On 11 November 2020 the UK Government introduced the National Security and Investment Bill (NSI Bill) to Parliament, setting out significant legislative reforms which will overhaul the review of transactions and investments on national security grounds in the UK, against a backdrop of tightening of foreign direct investment (FDI) regimes globally.
If passed, the NSI Bill will introduce for the first time a distinct regime and standalone powers for the review of FDI in the UK (referred to in this briefing as “the NSI regime”), replacing the existing public interest merger regime contained in the Enterprise Act 2002 (EA02) insofar as national security interests are concerned. The proposed NSI regime follows on from the Government’s July 2018 White Paper, but departs from the original proposals in a number of significant respects, including the introduction of mandatory notification obligations in 17 specified sectors. It is expected that the NSI Bill will become law in the Spring of 2021 and that the NSI regime will come fully into force at the same time or most likely shortly thereafter.
Further to our initial briefing published earlier this week as the NSI Bill was introduced to Parliament, we set out in this briefing our more detailed analysis of the key elements of the proposed NSI regime, namely:
- which investments are subject to review (section 2);
- whether all investors will be equally affected (section 3);
- those transactions that will be subject to mandatory notification obligations (section 4);
- consequences of failing to comply with the mandatory notification obligation (section 5);
- how the notification process will work (section 6);
- powers to “call in” non-notified transactions (section 7);
- information gathering powers (section 8);
- use of interim orders preventing integration pending clearance (section 9);
- the review process timetable (section 10);
- remedies that may be requested as a condition of clearance (section 11);
- sanctions for non-compliance (section 12);
- application to deals completed between 12 November 2020 and commencement date (section 13);
- obtaining informal guidance (section 14);
- the interaction between the NSI Bill and the UK merger control regime (section 15); and
- next steps (section 16).
Key practical takeaways for investors
- Whilst it will not be possible to notify transactions (either on a mandatory or voluntary basis) prior to the formal commencement of the regime, the Government will be able to exercise its power to “call in” any deal falling within the scope of the new regime completed on or after 12 November 2020.
- It is therefore critical to consider the potential application of the new regime for all deals completed from 12 November 2020 onwards which could potentially raise national security concerns (broadly defined). In particular, for transactions that have not yet signed, parties will need to consider whether a condition to cover the NSI regime should be included in the transaction documents and possibly factor the NSI review process into the deal timeline and long stop date. For deals that have already been signed but not yet completed, parties will need to consider obtaining informal guidance if there is any risk of a potential national security issue.
- The new regime applies to any acquisition of “material influence” (a shareholding of 15% or more, and sometimes this will be deemed to exist in relation to a shareholding even lower than 15%) in a company, assets (including land), or intellectual property, which potentially gives rise to national security concerns in the UK.
- It also applies to increases in existing shareholdings or voting rights, where the increase results in crossing the 25%, 50% or 75% threshold (e.g. an increase in shareholding from 20% to 30% could be caught).
- The regime applies even where acquirers and sellers do not have a direct link to the UK. So the acquisition of a business in another country could be caught if that business provides services to the UK, or supplies goods into the UK, upon which the UK fundamentally relies.
- Acquisitions of control over an entity which fall within the scope of the regime in the following 17 specified sectors are subject to mandatory notification requirements: civil nuclear; communications; data infrastructure; defence; energy; transport; 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; and satellite and space technologies. More precise definitions of the activities included in these sectors are set out in a consultation document that the Government is inviting comments on until 6 January 2021.
- Where the mandatory notification obligation applies, there is also a standstill obligation: the transaction cannot be completed prior to obtaining clearance from the Secretary of State. Completion without prior approval will be void and of no legal effect (although it is unclear how this will apply in practice to non-UK legally constituted assets or transactions).
- However, it is important to be aware that the mandatory notification obligation does not apply to asset transactions (including the acquisition of land). In such cases, parties should assess the risk of the transaction being called in for review and consider whether to make a voluntary notification.
- Sanctions for non-compliance will be severe: in addition to the risk of the transaction being void if completed prior to clearance, non-compliance may result in fines of up to 5% of worldwide turnover or £10 million (whichever is the greater) and/or imprisonment of up to 5 years, as well as director disqualification for up to 15 years.
- Whilst notification of relevant transactions in any other sector is stated to be voluntary, in practice it may, in the interests of certainty, often be advisable to notify if there is any risk of a national security issue, due to the Government’s power to call in non-notified transactions for review.
