New UK Government powers to block deals on national security grounds: the National Security and Investment Bill (Part 2 – the 'call-in' regime and voluntary notification)

In Part 1 of this series, we examined the new National Security and Investment Bill ('the Bill') and the forthcoming obligation to notify the Government about deals in certain key sectors. In this Part 2 we consider the new Government powers to 'call-in' for investigation deals it suspects of posing a national security risk.

The 'call-in' regime and voluntary notification

The Bill does not just create risk for deals that qualify as "notifiable acquisitions", it also empowers the Government to 'call-in' other deals for review if it has national security concerns.

Scope

This power will exist where a "trigger event" takes place in relation to a "qualifying entity" (see Part 1) or a "qualifying asset", and the Government thinks the deal could create a national security risk.

The term "qualifying asset" covers a very broad range of assets, catching land and corporeal moveable property, and “ideas, information or techniques which have industrial, commercial or other economic value” (the Bill gives the examples of trade secrets; databases; source code; algorithms; formulae; designs; plans, drawings and specifications; and software). In each case, the asset must be either within the UK or its territorial sea (in the case of land or corporeal property), or otherwise used in connection with either activities carried on in the UK or the supply of goods and services to persons in the UK.

A "trigger event" will occur where a person gains control of a qualifying entity or asset. Control of an entity is defined as explained in part 1 (and so the 15% threshold does not apply to the call-in power), or where the acquirer gains material influence over the target's policy (reminiscent of the 'control' test in UK merger control). For an asset, gaining control means a person acquiring a right or interest in, or in relation to, the asset that makes them able to use the asset or direct or control how it is used (or use it / direct its use to a greater extent). There is, again, no minimum turnover or deal value threshold.

These very broad definitions will enable the Government to exercise its call-in power in essentially any type of deal where a national security risk might be identified.

Timings

The call-in power can be invoked within six months of the Government becoming aware of the trigger event, but otherwise can be called-in at any time up to five years after the trigger event. This extremely long window is intended to ensure no transactions slip through the net.

This lengthy risk period can be avoided by voluntarily notifying the relevant transaction (either before or after completion) to a new Investment Security Unit under the remit of the Business Secretary. The Government will then have 30 working days to decide whether to call in the deal for further investigation over an additional 30 working day period (extendible to 75 working days).

A key point to note is that all deals completed after 12 November 2020 will come within the scope of the call-in regime, with the six month / five year periods only commencing when the relevant provisions of the Bill take effect. This anti-avoidance measure means the Bill must already be a significant consideration for deals that might raise UK national security considerations, in particular, because the process to have a deal cleared via voluntary notification will not even become available until the Bill is fully enacted and in force. In the interim period, parties will have no option but to decide whether to proceed at risk.

Consequences

Where the Government identifies a risk to national security it can impose remedies to prevent, remedy or mitigate that risk. The Bill gives a wide discretion on the remedies that can be imposed, but options are likely to include:

• unwinding a completed deal (e.g. by divestment of the relevant entity or asset);
• prohibiting a deal that has not yet been completed;
• requiring the business to appoint someone to supervise and potentially control any activities that would cause a national security concern; and
• operational restrictions, such as making UK security clearance a condition of a person accessing particular information, working at a particular site, taking part in certain operations or even holding a management role in the organisation.

If a completed deal is called-in or notified, the Government will be able to impose interim orders to prevent the review process being frustrated, most obviously by prohibiting the acquirer from integrating the acquired business or asset into its own operations. Such orders are routinely made in merger control situations, but may well be even stricter in the national security context.

Much like UK merger control, which is also (at least in principle) a voluntary regime, the potential consequences of completing a deal only for it to be called-in for review – including the administrative and financial burden of complying with an interim order, as well as the substantive risk of being forced to divest the entity or asset purchased – mean that buyers are likely to err on the side of caution and try to make any deal that might have national security implications conditional on Government clearance.

Interestingly (and very much unlike merger control), the Bill confers a power on the Government to give financial assistance to an entity in consequence of an order. That perhaps reflects a principle that the State should meet at least part of any additional cost incurred by a private entity as a result of measures imposed on national security grounds.

How will national security risks be assessed?

A potential risk to national security is not defined by the Bill in any meaningful sense. However, the Government has also published a draft 'Statement of policy intent' describing how it expects to use the call-in power.

The Government expects to consider three risk factors:

1. Target risk: the entity or asset subject to the trigger event could be used to undermine UK national security (e.g. the entity or asset plays a key role in national security matters or could, simply because of its nature, put national security at risk if it fell into the 'wrong' hands – there is likely to be significant overlap here with the sectors identified for mandatory notification);
2. Trigger event risk: the acquisition itself could undermine national security (e.g. because it could facilitate unauthorised access to sensitive information, or give a hostile actor leverage over the UK in other matters); and
3. Acquirer risk: the identity of the acquirer would give rise to national security concerns (a range of factors would be considered to determine this risk on a case-by-case basis, but the nationality of the acquirer – while not formally part of any test under the Bill – will surely be a key consideration).

These factors will be considered in combination – for example, the draft Statement of policy intent notes that a pension fund may invest in UK infrastructure, and on such circumstances a target risk may arise but acquirer risk would be absent.

Use and application

At this point, it is only possible to speculate as to how strictly the Government will apply the powers in the Bill and, in particular, how many deals will need to be notified to it. By the Government's own estimate, however, mandatory filings alone will result in between 1,000 and 1,830 notifications per year.

For the voluntary regime, and notwithstanding that the draft Statement and other guidance documents give some indication of how risks will be assessed, it will take time to build up a body of precedent that will allow buyers to consider when to notify (and even that may be complicated by the need for confidentiality in light of the obvious sensitivities). Buyers are therefore likely to err on the side of caution for some time, meaning the Government can also expect to receive a large number of voluntary notifications.

There will therefore be an enormous increase on the number of cases dealt with under the current public interest intervention regime, under which only 12 transactions have been reviewed on national security grounds since 2003 (albeit there has been an uptick following the recent threshold reductions, including the recent frustration of Chinese-backed Gardner Aerospace Holdings' proposed acquisition of Impcross, a UK manufacturer of aerospace components).

This move by the Government will impose a strict and wide-ranging new regime that has the potential to cause significant disruption to deals and investments. It is essential that investors, sellers and advisers are aware of the risks involved, including for any deal completed after 12 November 2020, and plan their transactions accordingly.