The UK’s much publicised National Security and Investment Bill has now been granted Royal Assent – passing into law an Act which will significantly affect the way investments in the UK can be reviewed by the Government where they raise national security considerations. The Act introduces a mandatory notification regime for certain key sectors (with significant sanctions for failure to do so) and the possibility of voluntary notification or risk of being called in by the Government for review for other transactions. The new regime is expected to go live towards the end of the year but has retroactive application in certain respects to transactions being undertaken in the interim.
On 29 April 2021, the National Security and Investment Bill was granted Royal Assent (see the announcement here) – meaning that it is now formally law (though not yet in force). As set out in more detail in our piece announcing the Bill’s introduction before Parliament last November (see Strengthening the defences: the new UK national security investment screening regime), this new investment control regime will significantly increase the Government's ability to scrutinise investments in the UK on national security grounds. In particular, the new National Security and Investment Act (the Act) creates a stand-alone regime covering all national security considerations arising as a result of acquisitions and other investments in UK businesses or assets. It will sit alongside (but separate from) the UK’s current merger control (competition) regime which is governed by the Enterprise Act 2002 (EA02).
Although not limited to foreign investments, it is expected that the new regime’s focus will largely be on overseas players looking to invest in the UK, in particular from jurisdictions perceived as posing higher risks to UK security interests. Below we provide a recap of the new regime and its implications, and cover what is expected in the interim.
Hybrid regime…with teeth
The two primary features of this new regime are:
There will be a mandatory notification requirement for prior approval of transactions in certain sensitive industry sectors (17 in total), reinforced by serious criminal and civil sanctions for non-compliance (including fines of up to £10m or 5% of an offending company’s annual revenues, whichever is higher, and/or prison sentences of up to five years).
Where a transaction is subject to the mandatory notification requirements but is not duly notified, it will be void ab initio unless it is subsequently validated by the Secretary of State (the SoS). Non-notified transactions will be exposed indefinitely to review by the SoS, unless the SoS becomes aware of the transaction in which case he/she will be subject to a six-month deadline to intervene.
Outside of the 17 mandatory notification sectors, the SoS will still be able to call in anticipated or completed deals where he/she reasonably suspects that the transaction has or could result in a risk to national security. The call-in power applies for up to five years post-closing (shortened to six months where the SoS becomes aware of the transaction).
As a corollary, a voluntary notification process will be available for transactions which, although outside the 17 sensitive sectors, may give rise to national security issues such that the parties wish to seek advance comfort in order to avoid a subsequent call-in by the SoS. The SoS will otherwise be able to call in the transaction in the following five years (again shortened to six months where he/she becomes aware of it).
Broad scope and retroactivity
Notably, the NS&I regime is very broad in scope. It will apply to a wide range of transaction types, with a low threshold for the ‘trigger events’ which engage the regime.
Application of the rules is also not subject to any materiality thresholds. Thus, unlike under the EA02 or other merger control regimes, there are no thresholds (e.g. relating to the size of the deal or the scale of the parties’ activities) that need to be met for jurisdiction to be established. As such, even small transactions may be caught by the Act.
The intentional exclusion of a specific definition of “national security” in the legislation will allow the scope for the Government to interpret the concept widely when applying the new regime.
Finally, the legislation has retrospective application in relation to ‘trigger event’ transactions which take place in the period between the introduction of the NS&I Bill on 12 November 2020 and the new regime coming into force later this year. Any such transactions will be open to review through a call-in by the SoS at any point in the five years running from the Act’s commencement date (shortened to six months where he/she becomes aware of it).
This means that, although the mandatory notification system will not apply to deals done in this prior period if they complete before the regime goes live, such transactions will be exposed to the possibility of a call-in once the new legislation is operative if they raise possible national security risks.
Some tweaks along the way
Since the NS&I Bill’s introduction in November 2020, the main changes made have been:
a refinement and tightening of the definitions/terminology regarding the 17 sectors which are to be subject to the mandatory regime; and
raising the acquired shares/voting rights ‘control’ threshold above which a transaction in one of the 17 sensitive sectors would be subject to the mandatory notification requirement from the original proposal of 15% to 25%, following strong feedback to the Government that 15% was disproportionately low. However, it is worth noting that investments in the these 17 sectors which do not exceed the 25% threshold but give the investor ‘material influence’ over the target entity remain potentially subject to the call-in regime, with the possibility of voluntary notification.
The Government has run a consultation exercise about the scope and definition of the sensitive sectors which will be subject to the mandatory notification requirements. Although that process did not lead to any sectors being removed from the list, the Government has updated the definition of these sectors with the aim of giving greater precision and specificity. It hopes that this will make the regime “as targeted and proportionate as possible” and, in turn, give businesses and investors more certainty as to whether their planned transactions will be caught by the mandatory notification requirement (thus reducing the prospects of unnecessary precautionary notifications being made).
The months ahead
The Government has indicated that it is aiming to bring the new regime into operation before the end of the year (probably not before the last quarter) and intends to work closely with stakeholders in the prior interim period, including through a cross-sector expert panel. The detail needed to support the Act is therefore likely to be settled and published during this period, including guidance on the Government's policy approach in applying the regime and operational matters for the notification system, as well as secondary legislation.
It is also important to consider that the policy drivers behind the Act will continue to steer ministerial decision-making and, ultimately, the practical implementation of the legislation. The guidance, and the decisions taken in the early months, will shape the regime for years to come.
Transaction parties are therefore well advised to pay close attention to these developments. The implications of the Act should be carefully considered for a wide range of current and potential transactions – and indeed long term investment strategies – whether M&A, finance or contracting/procurement.
In the meantime, parties continue to have the option of seeking informal advice from the Government and/or making the SoS aware of transactions which complete in the interim period prior to the commencement date of the new regime, in order to reduce the SoS's window for intervention via a call-in from five years to six months.