Background to the Act and expected commencement of the regime
In our previous post, 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. However, the national security regime outlined in the Act is not yet in force, as some statutory instruments that are required to give effect to the new regime are yet to be passed. The regime is expected to be in force by the end of 2021.
Mandatory notifications
The Act sets out a new mandatory notification regime. Failure to submit a mandatory notification in respect of transactions that meet the criteria once the regime is in force could result in fines of up to five per cent of worldwide turnover or £10 million, whichever is the greater, imprisonment of up to five years and director disqualification for up to 15 years.
Transactions that must be notified under the new regime firstly need to involve a specific ‘trigger event’. This can include the acquisition of (i) more than 25 per cent, 50 per cent or 75 per cent or more of votes or shares in of a target entity; (ii) voting rights that enable or prevent the passing of any class of resolution governing the affairs of the target 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.
Mandatory notification: sector definitions
Mandatory notification may be required where the target company is active in the energy sector (as well as certain other strategic sectors, as set out in our previous post). The government undertook a consultation to define these mandatory notification sectors and has published updated draft definitions in response to consultation feedback.
The government is now in the process of refining these most recently published definitions for the mandatory notification sectors (including the definition of Energy) before they are put forward for review by both Houses of Parliament and ultimately transposed into law as statutory instruments. The Parliamentary process may therefore lead to further changes.
What transactions in the Energy sector might be caught?
Under the most recently published definition of ‘Energy’ (as set out in the government’s response to the mandatory notification sectors definition consultation), mandatory notifications must be made in respect of trigger events concerning a target entity that is involved in the ownership or operation of:
(a) terminals, upstream petroleum pipelines or infrastructure which is or will be necessary to a petroleum production project, with (i) a throughput of greater than 3,000,000 tonnes of oil equivalent over the last 12months or (ii) for prospective terminals, upstream petroleum pipelines or infrastructure, greater than 3,000,000 tonnes of oil equivalent is expected to flow in its first year of operation;
This definition was amended to capture future plans for pipelines (the previous definition was only concerned with retrospective throughput), 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.
(b) licensed “transmission” or “distribution” operators as defined in section 6 of the Electricity Act 1989 or section 7 of the Gas Act 1986;
This definition picks up any entity that is licensed by Ofgem to transmit or distribute electricity or gas.
(c) gas or electricity interconnectors, long range gas storage and gas reception terminals, including Liquefied Natural Gas;
(d) Authorised Electricity Operators in Great Britain that provide load via:
(i.) individual assets that would have a total installed capacity, greater than or equal to 100 megawatts; or
(ii.) assets that, when cumulated with those of the affiliated undertakings of the acquiring entity, would have a total installed capacity, greater than or equal to one gigawatt;
An Authorised Electricity Operator is defined as 'any person (other than the licensee) who is authorised to generate, participate in the transmission of, distribute or supply electricity or participate in the operation of an interconnector'. The thresholds for Authorised Electricity Operators are relatively low (the 1GW threshold was originally 2GW in the first draft of the definitions) and cover the purchaser group’s capacity; not just that of the target. These thresholds do not distinguish by generation method, meaning small transactions can be caught, particularly if the purchaser is already active in electricity generation space.
(e) aggregators that control assets in Great Britain, that when cumulated have a total capacity greater or equal to one gigawatt;
The government has defined an 'aggregator' as 'a natural or legal person who combines multiple customer loads or generated electricity for sale, purchase or auction in the GB electricity market'.
The government has also noted that it will ensure the electricity definitions capture entities with 'a key role in overseeing or operating any part of the GB electricity and gas markets'. However, it has excluded retail electricity suppliers from the definition of Energy. Retail electricity suppliers were included in the original definition but this was revised following feedback that including retail energy suppliers would capture entities that do not have any control over actual infrastructure and therefore would not pose a national security risk.
(f) entities that supply petroleum-based road, aviation or heating fuels (including liquefied petroleum gas) to the United Kingdom market, via
(i.) a company that provides or handles more than 500,000 tonnes per annum; or,
(ii.) a downstream facility owner if the owned facility has capacity in excess of 50,000 tonnes;
where either carry out any of the following activities:
(aa) the import of any of crude oil, intermediates, components and finished fuels;
(bb) the storage of any of crude oil, intermediates, components and finished fuels;
(cc) the production of intermediates, components and finished fuels through a range of refining or blending processes;
(dd) the distribution of petroleum-based fuels to other storage sites throughout the UK by road, pipeline, rail or ship;
(ee) the delivery of petroleum-based fuels to retail sites, airports or end users.
This definition was amended to raise the threshold from 20,000 tonnes to 50,000 as the government received feedback that the thresholds were too low.
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 government’s consultation response expressly notes that it plans to update the definition further to give a more detailed breakdown of what is and what is not captured – for example, including how thresholds are assessed for capacity/production and the time periods against which those thresholds should be calculated. However, it has not specified what these will be and in particular, if these will capture future plans.
Nevertheless, it is plausible that the time period for calculating volumes for generation capacity will be updated to include future plans in order to ensure transactions do not escape scrutiny simply because the thresholds are not met at notification, but could be soon after. For example, the generation capacity thresholds could potentially be amended to cover capacity for projects that are planned, but not yet installed or in operation. Indeed, the current drafting already notes that assets 'would have' capacity, rather than 'currently have', suggesting that the definition is intended to be forward looking.
The Parliamentary review process may also give rise to further changes before the definitions become 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 comes 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 six 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).
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 (currently expected to be at the end of 2021) 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. Even if they are not subject to mandatory notification, the Secretary of State still has a call-in right.
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 written by Shachi Nathdwarawala and Sandra Mapara.