On 4 January 2022, the UK National Security and Investment Act will commence. It will introduce a new screening regime for transactions that might raise national security concerns.
The Act is likely to impact a significant number of transactions in key sectors of the economy. The scope of the regime is striking: there will be a mandatory notification in 17 key sectors, there will be no safe harbours on the basis of turnover thresholds and companies will face substantial fines in case of breaches.
The Act will also have a retrospective impact on certain transactions from the date of its introduction in Parliament (12 November 2011), a move prompted to prevent companies taking pre-emptive action.
Regardless of whether the transaction raises national security issues or not, notification will be mandatory for transactions in 17 designated sensitive sectors which are:
The Act contains definitions of the type of products / services that are covered by those sectors.
For deals in all other sectors of the economy or for companies providing products / services that do not fall into the definition of one of those 17 sectors, notification will be voluntary if the transaction raises national security issues.
The Act captures not just the acquisition of control but also what the Act calls "trigger events" such as:
Notably, the new regime will apply not only to investors from foreign countries looking to invest in the UK but also to UK-UK transactions. The Act also has extraterritorial effects as it covers acquisitions of non-UK entities if they carry out activities in the UK or supply goods or services to persons in the UK.
The Secretary of State for Business, Energy and Industrial Strategy (BEIS) will be responsible for the review. Once a notification has been submitted, the Secretary of State has 30 working days to make a decision whether to clear the transaction or to call it in for a more in-depth review. A full review could add several weeks to a deal timeframe.
The Secretary of State will make its assessment based on:
Upon notification, several outcomes are possible: approval, approval with conditions or prohibition (or unwinding the transaction). The government has wide powers to impose conditions, for example altering the amount of shares an investor is allowed to acquire, restricting access to commercial information etc.
Furthermore, the government will have the power to call in transactions that were not notified but raise national security concerns for a period of five years following the date of the investment as long as the Secretary of State acts within six months of becoming aware of the transaction (for example from the press). For acquisitions subject to mandatory filing and that were not notified, the five-year limit does not apply.
There will be extensive powers to request information and during the national security review the Secretary of State can issue interim orders to prevents the parties from completing a transaction: transactions subject to mandatory filing cannot be completed until approval has been given.
The CMA, the UK Competition Authority, will continue to be competent for transactions that raise competition law issues if the thresholds for a competition law assessment are met. This and the national security vetting will proceed in parallel but with different timeframes and might have a significant impact on the timing of completion of deals.
Once the Act commences in January, the government will be able to retroactively call-in transactions for review when they occur after the introduction of the Bill to Parliament in November 2020. They can do so for a period of five years.
Many of our clients have already been seeking informal advice from the government that their transaction is not captured by the Act or they will not be called in once the Act commences
Although the advice given by BEIS is not binding, it provides some comfort to companies.
Completing an acquisition subject to mandatory notification, or not notifying a transaction where notification is mandatory, carries heavy fines (5% of total worldwide turnover or £10 million (whichever is greater) and imprisonment up to five years). Transaction where notification is mandatory will be void without clearance.
In a period of many challenges, the severity and scope of this new regime may come as a surprise to international businesses but it is part of a trend we have seen in many countries, including in Europe, to strengthen national security rules.
A government estimate of receiving around 1000-1800 notifications a year seems conservative in our view and it is certain that the process will necessitate increasingly diligent consideration to avoid costly mistakes.
Although the government acknowledges that many transactions will be approved without conditions, recent high-profile cases demonstrate the government’s resolve to vet transactions that raise national security concerns.
The new regime will involve considerable costs for businesses: the large number of sectors affected and the serious consequences for not notifying as well as the suspensory effect of the new regime will impose increased challenges for foreign investments in the UK and create delays in transactions.
Additionally, the power to call in transactions covered by the Act and entered into from 12 November 2020 means that many companies are already requesting informal advice even before the Act commences, in order to avoid possible scrutiny later.
Our expert Competition, EU & Trade team has been involved in several clearances for national security law under the current regime and we stand ready to advise clients on the implications of this stricter regime for your investments.
Please get in touch if you think a conversation concerning the impact on your organisation would be of use to you.