Substantial change to the UK M&A landscape, with a wide range of transactions in scope, including current deals.
The UK's National Security and Investment Act 2021 has completed its passage through Parliament and was passed into law on 29 April 2021.
The Act creates a new stand-alone regime for the UK government to intervene in a broad range of transactions on national security grounds.
Although the Act is now on the statute books, the new regime will not come into effect immediately. The government intends to implement the Act towards the end of 2021, giving time for businesses to prepare and for some further details to be set out in secondary legislation.
This new law puts the UK on a par with other countries around the world which have similar rules - including the USA, Australia, Germany and France. It represents a substantial change from the current system which is linked to the UK's merger control laws where only about a dozen transactions have been reviewed on national security grounds in nearly 20 years.
Key features of the new law are:
- Affects current deals. The Act includes look back powers so any acquisition which takes place between 12 November 2020 (when the Act started the legislative process) and the date the Act is implemented potentially is in scope and could be called in for a national security assessment. In order to give some certainty, the government is open to informal representations about potentially in scope transactions in advance of the Act being implemented. Osborne Clarke has experience in assessing whether deals should be referred for informal assessment so please do speak to us if you are concerned about this.
- Mandatory notification for high risk sectors. When the regime comes into effect, transactions in 17 sectors will face mandatory notification. These transactions will not be able to complete until clearance has been given; any that do will be legally void (of no legal effect). We discussed the scope of the sectors within the mandatory regime in our Insight here, though these are subject to further consultation so may change again. Mandatory notification is required for in-scope deals where more than 25% of votes or shares are acquired (originally this threshold was set at 15% but it was raised to 25% as the Act went through legislative process). Voluntary notifications will be available for all other acquisitions.
- Wide range of acquisitions will be in scope.– The rules cover acquisitions of any type of entity (for example, companies, partnerships, trusts) and acquisitions of many types of assets (such as land, moveable property, intellectual property).
- Business secretary will be the ultimate decision maker. The Investment Security Unit within the Department for Business, Energy and Industrial Strategy will handle notifications and questions.
- Substantial sanctions will apply. By way of example, an acquirer who without reasonable excuse completes an acquisition subject to mandatory notification before clearance is given will commit an offence that attracts a fixed monetary penalty of the higher of 5% of total worldwide or £10 million. They may also be subject to criminal prosecution resulting in a fine or imprisonment for up to 5 years.
The government's own figures estimate that over 2,200 acquisitions a year will need to have some early dialogue with government and 1,800 acquisitions a year will need to be notified - though only 70-95 acquisitions will be called-in for a formal national security assessment and only around 10 will have any remedies imposed. The crucial question is therefore how the system will work for the vast majority of acquisitions which are of no concern to the government.
We now turn to how the new regime will work and the likely impact on deals.
Trigger events giving risk to national security risk
The core power under the new rules is for the Business Secretary to call-in acquisitions (that is, undertake a full national security review on them) and if necessary impose restrictions on the parties or even block the transaction.
The call-in power arises if any of the following trigger events occur or are in progress or contemplation where that event may give rise to national security risks:
- the acquisition of the votes and shares in a qualifying entity that go through thresholds of more than 25%, more than 50% or 75% or more;
- the acquisition of voting rights that enable or prevent the passage of any class of resolution governing the affairs of the qualifying entity;
- the acquisition of material influence over a qualifying entity’s policy (this is a familiar concept in existing UK competition law);
- the acquisition of a right or interest in, or in relation to, a qualifying asset providing the ability to use the asset (or use it to a greater extent than prior to the acquisition) or to direct or control how the asset is used (or direct or control how the asset is used to a greater extent than prior to the acquisition).
There is a broad definition of qualifying entity that includes companies and other body corporates, partnerships and trusts from any jurisdiction so long as it has a nexus to the UK by carrying on activities or supplying goods or services here.
There is also a broad definition of qualifying asset that includes land, moveable property and "ideas, information or techniques which have industrial, commercial or other economic value". So, for example, real estate transactions and transfers of intellectual property that give rise to national security concerns would potentially be caught.
How will the business secretary decide whether or not to call-in an acquisition?
The government has published a draft Statement of Policy Intent on how the business secretary expects to use the call-in powers. Broadly speaking, they will consider each of:
- the target risk – the nature of the target and whether it is in an area of the economy where the government considers risks more likely to arise.
- the trigger event risk – the type and level of control being acquired and how this could be used in practice.
