The government has announced a stringent new national security and investment regime. The National Security and Investment Bill (NSI Bill) was introduced in Parliament on 11 November and is currently being considered at committee stage in the House of Commons. It is intended to “strengthen the ability of the United Kingdom to investigate and intervene in mergers, acquisitions and other types of deals that could threaten our national security” by giving the Secretary of State powers to screen investments and to address any national security risks they involve.
The government’s current powers are limited to intervening in mergers which (subject to very limited exceptions) meet certain turnover, asset or market share thresholds, as part of a competition-focused regime. The NSI Bill creates a separate, much wider screening regime. All sectors of the economy are within scope and there are no minimum thresholds. Whilst transactions involving foreign investors are more likely to have associated security concerns, the new regime captures both foreign and domestic investment in any entity which carries on activities in the UK (or which supplies goods or services to the UK).
Proposed investments (direct or indirect) must be notified to the government if:
- The target operates within one of 17 key sectors (including transport, defence, energy and advanced technology).
- As a result of the transaction, a person (or entity) will either (i) gain control of the target (“control” being more than 25%, 50% or 75% of the votes or shares, or voting rights that enable or prevent the passage of any class of resolution) or (ii) acquire a right or interest in it which results in them holding 15% or more of the target’s shares or voting rights (if they didn’t already before).
Upon receipt of a mandatory notice, the government must decide whether to “call in” the proposed investment for scrutiny or clear it to proceed.
A consultation is underway (closing on 6 January 2021) to define which specific activities within the key sectors will trigger a notification requirement. This will hopefully provide enough clarity to allow parties to self-assess whether they need to notify. The activities will be set out in secondary legislation to enable them to be updated as new sectors of interest emerge (particularly in the sphere of advanced technology).
The legislation will have retroactive effect, giving the government a right to call-in and assess transactions which fall outside of the mandatory regime, provided it does so within five years of completion. Acquisitions of control over entities or certain assets (including land) which closed on or after 12 November 2020 are within scope if the government considers they present, or could present, a risk to national security. When exercising this call-in power, the government must have regard to its published statement of policy and intent (a draft of which is available on the government website). The “call-in power” will not be used before the NSI regime is commenced, however, in the meantime the government has invited parties to instigate an informal discussion with them where there is any potential national security risk, to discuss the likelihood (and mitigate the burden) of their particular transaction being called-in once the legislation comes into force.
Outside of the mandatory notification regime, parties will be able to pre-empt a call-in notice by voluntarily notifying the government of a proposed transaction where national security concerns might arise. The Law Society has recommended that a definition of “national security” be included in the legislation to provide a clear distinction between issues of national security and issues of national interest. This will help to avoid acquirers making a significant number of "cautionary" voluntary applications to protect the integrity of their acquisitions.
Following assessment, the government will be able to make orders imposing “proportionate remedies” to prevent, remedy or mitigate an identified national security risk.
There are significant sanctions for non-compliance with the regime. Where there is a failure to make a mandatory notification, any transaction that takes place without clearance will be declared void. There are also civil and criminal sanctions. The NSI Bill provides for the imposition of fines on a company of the higher of £10m or up to 5% of worldwide turnover for completing a notifiable acquisition without clearance or failing to comply with an order, and directors face up to five years imprisonment.
This is a comprehensive and wide ranging reform. If the NSI Bill is enacted in its current (or similar) form, foreign investment (and any potential national security risks it raises) will need to be carefully considered at an early stage of transaction planning and on a much wider range of transactions than is currently required. The government has published factsheets and flowcharts to assist businesses in assessing the impact of the new regime on their proposed transactions, and regulations will be published setting out the form of mandatory notification (a draft form can be found here). However, despite the government envisaging clearance within 30 days of notification (where no security risk is identified), the regime is likely to result in a bureaucratic delay on many transactions, as the NSI Bill casts it net wide. We would encourage small and micro businesses to seek informal government advice during the early engagement phase where the regime may apply in order to mitigate the cost burden of making an unnecessary notification.