On 29 April 2021 the UK National Security and Investment (NSI) Bill received Royal Assent. The NSI Act 2021 introduces significant legislative reforms which will overhaul the review of transactions and investments on national security grounds in the UK, against a backdrop of tightening of foreign direct investment (FDI) regimes globally. The new regime represents an important new execution risk factor, with a similar risk profile to merger control rules.
We have been very closely involved in the passage of this legislation through Parliament, including giving evidence before the Bill Select Committee and Foreign Affairs Select Committee, suggesting amendments to the Bill, and successfully assisting members of the House of Lords in arguing for specific changes to the proposed regime.
Broadly speaking, the new regime will apply to any acquisition of “material influence” in a company (which may be deemed to exist in relation to a low shareholding, potentially even below 15%), as well as the acquisition of control over assets (including land and intellectual property), which potentially gives rise to national security concerns in the UK. It will apply equally to both UK and non-UK investors (although the Government has acknowledged that UK investors will be less likely to give rise to national security concerns in practice), and may capture acquisitions of non-UK entities or assets in certain circumstances.
A mandatory notification obligation (and a corresponding prohibition on completion prior to clearance) will apply to certain transactions involving target entities which carry out specified activities in the UK in 17 sectors (including energy, transport, communications, defence, artificial intelligence and other tech-related sectors). Such transactions include the acquisition of a shareholding/voting rights of more than 25% (increased from 15% or more in the original NSI Bill – see further below).
This mandatory notification obligation will be combined with an extensive call-in power enabling the Government to call-in qualifying transactions for review, which extends to any sector and is not subject to any materiality thresholds in terms of target turnover or transaction value. Acquirers will also have a corresponding option to voluntarily notify a qualifying transaction to obtain clearance, which may be advisable in the interests of legal certainty where potential national security concerns arise.
Formal commencement of the new regime will be delayed until later this year (exact date to be confirmed). However, the Government will have retroactive powers to call in for review at the commencement date (or potentially up to five years thereafter) any qualifying transaction completed between 12 November 2020 and the commencement date. This means that it is critical for investors to consider the potential application of the new regime for all transactions completed from 12 November 2020 onwards which could potentially raise national security concerns (broadly defined).
Further to our earlier briefing issued when the NSI Bill was originally tabled in November 2020, in this briefing we set out:
Key practical takeaways for investors
- Once it enters into force later this year, the NSI regime will empower the UK Government to call in for review – and potentially prohibit – any qualifying transaction which may give rise to UK national security concerns, including:
- the acquisition of “material influence” in an entity (which may arise in relation to a low shareholding, potentially even below 15%);
- an increase in an existing stake which results in the investor’s shareholding or voting rights crossing the 25%, 50% or 75% thresholds;
- the acquisition of voting rights in an entity which enables the investor to secure or prevent the passage of any class of resolution governing the affairs of the entity; and
- the acquisition of control over assets (including land and intellectual property).
- This call-in power is exercisable at any time up to 6 months after the Secretary of State becomes aware of the transaction (for example, as a result of coverage in a national news publication), provided this is also within 5 years of the “trigger event” (i.e. acquisition of material influence or more) occurring. If the acquisition was subject to mandatory notification and completed without first obtaining clearance (see below), the 5 year time limit does not apply.
- Mandatory notification obligations will apply to certain acquisitions of shares/voting rights in target entities carrying on specified activities in the UK in 17 sectors (including energy, transport, communications, defence, artificial intelligence and other tech-related sectors), including acquisitions of more than 25% of shares or voting rights.
- The proposed sector definitions have been significantly narrowed following a public consultation, and the Government is continuing to engage with stakeholders in a number of sectors (including communications and energy) as it finalises the definitions. These will be set out in Notifiable Acquisition Regulations (by way of a separate statutory instrument, expected to be laid before Parliament shortly).
- Where the mandatory notification obligation applies, there will be a corresponding “standstill” obligation prohibiting completion prior to obtaining clearance. Breaching this standstill obligation will result in the transaction being treated as automatically void (unless retrospective validation can be obtained).
- Notification of qualifying acquisitions of entities in non-specified sectors, and qualifying acquisitions of assets in any sector, will be voluntary. However, it may be advisable to notify in the interests of certainty, if it is considered likely that the transaction might otherwise be called in for review.
- Limited guidance on the intended exercise of the call-in power was set out in a draft statement of policy intent published by the Government alongside the NSI Bill on 11 November 2020. A public consultation on a revised draft statement is due to be launched shortly.
- Whilst the focus of the new regime is clearly on foreign investment, it in principle applies equally to UK investors, who will be subject to the same notification obligations and potential sanctions (although in practice the regime is inherently likely to have a lesser impact - and operate as less of a deterrent - where investors of UK origin are concerned).
- It is also important to be aware that whilst the mandatory notification obligation applies only to qualifying acquisitions of an entity carrying out specified activities in the UK, the Government’s call-in power can also be used in relation to qualifying transactions involving non-UK companies or assets: it is sufficient if the target entity supplies goods or services to persons in the UK, or the target assets are used in connection with activities carried on in the UK or the supply of goods or services to persons in the UK.
