may be varied or revoked depending on the circumstances. This provides a flexibility for remedies which encourages parties to comply with any imposed condition.
Non-compliance with remedies
Penalties for failing to comply with any government imposed remedies will be “strong and clear” according to the 2018 White Paper, and as such both criminal and civil sanctions are envisaged. Criminal sanctions may involve imprisonment of up to 5 years, while civil sanctions may involve fines and disqualifications as directors.
Impact upon shareholders and directors
It is evident that the proposed Bill has the potential to significantly impact upon investment into UK businesses, either from within the UK or from abroad. Although the government suggests that only 200 notifications per annum will be made under the Bill, business owners should give though to any investment from individuals or companies that may be subject to the Bill’s intended remit when considering to proceed with the transaction and plan accordingly.