- This call in power is exercisable at any time up to 6 months after the Secretary of State becomes aware of the transaction (for example, as a result of coverage in a national news publication), provided this is also within 5 years of the “trigger event” (i.e. acquisition of material influence or more) occurring. Where the acquisition was subject to mandatory notification, the 5 year time limit does not apply (and the transaction will be deemed void if not notified).
- For transactions completed between 12 November 2020 and the formal commencement date, the call in power will apply for 6 months following the commencement date where the parties have informed the Government about the transaction prior to the commencement date, or the transaction has been made sufficiently public. Companies would also be able to lodge a notification on the commencement date. In practice, we expect that the Government’s exercise of its power to call in transactions completed between 12 November 2020 and the commencement date will focus on transactions in the 17 specified sectors, but the call in power also applies economy-wide.
- The Government is anticipating 1,000-1,830 notifications to be made to a new Investment Security Unit (part of the Department of Business, Energy and Industrial Strategy (BEIS)) under the new regime each year, and is expecting to call in a further 75-90 non-notified deals per year. This will be a notable sea-change compared to the existing EA02 public interest merger regime, where the Government has intervened in just 12 transactions since 2003.
- The Government may require remedies to address identified national security concerns in order to allow a deal to proceed. Examples given by the Government include altering the amount of shares an investor is allowed to acquire, restricting access to commercial information, or controlling access to certain operational sites or works. The Government has also made clear that it will have the power to block (and potentially unwind) transactions as a last resort.
- However, it is notable that the Government has stated that it is expecting only around 10 deals per year to require remedies (significantly lower than the estimate of 50 deals per year made in the context of the voluntary filing framework originally proposed in the White Paper).
- Prior to the formal commencement date, investors are encouraged to seek informal guidance and the Government is promising prompt feedback.
- The Government has also published a series of “Factsheets” for businesses summarising the key aspects of the new regime. It is however important to note that these inevitably simplify the position in some respects, and we would advise any investors who are concerned that a deal may be caught by the new regime to seek detailed legal advice.
- Alongside the NSI Bill the Government has also launched a public consultation (the Consultation) seeking views on the draft definitions used for the 17 specified sectors in which notification will be mandatory. It will be absolutely critical to ensure these definitions are honed down clearly, in a proportionate manner, and we will be actively engaging with the Consultation and businesses may also wish to do so should their activities fall within the specified sectors.
- The impact of the new regime on foreign investment into the UK remains to be seen. The Government has repeatedly stressed that it does not wish to deter friendly foreign investment and indeed has this week also announced the creation of a new Office for Investment tasked with identifying and co-ordinating investment for major projects.
- However, there is a clear risk that the new regime may deter some foreign investment into the UK, particularly in circumstances where, for example, the mandatory notification requirement - combined with a greater risk of detailed and more lengthy assessment for certain acquirers - could be enough to disadvantage some bidders in fast-paced auction processes.
To date, the UK has not had a separate FDI screening regime; instead, under the EA02, transactions meeting the relevant jurisdictional thresholds are subject to review by the Competition and Markets Authority (CMA) as to their impact on competition.
Broadly, the CMA has jurisdiction to review transactions where the target’s UK turnover exceeds £70m and/or where the transactions lead to the creation or enhancement of a share of supply in the UK to 25% or more. The EA02 also sets out limited grounds on which the Secretary of State can intervene for public interest reasons. At the time of writing, these grounds are: national security, media plurality, stability of the UK financial system and - prompted by the Covid-19 pandemic - combatting and mitigating the effects of a public health emergency.
The UK Green Paper on National Security and Infrastructure Investment published in October 2017 presented both short and long term proposals to reform the existing system, in light of concerns that the existing regime was not sufficient to protect UK national security interests.
The short term proposals were adopted by the Government on 11 June 2018, by amending the EA02 to reduce the jurisdictional thresholds to £1m UK target turnover or an existing share of supply of at least 25% (i.e. no requirement of any increase in the share of supply) for transactions in the military/dual use, quantum technology and computing hardware sectors (see our previous briefing). With effect from 21 July 2020, these lower jurisdictional thresholds have also been applied to transactions in the artificial intelligence, cryptographic authentication technology and advanced materials sectors (see our blog post).