- This means that the call-in power could be exercised in relation to, for example, the acquisition of a French company by a Japanese company, where the French company supplies UK customers (amongst others), if the Secretary of State reasonably suspects that the acquisition may give rise to a risk to UK national security.
- Where the NSI regime may be engaged, it will be important for parties to consider the impact of the notification and review process on the deal timetable. Once a notification is accepted as complete, the Government will have an initial 30 working days to decide whether to issue a call-in notice, triggering a more in-depth review. If a call-in notice is issued, a final decision must be reached within a further 30 working days, extendable by 45 working days (and potentially longer with the parties’ consent). In practice, this timetable may be extended further if “the clock is stopped” due to, for example, further information requests.
- Where national security concerns are identified following an in-depth review, the Government will have wide powers to impose remedies. Examples given by the Government include altering the amount of shares an investor is allowed to acquire, restricting access to commercial information, or controlling access to certain operational sites or works. The Government has also made clear that it will have the power to block (and potentially unwind) transactions as a last resort.
- Sanctions for non-compliance with the NSI regime will be severe: in addition to the risk of the transaction being void if completed prior to clearance where the mandatory notification obligation applies, non-compliance may result in fines of up to 5% of worldwide turnover or £10 million (whichever is the greater) and/or imprisonment of up to 5 years, as well as director disqualification for up to 15 years.
- Once the regime has entered into force later this year, notifications should be made to the new Investment Security Unit (ISU) (part of the Department of Business, Energy and Industrial Strategy (BEIS)). The Government is anticipating that 1,000-1,830 notifications will be made each year, in addition to potentially intervening in non-notified deals on its own-initiative using its call-in powers. We anticipate that these figures will prove to be a significant under-estimate, although the amendment to the shareholding threshold for mandatory notification should reduce the risk of the ISU being overwhelmed with notifications. The Government is expecting 75-90 transactions to be called-in for in-depth assessment each year (whether following notification or on its own initiative). This will be a notable sea-change compared to the existing public interest merger regime under the Enterprise Act 2002 (EA02), where the Government has intervened in just 12 transactions on national security grounds since 2003.
- However, it is notable that the Government has also stated that it is expecting only around 10 deals per year to require remedies (significantly lower than the estimate of 50 deals per year made in the context of the voluntary filing framework originally proposed in a 2018 White Paper).
- The Government is encouraging parties to seek informal guidance from the ISU as to the application of the new regime to particular transactions, both prior to and after formal commencement of the NSI Act. It has indicated that such guidance will usually be provided within a similar timeframe to that applicable to the initial review of a notification, i.e. within 30 working days. In genuinely urgent cases, it should be possible to obtain guidance more quickly, but this cannot be guaranteed.
- Unusually, the NSI regime will have retroactive effect: from the commencement date the Government will be able to call in for review any qualifying transaction completed between 12 November 2020 and the commencement date. This retrospective call-in power may be exercised at any time up to six months after the commencement of the NSI Act or six months after the date on which the Government becomes aware of the transaction, whichever is later (subject to a longstop of five years after completion of the relevant transaction).
- In practice, we expect that the Government’s exercise of its retrospective call-in powers will focus on qualifying acquisitions of entities carrying out specified activities in the UK in one or more of the 17 sectors (to which the mandatory notification obligation would have applied had it been in force at the time the transaction in question was completed). However, it cannot be ruled out that it will be used more widely.
- This means that it is critical for investors to consider the potential application of the new regime for all transactions completed from 12 November 2020 onwards which could potentially raise national security concerns (broadly defined).
- In particular, for transactions that have not yet signed, parties will need to consider whether an NSI regime condition precedent should be included in the transaction documents and possibly factor the NSI review process into the deal timeline and long stop date. Acquirers may also need to undertake more extensive due diligence on any target activities that could be relevant to national security.
- For deals that have already been signed but not yet completed, parties should consider obtaining informal guidance from the ISU if there is any risk of a potential national security issue.
- The impact of the new regime on foreign investment into the UK remains to be seen. The Government has repeatedly stressed that it does not wish to deter friendly foreign investment and has acknowledged the importance of such investment for the UK economy.
- However, there is a clear risk that the new regime may deter some foreign investment into the UK, particularly in circumstances where, for example, the mandatory notification and standstill obligations - combined with a greater risk of detailed and more lengthy assessment for certain acquirers - could be enough to disadvantage some bidders in fast-paced auction processes.
Key amendments made to the NSI Bill
Most of the main elements of the NSI regime remain as originally proposed in the NSI Bill. However, two important amendments were made during the passage of the legislation through Parliament.
Shareholding/voting rights threshold for mandatory notification increased from 15% to more than 25%
Under the NSI Bill as originally tabled, the types of transaction designated as “notifiable acquisitions” subject to a mandatory notification obligation (and a corresponding prohibition on completion prior to clearance) included the acquisition of a shareholding/voting rights of 15% or more in an entity carrying out specified activities in the UK in one of 17 specified sectors.
