The new UK national security and investment regime: how will deals be affected?

February 2021 | PROFESSIONAL INSIGHT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

February 2021 Issue

On 11 November 2020, the UK government published the National Security and Investment Bill, proposing legislation to significantly strengthen its ability to scrutinise transactions on the basis of national security.

The proposals involve a mandatory regime for transactions in key sectors and the ability of the government to ‘call-in’ other transactions. The legislation is expected to be passed in early-to-mid 2021 and its detail is subject to further consultation, as well as ongoing debate and consideration in Parliament. However, it is relevant to deals which closed since 12 November 2020, as, once the new regime is in force, the government will be able to call these in.

The Bill reflects the trend of similar measures being adopted in many other countries but involves a fundamental change in the UK’s approach. The government anticipates around 1000 to 1830 notifications will be made each year under the new regime, with 70 to 95 detailed national security assessments undertaken. This compares to one to two national security reviews per year currently.

The wide scope of the legislation and the extensive powers available to the government will significantly impact deal timings and potentially increase the execution risk of deals.

A mandatory regime with broad scope

Under the mandatory regime, National Security and Investment (NSI) clearance from the secretary of state for Business, Energy and Industrial Strategy will be required before relevant transactions can be closed. In contrast to other jurisdictions, the regime applies to acquisitions by both UK and foreign entities. It will also apply to ‘foreign-to-foreign’ transactions involving a target that carries on activity in the UK.

The regime covers targets in 17 specified 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, and satellite and space technologies. There are no revenue thresholds, so a filing will be required even if the target’s activities in a sector are minimal.

The mandatory regime relates to share acquisitions. Separate filings will be required where an acquiring party’s shareholding moves up through 15, 25, 50 and 75 percent thresholds.

Failure to obtain clearance before closing will expose the acquirer to the risk of fines of up to 5 percent of worldwide turnover or £10m (whichever is greater) and imprisonment of individuals for up to five years. The transaction will also be void unless it is subsequently cleared.

A risk of call-in for other transactions

The government will have the power to call-in transactions that are not subject to mandatory notification for a national security assessment. This will include the ability to review the acquisition of land, property, intellectual property and other information with industrial, commercial or economic value, for example formulae, designs or algorithms. The call-in power will cover transactions which have closed in the last five years (reduced to six months from closing if the parties make the secretary of state aware of the transaction).

Transactions which closed prior to 12 November 2020 cannot be called-in. Although transactions which closed on or after 12 November 2020 are caught and may be called-in once the new assessment regime is in force, the government has stated that it does not expect this retrospective power to be applied in relation to a significant number of transactions.

The NSI review process

An initial review will take up to 30 working days from notification, but parties should factor in additional time to prepare draft notifications and discuss these with the government. If, following that initial review period, the transaction is called in for a detailed NSI assessment, this will last a further 30 working days, extendable by 45 or more working days.

The government has (intentionally) not defined national security or identified particular jurisdictions as hostile. It has explained that in deciding whether to call-in a transaction and in assessing whether a transaction raises national security threats, it will consider the following three risk factors.

The target risk. Is the business or asset being acquired engaged in activities which are relevant to the national security? Transactions involving targets in defence, advanced technologies, infrastructure and critical suppliers to government are likely to be scrutinised closely.

The trigger event risk. Could the transaction give the acquiring party the ability to undermine national security by engaging in disruptive actions or espionage, or by exerting inappropriate leverage?

The acquirer risk. Is the acquirer likely to use its rights over the target in a manner which undermines national security? The government will look-through the ownership and control structure and consider those with ultimate control of the acquirer. It is most concerned by parties closely associated with hostile states.

If the government identifies national security concerns, it will be able to impose a wide range of remedies. These may include limiting access to confidential information or physical sites (e.g., to individuals with security clearances), requiring certain activities to be carried on or staff employed in the UK, or prohibiting the transaction from closing. For transactions which are called-in after closing, the government will have the power to unwind the deal.

Horizon scanning

Further detail on the operation of the NSI regime is expected in early 2021, and the government is consulting stakeholders on various elements. In the meantime, companies and their advisers should consider whether the timing and risk allocation of ongoing deals should be adapted to take account of the regime.

Steven Vaz is a partner and Christopher Eberhardt is a senior associate at Ashurst LLP. Mr Vaz can be contacted on +44 (0)20 7859 2350 or by email: steven.vaz@ashurst.com. Mr Eberhardt can be contacted on +44 (0)20 7859 2712 or by email: christopher.eberhardt@ashurst.com.

Steven Vaz and Christopher Eberhardt

Ashurst LLP