New Foreign Investment Control Regime Coming to the UK
The Development: The UK government has put before Parliament draft legislation introducing a new regime for governmental scrutiny and intervention in respect of investments that may pose a risk to national security in the UK.
The Result: If, as expected, Parliament passes the new proposal, the UK government expects that more than 1,000 deals per year, including acquisitions of non-UK businesses that simply sell into the UK but have no physical presence in the UK, will either (i) require mandatory notification to the UK government in advance of closing (and have to await clearance before closing); (ii) be voluntarily notified; or (iii) if not voluntarily notified, will, in some cases, for five years following closing, be subject to a retroactive review and the potential imposition of conditions or even unwinding.
Looking Ahead: Deals signed between now and the date when the new legislation comes into force, likely in 2021, may be investigated by the UK government after completion. Investors in businesses operating in 17 sensitive economic sectors may, in some circumstances and after consultation with advisers, want to engage with the UK government now to avoid an unwelcome intervention next year after the investment has closed.
In 2017, the UK government announced proposals to bring the UK in line with its allies and partners around the world, such as the United States, Australia, and Japan, by modernizing its powers to scrutinize deals that may affect UK national security. The National Security & Investment Bill ("NSI") aims to achieve that goal.
Scope and Key Provisions
The scope of the NSI is expansive and, if adopted, will cover not only majority investments that confer control over a business or assets but also increases in shareholdings. It introduces a hybrid mandatory and voluntary notification regime.
The NSI will empower the government to review anticipated or completed transactions that give rise to national security risks where specified "trigger events" occur. For acquisitions of companies or other entities, trigger events include certain minority investments (generally more than 25%); increases in shareholdings (to above 25%, above 50%, and above 75%); the acquisition of voting rights, which enable a person to secure or prevent the passage of resolutions governing the affairs of the entity; and the acquisition of "material influence". For acquisitions of assets, trigger events include the acquisition of rights enabling the acquirer to use or direct assets to a greater extent than before the transaction.
While trigger events can arise in any sector of the economy, the government will require mandatory notification of acquisitions of entities only in sectors with a heightened security risk. The government has proposed that the following sectors would require mandatory notification from the acquirer, although the government will have the power to vary this list, and to exempt certain transactions, so that the mandatory notification requirements remain targeted on the areas where there is most risk to national security:
- Civil nuclear;
- Data infrastructure;
- Autonomous robotics;
- Computing hardware;
- Cryptographic authentication;
- Advanced materials;
- Quantum technologies;
- Engineering biology;
- Critical suppliers to government;
- Critical suppliers to the emergency services;
- Military or dual-use technologies; and
- Satellite and space technologies.
An acquisition of 15% or more of the votes or shares in an entity engaged in a mandatory sector will not of itself be a trigger event but must be notified to enable the government to consider whether a trigger event (the acquisition of material influence) will occur.
Failure to notify in a mandatory sector will result in the transaction being legally void and possible civil and criminal sanctions.
Notification of trigger events is voluntary for acquisitions of (i) entities in other sectors of the economy and (ii) assets in all sectors. However, as the NSI permits the government to review a transaction up to five years after closing, voluntary notification may be preferable for acquirers seeking certainty, although this would need to be assessed at the time and would depend on the circumstances.
Following mandatory or voluntary notification, the government will have up to 30 working days to determine if a transaction should be cleared or "called-in" for a more extensive review. Once "called-in", the government will have 30 working days—extendable by 45 working days—to conduct a further review. The government may pause the clock in certain instances, for example, where additional information is required. While the government expects the majority of transactions to be cleared, where transactions are "called-in", they may be made subject to interim or final orders, blocked or unwound.
The Government May Intervene in Deals With No Direct UK Nexus
The government will be able to intervene in (i) acquisitions of non-UK entities if they carry on activities, or supply goods or services to customers, in the UK; and (ii) acquisitions of assets situated outside of the UK if they are used for activities in the UK or the supply of goods or services to customers in the UK. In other words, a physical presence in the UK is not a prerequisite for intervention if the transaction has a bearing on national security because, for example, the non-UK target provides services to the UK, or the asset being acquired (such as intellectual property) is one on which the country fundamentally relies.
The UK May Intervene in Deals Completed Before the Law Comes Into Force
Even if a transaction constituting a trigger event occurs on or after 12 November 2020 but before the date when the NSI comes into force ("commencement day"), the government would have the right to review it retrospectively. If the government becomes aware of a trigger event before the commencement day, it will have six months from commencement day to call the transaction in. If it becomes aware of it on or after commencement day, it will have six months from when it became aware (for up to five years after commencement day), such as by reading about the deal in the media or via a complainant.
How to Mitigate Deal Disruption Now
If a business may acquire a controlling interest in another business operating within any of the sensitive sectors listed above, it would be advisable in many cases for the acquirer to inform the government, in order to reduce the risk of a post-closing investigation.
Five Key Takeaways
- The UK is proposing the introduction of a far-reaching new national security regime.
- The government has emphasized that the sole purpose of this new regime is to allow the government to respond in a proportionate manner to "the fraction of transactions that do raise national security concerns". It expects that the "overwhelming majority" of transactions will remain unaffected.
- Nonetheless, the government expects more than 1,000 deals per year will be notified to it.
- The target does not need to have a physical presence in the UK: The new regime can apply to an acquisition by a non-UK company of a non-UK target or asset if the target makes, or the asset is used for, sales to UK customers.
- All sectors are covered by the new regime as long as the transaction poses a risk to national security and there is no value threshold for a deal—in theory, no deal will be too small to meet the notification thresholds.
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