Concerns were raised that this would result in a huge number of notifications, the vast majority of which would not give rise to any national security concerns. It was unclear how the ISU would be able to handle such a significant volume of notifications within the proposed statutory review timetable, and it was anticipated that this would risk adversely impacting investor confidence in the UK.
We were very closely involved in the Parliamentary debates and related discussions with Government on this issue, and highlighted that the proposed 15% threshold was significantly below the mandatory notification thresholds used in a number of other FDI regimes, including France (which generally requires a 25% shareholding) and Canada (33.3%). We proposed that setting the threshold at 25% would be a more proportionate approach, acknowledging the importance of protecting UK national security whilst minimising unnecessary regulatory burdens on investors.
We were delighted that the Government tabled an amendment to this effect following consideration of the NSI Bill by the House of Lords, which was accepted by the House of Commons and duly incorporated in the NSI Act.
It is important to be aware that the Government will retain powers to call-in an acquisition of a shareholding/voting rights of 25% or less (in any sector) where this results in the acquirer gaining “material influence” over the policy of the entity and the Secretary of State reasonably suspects that this may give rise to a risk to national security. Where a risk of call-in is identified, it may be advisable to voluntarily notify the transaction. However, there will be no prohibition on completion prior to clearance (subject to the terms of any interim order imposed by the Secretary of State if he/she decides that an in-depth investigation is required – see below), and no sanctions for non-notification.
Additional information included in Annual Report prepared for Parliament
Amendments have also been made to the NSI Bill as originally tabled to expand the information which must be included in the Annual Report on the operation of the NSI regime (which must be prepared by the Secretary of State and laid before Parliament each year).
The report must now also include details of the average number of working days from receipt of a mandatory or voluntary notification to (i) a decision by the Secretary of State to accept the notification or (ii) the giving of written reasons for a decision by the Secretary of State to reject the notification (for example, on the basis of it being incomplete).
The statutory timetable for review of a notified transaction does not start to run until the notification is accepted by the Secretary of State, so this additional information will be helpful for investors seeking to estimate the likely impact of notification on the deal timetable.
Detailed analysis of the key elements of the new regime
We set out below our updated analysis of the key elements of the new regime. To go directly to specific sections, please use the following links:
Until now, the UK has not had a separate FDI screening regime; instead, under the EA02, transactions meeting the relevant jurisdictional thresholds have been subject to review by the Competition and Markets Authority (CMA) as to their impact on competition.
Broadly, the CMA has jurisdiction to review transactions where the target’s UK turnover exceeds £70m and/or where the transactions lead to the creation or enhancement of a share of supply in the UK to 25% or more. The EA02 also sets out limited grounds on which the Secretary of State can intervene for public interest reasons. At the time of writing, these grounds are: national security, media plurality, stability of the UK financial system and - prompted by the Covid-19 pandemic - combatting and mitigating the effects of a public health emergency.
The UK Green Paper on National Security and Infrastructure Investment published in October 2017 presented both short and long term proposals to reform the existing system, in light of concerns that the existing regime was not sufficient to protect UK national security interests.
The short term proposals were adopted by the Government on 11 June 2018, by amending the EA02 to reduce the jurisdictional thresholds to £1m UK target turnover or an existing share of supply of at least 25% (i.e. no requirement of any increase in the share of supply) for transactions in the military/dual use, quantum technology and computing hardware sectors (see our previous briefing). With effect from 21 July 2020, these lower jurisdictional thresholds have also been applied to transactions in the artificial intelligence, cryptographic authentication technology and advanced materials sectors (see our blog post).
Longer term proposals regarding a new framework for permanent and significant reforms to the Government’s ability to intervene in transactions presenting national security concerns were set out in a July 2018 White Paper. This proposed a voluntary notification regime, allowing companies to flag transactions potentially raising national security concerns, alongside a call in power to enable the Government to review non-notified transactions up to 6 months following completion. The proposed framework did not include any target turnover or market share thresholds, and was intended to be applicable across all sectors, subject to certain specified sectors being identified as being particularly likely to give rise to concerns (including parts of national infrastructure and certain advanced technologies). For further detail on the White Paper proposals please see our previous briefing.
Many of the proposals in the White Paper have been carried forward into the NSI Act. However, as discussed below, the NSI regime also departs from those original proposals in a number of significant ways, most notably by introducing a mandatory notification obligation for certain transactions.
Once the NSI Act enters into force later this year, the Secretary of State will be able to issue a “call-in notice” where arrangements are in progress or in contemplation which would, if carried into effect, result in a “Trigger Event” taking place, and he/she reasonably suspects that the event may give rise to a risk to UK national security.
For this purpose, “Trigger Events” are defined as:
- the acquisition of “material influence” over the policy of the target entity (which may be deemed to exist in relation to a low shareholding, potentially even below 15%);
- an increase in the percentage of shares or voting rights held which results in crossing the 25%, 50% or 75% thresholds (for example, increasing a shareholding in a qualifying entity from 25% to 50% would be caught, whereas increasing it from 25% to 49% would not);
- the acquisition of voting rights in the target entity that (whether alone or together with other voting rights held by the acquirer) enable the acquirer secure or prevent the passage of any class of resolution governing the affairs of the entity; and
- in relation to acquisition of assets, the acquisition of the ability to use or direct the use of the asset to a greater extent than before. Assets for these purposes include land, tangible property and intellectual property (including trade secrets, databases, code, algorithms, formulae, designs, plans or software).