Longer term proposals regarding a new framework for permanent and significant reforms to the Government’s ability to intervene in transactions presenting national security concerns were set out in a July 2018 White Paper. This proposed a voluntary notification regime, allowing companies to flag transactions potentially raising national security concerns, alongside a call in power to enable the Government to review non-notified transactions up to 6 months following completion. The proposed framework did not include any target turnover or market share thresholds, and was intended to be applicable across all sectors, subject to certain specified sectors being identified as being particularly likely to give rise to concerns (including parts of national infrastructure and certain advanced technologies). For further detail on the White Paper proposals please see our previous briefing.
Many of the proposals in the White Paper have been carried forward into the NSI Bill. However, as discussed below, the proposed NSI regime also departs from those original proposals in a number of significant ways.
2. Which investments will be subject to review?
Unlike the UK’s merger control system under the EA02, there are no minimum target turnover or share of supply thresholds for a notifiable investment under the NSI regime. This has been a consistent element of the Government’s proposals since the White Paper.
Instead (and again, at least in principle in line with the White Paper), the power of the Secretary of State to call in a transaction or the obligation for parties to notify (in the specified sectors) arises where a transaction constitutes a “trigger event” (a Trigger Event). However, the scope of the transactions which could be notified/called in under the NSI regime is considerably broader than originally proposed in the White Paper. These Trigger Events include, in relation to a UK entity or any entity that carries on business in the UK:
- Acquisitions of control of an entity by acquiring the ability to materially influence its policy: a shareholding of 15% or more, and sometimes this will be deemed to exist in relation to a shareholding even lower than 15%.
- Acquisitions of control of an entity by increasing the percentage of shares or voting rights held by a specified proportion: Acquisition of “control” over an entity does not have the same meaning for the purposes of the NSI regime as it has under UK or EU merger control rules. In this context, an acquisition of control will be deemed to arise where there is an acquisition (or an increase of an existing shareholding or voting rights) of less than 25%, 50% or 75% to more than 25%, 50% or 75% respectively i.e. one of these “thresholds” is crossed. This means, for example, that increasing a shareholding in a qualifying entity from 25% to 50% would be caught, whereas increasing it from 25% to 49% would not.
- Acquisitions of control of an entity through voting rights or other interests which permit the acquirer to veto any class of resolution going to the governance of the entity or permit it to materially influence the policy of the entity.
- Acquisitions of control of assets: If, as a result of a transaction, an acquirer is able to use or direct the use of an asset to a greater extent than before, this will also constitute an acquisition of control. Assets for these purposes include not only land but also tangible property and IP (including trade secrets, databases, code, algorithms, formulae, designs, plans or software) in the UK and, indeed, outside of the UK if used to carry out business in the UK.
Acquirers will therefore need to be careful with regard to acquisitions of non-controlling interests, increases in shareholdings and transactions which confer greater power over the control of certain assets. Although it is to be hoped that the notifiable acquisition regulations (NARs) which the Secretary of State is required to make under the NSI Bill will provide more clarity on these Trigger Events and will reflect the outcome of the Consultation on the definitions of the 17 sectors in which notification will be mandatory, there appears to be a risk that even transactions such as share buy-backs or changes to shareholder agreements (which give a shareholder greater governance rights or rights over assets) could technically constitute Trigger Events.
Similarly, the potential breadth of the regime with regard to land could cause unexpected issues in sectors not normally considered to fall within the scope of FDI regimes; for example, extra care may need to be taken in real estate transactions to ensure that real estate acquired as part of a transaction could not be deemed proximate to sensitive sites such as critical national infrastructure sites or government buildings. For example, the acquisition of buildings located near to the headquarters of the UK’s security services (MI5 or MI6) in Central London or next to military bases by acquirers affiliated with actors considered hostile to the national security interest would appear likely to constitute Trigger Events.
The Government has also said that it is important that the regime allows the Secretary of State to be able to investigate transactions that raise national security concerns even where acquirers and sellers do not have a direct link to the UK. In such cases, the Secretary of State can intervene if the target entity carries on activities in the UK, or supplies goods or services to persons in the UK or, in respect of an asset or IP situated or registered outside the UK, if it is used in connection with activities taking place in the UK or the supply of goods or services to persons in the UK.
