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How will the National Security and Investment Bill affect your M&A and investments?
This Bill will enable the government to scrutinise and consider intervention in investments, mergers and acquisitions for the purposes of protecting national security. It beefs up the government’s current powers in common with many other nations implementing similar regimes.
How will this affect transactions?
Even though the Bill has only been introduced it will have a retrospective effect and can apply to any transaction that took place after 11 November 2020, even though the legislation has not yet been passed.
The regime will apply to many transactions in the technology, energy, telecoms, transport, government and military sectors.
The most significant impact to a transaction caught by the regime will be on timing since the notification process will take, at best case, 30 working days following acceptance of the notification by the government. It will also be necessary to consider the time it will take to prepare the notification and gather the information required to enable it to be submitted. This means the transaction will take much longer to complete.
Transactions may be exchanged on a conditional basis with completion only certain once clearance has been obtained. This will inevitably have cost implications when instructing your legal advisors. There is also the risk that clearance is refused or made subject to onerous conditions and subsequently aborts.
Currently it is not clear whether there will be any de minimis level below which transactions will not be considered to be significant enough to be caught by the regime. This may well materialise but currently the assumption is that all transactions subject to the regime will need to comply irrespective of the size of the target company or its purchase price.
What is the regime set out by the Bill?
Certain acquisitions or changes of control of qualifying entities and assets (trigger events) can be “called in” by the Secretary of State for Business, Energy and Industrial Strategy to undertake a national security assessment to assess if the trigger event may undermine national security. This might happen if the event resulted in the acquirer gaining control of critical supply chains, obtaining access to sensitive sites or sensitive information, the ability to cause corruption in critical processes or systems and inappropriate leverage or influence. A trigger event may be called in for such an assessment irrespective of whether it was notified to the government.
The Bill provides that trigger events may be called in retrospectively. This means that any such trigger event that takes place now may be called in at a later date even though the Bill is not yet in force.
In deciding whether or not to call in, the Secretary of State will consider, using principles of necessity and proportionality:
The target risk: the nature of the target and whether its business is in an area of increased risk.
The trigger event risk: the type and level of control being acquired and how the control might be used.
The acquirer risk: the extent to which the acquirer raises national security concerns.
The Bill includes powers for the government to vary the acquisitions that are subject to mandatory notification, and/or exempt certain types of acquisition, including adding or removing any of the specified sectors from the mandatory regime.
What are the trigger events?
Mandatory notification will be required for the following trigger events that take place in a specified sector:
A person gains control of a qualifying entity by acquiring shares or voting rights or increasing their existing shareholdings or voting rights from 25% or less to more than 25%, from 50% or less to more than 50% or from less than 75% to 75% or more.
A person acquires rights or interests to the extent that their shareholding or voting rights increase from less than 15% to 15% or more.
A person acquires voting rights enabling it to secure or prevent any resolution being passed, irrespective of shareholding.
A person acquires a material influence over a qualifying entity’s policy irrespective of shareholding or voting rights.
A person acquires a right or interest in a qualifying asset such as land, other tangible property or intellectual property.
What are the specified sectors?
There is an ongoing consultation (which ends on 6 January 2021) to define in detail the 17 sensitive sectors in which it will be mandatory to make a notification and obtain approval prior to the transaction.
The specified sectors are:
Communications (other than solely broadcasting services);
Critical suppliers to government;
Critical suppliers to the emergency services;
Military and dual use;
Satellite and space technologies; and
Transport (maritime, aviation and air traffic control).
Which entities and assets does the regime apply to?
The regime applies to a qualifying entity. This is wide-ranging and includes a company, limited liability partnership, any other body corporate, a partnership, an unincorporated association and trusts. It also includes such entities incorporated outside the UK if they carry on business in the UK or supply goods or services to persons in the UK.
Qualifying assets are land, tangible property, intellectual property or other industrial property of economic or commercial value such as trade secrets, databases, source code, algorithms, designs, software, etc. Land or tangible property situated outside the UK will be a qualifying asset if it is used in connection with activities in the UK or supply goods or services to persons in the UK.
What is the process for notification?
If the transaction is caught by the regime and a mandatory notification is required, proposed acquirers must notify the Secretary of State and obtain approval before completing the acquisition. Secondary legislation will determine the information required to make the notification but is likely to include details of the target entity and the parties to the transaction, the extent of control being acquired and any additional rights being granted to the acquirer.
In an auction process, a notification will be required once a specific acquirer has been chosen, although informal discussions may take place earlier with the other potential acquirers earlier in the process.
Informal discussions can be had to obtain advice on a non-binding basis.
A voluntary notification can be made where a mandatory notification is not required but to notify the Secretary of State that a trigger event has taken place in relation to a qualifying entity or qualifying asset or that arrangements are in progress or contemplation that will give rise to a trigger event. The Secretary of State has discretion whether to accept such a notification. If it does so accept it may issue a call in notice or provide a notification that no further action will be taken in relation to the trigger event.
How long does it take to get a decision after notification has been made?
Starting on the date that the Secretary of State informs the notifier that the notification is accepted, the government will have 30 working days to make its decision. The government may require an additional 45 working days if further assessment is required. The additional period may also be extended with the agreement of the acquirer. All time periods may be paused if an information notice is issued until the government receives such information.
Following the screening of the notification, the Secretary of State can either give the clearance for the transaction to proceed, or, if it believes there is a risk to national security, use the call in power to initiate a full national security assessment. During this period it may make any interim orders as it sees necessary and proportionate.
What else can happen?
Remedies may be imposed at any time during the assessment process or following the conclusion of a full national security assessment. These will be set out in an order issued by the Secretary of State and may focus on matters such as access to confidential information, supply chains, access to sensitive sites, intellectual property transfer, compliance, monitoring and employees. Orders may also include conditions, block the trigger event altogether or require it to be divested or even unwound.
Sanctions for non-compliance
Any transaction which is subject to mandatory notification and which takes place without clearance will be legally void although there may be scope to obtain a retrospective clearance in certain circumstances. Sanctions for non-compliance with the regime include fines of up to 5% of worldwide turnover or £10 million (whichever is the greater) and imprisonment of up to five years. Breaches of any orders can result in the imposition of daily rate penalties.
The government proposes to ensure the regime will work effectively with the Takeover Code. In addition the Bill contains some consequential amendments to the Enterprise Act 2002.
The information on this site about legal matters is provided as a general guide only. Although we try to ensure that all of the information on this site is accurate and up to date, this cannot be guaranteed. The information on this site should not be relied upon or construed as constituting legal advice and Howes Percival LLP disclaims liability in relation to its use. You should seek appropriate legal advice before taking or refraining from taking any action.