Introduction
The UK Government on 11th November 2020 published its long awaited National Security & Investment Bill (“the Bill”) which sets out radical new measures to protect the UK from malicious foreign investment and strengthen the country’s economic resilience. The Government’s proposed new regime updates the UK’s current powers contained in the Enterprise Act 2002 which are now almost 20 years old and which need modernisation to address the threats the UK faces in today’s modern world. See link: https://www.gov.uk/government/collections/national-security-and-investment-bill
The UK is not alone in introducing a foreign direct investment regime to vet hostile foreign direct investment. Many EU countries such as France, Germany and Italy already have or about to introduce similar regimes to protect their economies from hostile investment in key sectors.
According to the UK Government, the new Bill is designed to modernise its powers to investigate and intervene in potentially hostile foreign direct investment while at the same time ensuring the UK remains a global champion of free trade and an attractive place to invest. It is seeking to conduct a delicate balancing act between effective intervention while at the same time trying to incentivize investment and provide business with legal certainty in a quicker and more certain notification process.
The Government is at pains to emphasize that these powers will be exclusively for use on national security grounds, this will be expressly stated in the Act. Importantly the Government states that will not be able to use these powers to intervene in business transactions for broader economic reasons. So, this regime could not be used to protect jobs in high profile foreign investor acquisitions of UK companies like we have seen in the past unless it was, of course, justified on national security grounds.
The Bill will now be debated before Parliament.
The New Regime
(i) Notification Provisions
There are two separate notification systems set out in the Bill; the first is a mandatory notification for certain key sectors, the other is a voluntary notification system for the wider economy. Parties are encouraged to discuss the application of the legislation and their transactions with a new specific Government Unit called The Investment Security Unit. This will sit within the Department for Business, Energy and Industrial Strategy. This will provide a single point of contact for businesses wishing to understand the Bill and notify the Government about transactions. The unit will also coordinate cross-government activity to identify, assess and respond to national security risks arising through market activity.
Relevant merger situations as defined under the UK merger control rules in the Enterprise Act 2002 will still be scrutinised by the Competition & Markets Authority (“CMA”) in parallel to security assessments under the National Security Investment (NSI) regime. There are special provisions in the Bill which allow the Bill’s provisions to be applied to transactions from its date of first publication. However, transactions completed prior to 12 November, will not be affected for reasons of legal certainty. This means that transactions completed after 12 November and before commencement date could be investigated under the new NSI regime notwithstanding the fact that Bill has not yet become law. This is designed to stop transactions being expedited to avoid scrutiny under the new rules.
Mandatory notification for key sectors
For transactions involving specific sectors, which will be set out in a set of notifiable acquisition regulations which will accompany the Act, businesses and investors must submit a formal notification, providing as much relevant information as possible for clearance of the acquisition. There will be sanctions for non-compliance with the regime, which include fines of up to 5% of worldwide turnover or £10 million – whichever is the greater – and imprisonment of up to 5 years. Transactions covered by mandatory notification which take place without clearance will be legally void. There are also sanctions for non-compliance with information requests or providing false and misleading information which cover both mandatory and voluntary /called in transactions.
At the present time the Government is considering naming the following sectors as mandatory. However, the Government has launched a public consultation to obtain stakeholder views on its proposed list of sectors. That consultation exercise closes on 6th January 2021.
- Civil Nuclear
- Communications
- Data Infrastructure
- Defence
- Energy
- Transport
- Artificial Intelligence
- Autonomous Robotics
- Computing Hardware
- Cryptographic Authentication
- Advanced Materials
- Quantum Technologies
- Engineering Biology
- Critical Suppliers to Government
- Critical Suppliers to the Emergency Services
- Military or Dual-Use Technologies
- Satellite and Space Technologies
Voluntary Notification for the Wider Economy
If a transaction does not involve a listed sector, but may still have a national security element, businesses, whilst not obliged, are still encouraged to submit a notification. The Government has published a Statement of Policy which should assist the Parties in assessing the types of transactions that may raise national security concerns. The types of transactions which should be notified to government include transactions which do not fall in the mandatory regime but may still raise a national security concern and the acquisition and control of assets, such as security software code and blueprints for sensitive equipment.
The Government has the power to intervene in a transaction in the wider economy and call in the transaction for review for up to 5 years from its completion unless it is notified to the Government. The only exception to this is if the Secretary of State is made aware of the transaction. This could be accomplished for example by emailing the Security Investment Unit with details . Once the Secretary of State is aware, they have a period of 6 months to call in the transaction.