Determining exactly when such arrangements can be said to be sufficiently “in progress or contemplation” to permit the Secretary of State to issue a call-in notice will turn on the particular facts of the transaction in question. However, by analogy with the CMA’s decisional practice under similar provisions of the UK merger control regime (and our experience of advising clients in that context), it appears likely that the relevant point in time may occur much earlier than parties might typically expect. For example, the CMA’s decision last year in Gardner/Impcross suggests that having inter-party talks and providing an information memorandum, combined with evidence of the parties’ mutual contemplation of the transaction and the acquirer’s ability to bring it about, is sufficient to establish that arrangements are “in contemplation” for the purposes of enabling the transaction to be reviewed under the merger control regime. Investors should therefore be aware that the risk of call-in under the NSI regime could, in principle, arise very early in the M&A process, including where a non-binding offer has been submitted or heads of terms agreed (as these could be considered agreements or arrangements which enable an acquirer - contingently or not - to do something in the future that would result in a Trigger Event taking place).
It is also important to be aware that, in contrast to many other FDI regimes, the scope of the Government’s call-in power will also extend to qualifying transactions (i.e. Trigger Events which potentially give rise to national security concerns) involving non-UK companies or assets: it is sufficient if the target entity supplies goods or services to persons in the UK, or the target assets are used in connection with activities carried on in the UK or the supply of goods or services to persons in the UK.
This means that the call-in power could be exercised in relation to, for example, the acquisition of a French company by a Japanese company, where the French company supplies goods or services to UK customers, if the Secretary of State reasonably suspects that the acquisition may give rise to a risk to UK national security. In practice, this will be more likely if the supply of goods/services is in one of the 17 specified sectors, but this is not a pre-requisite.
The Secretary of State may exercise the call-in power at any time up to 6 months after he/she becomes aware of the transaction (for example, as a result of coverage in a national news publication), provided this is also within 5 years of the “trigger event” occurring. If the acquisition fell within the scope of the mandatory notification and was completed without first obtaining clearance (see below), the 5-year longstop does not apply.
Limited guidance on the Government’s intended exercise of its call-in power was set out in a draft statement of policy intent published by the Government alongside the NSI Bill on 11 November 2020. Broadly speaking, the decision as to whether to call-in a non-notified transaction for review will focus on three key considerations:
- the Target Risk – the nature of the target and whether it is in an area of the economy where the Government considers risks are more likely to arise;
- the Trigger Event Risk – the type and level of control being acquired and how this could be used in practice; and
- the Acquirer Risk – the extent to which the acquirer raises national security concerns.
The draft statement of policy intent considers each of these risks in turn, and includes some helpful clarifications on certain issues. For example, it states that the Secretary of State “rarely” expects to intervene in transactions outside the “headline sectors” in which national security risks are more likely to arise than in the wider economy, or in asset transactions more generally. It also confirms that the Secretary of State will not “often” seek to interfere with long-term investments by pension funds in entities that operate in the UK’s national infrastructure, and that the “overwhelming majority” of loans, conditional acquisitions, futures and options are not expected to pose any national security concerns (and in the rare circumstances where they do, the Secretary of State generally only expects to intervene when an actual acquisition of control will take place, giving the example of a lender seizing collateral).
However, there remain a significant number of important issues which are not addressed in any detail by the draft statement of policy intent. For example, it states that land is generally only expected to be an asset of national security interest where it is, or is proximate to, a sensitive site (such as critical national infrastructure sites or government buildings), but the Secretary of State may also take into account the intended use of the land. Yet there is no definition of “proximate” in this context, and no publicly available list of sensitive sites or searchable online database (such as the database launched last year in the context of the US FDI regime) to enable acquirers to carry out the necessary due diligence to assess the likelihood of a proposed transaction being called in for review. Similarly, there is a lack of detailed guidance on the intended use of the call-in power in relation to lending arrangements and IP licensing.
We have been heavily involved in discussions with Government about the need for more detailed practical guidance for investors, and the Government has indicated that it plans to launch a public consultation shortly on a revised version of the draft statement of policy intent, prior to finalising the statement ahead of the commencement date (as required by the NSI Act). It is hoped that the final version will be a more detailed and useful document for investors seeking to assess the likelihood of a particular transaction being called in for review, although in practice it seems likely that investors will also need to consider seeking informal guidance from the ISU for specific transactions (see below).
Alongside the Government’s extremely wide call-in powers, the NSI regime introduces a mandatory notification obligation for certain transactions, which applies even if it is clear that – in the context of the particular transaction - no national security concerns will arise in practice. Following acceptance of a mandatory notification, the Secretary of State must then decide whether to issue a call-in notice (and initiate an in-depth review) within 30 working days (see further below).
