On 11 November 2020, the UK government published draft legislation, the National Security and Investment Bill (the "Bill"), which will significantly change the treatment of mergers and acquisitions in the United Kingdom and will introduce a new security screening regime separate from competition law.
- The Bill provides for mandatory notification and prior approval of the acquisition of certain shareholdings or voting rights in "qualifying entities" active in a wide range of sensitive sectors, including acquisitions of minority interests as low as 15%. The notification obligation will be backed by the power to impose criminal penalties and heavy fines. Transactions subject to mandatory notification that are implemented without clearance will be void.
- It also provides for voluntary notification of acquisitions and a "call-in" power (i.e. a power to review transactions retrospectively) where the mandatory notification obligation does not apply, including in relation to acquisitions of assets and certain acquisitions of material influence. Assets for this purpose are broadly defined and include "ideas, information or techniques with industrial, commercial or other economic value". The voluntary notification regime and call-in power will apply to all sectors, where national security concerns might arise. The Bill envisages the possibility of certain acquisitions of assets being brought into the mandatory notification regime by future regulations.
- Transactions that might affect national security and that have not been approved will be subject to the possibility of retrospective review (call-in) for up to five years in the case of transactions falling outside the mandatory notification regime (in the case of transactions falling within the mandatory notification regime there is no such time limit).
- The retrospective call-in power will apply to transactions entered into from 12 November 2020 – i.e. before the Bill becomes law; this presents a risk for transactions that might give rise to national security concerns and that take place within that period. The government has stated that the Secretary of State will not use the call-in power before the commencement of the new regime following its approval by Parliament. However, if the government has become aware of a transaction within the scope of the new regime before the date of its approval by Parliament, the Secretary of State will have up to six months to exercise the call-in power after the commencement date.
- Although government statements refer to the need for the United Kingdom to be able to protect its interests against "hostile actors", the breadth of the screening mechanism will mean that all types of businesses will need to consider at an early stage of transaction planning how the new UK legislation might affect prospective acquisitions.
- The new provisions will apply alongside the provisions of UK competition law but will effectively take precedence over it where national security considerations arise.
- Market participants familiar with the prospective UK regime's US cousin – the Committee on Foreign Investment in the United States ("CFIUS") – will find important similarities in scope and process. Just as the CFIUS process has recently taken on an increased focus on sensitive, export-controlled technology, so does the Bill. The UK regime also adopts the US approach to mandatory notifications and severe consequences for failures to notify.
Sectoral scope and application of powers
The government expects that the mandatory notification obligation will apply to acquisitions in parts of the following sectors:
- Civil Nuclear
- Data Infrastructure
- Artificial Intelligence
- 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
- Satellite and Space Technologies
The specific products and services to which the new regime applies will be determined following a consultation on the scope of the draft legislation which was launched on 11 November (see here).
The notification obligation will apply to specified "trigger events" involving certain acquisitions of control of a "qualifying entity". These will include increases from:
- 25% or less to more than 25%;
- 50% or less to more than 50%; or
- less than 75% to 75% or more,
of the percentage of shares or voting rights that the acquirer will hold in the relevant entity. It will also apply to the power to secure or prevent the passage of any class of resolution governing the affairs of the entity, and to acquisitions as a result of which a person will hold an interest of 15% or more in the shares or voting rights of a qualifying entity.
There is an exception to the notification obligation where notification would be "impossible"; the scope of impossibility in this context is not entirely clear.
The definition of a qualifying asset is particularly broad, and applies to:
- tangible movable property; and
- ideas, information or techniques which have industrial, commercial or other economic value, including:
- trade secrets;
- source code;
- plans, drawings and specifications; and
In relation to assets, gaining control will include acquiring a right or interest as a result of which the acquirer is able:
- to use the asset, or to use it to a greater extent than prior to the acquisition; or
- to direct or control how the asset is used, or to direct or control how it is used to a greater extent than prior to the acquisition.
References to use of an asset include references to its "exploitation, alteration, manipulation, disposal or destruction".