3. Will all investors be equally affected?
The NSI Bill is in principle neutral as to the nationality of an acquirer or investor. However, from the statements made by the Government about the NSI regime it is clear that the focus is on acquirers who are either likely to be directly hostile to the interests of the UK’s national security or owe allegiance to those who are. The Government has made clear that it is affiliations to a hostile party rather than foreign nationality or relationships with foreign powers that will be problematic. In particular, the Government has expressly recognised in statements about the NSI regime that state-owned enterprises, sovereign wealth funds or other foreign state affiliated entities are not inherently more likely to pose a national security risk, particularly where they have operational independence and pursue long term investment strategies.
Although the ability to call in a transaction applies to any investor, the Government has said it is expected that its powers are more likely to be exercised in respect of foreign investors. Cases involving UK investors are expected to be rare, as they are generally considered less likely to involve threats to national security (however BEIS has indicated that a transaction without foreign investors would not preclude a transaction being called in or, indeed, a mandatory notification being required in some cases). Additionally, the Secretary of State does have the power to exempt certain acquisitions from the mandatory notification regime on the basis of the characteristics of the acquirer; although there is limited material currently available on potential exemptions, there have been indications that, for example, passive investors could be exempted or certain investors who are regularly notifying transactions without issue could benefit from future exemption.
4. Which transactions will be subject to mandatory notification obligations?
Mandatory notification is required where a transaction involves the acquisition of material influence or control of a qualifying entity which carries out certain prescribed activities in a specified sector. Qualifying entities are broadly defined to cover any legal person (but not individuals).
The Consultation sets out 17 specified sectors (the Specified Sectors) and the prescribed activities within them that, subject to the outcome of the Consultation, will give rise to a mandatory notification: civil nuclear; communications; data infrastructure; defence; energy; transport; 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; and satellite and space technologies. It should be noted that where assets are closely related to the prescribed activities within the Specified Sectors, there remains a risk a transaction will be called in (see further below in section 7).
Voluntary notification can be made for transactions that relate to a qualifying asset or entity in a Specified Sector (see section 2 above for further detail) but do not result in an acquirer gaining material influence or control (as defined in the Bill and as explained above in section 2) or for Trigger Events that do not fall within one of the Specified Sectors.
As the UK Government has recognised, the clarity of the detailed definitions of the Specified Sectors and the prescribed activities within these Sectors that will be subject to mandatory notification will be central to the effectiveness of the new NSI regime. The Consultation provides an important opportunity to provide feedback on the proposed definitions (the closing date is 6 January 2021). The Government has said that it expects some definitions to change following the Consultation.
While the detail included in the Consultation adds welcome clarity to the definitions originally included in the White Paper, the draft definitions appear to be unduly broad in a number of areas and risk requiring notification in relation to activities which seem far from “critical”. For example, some definitions for technology sectors such as quantum computing or advanced robotics could be considered unduly broad and may capture technologies that are far from ‘critical’; it is at least arguable that, for example, the definition of advanced robotics could (and despite the Government’s statement that robotic vacuum cleaners or similar are not in scope) readily capture chat-bot or document review technology that seems distant from the concerns that the Government has articulated with regards to this sector. For critical suppliers to the Government, the categories are such that the provision of a broad range of services to the Government could lead to a notification being required. The Government has indicated that it is keen for the NSI regime to target precisely the areas of highest risk and will therefore keep the Specified Sectors under review and add to or amend the definitions as new sectors/areas of interest (especially in the sphere of advanced technology) emerge.
The broad scope of the NSI Bill and its likely continuing evolution means that due diligence for transactions with a UK nexus will need to be expanded in order to determine whether a mandatory notification is required or a voluntary notification is advisable. At the time of writing, the lack of clarity in some of the sector definitions and the uncertainty about when the Government will wish to initiate a national security review, particularly in those cases that do not raise obvious issues, are likely to mean that businesses will err on the side of caution in engaging with BEIS and, in particular, in making “failsafe” voluntary notifications.
5. Consequences of failing to comply with the mandatory notification obligation
Any transaction that is subject to a mandatory notification obligation but is completed without the Secretary of State’s approval is void. Approval either results from parties submitting a notification or the calling in of the transaction by the Secretary of State. Where an acquirer does not make a mandatory notification, it is possible to apply for a retrospective validation notice; if granted, the transaction is treated as having been completed with the approval of the Secretary of State.
6. Overview of the notification process
How are transactions notified?