The mandatory notification obligation does not apply to all Trigger Events. It only applies to “notifiable acquisitions”, which are expressly defined as transactions involving a target entity which carries on activities in the UK of a specified description in one of 17 specified sectors, which result in:
- the percentage of shares or voting rights that the acquirer holds in the entity increasing and crossing the 25%, 50% or 75% thresholds (for example, increasing a shareholding from 25% to 40% would be caught, whereas increasing it from 26% to 49% would not); or
- the acquisition of voting rights in the target entity that (whether alone or together with other voting rights held by the acquirer) enable the acquirer to secure or prevent the passage of any class of resolution governing the affairs of the entity.
For such transactions, there is also a corresponding “standstill obligation”, which prohibits completion prior to clearance. Breach of the standstill obligation will result in the transaction being deemed automatically void and of no legal effect (subject to successfully obtaining retrospective validation from the Secretary of State).
It is important to note that whilst the acquisition of material influence constitutes a Trigger Event for the purposes of the Government’s call-in powers (and the corresponding possibility of voluntarily notifying a qualifying transaction), it does not (in itself) amount to a notifiable acquisition requiring mandatory notification, even if the target entity carries on activities in the UK of a specified description in one of the 17 specified sectors.
Similarly, the mandatory notification obligation does not apply to any acquisition of control over assets, in any sector (subject to any future amendments made to the scope of the mandatory regime pursuant to Notifiable Acquisition Regulations, which is a possibility expressly envisaged in the NSI Act).
The precise definitions of the specified activities in the 17 specified sectors are not included in the NSI Act. They will be set out separately in Notifiable Acquisition Regulations, which will take the form of a statutory instrument which is due to be laid before Parliament shortly. However, the 17 sectors are: civil nuclear; communications; data infrastructure; defence; energy; transport; artificial intelligence; autonomous robotics; computing hardware; cryptographic authentication; advanced materials; quantum technologies; synthetic biology (originally engineering biology); critical suppliers to Government; critical suppliers to the emergency services; military or dual-use technologies; and satellite and space technologies.
Draft definitions of the specified activities within each of these sectors were published for consultation when the NSI Bill was originally introduced to Parliament in November 2020. Together with a wide range of other stakeholders, we expressed concerns that many of these draft sector definitions were drafted too broadly, and in many cases were not sufficiently specific to enable acquirers to identify whether a particular transaction would fall within scope of mandatory notification.
In its response to the consultation (published on 2 March 2020) the Government acknowledged these concerns, and set out revised draft definitions which represented a significant narrowing of scope in many areas. For an overview of the key changes made in each of the 17 sectors please see our previous briefing.
These revised draft definitions remain under review, and the Government is continuing to carry out targeted engagements with relevant stakeholders to refine the definitions further in certain sectors, including communications and energy. Now that the NSI Act has received Royal Assent, a draft of the proposed Notifiable Acquisition Regulations containing the final draft definitions is expected to be laid before Parliament shortly (prior to the grant of Royal Assent, the Secretary of State did not have the power to make such regulations).
The final sector definitions adopted in the Notifiable Acquisition Regulations will also be kept under review going forward, and may be updated in the future as needed, for example as the relevant technology evolves.
A voluntary notification may be made in relation to any transaction which could potentially be called in for review by the Secretary of State, i.e. any Trigger Event (see above), which may give rise to a risk to UK national security. Following acceptance of a voluntary notification, the Secretary of State must then decide whether to issue a call-in notice (and initiate an in-depth review) within 30 working days (see further below).
In practice, deciding whether to make a voluntary notification is likely to depend largely on an assessment of the likelihood of the transaction being called in for review in the event that it is not notified. Where a transaction amounts to a Trigger Event, and there is a potential risk to national security (broadly defined), it may be advisable to voluntarily notify the transaction in the interests of legal certainty, given that the Secretary of State’s call-in power could potentially be exercised at any time up to five years post-completion (provided this is not more than six months after the Secretary of State becomes aware of the transaction).
As discussed above, the Government has set out limited guidance on the intended exercise of the call-in power in a draft statement of policy intent, but in many cases this is unlikely to provide sufficient detail to enable investors to accurately assess the risk of call-in. A public consultation on a revised version of the statement is due to be launched shortly, and it is hoped that the final version of the statement will provide a greater degree of clarity for investors. In addition, investors can request informal guidance from the ISU regarding the application of the NSI regime to a particular transaction (see further below).
The NSI regime applies in principle equally to all investors, both UK and non-UK. However, when assessing the extent to which a particular acquirer raises national security concerns, the Government’s focus will be on acquirers who are either likely to be directly hostile to the interests of the UK’s national security or owe allegiance to those who are.
The Government has made clear that it is affiliations to a hostile party rather than foreign nationality in itself or relationships with foreign powers that will be problematic. In particular, the Government has expressly stated that state-owned enterprises, sovereign wealth funds or other foreign state affiliated entities are not considered to be inherently more likely to pose a national security risk, particularly where they have operational independence and pursue long term investment strategies.
