The government is proposing to introduce sweeping new powers allowing it to intervene in transactions where it believes there is a risk to national security. The new regime could have a significant effect on UK transactions, leading to precautionary notifications, extended deal timetables and increased costs.
Although the powers are aimed at controlling foreign investment in sensitive UK businesses, they will apply equally to both UK and foreign investors across a wide range of industries.
A mandatory notification must be made where an investor or buyer:
- acquires 15% or more of the shareholding or voting rights in an entity active in one of 17 specified sectors;
- passes through the 25%, 50% and 75% shareholding or voting rights thresholds in an entity in one of the sectors; or
- acquires voting rights that enable or prevent the passage of any class of resolution governing the affairs of an entity in one of the sectors.
The government has been consulting on the 17 specified sectors that fall within the mandatory notification regime. These include industries with a clear national security angle, such as civil nuclear and defence, but also those of a more general nature, such as energy, transport and communications.
A transaction requiring a mandatory notification cannot complete until clearance has been given. There are significant sanctions for an investor that fails to make a mandatory notification when required, including a fine of up to 5% of global turnover or £10 million (whichever is the higher) and possible prison sentences for the directors. In addition, any transaction that should have been notified under the mandatory filing regime but which completes without such a notification being made is void.
The severity of the sanctions suggests that transactions within the 17 specified sectors may routinely become conditional on clearance being given.
A voluntary notification can be made where a transaction falls outside the mandatory notification regime but could still give rise to national security concerns. A notification can be made where a person:
- acquires 25% of the shares or votes in an entity, or passes through the 25%, 50% or 75% voting or shareholding thresholds;
- acquires 'material influence' over an entity's policy; or
- gains certain rights, interest or control of a qualifying asset, including land, tangible moveable property and intellectual property.
As with the mandatory notification regime, there is no deal size or monetary threshold and transactions of any size could be caught.
Call in powers
The government will also be able to call in a transaction for review that should, or could, have been notified under the mandatory or voluntary filing regimes if it believes that it may present a risk to national security.
There is no definition of 'national security' but the government has said it will consider the following factors when deciding whether to exercise these powers:
- the target risk – the nature and activities of the target business;
- the trigger event risk – the level of influence acquired; and
- the acquirer risk – the identity and affiliations of the buyer, with affiliations to other countries being of particular importance.
A controversial aspect of the new powers is that although the relevant legislation, the National and Security Investment Bill, has not yet come into force, when it does it will have retrospective effect. So any transaction completed between 12 November 2020 and the date the legislation comes into force may be called in for review in the six months following the implementation date.
The review process
When a transaction is notified or called in for review, it will be considered by a new Investment Security Unit. There will be an initial 30 working day period within which either clearance will be given or the transaction will be referred for a phase 2 investigation. That investigation will take another 30 working days, which could be extended by a further 45 working days.
The review process ends with:
- unconditional approval;
- conditional approval, with conditions designed to minimise the risk to national security – for example requiring a disposal, placing a limit on the level of interest that can be acquired or imposing restrictions on access to national security sensitive information; or
- a prohibition on the transaction taking place.
The new powers in practice
The government estimates that the new regime will result in between 1,000 and 1,800 notifications per year although some commentators believe that, as currently drafted, there will actually be many more notifications. Given that there have only been 13 interventions by the UK government on national security grounds since general merger control legislation came into force in 2003, this clearly marks a significant step change in the UK's approach.
Buyers and investors will need to conduct careful due diligence to understand whether the target's activities have national security implications. Qualifying transactions in the 17 specified sectors will need to be conditional on clearance being given and the threat of the call in powers is likely to see buyers making precautionary notifications even outside those sectors.