The Government has published the much-anticipated National Security and Investment Bill (Bill) which, if passed, will give it new powers to intervene in investment in, and acquisitions of, UK businesses. The Bill gives the Government the power to vet, and in some instances block, transactions that are subject to a new wide-ranging set of notification requirements.
Under the Bill, investors will be required to submit pre-completion notifications to the department for Business, Energy and Industrial Strategy (BEIS) of all qualifying transactions (which includes investments, takeovers and asset purchases) across 17 industry sectors deemed to be of national importance.
Which types of transactions will be caught?
The Bill applies to all transactions, whether by domestic or non-UK investors acquirors, in an initial list of 17 “high-risk” sectors (available here). This list is currently under review, and the Government has published a public consultation on which sectors should fall under the new rules. The current list includes defence, energy, data infrastructure, communications and artificial intelligence.
If a transaction falls within one of the high-risk sectors, notification of the transaction is mandatory where it involves the acquisition of:
- 15% or more of the votes or shares in an entity;
- an increase in a holding of votes or shares in an entity to more than 25%, 50% or 75%; or
- voting rights that enable the person to secure or prevent the passage of any class of resolution governing the affairs of the entity.
Importantly, there is no deal size threshold, so all qualifying transactions in the high-risk sectors must be notified.
If a transaction does not fall within of the high-risk sectors (or if the position is unclear), the parties have the option to submit a voluntary notification for transactions that constitute “trigger events”. Trigger events are less clearly defined than mandatory notifiable events, and include the acquisition of:
- an increase in a holding of voting rights or shares to more than 25%, 50% or 75%;
- “material influence” over the policy of an entity;
- voting rights that enable or prevent the passage of any class or resolution governing the affairs of the target; or
- a right or an interest in an asset giving the ability to use the asset.
Minority investors and those with veto or investor consent rights will have to carefully consider these trigger events not only in the context of making new investments but also existing investments in which they are contemplating increasing their stakes or obtaining a greater degree of contractual control over a company’s affairs.
Parties to transactions will need to review their deal structuring, particularly in the high-risk sectors. It remains to be seen whether investors and acquirors will seek to implement transactions in stages pre- and post-notification and clearance, but this would certainly seem to be an option as in other regulated sectors.
The ability to voluntarily notify a transaction will help to achieve deal certainty by providing comfort that the BEIS will not use its “call-in” powers at a later date to retroactively review a transaction (see further below).
How does the review process operate and what are the penalties for non-compliance?
The BEIS will have a 30-day screening period within which to decide whether to “call-in” a transaction and launch an in-depth investigation. If it decides to do so, the in-depth investigation can take up to a further 75 working days, or longer if agreed between the BEIS and the acquiror.
The BEIS will also have the authority to retroactively “call-in” transactions up to five years after they have concluded. These call-in powers apply to transactions completed on or after 12 November 2020 and, while it is neither possible for an acquiror to notify the BEIS of a transaction or for the BEIS to exercise its call in powers until the Bill has been passed into law, the possibility that the BEIS will exercise such powers in the future should be actively considered during all present transactions.
If a deal subject to the Bill is not notified, the transaction will be legally void and the penalties are stringent; investors and buyers may be fined up to the greater of £10 million and 5 per cent of their global annual revenue, and criminal sanctions apply to directors.
The Bill is a major overhaul of the Government’s approach to reviewing transactions in the UK and, while the proposed regime is not limited to foreign investors, it needs to be viewed in the context of the UK’s foreign investment strategy. Indeed, it was announced just two days after the Prime Minister unveiled a new Office for Investment, designed to attract strategic foreign investment opportunities in the UK, and it replaces the current mechanism for reviewing transactions under the Enterprise Act 2002. Under these existing rules, the Government has adopted an investor-friendly attitude to foreign investor screening, and its power to intervene in takeovers is limited to specific grounds, being national security, media quality, plurality and standards and stability of the UK financial system.
However, the new regime goes much further as it requires both domestic and overseas acquirors to notify their transactions. It therefore heralds one of the most significant developments in UK M&A and investment in recent years and, given the sectors in which Marriott Harrison advises, is likely to have an impact on many of our clients, particularly those that are active in the technology space, including in artificial intelligence and cybersecurity.
The trend towards increased review of proposed takeovers is in keeping with that of other major economies, particularly in Europe. Germany, for example introduced a similar regime of stricter rules and the broadening of notification requirements back in 2017, when it introduced new provisions amending the German Foreign Trade and Payments Ordinance.
The timing of the Bill’s introduction has led to criticism that it will create further uncertainty for UK businesses – including the risk that the prospect of extended deal timelines could serve as an additional deterrent – at a time when they are most in need of capital to mitigate the financial impact of the Covid-19 pandemic.
The Law Society has also raised concerns about how the new regime will operate in practice and it has warned that, as currently drafted, the Bill could create significant administrative burdens and uncertainty for investors. In order to address these concerns, it has recommended, among other matters, including a clear definition of “national security” within the Bill, a more thorough consultation on the proposed review process and the inclusion of more stringent time limits for the BEIS in relation to responding to voluntary notifications.
There is cause for optimism, however, as the Impact Assessment published alongside the Bill estimates that, while the number of notifications each year is predicted to be high (1,000 – 1,830), the number of remedies is predicted to be low (just 8 – 10). This indicates that the Government is intending to use its new intervention powers sparingly, but it remains to be seen how accurate this estimate will turn out to be. Much depends, we expect, on whether the BEIS finds itself inundated with voluntary notifications from investors in search of certainty and to avoid being subject to the BEIS’s five-year call-in powers.
Updates will follow on the progress of the Bill through Parliament as soon as further information becomes available.
This article is current as of the date of its publication. The information and any commentary contained in this article is for general information purposes only and does not constitute legal or any other type of professional advice. Marriott Harrison LLP does not accept and, to the extent permitted by law, excludes liability to any person for any loss which may arise from relying upon or otherwise using the information contained in this article.