In practice, the NSI regime is inherently likely to have a lesser impact - and operate as less of a deterrent - where investors of UK origin are concerned. However, the Government has indicated that the fact that a transaction does not involve foreign investors would not necessarily preclude it from being called in for review or, indeed, a mandatory notification being required if the transaction constituted a “notifiable acquisition” (see above).
The Secretary of State will have powers under the NSI Act to exempt certain acquisitions from the mandatory notification regime on the basis of the characteristics of the acquirer, but it is not anticipated that any such “White List” will be forthcoming in the near future. It is hoped that further details on the circumstances in which these powers will be used by the Secretary of State will be set out in forthcoming guidance.
No notifications (whether mandatory or voluntary) will be accepted prior to the formal commencement of the NSI regime later this year. From the date of commencement, notifications will need to be submitted to the ISU via a new online portal (currently in development). No filing fees will apply.
The final version of the notification form has not yet been published, but draft questions were published by the Government on 20 November 2020 to provide examples of the information that is likely to be required, and comments were invited from stakeholders. In addition to details of the parties and the controlling ownership structure for the acquired target entity/assets before and after the acquisition, the draft questions relate to matters such as whether the target entity is included in any UK Government protected lists and whether any government other than the UK has a direct role in the operation/decision-making of the acquirer.
With regard to the point in time at which a notification should be made:
- where the mandatory notification obligation applies, the notification must be submitted prior to the acquisition of control;
- for voluntary notifications, the notification may be submitted from the point at which arrangements are in progress or contemplation which, if carried into effect, would result in a Trigger Event taking place in relation to a qualifying entity or asset. This is the same point in the process of a transaction at which the Secretary of State may exercise his/her call-in power (discussed above).
The Government will actively monitor markets for transactions which may potentially give rise to national security concerns. In addition, the NSI Act grants the Government extensive information gathering powers, enabling it to request any information, at any time, from any person, if it is considered necessary to inform an assessment of the national security risks of a transaction and the request is proportionate in terms of enabling the Secretary of State to carry out his/her functions under the regime. This may include requesting information in circumstances where no notification has been submitted so as to enable him/her to determine whether to exercise the call in power.
Information may be requested by way of a formal notice, which will specify a deadline for responding (not subject to any statutory limit). The Secretary of State may also require the attendance of witnesses to give evidence at a time and place specified in an attendance notice.
Information and attendance notices may be given to persons located outside the UK, but only where the person in question is:
- the acquirer in a transaction which amounts to (or would amount to if the arrangements in progress or contemplation are carried into effect):
- a Trigger Event involving a qualifying entity which is formed or recognised under UK law;
- a Trigger Event involving a qualifying asset which is situated in the UK or the territorial sea or used in connection with activities carried on in the UK;
- a UK national;
- an individual ordinarily resident in the UK;
- a body incorporated or constituted under the law of any part of the UK; or
- carrying on business in the UK.
Failure to comply with the requirements of an information or attendance notice without reasonable excuse is punishable by up to 2 years’ imprisonment and/or a fine which may be calculated as a fixed penalty of up to £30,000 or a daily rate penalty of up to £15,000 per day (or a combination of both).
Intentionally or recklessly altering, supressing or destroying information required by an information notice (or causing or permitting such alteration, suppression or destruction), or knowingly providing materially false or misleading information in response to an information request or attendance notice (or being reckless as to whether the information is false or misleading in a material respect) is an offence punishable by up to 2 years’ imprisonment and/or a fine of up to £30,000.
If the Secretary of State’s decision as to whether to allow a transaction to proceed is materially affected by the provision of false or misleading information, the Secretary of State may reconsider the decision and reach a different conclusion. This could include exercising the power to call in a transaction for review, even if the usual time limit for doing so has expired (subject to doing so within six months of the day on which the information was discovered to be false or misleading).
The Secretary of State may disclose information obtained in the course of the review of a transaction under the NSI regime to other public authorities (and vice-versa), both UK and overseas, for certain specified purposes. The NSI Act also amends the overseas disclosure gateway in section 243 of the EA02 to remove the restriction on UK public authorities (including the CMA) from disclosing information they obtain in connection with a merger investigation under that gateway. The Government has indicated that this is intended to strengthen the CMA’s ability to protect UK markets and consumers as it takes a more active role internationally post-Brexit.
Where a call-in notice has been issued (either following the initial review of a mandatory or voluntary notification, or on the Secretary of State’s own initiative), the Secretary of State may impose an interim order prohibiting pre-emptive action pending the conclusion of the in-depth investigation of the transaction.
Such an order may include prohibiting integration of the businesses pending clearance under the NSI regime, and may extend to cover a person’s conduct outside the UK if they are a UK national, an individual ordinarily resident in the UK, a body incorporated or constituted under the law of any part of the UK, or carrying on business in the UK. Such interim orders will not necessarily be made public.
It appears likely that interim orders under the NSI regime will operate in a similar manner to the “initial enforcement orders” (IEOs) regularly imposed by the CMA when investigating the potential impact of a merger on competition. It is worth noting in this context that the CMA now routinely imposes IEOs in completed mergers, and is increasingly also doing so in anticipated mergers, as well as stepping up its enforcement action in relation to breaches of IEOs (see our blog post for further background). It remains to be seen whether the Secretary of State will take a similar interventionist approach in the context of the NSI regime.