Joint and indirect acquisitions of control
Schedule 1 to the Bill includes additional information concerning trigger events and the holding of interests or rights, which can be held jointly or indirectly, as well as joint arrangements; an arrangement is stated to be something that has "at least some degree of stability about it". The concept of an indirect holding is broad and liable to give rise to uncertainty in practice. It includes circumstances involving:
- majority stakes (including by reference to chains of control, voting rights, membership of boards or equivalent bodies, voting agreements, and the existence of "dominant influence");
- rights held by a person who controls their exercise;
- rights exercisable only in certain circumstances;
- rights attached to shares held by way of security;
- connected persons; and
- the existence of a common purpose.
Voluntary notification and call-in power
Voluntary notification will be possible where a trigger event has taken place, or arrangements are in progress or contemplation which would result in a trigger event taking place, in relation to a qualifying entity or asset, and where the mandatory notification obligation does not apply. This will be the case in particular in relation to acquisitions of control of entities and assets falling outside the designated sensitive sectors as well as to certain acquisitions of "material influence" in the designated sectors.
The Bill also provides the Secretary of State with a power to "call-in" acquisitions falling outside the mandatory notification regime for up to six months after becoming aware of a trigger event, or for up to five years from the date of the trigger event.
A draft Statement of Policy Intent (the "Statement") has been published alongside the Bill which sets out a number of applied examples on how the government expects to use the call-in power and assess potential risks to national security. The examples are organised under three risk categories: target risk; trigger event risk; and acquirer risk. The Secretary of State will be required to have regard to the Statement when exercising the call-in power (although the Statement expressly provides that it is intended to be a non-exhaustive document which should not limit the exercise of the call-in power). The Statement sets out an expectation that it will be used by transaction parties to determine whether a national security risk giving rise to a notifiable transaction (as explained above) could arise. The call-in power cannot be exercised until the Statement is approved by Parliament, which must be reviewed (at a minimum) every five years.
The Bill provides for the possibility of retroactive validation of a notifiable acquisition that is completed without the approval of the Secretary of State and that would otherwise be void. The Secretary of State will have six months from becoming aware of a non-notified but notifiable acquisition either to issue a call-in notice or a validation notice (which treats the completed acquisition as having received the approval of the Secretary of State). Unlike under the voluntary notification regime, the five-year limit on the Secretary of State's call-in power does not apply to notifiable acquisitions – i.e. there is no long-stop date providing a safe harbour for acquisitions falling within the mandatory notification regime which are not notified by the acquirer. A party seeking to secure retrospective validation of an acquisition may need to provide detailed submissions to the Secretary of State in support of this.
The Bill therefore presents significant legal uncertainty and the potential for disputes pending receipt of a validation notice in the light of the temporary nullity of transactions. For example, the call-in power may be exercised after a significant amount of time has passed after completion; however, the assessment of what constitutes a national security risk may have evolved since the date of the trigger event and beyond that set out in the Statement published at the time.
The regime will be enforced by a new unit within the Department for Business, Energy and Industrial Strategy ("BEIS"). Regulations will be published setting out the form of the mandatory notification notice and providing additional guidance.
The government anticipates receiving a large number of notifications and envisages clearance of most acquisitions that are subject to mandatory notification within 30 days (the "review period"). If the Secretary of State issues a call-in notice, the transaction will be examined during an "initial period" of 30 days, which can be followed by an "additional period" of 45 days; this may be followed in turn by a "voluntary period" agreed between the Secretary of State and the acquirer.
The Secretary of State will have extensive powers to require the provision of information ("information notices") and to require the attendance of witnesses ("attendance notices"). The issuance of information and attendance notices will have the effect of stopping the clock pending issuance of a notice confirming that the requirements of the information notice or attendance notice have been met.
The Secretary of State will also be entitled to issue interim orders, to prevent "pre-emptive action" or mitigate its effects, and final orders, to prevent, remedy or mitigate any risks to national security. Such action might include blocking a transaction, requiring it to be unwound, or imposing remedial measures.
