On 11 November 2020, the National Security and Investment Bill ('the Bill') was given its first reading in Parliament and the Government published its response to the White Paper consultation on the national security and infrastructure investment review. The Bill will create a stand-alone foreign direct investment regime in the UK and will replace the Secretary of State’s ability to scrutinise mergers that give rise to national security consideration under the Enterprise Act 2002 (see our previous update here). The purpose of the legislation is to widen the scope of the Government’s powers to review transactions on national security grounds and to update its powers so that they are in line with the approach of the UK’s key international partners.
Background
In 2017, the Department for Business, Energy and Industrial Strategy ('BEIS') published a Green Paper for consultation on whether the UK’s approach of assessing foreign investments under the Enterprise Act 2002 was sufficient to safeguard against national security risks. The Green paper proposed both short-term and long-term reforms to the regime. In July 2018 and June 2020, the Government introduced short-term reforms, which lowered the merger control jurisdictional thresholds where the target is active in certain sectors that are considered crucial to the UK’s national security (we reported on these changes here):
- The development or production of items for military or military and civilian use
- The design and maintenance of aspects of computing hardware
- The development and production of quantum technology
- The production, development and design of artificial intelligence technologies
- The development or production of any product where cryptographic authentication is its primary function
- The development or production of advanced materials
In 2018, BEIS published a White Paper, which set out its proposed long-term legislative reforms for assessing foreign investments. This included the introduction of a voluntary notification regime, the Government’s power to call in transactions giving rise to national security concerns and proposed remedies to address national security risks. On 11 November 2020, the Government published its response to the consultation, which concluded that the proposals set out in the White Paper do not go far enough in addressing the national security risks arising from transactions in particularly sensitive sectors. In addition, the Government concluded that the White Paper proposals do not reflect the full gravity of the current situation. In particular, the Government considered that there were new risks to national security posed by the COVID-19 pandemic, that the UK’s key international partners had recently strengthened their foreign investment rules and there had been an Integrated Review of Security, Defence and Foreign Policy to re-examine the UK's priorities and set strategic aims for UK national security.
Key features of the Bill
On 11 November 2020, the Government announced that the new Bill will modernise its powers to investigate and intervene in foreign direct investment that threatens UK national security. The Bill will introduce a comprehensive investment-screening regime that will allow the Secretary of State to intervene in a broader range of transactions, involving businesses of all sizes across the economy.
The key features of the Bill are as follows:
‘Trigger events’ – The Secretary of State will be able to intervene in transactions involving specific ‘trigger events’. This includes the acquisition of (i) more than 25 per cent, 50 per cent or 75 per cent or more of votes or shares in a qualifying entity; (ii) voting rights that enable or prevent the passage of any class of resolution governing the affairs of the qualifying entity; (iii) material influence over a qualifying entity’s policy; (iv) 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.
Hybrid notification system:
Mandatory notification – A mandatory notification system will be introduced where the trigger events in (i) – (iii) above occur for transactions in specified sectors. In addition, a mandatory notification will be required where there is an acquisition of 15 per cent or more of votes or shares where the transaction relates to a specified high-risk sector. The Government is currently consulting on draft definitions of the sectors to which the mandatory notification will apply. These currently cover the following sectors:
- 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 – A voluntary notification system and a call-in power will be introduced for all other acquisitions. The Secretary of State will be able to call in transactions where it reasonably suspects that a trigger event has occurred or is in progress or contemplation and that trigger event has given rise to or may give rise to a national security risk. The Government will have a five-year retrospective power to call in transactions in the wider economy that were not notified but may give rise to national security concerns. In assessing whether to use its call in powers, the Secretary of State will consider:
- the target risk – the nature of the target and whether it is in an area of the economy where the Government considers risks more likely to arise;
- the trigger event risk – the type and level of control being acquired and how it could be used in practice; and
- the acquirer risk – the extent to which the acquirer raises national security concerns, including whether the acquirer has any relevant criminal offences, the identity of those that ultimately control the acquirer and whether the acquirer owes allegiance to hostile states or organisations to the UK’s national security.
No jurisdictional thresholds – The new regime will not include a turnover or a share of supply jurisdictional test which exists under the current regime.
Transactions completing from 12 November 2020 – The Secretary of State will have the power to call in transactions which complete during the period from 12 November 2020 to when the Bill comes into force if it considers that the transaction may give rise to a national security risk.
Review period – The Government will screen transactions within 30 working days, regardless of whether the notification has been submitted voluntarily or mandatorily. This period can be extended by an additional 45 working days where the initial period is not sufficient to conduct the assessment. Transactions subject to mandatory notification will not be allowed to proceed to completion until the Secretary of State has given explicit clearance.
Reviewing body – Notifications will be submitted to a dedicated Government unit, the Investment Security Unit, which will sit within BEIS. The unit will provide a single point of contact for businesses wishing to understand the Bill and notify the Government about transactions.
Sanctions – Sanctions for non-compliance with the regime will include fines of up to 5 per cent of worldwide turnover or £10 million, whichever is the greater, and imprisonment of up to 5 years. Transactions which are covered by mandatory notification which take place without clearance will be legally void.
What does this mean for businesses and investors?
The Bill comes at a time when scrutiny of FDI is increasing on a global scale, and the new rules introduced by the Bill chime with actions being taken by other Five Eyes nations, including the US and Australia. The Bill gives the UK Government greater scope to intervene in transactions on national security grounds in a wide range of sectors. In light of this and the fact that the new regime will apply to investors from any country around the world, the new regime is likely to affect a significant number of transactions. The Government’s Impact Assessment estimates that 1,000 to 1,830 transactions will be notified and 70 to 95 transactions will be called in per year under the new regime. Given that the Bill will have retrospective effect, businesses and investors aiming to complete their transactions prior to the Bill coming into force should proactively consider whether their transactions will be caught by the new regime as well as the existing regime. Businesses and investors should therefore seek appropriate legal advice.
The Bill is currently being debated in Parliament and the second reading is due to take place on 17 November 2020. The Government’s consultation on the mandatory notification sectors will close on 6 January 2021.
How can we help?
Burges Salmon has significant experience advising domestic and international investors on UK merger control matters, including the foreign investment regime. 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 written by Sandra Mapara.