Energy sector investors beware – the UK national security merger control regime latest developments

Background to the Act

In our previous article, we summarised the key features of the National Security and Investment Act (the 'Act') which was introduced in Parliament on 11 November 2020 and given Royal Assent on 29 April 2021. Once the Act is fully in force it will create the UK’s first stand-alone national security and foreign direct investment regime, which gives the government the power to review, impose conditions on or even block deals where it considers the deal to pose a national security risk.

On 20 July 2021, the Department for Business, Energy and Industrial Strategy ('BEIS') published detailed guidance on the application of the regime and confirmed the regime will come fully into force on 4 January 2022.

Relevant transactions

Transactions that may be caught by the regime involve a specific ‘trigger event’. This can include the acquisition of:

• more than 25 per cent, 50 per cent or 75 per cent or more of votes or shares in of a qualifying entity
• voting rights that enable or prevent the passing of any class of resolution governing the affairs of the qualifying entity
• material influence over a qualifying entity’s policy
• a right or interest in, or in relation to, a qualifying asset (e.g. land, other physical property and IP), providing the ability to use the asset, or direct control of how the asset is used (although acquisitions of qualifying assets do not, at this stage, form part of the mandatory regime).

This is a relatively broad definition and has been drafted to align with the approach taken under the existing competition merger control regime, particularly with regards to ‘material influence’ e.g. a trigger event could exist where the acquirer acquires only a 15 per cent shareholding but has material influence by the right to appoint the majority of board members of the target company.

Mandatory regime

Once the regime comes into force, transactions involving the acquisition of qualifying entities (including the acquisition of minority stakes or material influence, as described above) in any of the 17 mandatory sectors will have to be notified to BEIS (to a new dedicated Investment Screening Unit) and receive clearance prior to completion. There is also a separate voluntary notification regime for the acquisition of qualifying assets or qualifying entities that are active in other areas of the economy.

Qualifying entity

A ‘qualifying entity’ is an entity that carries on activities in the UK; or if it is a foreign company, it supplies goods or services to people in the UK, e.g. a regional office in the UK or exports to the UK, has staff who regularly work in the UK (even if here is no local office).

For foreign entities, the activity or supply of goods/services requires the target to be ‘sufficiently involved’ in doing so in order for the regime to apply, so more remote connections, e.g. having owners or investors who are based in the UK, even if the target is not, is unlikely to be sufficient.

The guidance published also includes a draft statutory instrument which sets out the 17 proposed sector definitions in more detail. These definitions will be passed into law and form part of the mandatory notification regime.

What transactions in the Energy sector might be caught?

Under the draft definition set out in the statutory instrument, if a qualifying entity carries out any of the following activities:

Petroleum facilities, terminals and pipelines

'upstream petroleum facility' means a terminal, upstream petroleum pipeline or unit of infrastructure that is or will be necessary to a petroleum production project

• Existing upstream facilities: owning, operating, enabling the operation of (i.e. the qualifying entity owns or operates) or holding a petroleum licence in respect of :
  • any existing petroleum facility - where it began operating before the first day of the month that is 12 calendar months before the trigger event took place); and
  • where it has a throughput of greater than 3,000,000 tonnes of oil equivalent over the 12 calendar months preceding the month in which the trigger event takes place; and
  • the facility is situated in (in whole or in part) the UK or is used in connection with the supply of petroleum to persons in the UK
    
    
• New upstream facilities:owning, operating, developing or enabling the operation of (owns or operates or intends to do so) or holding or applying for a petroleum licence in respect of:
  • any new petroleum facility (i.e. one that has not begun operating on the first day of the month that is 12 calendar months before the trigger event takes place); and
  • where it has an expected throughput of greater than 3,000,000 tonnes of oil equivalent in its first 12 calendar months of operation; and
  • the facility is or will be situated in (in whole or in part) the UK or used in connection with the supply of petroleum to persons in the UK.

This definition was amended to capture future plans for pipelines, presumably to allow the Government to review transactions that fail to meet the thresholds at completion of the transaction, but could nevertheless potentially affect energy supply later down the line.

The instrument clarifies that for the purposes of assessments of throughput, where petroleum is in a gaseous state 1,100 cubic meters of this petroleum at a temperature of 15 degrees Celsius and pressure of one atmosphere is counted as equivalent to one tonne.

The drafting surrounding ‘enabling the operation of’ is somewhat unclear as this is described in the statutory instrument as simply requiring the qualifying entity to own or operate the facility but it may be intended to capture other scenarios.

Electricity and gas licence holders

• holding a transmission licence, distribution licence or interconnector licence under section 6 of the Electricity Act 1989or carrying on any activity in pursuance of an exemption from section 4(1)(b), 4(1)(bb) or 4(1)(d) of the Electricity Act 1989 granted to the qualifying entity by order under section 5(1) of the Electricity Act 1989 licensed 'transmission' or 'distribution' operators as defined in section 6 of the Electricity Act 1989; or
• holding a licence under section 7 of the Gas Act 1986 or 7ZA of the Gas Act 1986 or carrying on any activity in pursuance of an exemption from sections 5(1)(a) or 5(1)(aa) of the Gas Act 1986 granted to the qualifying entity by order under section 6A(1) of the Gas Act 1986;

This definition picks up any entity that is licensed by Ofgem to transmit or distribute electricity or act as an interconnector or to act as a gas transporter or interconnector.

Electricity generating assets including renewable energy assets

• Qualifying entities which own or operate any individual generating asset that has a total installed capacity 100 megawatts or more; or
• Qualifying entities which have a relevant capacity of 1 gigawatt or more; and:
  • they hold a generation licence under section 6 of the Electricity Act 1989 or carries on any activity in pursuance of an exemption from section 4(1)(a) of the Electricity Act 1989 granted to it by order under section 5(1) of the Electricity Act 1989; or
  • they carry on aggregation.