No notifications (whether mandatory or voluntary) will be accepted prior to the formal commencement date of the NSI regime. Thereafter notifications must be made to the Investment Security Unit within BEIS via a digital platform. At the time of writing, the Government is yet to publish a template notification form (although it is expected to do so shortly); however, it has indicated that it will be around 5-10 pages and will be designed to be as business/user-friendly as possible.
At what point should transactions be notified?
Where the mandatory notification obligation applies, notification must be made before the relevant acquisition of control or material influence occurs.
In relation to voluntary notifications, notifications may be submitted from the point at which 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 in a Specified Sector. This is the same point in the process of a transaction at which the Secretary of State may exercise his/her call in power (discussed further below in section 7). Determining exactly when this point in time is reached will turn on the particular facts of the transaction in question, and may include a situation where a non-binding offer has been submitted or heads of terms agreed, as these could be considered agreements or arrangements which enable an acquirer (contingently or not) to do something in the future that would result in a Trigger Event taking place. In this context, the NSI Bill provides that a key question will be how likely it is in practice that the person will proceed with the action that would result in a Trigger Event taking place.
By analogy with the CMA’s decisional practice under similar provisions of the UK merger control regime (and our experience of advising clients in that context), it appears likely that the relevant point in time may occur much earlier than parties might typically expect. For example, the CMA’s recent decision in Gardner/Impcross suggests that having inter-party talks and providing an information memorandum along with evidence of the parties’ mutual contemplation of the transaction and the acquirer’s ability to bring it about was sufficient to establish that arrangements were “in contemplation” for the purposes of enabling the transaction to be reviewed under the merger control regime.
Those considering M&A in the UK or with a UK element in one of the Specified Sectors should therefore be aware of the risk that the calling in of a transaction for review under the NSI regime could, in principle, occur very early in the M&A process. As a result, parties should consider carefully when to initiate pro-active engagement with BEIS.
7. Call in of non-notified transactions by the Secretary of State
Where a transaction is not notified, the Secretary of State has the power to call in the transaction up to 6 months from the date on which he/she becomes aware of the transaction, provided this is no more than 5 years from when the Trigger Event took place (this is similar to the approach adopted by the German FDI regime). Should acquirers want certainty/avoid the risk of a transaction being called in for up to 5 years after the Trigger Event, BEIS is encouraging parties to make the Secretary of State “aware” of a transaction (thus reducing risk of call in to 6 months) by a written notification and/or discussions with BEIS (a press release on an industry or other specialist website is unlikely to be sufficient). As noted previously, this is not the only course of action open to the Secretary of State for a non-notified transaction; he/she can choose to issue a validation notice indicating that no further action will be taken instead.
The decision as to whether to call in a non-notified transaction for review will focus on three considerations:
- the Target Risk – the nature of the target and whether it is in an area of the economy where the government considers risks are more likely to arise;
- the Trigger Event Risk – the type and level of control being acquired and how this could be used in practice; and
- the Acquirer Risk – the extent to which the acquirer raises national security concerns.
The Government has given helpful guidance for investors seeking to assess the likelihood of a particular transaction being called in for review if it is not notified:
- In relation to Target Risk, the focus will be on the activities within the Specified Sectors where the mandatory notification requirement applies (see above in section 4). For asset acquisitions (which are not subject to mandatory notification), transactions are more likely to be called in where the assets are closely related to such activities or, in relation to land, where the asset is in a sensitive location. This can mean that even greenfield assets (for example start-ups in the pharma sector where there is no entity, only IP) would give rise to a Target Risk if the IP was within a Specified Sector. Other transactions in the wider economy are deemed unlikely to pose risks to national security and the Government therefore only expects to call in such transactions “on an exceptional basis”.
- In relation to Trigger Event Risk, the focus of the assessment will be on the potential for the underlying acquisition of control to undermine national security by, for example, increasing the practical ability of a hostile actor to corrupt processes or systems, to have unauthorised access to sensitive information, or to exploit an investment to influence the UK. Although loans, conditional acquisitions, futures and options are not exempt from scrutiny, the overwhelming majority of these are expected to pose no national security concerns, even within the Specified Sectors. In the (rare) event that concerns do arise, the Government would only expect to intervene where an actual acquisition of control will take place (e.g. a lender seizing collateral).