- the acquirer risk – the extent to which the acquirer raises national security concerns. The rules are not targeted at any jurisdiction and there is no white list or black list of safe/hostile states or organisations.
The draft statement will shortly be subject to a formal public consultation and a final copy will be published when the Act is implemented.
Which sectors will be subject to mandatory notification?
The government has identified 17 sectors where it considers national security risk to be highest. The list of high risk sectors is subject to review and change.
Currently, the sectors where mandatory notification will apply are: 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 and the emergency services, military or dual-use technologies and satellite and space technologies.
Not all parts of these sectors will be in scope of the mandatory regime. The government consulted on the definitions of the sectors earlier in 2021 – which we looked at in more detail here. The government intends further targeted engagement with relevant sectors to continue to refine the definitions before laying the final regulations.
What is the threshold for mandatory notification?
In the specified sectors, a notification will have to be made if the acquirer is acquiring:
- more than 25% of the votes or shares, more than 50% of the votes or shares or 75% or more of the votes or shares, in a qualifying entity; or
- the acquisition of voting rights that enable or prevent the passage of any class of resolution governing the affairs of the qualifying entity.
Acquisitions of assets in the specified sectors will not be subject to mandatory notification, but acquirers will have to assess whether they should make a voluntary notification where a national security risk is likely to arise.
Who will have to make the notification?
The government believes that the acquirer will be best placed to make the notification and so the legal obligation to notify will rest on it.
What information will it have to provide?
The full suite of information required for notifications will be set out in secondary legislation. The requested information is likely to include details of the entity affected, the transaction and the ownership/control being acquired, the rights this would bring, the identity of the acquirer and their background and existing holdings.
A draft notification was published by the UK government for comment. The final form and content of both the mandatory and voluntary notifications will be published shortly.
When will it have to make the notification?
For mandatory notifications, the acquirer must notify prior to the acquisition taking place. The government recognises that this will cause difficulties in some scenarios – for example, auction processes where the identity of the acquirer may not be confirmed until quite late in the process. However, the government is open to dialogue with parties early in the auction process prior to notification.
There is no timescale for voluntary notifications however, once a transaction has been notified, the government's call-in powers will be limited to six months after the notification. Without notification, the government has up to five years after the date of the trigger event to call in the acquisition.
How will the clearance process work?
All notifications (mandatory or voluntary) will be subject to a screening process for a maximum of 30 working days after which time the transaction will be cleared or called-in. In the case of a mandatory notification, the transaction must not be completed until clearance is given.
If the transaction is called in, the government will have up to 30 working days to do a detailed national security assessment. It will be able to extend this by a further 45 working days if more time is needed.
The government will have powers to require that the target and acquirers provide any information relevant to the transaction.
During the assessment period, the parties will be able to continue to progress the transaction (unless the government orders otherwise).
At the end of the assessment period, the government will make a decision about whether it wishes to impose any remedies. The government will not be able to revisit its decision unless it can establish that false or misleading information was provided to it during the process. The government's decisions will be challengeable by way of judicial review.
What are the penalties for non-compliance?
Most importantly, a transaction within the mandatory regime cannot complete without approval. If it does, the transaction will be void (of no legal effect). It will be possible to apply for retrospective validation in this situation but this is a backstop measure rather than one that parties to transactions should rely upon. The form and content of an application for retrospective validation will be published shortly and be subject to further testing by the government.
Civil and criminal penalties also apply to offences under the Act such as completing a transaction within the mandatory regime without approval, failing to comply with an interim order or final order, and in relation to supplying information or the attendance of witnesses.
The government will shortly publish details of how to determine the turnover of a business for the purposes of calculating penalties and to define when a business is to be treated as controlled by another. This will be similar to the way in which these are calculated for the purposes of the UK's merger control regime.
Osborne Clarke comment
The National Security and Investment Act 2021 is a substantial change to the UK M&A landscape.
Businesses will need to adjust M&A processes to incorporate an assessment of whether a transaction is subject to mandatory notification or whether it otherwise is reasonably likely to give rise to a national security risk and so tactically, a voluntary pre-completion notification should be made. This is likely to lead to an increase in the number of split exchange and completion deals.
Until the Act is fully implemented, deals will need to be assessed and a judgement made whether to put them forward for informal notification.
Osborne Clarke has considerable experience of assessing deals on national security grounds. Please contact us if you have any questions about the practical impact of the Act.