Assessment of Notifications
Following a notification, the Secretary of State will have a maximum of 30 working days to decide whether to call in a transaction to further scrutinise a transaction for national security concerns. As part of the Government ‘s screening they may request any information, at any time, from any person if it is necessary to inform an assessment of the national security risks of a transaction. This information needs to be provided as quickly and thoroughly as possible to ensure the Government can complete its assessment of the notification in good time.
If the Government decides there should be a more detailed review as there could be a national security concern the Government has a further 30 working days to undertake a detailed national security assessment. This can be extended by a further 45 working days. If more time is needed, the Government will discuss a possible extension with the relevant businesses and investors. During the assessment period the Government can then take interim measures which it considers necessary and proportionate to address any national security risk to stop any damage to national security.
During the assessment period, businesses and investors can continue to progress the transaction (unless the government orders otherwise though interim measures see above). However in the case of a notifiable acquisition in a mandatory sector, the transaction must not be completed until clearance is given by the Government to the parties.
Conclusion of the Security Assessment
Once the Government has concluded its assessment it will notify the parties of its conclusions including details of any conditions imposed, and the consequence of any breach of those conditions. The Government has published in its policy statement the types of remedies it expects to use to address national security risks. The Government may issue orders forbidding or requiring certain actions to be taken by relevant parties, such as reducing the shares acquired. In extreme cases this could include unwinding transactions. Parties will have the opportunity to discuss any restrictions imposed on them. The Government will be under duty to consider these representations if there has been a material change of circumstances.
Once the Government has concluded its assessment and made a decision, it cannot revisit its decision (though orders may be amended). However, if it is established that false or misleading information was provided in a notification or in response to an information request – the Government can reopen the case. In addition, the Bill will include a safeguarding mechanism to allow the parties to judicially review a Government decision in the High Court.
Trigger events
The Bill covers certain types of transactions by foreign investors known as trigger events under the legislation. The Bill covers principally the acquisition of shares or shareholdings by foreign investors in entities which carry on the relevant activities in the UK, but it can also extend to assets owned by relevant entities. Assets in scope of the Bill are land, tangible moveable property, and (covering intellectual property) any idea, information, or technique with industrial, commercial, or other economic value.
Relevant notifiable transactions will include the acquisition of:
- Shareholdings of 15% -24% in entities . It will be for Government ot assess whether it regards the acquisition of “material influence over the policy of the entity has taken place”; or
- Shareholdings in an entity of over certain thresholds namely 25% ,50% or 75%
What is unlikely to be covered by the regime are the following types of transaction:
- Transactions involving stakes of below 15% in entities unless such a holding (alone or in combination with other rights or interests) amounts to the acquisition of “material influence over the policy of the entity”
- Transactions involving an existing holding in an entity of over 25% moving to a new level of 26-50%
- Transactions involving an existing holding in an entity of over 50% moving to a new level of 51-74%
- Transactions involving an existing holding in an entity of 75% or more, moving to a new level of 76-100%
- Assets bought by consumers – e.g. personal computer software, mobile phones, GPS.
Therefore, if a foreign investor has an existing shareholding there is a certain amount of latitude for the investor increasing his stake without the need for a further notification.
Similar trigger event thresholds exist for voluntary notifications from the wider economy.
Level of notifications
Under the existing regime there have only been 12 public interest interventions on national security grounds since 2002. Under the new regime the number of interventions is likely to increase significantly. First of all, the number of notifications which will be made under the new legislation is likely to be well over the estimate in the White Paper of 2018 which proposed the new regime. That estimated that the Government was likely to receive about 200 notifications each year of which 100 will raise national security concerns and of which 50 will be subject to some kind of intervention. However as there are no de minimis thresholds or exemptions proposed at the outset under these proposals the number of notifications according to the Impact Assessment of the Bill is likely to be between 1,000-1,800. The acid test will be how efficient the initial screening process is. If it is effective and efficient, we could see the number of cases going to a more detailed review not being appreciably more than those predicted under the White Paper (100) and those requiring intervention at around 50. Even if this ambitious goal was achieved that is a considerable workload. In addition, there are also bound to be teething troubles at the beginning of the regime.
Conclusion
This will impose a considerable extra regulatory burden on companies investing in the UK and will also give those companies issues in timetabling clearances and completion of their transactions especially if they are international in nature.
However, the UK is not alone in introducing stricter FDI regimes. Whether the Government achieves its delicate balancing exercise in providing an effective intervention against hostile actors at the same time as demonstrating the UK is open for business will depend upon how well and efficiently the UK Government operates its new system and in particular its initial screening process.
I suspect that once this system has been on the statute book for some time and the Government has assessed how the regime is working the Government will be more willing to introduce exceptions or exemptions such as those provided for in the abstract powers set out in Clause 6.5 of the Bill.
