The UK Government plans to introduce legislation that would create a more robust mechanism for reviewing transactions that would result in acquisition of "significant influence or control" over sensitive assets. Supporting its policy, the Government referred to similar "modernising" efforts being made by Australia, Germany, France, Japan and the United States. Indeed, those familiar with the CFIUS process and the forthcoming Foreign Investment Risk Review Modernisation Act (see our previous update) will note similarities in the proposed UK legislation. The Government's intentions were published in a white paper and statement of policy intent, available here.
Nature of the proposed regime
The aim of the proposed system is to allow the Government to review and assess investments, acquisitions or other transactions that may pose risks to UK national security.
As with the US regime, the proposed UK system provides for a voluntary review mechanism, by which parties to the transaction can proactively submit a deal to be reviewed by the Government. The Government will then either confirm that the deal may proceed, clear the deal with conditions intended to mitigate the perceived security risks, or block the transaction. The review process can also be activated by the Government intervening in a transaction ("calling-in"), either before or after completion. The Government will have the authority to unwind completed transactions during a certain period post-completion (the current proposal is six months).
Under the proposals, the Government will be able to "call-in" a transaction if two standards are met.
First, there must be reasonable grounds for suspecting that a "trigger event" is in progress or in contemplation, or has occurred within a period post-completion. A trigger event is one that results in an acquirer gaining the "ability to direct the operations of an asset or direct the operations or strategic direction of an entity". Specifically, those are the acquisition of:
- More than 25% of the shares or votes in an entity
- Significant influence of control over an entity
- Further significant influence or control over the above thresholds
- More than 50% of an asset
- Significant influence of control over an asset
Second, for the Government to call-in a transaction, there must be a reasonable suspicion that the trigger event poses a risk to national security. The national security assessment will be made on the basis of three elements: target risk, trigger event risk, and acquirer risk.
Target risk: The entity or asset is such that acquisition of control over it may pose a risk to UK national security.
Trigger event risk: The trigger event may give the acquirer the means or ability to undermine the UK's national security through disruption, espionage, inappropriate leverage or some other means.
Acquirer risk: The acquirer may seek to use their acquisition of control over the entity or asset to undermine UK national security.
Put another way, target risk is the national security value inherent in the asset being acquired; trigger event risk is the potential use of that asset to undermine national security; acquirer risk is the likelihood that the particular acquirer will use that asset to undermine national security. In short, the process will assess what, how and who.
The Government will encourage parties to voluntarily notify trigger events to which they are a party and where they consider there may be national security interest at stake.
Upon voluntary notification, an initial 15-working day screening period begins. The period can be extended to 30 working days.
If the Government decides that the call-in test is met, the transaction is subject to a national security, which lasts for 30 working days, extendable to a total of 75 working days (or longer where the parties do not respond to information requests in a timely manner).
The Government is represented in the process by a "Senior Minister", which is a Cabinet-level minister: i.e. a Secretary of State, the Chancellor or the Prime Minister. Earlier proposals called for different ministers to be responsible for approvals based on their areas of competence: assuming cross-ministerial consultation will still occur, the single "Senior Minister" will presumably play a coordinating lead role.
Key sectors and implications
As with CFIUS, the range of sectors potentially affected is broad. The Government identifies four "core areas":
- Some parts of national infrastructure sectors (civil nuclear, defence, communications, energy and transport)
- Some advanced technologies
- Critical direct suppliers to the Government and emergency services sectors
- Military and dual-use technologies
Beyond the "core areas", the Government identifies other parts of the economy where it expects national security risks are more likely to arise in comparison with the wider economy as a whole:
- Critical suppliers who directly and indirectly supply the core areas
- Those parts of the national infrastructure sectors not in the core areas (chemicals, food, health, space, water and finance)
- Those advanced technologies not in the core areas
The wide range of sectors potentially affected, the uncertainty involved in predicting what the Government considers to be a risk to national security, and the potential for unwinding completed transactions will likely result in a large number of voluntary notices. Indeed, the Government predicts that approximately 200 voluntary notices will be filed each year under the proposed system. Of those, the Government expects 100 of them to undergo a national security review and 50 to be ultimately subject to conditions.
Whilst the white paper takes great pains to underscore the importance of inbound investment to the UK, the proposed legislation introduces an element of additional process and uncertainty into UK acquisitions. That element, however, will not be unfamiliar to parties experienced in the US process and, given the clear trend toward more robust national security review and approval systems, is quickly become a common element of cross-border acquisitions.