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UK Government gets CFIUS with wide-ranging powers under the National Security and Investment Bill

  • United Kingdom
  • Global
  • Competition, EU and Trade - Foreign investment regimes
  • Mergers and acquisitions

12-11-2020

Introduction

The UK Government published yesterday (11 November 2020) its long-awaited National Security and Investment Bill (the “Bill”).  The Bill sets out the Government’s proposals for a new standalone foreign direct investment (“FDI”) regime in the UK which will be comprehensive and far-reaching, and will have the effect of bringing the UK into line with other major jurisdictions around the world including the USA and Germany.

A new regime has been in the pipeline ever since the Government issued its July 2018 White Paper on the matter, but the regime as set out in the Bill departs quite considerably from that proposed in the White Paper, most notably through the introduction of a mandatory notification obligation for a large number of deals. 

The Bill was placed before Parliament for its “first reading” yesterday (merely a formality, with no debate on content), and is expected to undergo its second reading within the next two weeks, when MPs will debate the general principles of the Bill for the first time. 

In this briefing we set out and consider the key aspects of the proposed new regime, and the impact that this will have on transactions involving UK entities and assets. 

Mandatory notification for deals in a wide range of sectors

The new regime will require mandatory notification of certain types of transactions in 17 key sectors which are regarded as being the most sensitive areas of the economy.  These sectors are as follows: advanced materials; advanced robotics; artificial intelligence; civil nuclear; communications; computing hardware; critical suppliers to Government; critical suppliers to the emergency services; cryptographic authentication; data infrastructure; defence; energy; engineering biology; military and dual use; quantum technologies; satellite and space technologies; and transport. 

The Government opened yesterday a public consultation in which it sets out its proposed definitions for the types of entity within each sector that could come under the Bill’s mandatory regime.  For each sector, the consultation document includes a proposed definition for the types of activities undertaken by entities in that sector which would be subject to the mandatory regime, as well as a detailed list of the sub-sectors which fall within the relevant sector. Responses to the consultation, which must be submitted by 6 January 2021, will be used to refine the definitions so they provide enough clarity to enable parties to transactions to self-assess whether they need to notify.  The Government’s intention is to include the final definitions into secondary legislation which will be introduced in time for commencement of the Bill in 2021. 

According to its Impact Assessment in relation to the Bill which was also published yesterday, the Government anticipates that the new regime will result in between 1,000-1,830 transactions being notified to it per year. 

Even acquisitions of minority shareholdings will be subject to mandatory notification

If a transaction falls within one of the 17 key sectors as outlined above, it will be subject to a mandatory notification obligation if it involves one of the following “trigger events”:

  • the acquirer gains control of the entity by virtue of the percentage of the voting rights or shares that the acquirer holds in the entity increasing from: 25% or less to more than 25%; 50% or less to more than 50%; or less than 75% to 75% or more;
  • the acquirer obtains a right or interest in the entity, and as a result, the percentage of the shares or voting rights that the acquirer holds in the entity increases from less than 15% to 15% or more; or
  • the acquirer obtains voting rights in the entity that (whether alone or together with other voting rights held by it) enables it to secure or prevent the passing of any corporate resolution governing the affairs of the entity. 

This means that transactions involving the acquisition of minority shareholdings as low as 15% will trigger the mandatory notification obligation.  In addition, if an investor already holds shares or voting rights in an entity, an increase in that shareholding which takes the investor over any of the thresholds listed above (i.e., 15%, 25%, 50% or 75%), however small, will require a mandatory notification to be made.  This means that the obligation to notify cannot be avoided by staggering the acquisition of a larger shareholding across several different transactions.  Significantly, the mandatory notification obligation is not limited to acquisitions of particular shareholdings, and it is sufficient for the acquirer to obtain veto rights enabling it to secure or prevent the passing of any corporate resolution. 

Voluntary regime to apply to other sectors of the economy

In addition to the mandatory part of the regime, the Bill also envisages a voluntary notification system to encourage notification from parties who consider that their transaction or other acquisition may raise national security concerns.  The “trigger event” for the voluntary part of the regime is a lower threshold than those for the mandatory part of the regime, and entails an acquisition of “material influence” over the policy of the entity in question.  As with UK merger control, “material influence” in this context could be triggered by the acquisition of shareholdings as low as 10-15%. 

We understand that the voluntary part of the regime could in theory be applicable to any sector, and is not restricted to the 17 key sectors as outlined above.  The Secretary of State will also have the power to call-in transactions which do not fall within the mandatory part of the regime, but which it considers could be a risk to national security as a result of the acquisition of control. 

Call-in powers for up to five years after completion under the voluntary regime

The Bill contains an expansive “call-in” power which would enable the UK Government to review transactions which were not mandatorily notifiable, but which may raise national security concerns, for up to five years post-completion (reduced to six months once the Government becomes aware of the transaction).  Whilst there are similar powers in place under the French, German and Italian FDI regimes, this is considerably longer than the retrospective period in the new EU-wide regime under which transactions can be subject to review for up to 15 months after completion.  Significantly, the five year time limit does not apply to transactions subject to mandatory notification, and these remain vulnerable to Government intervention for an indefinite period following completion where there has been a failure to notify the transaction. 