When tabling the NSI Bill before Parliament, the Government emphasised its intention to screen investments “much more quickly than the current regime, assessing transactions within 30 working days – and often faster”.
However, the suggestion that a decision will be reached in every case within 30 working days is misleading. Pursuant to the review timetable set out in the NSI Act, the Secretary of State must reach an initial decision within 30 working days as to whether to clear a transaction following acceptance of a mandatory or voluntary notification. However, if the Secretary of State decides that further detailed scrutiny is required and issues a call-in notice, he/she then has a further 30 working days to carry out a detailed assessment, which may be extended by up to an additional 45 working days. This means that the total time for review is potentially 105 working days (or even longer if the parties consent to a further voluntary extension, which it seems likely they would do if, for example, more time was needed to finalise discussions relating to remedies).
Where an information notice or attendance notice is issued requesting information to be provided, this will also “stop the clock”, and the review timetable will not start running again until the Secretary of State confirms that either the requirements of the notice have been complied with or that the deadline for compliance has passed.
Furthermore, the review timeline only starts to run in the first place once the Secretary of State has formally accepted a notification (or exercised his/her power to call in the transaction on his/her own initiative). The Secretary of State may initially reject a notification on a number of grounds, including where it does not include all necessary information. This could potentially result in one or more rounds of submission and rejection, before the formal review timeline starts to run. However, it is understood that the Government will be encouraging proactive pre-notification contacts (potentially akin to pre-notification discussions with the CMA in the context of the EA02 merger control regime) which may enable parties to obtain confirmation that a notification will be deemed “complete” prior to formal submission.
Where the NSI regime may be engaged, it will be important to factor the review timeline into deal timetable planning, alongside other applicable regulatory approval processes such as merger control (potentially across multiple jurisdictions). This will be particularly important where the transaction falls within the scope of the mandatory notification obligation, given the prohibition on completion of such transactions prior to obtaining clearance.
Where national security concerns are identified following an in-depth review of a transaction, the Secretary of State may require remedies in order to allow the transaction to proceed. Examples given by the Government include altering the amount of shares an investor is allowed to acquire, restricting access to commercial information, or controlling access to certain operational sites or works.
The approach taken by the Secretary of State when accepting undertakings to address national security concerns in the context of recent cases considered under the public interest merger regime of the EA02 may offer some guidance as to the sort of remedies which may need to be negotiated. For example, in both Connect BidCo/Inmarsat and Advent/Cobham it proved possible to address national security concerns by agreeing undertakings relating to the maintenance of strategic capabilities and protection of sensitive information.
However, businesses should not assume that it will always be possible to agree remedies, and the Government has made clear that it will have the power to block (and potentially unwind) transactions as a last resort. Whilst no transactions have been prohibited on national security grounds under the existing public interest merger regime, this should not be seen as providing any precedent for the new NSI regime, which is being introduced against a backdrop of increased global protectionism and a growing number of high-profile examples of deals being blocked under FDI regimes in other jurisdictions (e.g. Beijing Kulun/Grindr in the US, Yantai Taihai/Leifeld in Germany and Cheung Kong Infrastructure/APA Group in Australia).
It is however notable that the Government has stated that it is expecting only around 10 deals per year to require remedies (which is significantly lower than the estimate of 50 deals per year made in the context of the voluntary framework originally proposed in the White Paper; it is unclear on what basis this revised estimate under a stricter regime has been reached).
In terms of remedies process, the positioning under the new NSI regime appears to be somewhat different to the merger remedies process before the CMA: the parties will have some degree of involvement, but the Government has stated that it will make a deliberate and formal decision on the remedies it believes are required.
With regard to extra-territorial application of remedies orders, the NSI Act provides that a final order may only apply to a person’s conduct outside the UK if they are a UK national, an individual ordinarily resident in the UK, a body incorporated or constituted under the law of any part of the UK, or carrying on business in the UK.
Sanctions for non-compliance with the NSI regime will be severe:
- fines of up to 5% of worldwide turnover or £10 million (whichever is the greater) and/or imprisonment of up to 5 years;
- director disqualification (up to 15 years); and
- transactions completed in breach of the standstill obligation (which applies to transactions which fall within the scope of the mandatory notification obligation) will be void and of no legal effect.
It remains unclear exactly how the “automatic voidness” sanction will apply to non-UK legally constituted assets or transactions, given the limitations placed on extra-territorial application of final remedies orders. This issue was debated during the passage of the NSI Act through Parliament, and amendments were tabled at the Report stage in the House of Lords to replace the automatic sanction with a power for the Secretary of State to declare the transaction to be void (i.e. “voidable” rather than being automatically void). However, the proposed amendments were rejected.
Whilst it will not be possible to notify deals and seek formal clearance under the NSI regime prior to formal commencement, the Government will be able to call in from the commencement date any qualifying transaction completed on or after 12 November 2020 which gives rise to national security concerns.
