Laid before Parliament on 11 November 2020, the National Security & Investment Bill (the “Bill”) promises to usher in a sweeping reform of the way in which the UK Government can scrutinise foreign investment. Aimed at bolstering the Government’s ability to intervene in transactions which may give rise to national security concerns, the Bill proposes for the first time in the UK a mandatory notification regime for certain key sectors, with other sectors covered by a voluntary notification regime. Notifiable transactions which are not notified will be legally void by application of the legislation. The new regime will work in parallel to the existing (voluntary) merger control regime, which focuses on whether a transaction substantially lessens competition.
As opposed to the (only) twelve transactions reviewed on national security grounds under the current public interest regime, the Government suggests that between 1,000 and nearly 2,000 transactions will be subject to notification under the new regime, per annum, with possibly a further 10 non-notified transactions that get called in. This is clearly a significant uplift, and demonstrates the significance of the proposals. Moreover, this is not one to be banked for the future: though the Bill remains subject to debate and amendment, if passed in its current form the Government will have retroactive enforcement powers applicable to transactions that took place following the introduction of the Bill on 11 November 2020.
Mandatory, or voluntary?
The Bill imposes a mandatory notification regime for seventeen sectors, with transactions in these sectors having no legal effect until clearance is obtained: 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. It is likely that the final list of sectors will be amended as a result of the legislative scrutiny and ongoing business consultation.
Outside of these sectors, parties will be encouraged to voluntarily notify the Government of “trigger events” which could be of concern to national security, including the acquisition of low levels of shareholdings or control – for example, where a person’s shareholding or voting rights increase to over 15%, or even lower if there is an acquisition of material influence. Furthermore, the regime will cover foreign to foreign transaction that will impact national security, for example the potential acquisition by a Chinese investor of a data storage company in India performing services which impact on national security in the UK.
Not only does the Bill significantly widening the scope of transactions subject to national security review , but it also does not provide for any turnover or market share safe harbours under which transactions cannot be reviewed, and allows the Government to review non-notified transactions for up to five years post-completion (although this power is limited to a period of six months after the Government becomes aware of the transaction).
The Department for Business, Energy & Industrial Strategy: the power is in your hands
The Secretary of State for Business, Energy & Industrial Strategy (the “SoS”) will act as a quasi-judicial decision-maker in assessing risks to national security, taking the baton from the Competition and Markets Authority which has current responsibility for equivalent public interest (including national security) assessments. The SoS’ assessment will result in either approval of the transaction, prohibition or approval subject to conditions to prevent or mitigate national security risks.
Importantly, the SoS will only be able to call-in a transaction for review if there is reasonable suspicion of a risk to national security, and not simply if there are wider economic concerns. Unhelpfully however, the Bill has not defined the concept of national security risk, leaving it slightly unclear as to which transactions can be called-in. Guidance on this subject is to be expected.
After parties make a mandatory or voluntary notification, the SoS will be required to issue a call-in notice within 30 working days. Where such a notice is issued – whether for notified or non-notified transactions – the Government will then have a 30 working day preliminary screening period to either impose remedies or to take no action. If the SoS believes that a transaction raises a national security risk that requires further investigation, this preliminary period can then be extended by another 45 working days. Extensions beyond this will then need to be agreed between the SoS and the parties involved.
Non-compliance with this regime will lead to civil and criminal sanctions, and these are sufficiently high not to be taken lightly. In particular, non-compliance with the mandatory notification obligation will result in the invalidity of the transaction and breach of interim orders or requests for information, will result in fines of up to 5% of the party’s worldwide turnover or GBP10 million (whichever is higher), along with a maximum of five years in prison.
The UK is embarking on a serious journey to toughen foreign investment rules in line with other major economies in a move prompted by concerns surrounding foreign investment in critical or sensitive sectors such as the technology and – following COVID-19 – medical sectors. Once passed, this Bill will provide the Government with unprecedented jurisdiction over acquisitions of UK businesses, meaning UK foreign investment rules will invariably become an important issue for parties when evaluating deal feasibility and transaction timetables. In the Government’s view, however, this regime is not simply a form of over-protectionism. It is seeking to ensure that the UK remains “a global champion of free trade and an attractive place to invest” 1. Whether this is to be the case remains to be seen.