It is an offence to complete a notifiable acquisition without approval in the absence of reasonable excuse. If an offence is committed with the consent or connivance of an officer of the body corporate or is due to any neglect on the part of such an officer, both the body corporate and the officers will be liable. "Officer" for this purpose is broadly defined and includes a director, member of the management committee, CEO, manager, secretary or similar officer, as well as partners (or a person purporting to act as a partner) in a partnership.
The Bill provides for the imposition of fines of up to 5% of worldwide turnover on a company for completing a notifiable acquisition or failing to comply with an order; the imposition of daily penalties in respect of the latter; and fines of up to £10m on individuals.
Criminal penalties will also apply in the event of failure without reasonable excuse to comply with a requirement of an information notice or attendance notice; the intentional or reckless alteration, suppression or destruction of information; or the provision of false or misleading information. The provision of such information may also result in the revocation or modification of a decision by the Secretary of State.
The Bill contains a novel provision allowing the Secretary of State to provide financial assistance (including loans, guarantees or indemnities, or any other kind of financial assistance, actual or contingent) in consequence of making a final order. Pre-Brexit, such a provision would have been subject to the EU State aid rules. Post-Brexit, it may be subject to the terms of any "level playing field" commitments between the United Kingdom and the European Union to be contained in a Free Trade Agreement between them; it will potentially also be subject to the proposed EU regime on foreign subsidies contemplated in a White Paper published by the European Commission earlier this year (see our update, here).
Disclosure of information
The Secretary of State may disclose information received under the provisions of the Bill to public authorities for a range of purposes including the detection of crime, criminal investigations and proceedings, and the protection of national security, as well as to overseas public authorities for the exercise of corresponding functions.
Competition & Markets Authority ("CMA")
The Secretary of State may direct the CMA to do or not to do anything under the merger control provisions of the Enterprise Act 2002 that the he/she reasonably considers is necessary and proportionate for the purpose of preventing, remedying or mitigating a risk to national security. The provisions of the Bill therefore effectively take precedence over the merger control provisions in the event of a conflict, subject to an obligation to consult the CMA. The CMA is also required to assist the Secretary of State; this might involve use of the CMA's mergers intelligence function.
In parallel, the CMA is preparing for a significant increase in its merger case load from the end of the Brexit transition period on 31 December 2020. New Draft Merger Guidance published earlier this month highlights the growing complexity of multi-national transactions and encourages merging parties to engage with officials at an early stage in order to discuss the alignment of the investigation with other regulatory processes, as well as merger control proceedings in other jurisdictions. In appropriate cases, this will entail liaison with BEIS.
Consequences for businesses
By any standards, the proposed new regime is draconian. The combination of a mandatory notification obligation, criminal penalties for companies and individuals for failure to notify, nullity of transactions and the far-reaching enforcement powers in the Bill, are at the high watermark in terms of the review of mergers and acquisitions and foreign investment review globally. The new regime will mark a major change in the review of mergers and acquisitions affecting UK businesses that may give rise to national security issues (see our previous update discussing government intervention in respect of national security under the existing merger control regime here), and this is further accentuated by the inclusion of assets in the new regime, the breadth of the sectors covered by it, and the wide definition of trigger events.
Although elements of the regime, for example in relation to material influence and certain information gathering and enforcement powers, are familiar from UK merger control, much will remain to be clarified during the consultation on the Bill and in the proposed regulations. To handle the volume of notifications that the government anticipates receiving, the new unit in BEIS will require significant resources. The breadth of the notification obligation and call-in power is likely to give rise in practice to the need for early informal consultation with BEIS and potentially other government bodies including the CMA.
The existence of wide information sharing powers will assist the UK government in playing an increasingly prominent role in the review of international transactions post-Brexit, and will facilitate co-ordination between authorities. The territorial reach of the Bill is wide, including in respect of criminal enforcement – a qualifying entity need only carry out activities or supply goods/services in the United Kingdom (regardless of where it is incorporated).
The new UK legislation will represent a major addition to the burgeoning array of foreign investment regimes globally and further emphasises the need for early consideration of foreign investment review in transaction planning.