The regime is “pro-active” with immediate effect

Whilst it is not possible for deals to be notified until the new regime comes into force, the Government will be able to call-in any deal which falls within the scope of the new regime and which is completed any time from yesterday onwards, for review on or after the commencement date of the legislation.  In addition, parties to transactions are able to obtain informal guidance about any potential Government interest in transactions from yesterday onwards. 

Applies to investors from any countries, and to deals of any size

The new regime applies to transactions regardless of the identity or nationality of the acquirer.

According to the Statement of Policy Intent (the “Statement”) published yesterday, when considering whether to exercise the call-in power, one of the factors which will be taken into account by the Secretary of State will be the “acquirer risk” (i.e., the extent to which the acquirer raises national security concerns), and factors which are relevant to the assessment of the acquirer risk include the following:

  • those in ultimate control of the acquiring entity
  • the track record of those people in relation to other acquisitions or holdings
  • whether the acquirer is in control of other entities within a sector or owns significant holdings within a core area, as this increases their potential leverage
  • any relevant criminal offences or known affiliations of any parties directly involved in the transaction

The Statement acknowledges that national security risks are most likely to arise when acquirers are hostile to the UK’s national security, or when they owe allegiance to hostile states or organisations.  This means that an acquirer does not necessarily need to be foreign in order to give rise to concerns.  Interestingly, the Statement emphasises that the new regime does not regard state-owned entities, sovereign wealth funds, or other entities affiliated with foreign states as being inherently more likely to pose a national security risk.  Instead, when considering the acquirer risk, the Secretary of State will consider the entity’s affiliations to hostile parties, rather than the existence of a relationship with foreign states in principle, or their nationality.

In addition, the proposed regime will apply to transactions of any size, and there will be no minimum target turnover or market share thresholds. 

Guaranteed response within 30 working days

Once a transaction has been notified or called-in, the Bill foresees that the Government will be required to undertake its assessment within a 30 working day review period (extendable by an additional 45 working days in the event that the assessment requires additional time).  In comparison to the existing public interest merger regime, under which there is no statutory deadline by which a decision needs to be made in relation to a transaction, this is a welcome development which will provide certainty to transaction parties, and enable the notification process to be built into deal timetables. 

Proposed penalties

Sanctions for non-compliance with the new regime will be severe, with fines of up to 5% of worldwide turnover or £10 million (whichever is the greater) and/or imprisonment of up to five years.  In addition, transactions that are covered by the mandatory notification requirement, but which proceed without obtaining clearance, will be legally void. 

A new Office for Investment

The publication of the Bill comes just days after Prime Minister Boris Johnson announced a major addition to the UK Government’s ability to attract foreign investment in the form of a newly established Office for Investment (the “Office”). 

The UK Government has cited the purpose of the new Office as being to support the landing of investment opportunities into the UK which align with key government priorities such as cutting greenhouse gas emissions to “net zero”, investment in critical infrastructure and advancing research and development.  In a press release published on Monday 9 November, the Government acknowledged that the most strategic investments are often the most complex, requiring a joined-up approach across Government and the private sector, and explained that the Office will look to resolve potential barriers to landing these “top tier” investments by operating as a “single front door” for inward investment to flow through. 

The Office will be based in the Department for International Trade, with Minister for Investment Gerry Grimstone leading its work under sponsorship of the Prime Minister and Chancellor of the Exchequer. 

The timing of the publication of a Bill aimed at regulating foreign investment just days after the unveiling of a mechanism aimed at facilitating inward investment is telling, and is illustrative of the balance that the Government is seeking to strike between protecting strategic UK businesses and assets, and boosting economic recovery following the devastating impact of the ongoing COVID-19 pandemic.

Comment

The proposed new regime is broad, and for the first time in the UK introduces a mandatory procedure for transactions in a wide range of sectors that will undoubtedly have a significant impact on deals, particularly given the low thresholds in terms of the levels of shareholdings and voting rights that will be caught by it.  This follows a global trend, with jurisdictions such as France, Germany, Italy and Spain significantly expanding their domestic FDI regimes in recent months, and the recent introduction of an unprecedented EU-wide regime. 

The proposed new UK regime, however, goes even further in some respects given that transactions which are not subject to the mandatory notification obligation, in any sector, are liable to be called-in by the Government for up to five years after completion if the Government considers that they give rise to national security concerns.  This is a potentially intrusive power, particularly given the possible sanctions, and means that parties to transactions cannot rely on the certainty which is afforded by a solely mandatory regime. 

The proposed new regime is likely to impact a substantial number of deals, with the Government’s Impact Assessment predicting a total of between 1,000-1,830 notifications per year.  This would make the new regime around 20 times the size of the UK merger control regime, under which the UK typically investigates approximately 60 transactions per year.  This also shows that the proposed new regime is likely to be considerably more far-reaching than that which was originally proposed back in 2018, as the July 2018 White Paper predicted that the originally proposed regime would result in just 200 notifications per year.  Given the reach of the proposed new regime, it will need to become second nature for investors to undertake an FDI assessment when dealing with UK target entities, in the same way that they already do with merger control, and will add a new layer of complexity to deal timetables.

Listen to our podcast

In this accompanying podcast our UK Competition, EU and Trade team disucss the implications of the proposed regime, and the impact on transactions involving UK entities and assets, including prior examples of intervention by the UK Government.

Listen here >

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