On 4 January 2022 the UK National Security and Investment (NSI) Act enters into force, introducing a new foreign direct investment (FDI) regime with standalone powers for the review of FDI in the UK. The new regime replaces the existing public interest merger regime provisions of the Enterprise Act 2002 insofar as a transaction involves national security considerations. On 15 November 2021 the Government published further guidance for businesses on how to prepare for the new rules (General Guidance) and detailed guidance on the mandatory notification applying across 17 sensitive areas of the economy (Notifiable Acquisitions Guidance).
The new regime represents an important new execution risk factor, with a similar risk profile to merger control rules. Broadly speaking, the new regime will apply to any acquisition of “material influence” in a company (which may be deemed to exist in relation to a low shareholding, potentially even below 15%), as well as the acquisition of control over assets (including land and intellectual property), which potentially gives rise to national security concerns in the UK. It is worth noting that qualifying acquisitions that are part of a corporate restructure or reorganisation may also be covered. The regime will apply equally to both UK and non-UK investors (although the Government has acknowledged that UK investors will be less likely to give rise to national security concerns in practice), and may capture acquisitions of non-UK entities or assets in certain circumstances (see Guidance on how the NSI Act could affect people or acquisitions outside the UK).
A mandatory notification obligation (and a corresponding prohibition on completion prior to clearance) will apply to certain transactions involving target entities which carry out specified activities in the UK in 17 sectors (including energy, transport, communications, defence, artificial intelligence and other tech-related sectors). The 17 sectors are defined in the Notifiable Acquisitions Regulations and additional guidance, with examples, is set out in the Notifiable Acquisitions Guidance. Such transactions include the acquisition of a shareholding/voting rights of more than 25%.
This mandatory notification obligation will be combined with an extensive call-in power enabling the Government to call-in qualifying transactions for review, which extends to any sector and is not subject to any materiality thresholds in terms of target turnover or transaction value. Acquirers will also have a corresponding option to voluntarily notify a qualifying transaction to obtain clearance, which may be advisable in the interests of legal certainty where potential national security concerns arise.
The substantive provisions of the Act will enter into force on 4 January 2022. However, the Government will have retroactive powers to call in for review as of that date (or potentially up to five years thereafter) any qualifying transaction completed between 12 November 2020 and the commencement date. This means that it is critical for investors to consider the potential application of the new regime for all transactions completed from 12 November 2020 onwards which could potentially raise national security concerns.
Key practical takeaways for investors
Detailed analysis of the key elements of the new regime
We have set out below our analysis of the key elements of the new regime. To go directly to specific sections, please use the following links:
Until now, the UK has not had a separate FDI screening regime; instead, under the EA02, transactions meeting the relevant jurisdictional thresholds have been 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. Many of the proposals in the White Paper have been carried forward into the NSI Act. However, as discussed below, the NSI regime also departs from those original proposals in a number of significant ways, most notably by introducing a mandatory notification obligation for certain transactions.
Which investments may be called in for review?
Once the NSI Act enters into force on 4 January 2022, the Secretary of State will be able to issue a “call-in notice” where arrangements are in progress or in contemplation which would, if carried into effect, result in a “Trigger Event” taking place, and he/she reasonably suspects that the event may give rise to a risk to UK national security.
For this purpose, “Trigger Events” are defined as:
It is also worth noting that qualifying acquisitions that are part of a corporate structure or reorganisation may also be covered by the new rules, even if the acquisition takes place within the same corporate group. Therefore, even for corporate restructures, it may be mandatory to notify.
Determining exactly when such arrangements can be said to be sufficiently “in progress or contemplation” to permit the Secretary of State to issue a call-in notice will turn on the particular facts of the transaction in question. The General Guidance clarifies that the signing of heads of terms in the context of acquisition negotiations is likely to be interpreted as a qualifying acquisition that is in contemplation and even though the acquisition has not yet happened it may be called in. Also, 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 is likely that the relevant point in time may occur much earlier than parties might typically expect. For example, the CMA’s decision last year in Gardner/Impcross suggests that having inter-party talks and providing an information memorandum, combined with evidence of the parties’ mutual contemplation of the transaction and the acquirer’s ability to bring it about, is sufficient to establish that arrangements are “in contemplation” for the purposes of enabling the transaction to be reviewed under the merger control regime. Investors should therefore be aware that the risk of call-in under the NSI regime could, in principle, arise very early in the M&A process, including 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).