- In relation to Acquirer Risk, the Government will have regard to who has ultimate control of the acquiring entity, the track record of those people in relation to other acquisitions or holdings, whether the acquirer is in control of other entities within a sector or owns significant holdings within one of the Specified Sectors (on the basis that this increases their potential leverage), and any relevant criminal offences or known affiliations of any parties directly involved in the transaction. As noted above in section 3, statements from the UK Government on the NSI regime emphasise that the key question for the regime is the acquiring entity’s affiliations to hostile parties, rather than the existence of a relationship with foreign states in principle or their nationality.
8. Information gathering
The Government will actively monitor markets for transactions which may potentially give rise to national security concerns.
In addition, the NSI Bill grants the Government extensive information gathering powers, enabling it to request any information, at any time, from any person, if it is considered necessary to inform an assessment of the national security risks of a transaction and the request is proportionate in terms of enabling the Secretary of State to carry out his/her functions under the regime. This may include requesting information in circumstances where no notification has been submitted so as to enable him/her to determine whether to exercise the call in power.
Information may be requested by way of a formal notice, which will specify a deadline for responding (not subject to any statutory limit). The Secretary of State may also require the attendance of witnesses to give evidence at a time and place specified in an attendance notice.
However, information and attendance notices may only be given to persons outside the UK in limited circumstances. The person in question must be a UK national, an individual ordinarily resident in the UK, a body incorporated or constituted under the law of any part of the UK, or carrying on business in the UK.
Knowingly providing materially false or misleading information in response to an information request or attendance notice (or being reckless as to whether the information is false or misleading in a material respect) is an offence punishable by fines of up to £30,000 and/or 2 years’ imprisonment.
If the Secretary of State’s decision as to whether to allow a transaction to proceed is materially affected by the provision of false or misleading information, the Secretary of State may reconsider the decision and reach a different conclusion. This could include exercising the power to call in a transaction for review, even if the usual time limit for doing so has expired.
The Secretary of State may disclose information obtained in the course of the review of a transaction under the NSI regime to other public authorities (and vice-versa), both UK and overseas, for certain specified purposes. The NSI Bill also amends the overseas disclosure gateway in section 243 of the EA02 to remove the restriction on UK public authorities (including the CMA) from disclosing information they obtain in connection with a merger investigation under that gateway. The Government has indicated in its public statements that this is intended to strengthen the CMA’s ability to protect UK markets and consumers as it takes a more active role internationally post-Brexit.
9. Use of interim orders preventing integration pending clearance
The Secretary of State will be empowered to impose interim remedies while a Trigger Event is being assessed to ensure that the effectiveness of the national security assessment or subsequent remedies are not prejudiced by action taken by the parties. This may include prohibiting integration of the businesses pending NSI clearance, and may extend to cover a person’s conduct outside the UK if they are a UK national, an individual ordinarily resident in the UK, a body incorporated or constituted under the law of any part of the UK, or carrying on business in the UK. Such interim orders will not necessarily be made public.
It appears likely that these will operate in a similar manner to the “initial enforcement orders” (IEOs) regularly imposed by the CMA when investigating the potential impact of a merger on competition. It is worth noting in this context that the CMA now routinely imposes IEOs in completed mergers, and is increasingly also doing so in anticipated mergers, as well as stepping up its enforcement action in relation to breaches of IEOs (see our recent blog post for further background). It remains to be seen whether the Secretary of State will take a similar interventionist approach in the context of the NSI regime.
10. The timetable for review
In public statements, the Government has emphasised its intention to screen investments “much more quickly than the current regime, assessing transactions within 30 working days – and often faster”.
However, it is important to be aware that whilst the NSI Bill provides that the Government must reach an initial decision within 30 working days as to whether to clear a transaction, if it decides that further detailed scrutiny is required it then has a further 30 working days to carry out a detailed assessment, which may be extended by up to an additional 45 working days. This means that the total time for review is potentially 105 working days. A further voluntary extension may also be agreed between the acquirer and the Secretary of State if required to make a decision on whether to make a final order or what it should contain.
Where an information notice or attendance notice is issued requesting information to be provided, this will “stop the clock”, and the review timetable will not start running again until the Secretary of State confirms that either the requirements of the notice have been complied with or that the deadline for compliance has passed.
Furthermore, the review timeline only starts to run in the first place once the Secretary of State has formally accepted a notification (or exercised his/her power to call in the transaction). The Secretary of State may initially reject a notification on a number of grounds, including where it does not include all necessary information. This could potentially result in one or more rounds of submission and rejection, before the formal review timeline starts to run. However, it is understood that the Government will be encouraging proactive pre-notification contacts (potentially akin to pre-notification discussions with the CMA in the context of the EA02 merger control regime) which may enable parties to obtain confirmation that a notification is, in fact, required and will be deemed “complete” prior to submission.