This is intended to avoid a “rush” of potentially problematic deals being completed prior to formal commencement of the NSI regime later this year. This approach is highly unusual and places investors in a potentially difficult position in relation to deals currently being negotiated as well as deals that have already signed and are due to complete in the coming months.
For transactions that have not yet signed, parties should consider whether a condition precedent to cover the NSI regime should be included in the transaction documents, and possibly factor the NSI review process into the deal timeline and any longstop date. Acquirers may also need to do more extensive due diligence on any target activities or assets that could be relevant to UK national security.
For deals that have already been signed but not yet completed, parties should consider obtaining informal guidance from the ISU if there is any risk of a potential national security issue.
The Government is encouraging investors to seek informal guidance in relation to transactions which are due to complete prior to the commencement date where questions arise as to the potential application of the new regime (see further below). This is likely to be particularly important in circumstances where the transaction would fall within the scope of the mandatory notification obligation if the NSI regime were already in force at the time of completion, and national security concerns may potentially arise (given the expectation that these will be the transactions which the Government is likely to focus on when exercising its retrospective call-in powers). Determining whether a particular transaction would be within scope of the mandatory regime is complicated in practice by the fact that the definitions of the specified activities in the 17 specified sectors have not yet been finalised. For now, this assessment should be undertaken on the basis of the latest draft definitions published by the Government in March 2020.
The Government is encouraging parties to seek informal guidance from the ISU as to the application of the new regime to particular transactions, both prior to and after formal commencement of the NSI Act.
It has indicated that such guidance will usually be provided in a similar timeframe to that applicable to the initial review of a notification, i.e. within 30 working days. In genuinely urgent cases, it should be possible to obtain guidance much more quickly, but this cannot be guaranteed.
Where the ISU has been informed about a transaction prior to the commencement date through the informal guidance route, the Government has confirmed that the potential exercise of its call-in power will be limited to 6 months from the commencement date.
Following formal commencement of the NSI Act, the existing public interest merger regime provisions of the EA02 will fall away insofar as a transaction involves national security considerations (however it should be noted that up until formal commencement the Secretary of State will continue to have and make use of his/her powers under the EA02 if necessary).
However, there is nonetheless likely to be material interaction between decisions taken by the CMA under its EA02 powers to review mergers on competition grounds and decisions taken by the Secretary of State pursuant to the NSI regime, given that a particular transaction may well engage both regimes.
This is expressly recognised in the NSI Act, which makes clear that where a transaction is being reviewed under the NSI regime and under UK competition law by the CMA and the Secretary of State has given a final order under the NSI Act, he/she has the power to give directions to the CMA to ensure that the CMA and NSI regime remedies are complementary and that CMA’s decision does not undermine or cut across remedies agreed for resolving national security concerns. This appears to be similar to the current approach under the public interest merger regime, where public interest considerations may “trump” competition considerations in the event of conflict between the two.
However, the NSI Act and the materials published by the Government when the NSI Bill was originally tabled are silent on how the earlier stages of the process will interact, particularly in light of the often lengthy pre-notification discussions that are required for CMA filings, and the lack of clarity as to the scope of pre-notification discussions under the NSI regime.
It is, however, helpful that the NSI Act incorporates similar wording to the EA02 with regard to the point in the transaction process at which a transaction may be voluntarily notified or called-in (i.e. “in progress or contemplation”). Moreover, the Government has stated that the CMA and the ISU will prepare a more detailed Memorandum of Understanding to resolve any conflicts between the competition and NSI regimes. In the interim, however, it would seem sensible that if both NSI regime notifications and CMA filings may be required, both regulators are approached at the same time to ensure that timelines for the review and clearance process do not come into conflict.
The commencement date for the NSI Act has not yet been confirmed, but the Government has indicated that it intends the new regime to be fully implemented by the end of 2021, subject to further Parliamentary scrutiny and debate on the statutory instruments related to the new regime.
Between now and the commencement date, a number of further steps need to be taken to achieve this:
- publication of a final statement of policy intent relating to exercise of the Secretary of State’s call-in power, which will be preceded by a public consultation on a revised draft statement (due to be launched shortly);
- passage of Notifiable Acquisition Regulations setting out the specified activities in the 17 specified sectors for the purpose of determining whether a transaction is caught by the mandatory notification obligation;
- passage of regulations prescribing the form and content of a mandatory and voluntary notification (no further formal consultation is planned in this regard, but the Government has indicated that it will continue with targeted engagement with interested parties “to test the form”);
- passage of regulations prescribing the form and content of an application for retrospective validation of a transaction falling within the scope of the mandatory notification obligation which has been completed without first obtaining clearance;
- passage of regulations specifying how to determine the turnover of a business for the purposes of calculating penalties and defining when a business to be treated as controlled by another business;
- passage of regulations specifying the procedure for serving call-in notices, information and attendance notices, and notices relating to remedies; and
- passage of regulations setting out commencement provisions, together with any necessary transitional and saving provisions not already included in the NSI Act to ensure the regime can commence.
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2021