It is also important to be aware that, in contrast to many other FDI regimes, the scope of the Government’s call-in power will also extend to qualifying transactions (i.e. Trigger Events which potentially give rise to national security concerns) involving non-UK companies or assets: it is sufficient if the target entity supplies goods or services to persons in the UK, or the target assets are used in connection with activities carried on in the UK or the supply of goods or services to persons in the UK. The Government has published separate Guidance on how the NSI Act could affect people or acquisitions outside the UK.
This means that the call-in power could be exercised in relation to, for example, the acquisition of a French company by a Japanese company, where the French company supplies goods or services to UK customers, if the Secretary of State reasonably suspects that the acquisition may give rise to a risk to UK national security. In practice, this will be more likely if the supply of goods/services is in one of the 17 specified sectors, but this is not a pre-requisite.
The Secretary of State may exercise the call-in power at any time up to 6 months after he/she becomes aware of the transaction, provided this is also within 5 years of the “trigger event” occurring. If the acquisition fell within the scope of the mandatory notification and was completed without first obtaining clearance (see below), the 5 year longstop does not apply.
How will the Government exercise its call-in powers in practice?
Guidance on the Government’s intended exercise of its call-in power is set out in its Statement for the purposes of Section 3, which was published on 2 November 2021. Broadly speaking, the decision as to whether to call-in a non-notified transaction for review will focus on three key considerations:
The Section 3 Statement considers each of these risks in turn, and includes some helpful clarifications. For example, it states that acquisitions in areas of the economy which are closely linked to the 17 sectors specified as requiring mandatory notification (but which are not subject to mandatory notification) could be more likely to be called in than those in other areas of the economy. Qualifying acquisitions which occur outside these areas of the economy are unlikely to be called in as national security risks are expected to occur less frequently in these areas.
Acquisitions of control over qualifying assets are also in scope of the call-in power and the Secretary of State will consider what the asset could be used for and whether that use could give rise to a risk to national security. The call-in power is more likely to be used for assets that are or could be used in connection with the 17 mandatory notification sectors. Land is mainly expected to be an asset of national security interest where it is, or is proximate to, a sensitive site, but the Secretary of State may also take into account the intended use of the land. The Statement makes it clear that, overall, the Secretary of State expects only rarely to call in acquisitions of assets that do not fall into these categories.
The Statement also clarifies that loans, conditional acquisitions, futures and options are unlikely to pose a risk to national security and are therefore unlikely to be called in.
Despite providing some helpful clarifications the Statement is very high level and makes it clear that it provides as much detail as is possible "given the sensitivity of national security". In practice it seems therefore likely that investors will also need to consider seeking informal guidance from the ISU for specific transactions (see below).
Which transactions will be subject to mandatory notification obligations?
Alongside the Government’s extremely wide call-in powers, the NSI regime introduces a mandatory notification obligation for certain transactions, which applies even if it is clear that – in the context of the particular transaction - no national security concerns will arise in practice. Following acceptance of a mandatory notification, the Secretary of State must then decide whether to issue a call-in notice (and initiate an in-depth review) within 30 working days (see further below).
The mandatory notification obligation does not apply to all Trigger Events. It only applies to “notifiable acquisitions”, which are expressly defined as transactions involving a target entity which carries on activities in the UK of a specified description in one of 17 specified sectors, which result in:
For such transactions, there is also a corresponding “standstill obligation”, which prohibits completion prior to clearance. Breach of the standstill obligation will result in the transaction being deemed automatically void and of no legal effect (subject to successfully obtaining retrospective validation from the Secretary of State).
It is important to note that whilst the acquisition of material influence constitutes a Trigger Event for the purposes of the Government’s call-in powers (and the corresponding possibility of voluntarily notifying a qualifying transaction), it does not (in itself) amount to a notifiable acquisition requiring mandatory notification, even if the target entity carries on activities in the UK of a specified description in one of the 17 specified sectors.
Similarly, the mandatory notification obligation does not apply to any acquisition of control over assets, in any sector (subject to any future amendments made to the scope of the mandatory regime pursuant to Notifiable Acquisition Regulations, which is a possibility expressly envisaged in the NSI Act).
The precise definitions of the specified activities in the 17 specified sectors are not included in the NSI Act. They are set out separately in the Notifiable Acquisition Regulations and the Government has also published separate Notifiable Acquisitions Guidance with additional guidance and examples. The final sector definitions adopted in the Notifiable Acquisition Regulations will also be kept under review going forward, and may be updated in the future as needed, for example as the relevant technology evolves.
The definitions are very detailed and we have set out in the table below a high level summary for each of the sectors.