The NSI regime review timeline should therefore be factored into deal timetable planning, alongside other applicable regulatory approval processes such as merger control (potentially across multiple jurisdictions).
Where national security concerns are identified, the Government may require remedies in order to allow a deal to proceed. Examples given by the Government include altering the amount of shares an investor is allowed to acquire, restricting access to commercial information, or controlling access to certain operational sites or works.
The approach taken by the Government when accepting undertakings to address national security concerns in the context of the existing public interest merger regime may offer some guidance as to the sort of remedies which may need to be negotiated. For example, in both Connect BidCo/Inmarsat and Advent/Cobham it proved possible to address concerns by agreeing undertakings relating to the maintenance of strategic capabilities and protection of sensitive information.
However, businesses should not assume that this will always be possible, and the Government has made clear that it will have the power to block (and potentially unwind) transactions as a last resort. Whilst it is true that no transactions have been prohibited on national security grounds under the existing public interest merger regime, this should not be seen as providing any precedent for the new NSI regime, which is being introduced against a backdrop of increased global protectionism and a growing number of high-profile examples of deals being blocked under FDI regimes in other jurisdictions (e.g. Beijing Kulun/Grindr in the US, Yantai Taihai/Leifeld in Germany or Cheung Kong Infrastructure/APA Group in Australia).
It is however notable that the Government has stated that it is expecting only around 10 deals per year to require remedies (this is significantly lower than the estimate of 50 deals per year made in the context of the voluntary framework originally proposed in the White Paper; it is unclear on what basis this revised estimate under a stricter regime has been reached).
In terms of process, the positioning under the new NSI regime appears somewhat different to the merger remedies process before the CMA: the parties will be involved but the Government says that it will make a deliberate and formal decision on the remedies it believes are required.
With regard to extra-territorial application of remedies orders, the NSI Bill provides that a final order may only apply to a person’s conduct outside the UK if they are a UK national, an individual ordinarily resident in the UK, a body incorporated or constituted under the law of any part of the UK, or carrying on business in the UK.
12. Sanctions for non-compliance
Sanctions for non-compliance with the new regime will be severe:
- fines of up to 5% of worldwide turnover or £10 million (whichever is the greater) and/or imprisonment of up to 5 years;
- director disqualification (up to 15 years); and
- transactions completed in breach of the standstill obligation (which applies to transactions which fall within the scope of the mandatory notification obligation) will be void and of no legal effect (although note that it is unclear how this will apply to non-UK legally constituted assets or transactions, given the limitations placed on extra-territorial application of final remedies orders).
13. Application to deals completed between 12 November 2020 and commencement date
The new regime will be “pro-active” with immediate effect from 12 November 2020: whilst it will not be possible to notify deals for clearance under the new regime prior to formal commencement, the Government will be able to call in from the commencement date any deal completed on or after 12 November 2020 which falls within the scope of the new regime. In practice, we expect that the Government’s exercise of this power will be focussed on transactions in the Specified Sectors, but the call in power also extends to the wider economy.
This is intended to avoid a “rush” of potentially problematic deals being completed in the period between introduction of the NSI Bill and formal commencement of the NSI regime. This approach is highly unusual and places investors in a potentially difficult position in relation to deals currently being negotiated as well as deals that have already signed and are due to complete in the coming months. For transactions that have not yet signed, parties will need to consider whether a condition to cover the NSI regime should be included in the transaction documents and possibly factor the NSI review process into the deal timeline and long stop date. For deals that have already been signed but not yet completed, parties will need to consider obtaining informal guidance if there is any risk of a potential national security issue.
As noted, the NARs have not yet been published (and are unlikely to be published until January 2021 at the earliest, given that the Consultation will run until 6 January 2021). This means that the exact scope of the mandatory notification obligation is currently unclear. It also makes it more difficult to assess the risk of the Government exercising its call in power, as part of the assessment of whether to voluntarily notify a transaction.
