Implications for investors
A degree of procedural certainty for investors that submit a notification
A UK national security filing should be easily accommodated in most pre-closing timetables. The Government will be required to complete its initial screening within 30 working days, and the majority of transactions are unlikely to raise significant national security concerns requiring the deal to be called in for a longer in-depth review (consisting of an initial review period of 30 working days, that can be further extended by the Government by an additional 45 working days and for any period beyond that with the parties' consent).
However, the new law leaves a wide margin of discretion for deciding which transactions qualify for notification
The definitions of the 17 sectors subject to a mandatory notification (which will be finalised in separate regulations following the public consultation) are broadly drafted, leaving significant uncertainty for potential investors in the large number of UK businesses active in these areas, who may be surprised to find contemplated transactions must be notified. The lack of safe harbours or jurisdictional thresholds means the new UK regime will be over-inclusive, capturing transactions raising no plausible national security risks. Moreover, the breadth of transactions qualifying for mandatory or voluntary notification will be unprecedented, capturing acquisitions of even minority shareholdings (15%, or even lower if there is material influence) and a wide range assets (including land, tangible moveable property and anything with some commercial or economic value, such as IP, trade secrets or source codes).
Failure to notify: a long "claw back" period
The Government believes that if it is not notified of a transaction that has national security risks, then it should have the ability to step in retrospectively (including after completion) to address those risks. The Government will have six months from 'becoming aware' of a non-notified transaction in which to call it in for review, subject to an overall deadline of five years from the transaction. However, the five year limit will not apply to deals requiring mandatory notification - this means that there is no definitive end date by which the Government must act. The Government could, in theory, become aware of the transaction many years after closing, call it in within six months of gaining that knowledge, and impose remedies (including, as a last resort, prohibiting the deal) if it raises national security concerns.
Deals happening now (including those outside the 17 sectors identified by the Bill) could be affected
Transactions which are in progress or contemplation in the interim period between 12 November 2020 and the start of the new regime can be called in by the Government once the Bill completes its passage through Parliament, regardless of whether they are completed before the new regime comes into effect.
For transactions that do take place (i.e., complete) in the interim period, the call-in power will be retrospective and the parties will have a strategic choice as to how and whether to engage with the Government. If the parties tell the Government about a completed transaction (or where the Government has become aware of the transaction) during the interim period, the deal can be called in within six months from the commencement date of the new law. However, if parties choose not to inform the Government (risking that Government may remain unaware of the transaction), the six months for the call-in power to be used will not start until the Government becomes aware of the deal, and the transaction could be called-in as late as five years after the commencement date.
In practice, and especially in the early years of the new regime, businesses will likely be cautious and a large volume of voluntary notifications is expected
Although the new powers can only be used for assessing the national security implications of transactions and not to serve a wider economic or industrial policy agenda, the lines are likely to quickly become blurred. The new law does not define 'national security', leaving the question of what constitutes a national security concern to the discretion of the Government. Also, the Government's description of the 17 sensitive sectors suggests that industrial policy concerns are driving the inclusion of some of the sectors. Given the stiff penalties for failing to notify mandatory transactions and risk of completion being nullified years after the event, many investors may not be prepared to take the risk. Indeed, the Government estimates that it will receive 1000 - 1,830 notifications a year.
Starting in early 2021, a mandatory national security notification system will apply to acquisitions of as little as a 15% shareholding in businesses in one of 17 strategically important industry sectors (such as defence, energy, transport, communications, data infrastructure, a range of specialised technology industries as well as critical suppliers to the Government and emergency services). Outside of the 17 focus industries, notification will be voluntary.
Businesses will need to self-assess whether they must submit a mandatory filing. The Government is publicly consulting until 6 January 2021 on how the 17 in-scope industry sectors should be defined.
The mandatory regime will be suspensory, meaning that transactions cannot complete until clearance is given by the Government. If a transaction that is subject to mandatory notification completes prior to obtaining clearance, it will be legally void.
If the acquirer fails to submit a mandatory filing, it risks significant financial penalties (up to 5% of total worldwide turnover or GBP 10 million, whichever is higher) and criminal liability for directors.
The Government will have the ability to 'call in' both mandatory transactions (that should have been notified) and transactions meeting the voluntary criteria (but where the purchaser decided not to notify). Although the Government cannot use the call-in power before the new regime has commenced, after the Bill is enacted the Government will be able to call in deals that are in progress or in contemplation as of today, 12 November 2020. Any investor engaged in a live deal affecting the UK should therefore be acting now, to consider whether the transaction raises national security issues under the new regime and whether to proactively engage with the Government in the coming weeks.
Given the stiff penalties for failure to notify under the mandatory regime and the risk of the deal being declared void after the event, businesses will likely err on the side of caution and file voluntarily where there is a possibility that their transaction may be caught by the mandatory regime or otherwise give rise to a national security issue. Overall, investors into the UK should be prepared for additional regulatory burdens, more complex risk assessments and allocation as well as delays to anticipated deal timelines.
Fundamental overhaul of the UK national security regime.
- Prior to the introduction of the Bill, there was no standalone foreign investment screening in the UK. Instead, the law enabled the Government to proactively intervene in transactions raising possible national security concerns.
- Although recent interim reforms made it easier for the Government to investigate six strategic sectors linked to defence and advanced technologies, overall the Government's powers were limited and infrequently exercised. Since 2002, there had been only 12 public interest interventions on national security grounds, almost all in the defence sector.
No jurisdictional thresholds and a wide range of transactions in scope
- Unlike many foreign investment systems globally, the Bill does not envisage any monetary or share of supply jurisdictional thresholds to identify qualifying transactions. Instead, the Government will have jurisdiction to call-in any transaction that constitutes a 'trigger event' (see Box 2) for an in-depth national security assessment under the new regime.
- A range of legal structures (including companies, limited liability partnerships, unincorporated partnerships, associations and trusts) can be the target of a 'trigger event'.
- Acquisitions of assets comprising land, tangible moveable property or any ideas, information or techniques which have industrial, commercial or economic value will also be in scope, covering purchases of bare assets including IP, trade secrets, databases, source codes, algorithms, formulae, designs/plans and software. Acquisitions of assets by consumers are excluded, other than for land or sensitive items subject to export controls.
- There will be an extraordinarily wide geographic nexus, capturing acquisitions of non-UK entities and assets (e.g., foreign IP or infrastructure) as long as they are responsible for activities in or supply of goods or services into the UK. For example, an acquisition of off-shore deep-sea cables which supplies energy to the UK could in principle satisfy the nexus requirements. Although the political focus is likely to be on foreign inward investment, the law will apply to transactions by both UK and non-UK acquirers alike.
For more in-depth analysis, please read the full alert here.