'Relevant capacity' captures the sum of the total installed capacity of generating assets owned or operated by the purchaser group ('group undertakings') and the qualifying entities. For aggregation, the relevant capacity is the amount of customer load and generated electricity available to both the purchaser group and the qualifying entity for aggregation.

This definition is extremely broad, as it captures capacity of both the purchaser and the target group. It does not, however, capture future projects in the definition, which will be helpful for companies acquiring assets that will not become operational for several years.

Gas processing

• owning or operating—
  • any gas processing facility in Great Britain where the gas processing facility has the technological capacity to carry on gas processing operations in relation to greater than 6 million cubic metres of gas per day; or
  • any LNG import or export facility where the LNG import or export facility has the technological capacity to carry on the importation, regasification or liquefaction of greater than 6 million cubic metres of gas per day

LNG import or export facilities do not include facilities that are in the territorial sea adjacent to Great Britain or the sea in any area designated under section 1(7) of the Continental Shelf Act 1964.

Supply of fuel in the UK

• where the qualifying entity supplies petroleum-based road, aviation or heating fuels (including liquefied petroleum gas) to persons in the United Kingdom and
  • the qualifying entity carries on any downstream oil activity; and
  • the qualifying entity—
    1. has capacity of greater than 500,000 tonnes; or
    2. owns a facility in the United Kingdom that has capacity of greater than 50,000 tonnes.

The definition of downstream oil activity is very broad, covering the import or storage any of crude oil, intermediates, components and finished fuels; the production of intermediates, components and finished fuels through refining or blending processes; the distribution of petroleum-based fuels to storage sites by road, pipeline, rail or ship; and the delivery of petroleum-based fuels to retail sites, airports and end users.

The definition looks at past production capacity, not just existing capacity. It states that a qualifying entity or a facility 'has capacity of greater than' a specified number of tonnes if any downstream oil activity was carried/if the facility was used for the purposes of any downstream oil activity on in the United Kingdom by that qualifying entity in relation to greater than that number of tonnes of oil in at least one of the three calendar years preceding the year in the transaction takes place.

It is worth noting that the Act and draft definitions do not require a foreign acquirer element; even relatively small UK-to-UK transactions (i.e. acquisitions by UK entities) can be caught.

The Parliamentary review process may also give rise to further changes before the definitions becomes part of UK law.

The call in power

The Secretary of State will be able to call in transactions that complete during the period from 12 November 2020 to when the regime into force if it considers that the transaction may give rise to a national security risk. 

Once the regime is in force, the Secretary of State will have a retrospective power to call in transactions that may give rise to a national security risk (whether or not the sector definitions are met).

The call in power can be exercised for up to five years, but this can be reduced to 6 months from commencement of the new regime where the Secretary of State is made aware of the transaction (which will be the case where a voluntary notification is made, but also if the transaction is made public in a national newspaper, for instance).

Draft statement on exercise of call in power

The Act requires that the Secretary of State issues a statement as a form of guidance on how this call in power will be used and the government has recently published a consultation on the proposed statement. The draft statement notes that each case will be assessed individually to see if it presents a national security risk, but that transactions that take place in the mandatory notification sectors (but are not notifiable under the regime), or even related to those sectors, are more likely to be of interest from a national security perspective. Other factors include the amount of control being acquired; whether the acquirer has ties or an allegiance to states that are hostile to the UK; the status of any pre-existing holdings; and the activity of the target and whether such activities could affect national security.

When will the Act come into force, and how long will reviews take?

The regime (including the mandatory notification requirement) will come into force on 4 January 2022.

• Once a notification has been made - If a transaction is notified under the mandatory or voluntary regimes and it has been accepted, the government then has 30 working days to decide if it will take no further action or call in the acquisition for a national security risk (at which point a further 30 working day period would be triggered, as outlined below). Until BEIS has finished its assessment, mandatory transactions cannot close.
• If the transaction is called in – if the transaction has been called in (either following a notification or simply because the government considers it necessary), the government can take up to 30 working days to assess the national security risk, and this can be extended by a further 45 working days if more time is needed. Based on this guidance, more complex transactions could take several months for BEIS to approve.

Sanctions

Sanctions for non-compliance with the regime will include fines of up to five per cent of worldwide turnover or £10 million (whichever is the greater), director disqualification for up to 15 years, and imprisonment of up to five years, and transactions which are covered by mandatory notification which take place without clearance will be legally void.

What does this mean for businesses and investors in the energy sector?

Parties in the energy sector who are planning transactions in 2021 should consider conducting initial assessments to check whether the Act’s requirements apply to their transactions:

• Transactions that have completed or are due to complete before the regime comes into force on 4 January 2022 could be subject to the call in power if they complete after 12 November 2020.
• Transactions that are already underway but that complete after the regime comes into force may become legally void and parties may be subject to sanctions if it transpires that those transactions were subject to the mandatory notification regime and were not notified to BEIS. Even if they are not subject to mandatory notification, the Secretary of State still has a call in right if it considers that they may pose national security risks.

Parties contemplating energy transactions that may be caught by the mandatory regime should therefore seek appropriate legal advice and consider whether to informally approach BEIS about the potential application of the regime.

How can we help?

Burges Salmon has significant experience advising domestic and international investors on UK merger control and foreign investment matters in the energy sector. If you have any questions in relation to the issues raised in this article, please contact Chris Worrall or your usual Burges Salmon contact.

This article was co-written by Chris Worrall, Shachi Nathdwarawala and Sandra Mapara.