The UK government is giving itself new powers to scrutinize and block transactions and asset acquisitions that raise national security concerns. Transactions in over 17 sensitive sectors – including Artificial intelligence, Cryptographic Authentication, computing hardware – will be subject to mandatory notification. Even in sectors where there is no mandatory notification, the Government will have power to ‘call in’ a transaction. The proposed reforms follow concerns about foreign control of UK businesses in sensitive sectors. The UK has traditionally taken a very liberal approach to foreign investors and has until now had no standalone system to review foreign investment, unlike the US, Germany and France. The proposed legislation due to come into force later this year will fill this gap. The retrospective claw-back provision in the legislation means that any transaction that closed on or after 12 November 2020 could be subject to scrutiny.
What is the National Security and Investment Bill 2020?
On 11 November 2020, the Government published the National Security and Investment Bill (the Bill). The proposed law is a long-awaited reform to expand the UK government’s ability to review transactions for national security concerns. The law is going through the parliamentary adoption process and is expected to come into force later this year. In parallel, the UK Department for Business, Energy and Industrial Strategy (BEIS) is consulting on mandatory notification in specific sectors under the Bill.
What will this new legislation do?
The Government will have the power to vet and block transactions across any industry deemed to be of national importance. The Bill proposes a system of mandatory notification of transactions in 17 specific sectors. It also proposes voluntary notification of transactions outside these sectors.
What transactions fall into scope?
The Bill defines a set of ‘trigger events’ that enables the Government to examine a range of transactions. Trigger events include acquisitions of shareholding, even minority shareholding – for example – where a person’s shareholding or voting right increases above 15%. Trigger events also cover transactions involving acquisition of a range of asset types, including land, moveable property and intellectual property. There is no turnover or market share thresholds and no safe harbours. Trigger events could lead to mandatory or voluntary notification requirements depending on the sector. The regime will apply to investors from any country.
What are the sectors requiring mandatory notification?
There are 17 sectors which are considered most likely to give rise to national security risks. The BEIS has consulted on the definitions of each of these and has published a clarification on 2 March. These sectors are:
Advanced Materials
Advanced Robotics
Artificial Intelligence
Civil Nuclear
Communications
Computing Hardware
Critical Suppliers to Government
Critical Suppliers to the Emergency Services
Cryptographic Authentication
Data Infrastructure
Defence
Energy
Military and Dual-Use
Quantum Technologies
Satellite and Space Technologies
Synthetic Biology (formerly known as Engineering Biology. This sector has been renamed in response to the consultation responses)
Transport.
On 2 March BEIS published the result of its consultations on the definitions of each of these sectors and has tightened up definitions for Artificial Intelligence and Synthetic Biology but has not substantially changed any category.
In other sectors, the parties can make a voluntary notification to the Government if they believe that the Government will have national security concerns about the transaction.
What happens when a transaction is notified?
The Government has 30 working days to review the proposed transaction and decide whether to call in the transaction for investigation. The parties are not allowed complete the transaction until clearance is given by the Government.
In the case of transactions subject to mandatory notification, if the parties complete without Government approval, then the transaction is void; and if the parties fall to submit a notification, then they risk financial penalties of up to 5% of worldwide turnover or £10million (whichever is higher) and the directors could be subject to criminal proceedings.
Failure to notify and Government power to call in transactions?
The Government has power to investigate transactions in any sector of the economy and to ‘call in’ for review for national security risks.
The Government has 6 months after becoming aware of a transaction (a ‘trigger event’). This means it can retrospectively call in an un-notified transaction for up to 5 years after a trigger event for transactions subject to voluntary notification. There is no time limit on the Government calling in a transaction that are subject to mandatory notification requirements.
Retrospective effect: can transactions from 12 November 2020 be ‘called in’ for review?
Yes. The Government will be able to retrospectively call-in transactions that closed on or after 12 November 2020. This is intended to prevent parties attempting to close transactions in sensitive sectors before the legislation comes into force. However, this means that deals happening now are potentially affected by this legislation and parties should be made aware that the transaction could be subject to be called-in after the Bill comes into force later this year.
How will the national security assessment happen?
This will be done by the Government department BEIS. This review will be entirely separate from any competition law assessment by the Competition and Markets Authority (the CMA, the UK antitrust body responsible for merger control). This is an entirely new regime and will be run by a new unit ‘Investment Security Unit’ within BEIS. When a notification is made, the BEIS will have 30 days to issue a ‘call-in’ notice for in-depth review. The Government then has a further 30 working days to preliminary screening and this can be expended for a further 45 working days when the national security risk is considered to justify further investigation.
Implications and impact for businesses and investors
This legislation will impact a wide range of foreign investors and transactions. It increases uncertainty for investors and businesses and many investors may want to voluntarily notify transactions even if there is no obligation to do so and the national security risk is minimum to avoid being ‘called-in’ at a later date. One major concern is that how the Government will assess national security concerns. The guidance to date is very vague and there is no specific legislative test, for example, the draft legislation does not define ‘national security.’
Although the Government states that it will only use this legislation for reviewing national security risks, there will inevitably be concerns from foreign investors that this will allow more discretionary Government intervention in a wide range of transactions and could lead to some economic nationalist concerns. Finally, the potential need for notification by businesses will need to be factored into transaction timetables at an early stage in any negotiations or deal discussions.