The UK Government has pledged to adopt legislation to strengthen existing powers to scrutinise and intervene in business transactions in order to protect national security. The proposal was included in the legislative programme put forward by the Government in the Queen's Speech on 14 October 2019, which was approved by Parliament on 24 October 2019.1
The proposal confirms the Government's intention to redefine its ability to intervene in transactions on national security grounds, and reflects the contents of a consultation document published under former Prime Minister Theresa May in July 2018 (the "White Paper")2. It comes shortly after the Government's announcement on 18 September 2019 that it had intervened on national security grounds in respect of Advent International's bid for Cobham plc – on which we commented here3.
Under the proposal, the key elements of the legislation will be threefold:
- A notification system – allowing businesses to flag transactions that may give rise to national security concerns to the Government for screening (similar to the US CFIUS process);
- Further powers to mitigate risks to national security – by adding conditions to a transaction, blocking a transaction (as a last resort) or imposing sanctions for non-compliance with the regime; and
- A safeguarding mechanism – allowing business to appeal decisions.
The Government intends the regime to be transparent and applicable across the United Kingdom as a whole, in all sectors of the economy and, crucially, to all businesses of any size; this suggests that there will be little room for de minimis criteria or safe harbours from scrutiny. However, the Government has sought to assure businesses that it expects to rule out national security risks quickly in most cases, allowing parties to proceed with certainty. To date, the Government has made 10 public interest interventions in transactions on national security grounds since the regime was overhauled in 2002.
The White Paper proposed a voluntary notification system and threatened sanctions for non-compliance – on which we commented here4. It also envisaged a "call in" mechanism by which the Government would be able to review a transaction where: (a) there are reasonable grounds for suspecting that a "trigger event" (being the ability to direct the operations of an asset or direct the operations or strategic direction of an entity) has occurred within a period post-completion; and (b) there is a reasonable suspicion that the trigger event poses a risk to national security.
The White Paper also acknowledged the need to address how the new regime would operate in conjunction with the UK merger control regime, and an additional dimension of this will relate to proposed amendments to the powers of the Competition and Markets Authority ("CMA") which were put forward by the CMA's Chairman, Lord Tyrie, earlier this year5. As part of those proposals, the notification of mergers would become mandatory, and a standstill obligation would apply pending clearance by the CMA, where certain threshold criteria are met by the transaction, with the existing voluntary regime remaining in place for transactions falling below the relevant thresholds.
In response to an earlier 'National Security and Infrastructure Investment Review' consultation6, the CMA noted that any new or amended mechanisms should "avoid unnecessary uncertainty and costs, both for businesses and the CMA, in practically applying the measures alongside the existing merger control regime"7. The White Paper states that the Government intends to design a process for ensuring that the interaction of the two regimes is efficient and transparent, and maintains the operational independence of the CMA. It notes, however, that in certain instances where the positions of the Government and the CMA are incompatible (for example, in relation to remedies), national security considerations will prevail. Following introduction of the new regime, businesses will need to take the timing implications of such possibilities into account in their transaction planning.
The changing landscape
The briefing note issued at the time of the Queen's Speech reiterates key elements of the White Paper. The proposed jurisdictional criteria, procedures and powers contain many echoes of the existing voluntary UK merger control regime, a key distinction being that new powers will extend to the acquisition of assets and not just businesses.
The White Paper refers to the evolving nature of the threat to national security presented by "continued and broad-ranging hostile activity from foreign intelligence agencies and others" and notes that the United Kingdom faces "greater and more complex threats" than at the time of a previous review in 2010. Those threats include "human, technical and cyber operations… to compromise Government-held information and critical national infrastructure; attempts to influence Government policy covertly; and operations to steal sensitive commercial information and disrupt the private sector".
The proposals refer to "the risks that can arise from hostile parties acquiring ownership of, or control over, businesses or other entities and assets that have national security implications" and to the need to prevent "hostile parties or groups [from circumventing] our rules on a technicality by acquiring an asset rather than acquiring the business itself". Such hostile parties are not confined to foreign groups but may include UK entities.
The proposals note that the new powers would be consistent with those of "our major partners and allies around the world", such as Australia, Germany, Japan and the United States. A new EU regime relating to the screening of foreign direct investments into the European Union will also apply from 11 October 2020 (certain of its co-operation provisions being capable of applying to transactions completed from 10 April 2019); that regime will leave to Member States the right to determine whether or not to screen a particular foreign direct investment and is intended to promote co-ordination.
For the time being, UK Parliamentary time remains dominated by Brexit business and the prospect of an election, but it will remain important to monitor developments in this area and their effect on proposed investments in the United Kingdom, as well as the impact of similar existing and emerging regimes in other jurisdictions. Questions will remain as to how the concept of national security will be interpreted in practice; and the Government has set out draft policy guidance accompanying the White Paper, which would require Parliamentary approval.8