The UK’s new national security screening regime
The UK Government has published its long-awaited National Security and Investment (NS&I) Bill which will establish a new screening regime for investments in a wide range of sensitive and strategic sectors, with – for the first time - mandatory filing and pre-approval requirements for deals involving specified sectors and significant civil and criminal penalties for non-compliance.
The Bill started its legislative process through the UK’s parliament on 11 November 2020, so is not expected to become law until Q1-Q2 2021 at the earliest, depending on parliamentary time. However, once the regime is in force, the Government will be able retrospectively to call-in certain deals which had not completed by 12 November but which potentially give rise to national security concerns. This power is expected to be used rarely, but given the wide-scope of the regime and the Government’s powers, investors currently involved in deals that would fall under the mandatory regime or may otherwise give rise to national security issues should consider engaging with the Government early and should ensure appropriate protection in deal documents.
Deals which have not completed by the time the new regime comes into force, and which trigger the mandatory notification requirement, will need to be notified and cleared before closing.
Acquisitions and investments falling within scope of the new regime will be notified to a new Investment Security Unit within the Department for Business, Energy and Industrial Strategy (BEIS).
The Government will also be able to call-in certain deals (before or after completion) which it considers fall within scope and raise potential concerns.
The Business Secretary, currently Alok Sharma, will be the decision-maker, acting independently to assess the risk of the investment to national security and whether any remedies are necessary and proportionate to prevent or mitigate that risk. All such decisions will be subject to judicial oversight.
The new regime aims to address growing concerns around mergers, acquisitions and other types of deals that could threaten national security. The Government has been considering reform to the existing public interest regime for some time, but its approach has moved significantly since the 2018 White Paper was published, reflecting changed attitudes to perceived threats and stricter regimes brought in by other countries, including the US, Australia, Japan and many in Europe (notably, Germany, France, Italy and Spain).
Key features of the new regime are:
acquisitions of certain shareholdings in businesses active in one of 17 designated sectors will be subject to a new mandatory notification system with statutory review time-lines. These sectors include:
- critical national infrastructure (e.g. civil nuclear, communications, data infrastructure, defence, energy and transport);
- advanced technologies (e.g. artificial intelligence, autonomous robotics, computing hardware, cryptographic authentication, advanced materials, quantum technologies and engineering biology);
- critical suppliers to Government and emergency services;
- military or dual-use technologies; and
- satellite and space technologies.
Transactions falling within the scope of the mandatory notification requirements will not be permitted to complete until clearance is given by the Government. Transactions that complete before receiving Government clearance will be legally void.
In order to tightly define the sectors which will require mandatory notification, the Government is currently consulting on proposed sector definitions which will remain under review and subject to change. The consultation runs for 8 weeks up to 6 January 2021.
- target risk: if the target is active in one of the sectors which the Government has identified as areas where national security risks are more likely to arise (e.g. critical infrastructure, advanced technology, military and dual-use technologies and suppliers to Government), and exceptionally in the wider economy;
- trigger event risk: the type and level of control being acquired and the potential for such acquisition to undermine national security; and
- acquirer risk: the extent to which the Government considers that a particular acquirer raises national security concerns, for example, due to affiliations with hostile states or organisations.
- restricting the amount of shares acquired;
- ring-fencing sensitive information and/or technology;
- requirements to maintain strategic capabilities/security of supply in the UK; or
- commitments to maintain a UK headquarters or presence and to protect employees and local R&D capabilities.
Impact on investors: start preparing today
Under the new regime, the Government expects a dramatic increase in notifications signalling the significant gear change in the UK’s approach. The Government forecasts 1,000 – 1,830 notifications, 70-95 national security assessments and around 10 cases requiring remedies per year. Although the new regime will not be in place for several months, any party considering investing in a business which falls within the scope of the regime should consider:
- Engaging in the debate on the regime’s scope: any investors or businesses active in the relevant sectors should review the Government’s stated intentions and draft definitions of sectors that will be subject to mandatory notification to ensure the scope of the regime is sufficiently clearly defined, predictable and transparent. Going forward, the scope of these sectors will need to be kept under constant review.
- In-flight cases - assess the risk of the deal being ‘called-in’ after the regime comes into force:
- acquisitions which close between 12 November and commencement of the new regime may be called-in for a period of up to 6 months from commencement (if the Secretary of State was aware of the deal before commencement) or 6 months from when the Secretary of State became aware (if he/she became aware after commencement) where the transaction raises national security concerns and the Government has not exercised its powers to intervene under the Enterprise Act 2002 regime;
- acquisitions which have signed but not closed by commencement but which fall within the scope of the mandatory notification regime will trigger a mandatory notification requirement and will be prohibited from closing until clearance has been received.
In each of these cases, parties should assess the risk of the acquisition falling within scope and, if appropriate, contact the new Investment Security Unit for informal advice. Early engagement with the Government has a number of advantages in terms of timing and predictability, particularly in the early stages of the regime.
- Risk of mandatory filing obligation or call-in: once the regime comes into force, investors will need to assess early on whether deals fall within scope for mandatory filing obligations or are at risk of call-in and should be notified voluntarily, alongside other foreign investment review and merger control requirements.
- Deal documents: investors negotiating deals should ensure that they include appropriate conditionality, risk allocation measures and long-stop dates for a potential notification and review period. Similar considerations apply to investors seeking to sell stakes in businesses which may now involve suspension obligations and intervention risk driven, to some extent, by the identify of the new acquirer.
- Identify possible remedies to secure clearance: for any deals that may raise national security issues, parties are recommended to engage with the Government early on potential solutions to resolve national security concerns. Although no deal has yet been blocked on public interest concerns, a number have been abandoned following an intervention and, for those which proceed, strict conditions are frequently imposed. Early engagement on potential remedies is key to reaching an acceptable outcome.
The new regime will have a significant impact on deal certainty and timing for any investments involving a sensitive or strategic sector.
As the Bill progresses through parliament, now is a crucial time to engage with discussions and understand the scope of the final regime in order to anticipate the likely impact on any live transactions and your forward-looking M&A strategies.