The Government is encouraging investors to seek informal guidance in relation to transactions which are due to complete prior to the commencement date where questions arise as to the potential application of the new regime (see further below in section 14). This is likely to be particularly important in circumstances where parties believe there is a risk that a transaction which is due to complete prior to the commencement date may fall within the scope of the mandatory notification obligation. In such cases, it would be advisable to make contact with and seek confirmation from BEIS as to how to proceed. Once the notification form has been published by BEIS (expected shortly) it would be advisable to consider pre-submitting a notification form so that a transaction can be reviewed and cleared at/shortly following the NSI Bill becoming law in Spring 2021.
Proceeding with completion of such a transaction before the commencement date without having contacted BEIS and, potentially, pre-notifying risks the transaction being called in at the commencement date, at which point an interim order could be imposed to prevent further integration, and ultimately remedies could be imposed, potentially in a worst case scenario including full unwinding of the transaction. It does however appear that the transaction would not be deemed void due to non-notification in such circumstances, as the notification obligation does not apply until the commencement date.
Where BEIS has been informed about a transaction prior to the commencement date through the informal guidance route, the Government has confirmed that its call in power will be limited to 6 months from the commencement date.
Given the numerous potential complexities of the new NSI regime and ongoing uncertainty regarding the precise scope, we would also advise any investors who are concerned that a deal may be caught by the new regime to seek detailed legal advice. Whilst the Government has published a series of helpful “Factsheets” for businesses summarising key aspects of the new regime, it is important to note that these inevitably simplify the position in some respects, and do not fully capture all the complexities which may be relevant to the assessment of a particular transaction.
14. Obtaining informal guidance
Informal advice to assist investors in determining whether or not a transaction falls within the scope of the new NSI regime is now available from BEIS and will continue to be available following formal commencement of the NSI regime, with the Government promising a prompt response.
15. Interaction between the NSI regime and the UK merger control regime
Following formal commencement of the NSI regime, the existing public interest merger regime provisions of the EA02 will fall away insofar as a transaction involves national security considerations (however it should be noted that up until formal commencement the Secretary of State will continue to have and make use of his/her powers under the EA02 if necessary). That regime will however remain in place for transactions giving rise to other specified public interest considerations i.e. media plurality, stability of the UK financial system and combatting and mitigating the effects of a public health emergency.
However, there is nonetheless likely to be material interaction between decisions taken by the CMA under its EA02 powers to review mergers on competition grounds and decisions taken by the Secretary of State pursuant to the NSI regime, given that a particular transaction may well engage both regimes.
This is expressly recognised in the NSI Bill, which makes clear that where a transaction is being reviewed under the NSI regime and under UK competition law by the CMA and the Secretary of State has given a final order under the NSI Bill, he/she has the power to give directions to the CMA to ensure that the CMA and NSI regime remedies are complementary and that CMA’s decision does not undermine or cut across remedies agreed for resolving national security concerns. This appears to be similar to the current approach under the public interest merger regime, where public interest considerations may “trump” competition considerations in the event of conflict between the two.
However, the NSI Bill and the accompanying materials published by the Government are currently silent on how the earlier stages of the process will interact, particularly in light of the often lengthy pre-notification discussions that are required for CMA filings, and the lack of clarity as to the scope of pre-notification discussions under the NSI regime. It is, however, helpful that the NSI Bill incorporates similar wording to the EA02 with regard to the point in the transaction process at which a transaction may be voluntarily notified or called-in (i.e. “in progress or contemplation”). Moreover, the Government has stated that the CMA and the Investment Security Unit responsible for the NSI regime will prepare a more detailed Memorandum of Understanding to resolve any conflicts between the competition and NSI regimes. In the interim, however, it would seem sensible that if both NSI regime notifications and CMA filings may be required, both regulators are approached at the same time to ensure that timelines for the review and clearance process do not come into conflict.
16. Next steps
The NSI Bill will now begin its passage through Parliament. The introduction of the NSI Bill to Parliament on 11 November 2020 marked the “first reading”, but this is merely a formality with no debate on the content.
The second reading will present the first opportunity for MPs to debate the general principles of the NSI Bill and will take place on 17 November 2020. This will be followed by the committee stage, where the detail of the NSI Bill will be debated on a clause by clause basis. At this point in the process, organisations and individuals will be able to submit written submissions proposing amendments to the NSI Bill, or supporting or opposing any amendments proposed to the NSI Bill by others.
As noted above, alongside the passage of the NSI Bill through Parliament, the Government has launched a Consultation seeking comments on the draft definitions of the Specified Sectors where mandatory notification will be required. Responses to that consultation must be submitted by 6 January 2021.