The UK Government produced its much anticipated National Security and Investment Bill ('the Bill') in November. When enacted, the Bill will give the Government unprecedented new powers to investigate and block corporate deals that it suspects might threaten the security of the UK. Deal-makers will therefore now need to consider a new, and possibly much more onerous, layer of scrutiny in addition to the usual UK merger control rules. This is a two-part piece on the Bill. Part 1 looks briefly at the background to the Bill and the mandatory notification procedure it will introduce. Part 2 discusses the Government's powers to 'call-in' other deals for review, how it will assess national security risks (under either regime), and the potential implications of the Bill for investors.
The Bill follows a government white paper, a Select Committee inquiry and various interim measures stemming from concern over foreign investment in UK assets, including Chinese investment in the Hinkley Point nuclear power plant and Huawei's involvement in the UK 5G network. There have also been allegations of 'aggressive acquisitions' during the COVID-19 pandemic. There was therefore little surprise when the most recent Queen's Speech announced a new framework to scrutinise investment in the UK (though the Bill does not expressly draw a distinction between UK and foreign investors, and in principle, the nationality of the investor company need not be definitive on the question of national security risks). At present, the UK Government can intervene in a transaction on national security grounds where a deal meets the thresholds for UK merger control. The bar for that has recently been lowered for targets with potential national security implications, in order to facilitate more government intervention (see our recent post on UK merger control for more details). These powers will continue to apply pending the enactment of the Bill, which will greatly expand the State's role.
First, and as mentioned above, the Bill will introduce a pre-closing, mandatory notification obligation for a certain category of deals. Second, it will empower the Government to 'call-in' acquisitions it considers may give rise to a national security risk, up to five years after the deal has completed. This power (which we cover in Part 2 of this series) will apply retrospectively to any deal completed after 12 November 2020, the date the Bill was introduced to Parliament.
The obligation to notify a deal will arise where an investor acquires a right or interest in a "qualifying entity" (which can be any form of legal entity, such as a company, partnership or trust) that participates in particular (yet to be specified) activities within a key sector. The 17 sectors identified by the Government as raising potential concerns include not only the most obvious candidates but also broad categories that may not immediately be thought of as having national security implications. The potentially affected sectors are:
- Advanced Materials
- Advanced Robotics
- Artificial Intelligence
- Civil Nuclear
- Computing Hardware
- Critical Suppliers to Government
- Critical Suppliers to the Emergency Services
- Cryptographic Authentication
- Data Infrastructure
- Engineering Biology
- Military and Dual-Use Technologies
- Quantum Technologies
- Satellite and Space Technologies
There is no minimum level of turnover the target must have before the notification obligation will apply, and it is wide enough to catch deals involving non-UK entities that are active in the UK.
The Bill gives the Government-wide powers to make regulations that will significantly affect the shape and scope of the regime, including by amending the sectors of the economy and types of transaction and activity that will engage the notification obligation, exempting deals based on the characteristics of the acquirer and specifying circumstances in which a notifiable acquisition does or does not take place. The Government has launched a public consultation, which includes questions on the types of entities/activities the regime will capture within each of the key sectors.
Level of control
A "notifiable acquisition" will arise where the transaction results in the acquiring person either acquiring a right or interest equivalent to at least 15%* of the shares or voting rights in the target, or gaining control over the target. Gaining control of an entity means acquiring:
- More than 25% of the shares or voting rights, with a new notifiable acquisition if an existing shareholder passes thresholds of 50% and 75%; or
- Voting rights that enable the acquirer to ensure or prevent the passage of any class of resolution.
The Bill provides that a notifiable acquisition that completes without approval will be void. It is not clear what that will mean in practice: most obviously it would mean that the terms of a deal may be legally unenforceable. If the parties are content to implement the deal regardless, the Government will have the same powers to unwind a non-notified deal as it has under the voluntary regime (see below).
There will also be very significant corporate and personal consequences of failing to clear a notifiable acquisition. A person who completes such a deal (including any director, manager etc. of a body corporate) risks a criminal conviction with up to 5 years imprisonment and/or an unlimited fine. Alternatively, the Government can impose civil penalties of up to 5% of turnover or (if higher) £10 million.
Unlike the voluntary regime, which we discuss in Part 2, the mandatory notification obligation does not have an immediate impact on deals. However, investors should follow the Bill with keen interest, in anticipation of being faced with a significant new regulatory hurdle in 2021.
*The 15% threshold was later removed in the House of Lords. Under the National Security and Investment Act 2021 the notification obligation will arise where there is an acquisition of at least 25% of the shares or voting rights in the relevant entity.