The government has published a Call for Evidence on the scope and implementation of the UK’s National Security and Investment (NSI) regime, which governs screening of transactions on national security grounds for both foreign and UK investors.
The National Security and Investment Act 2021 introduced a new framework for the review of transactions and investments on national security grounds in the UK with effect from 4 January 2022. Since entering into force, the UK has seen significantly more filings than many other foreign direct investment (FDI) regimes and concerns have been raised by investors and advisors that the regime places disproportionate burdens on companies and investors and operates without sufficient transparency.
The government is inviting comments on the operation of the regime to date, with the stated aim of making it “as pro-business and pro-investment as possible”.
The Call for Evidence makes clear that the government is not currently considering any changes to primary legislation, such as changing the shareholding thresholds for mandatory notification. However, it asks for views on various proposals, including:
- introducing targeted exemptions from the mandatory notification obligation, for example group reorganisations;
- clarifying and refining the definitions of specified activities in a number of the sensitive sectors;
- expanding and updating the guidance for investors; and
- improving transparency in the decision-making process.
The deadline for responses to the Call for Evidence is 15 January 2024. The government has indicated that it may subsequently undertake more detailed consultation on specific measures or proposed legislative changes, depending on the responses received.
For further information on the Call for Evidence, see our Competition Notes blog post.
The obligation to notify M&A and similar transactions under the EU Foreign Subsidies Regulation (FSR) applies from 12 October 2023.
The FSR aims to level the playing field between EU entities and competitors from non-EU Member States that are not subject to the same kind of strict rules against state subsidies as EU entities are under the EU State Aid rules. Consequently, the FSR impacts non-EU entities, including UK entities. The obligation to notify is not solely triggered where an entity involved in a transaction has received state subsidies.
Although the aim of the FSR is to address foreign subsidies that distort competition, the notification obligations are triggered where undertakings have received foreign “financial contributions”, a much wider concept. A foreign financial contribution could, for example, include payment by a non-EU government or public authority for goods and services, even where those payments were made on arm’s length market terms (so there is no subsidy).
M&A transactions and joint ventures will have to be notified to the European Commission, and clearance obtained prior to completion, if:
- the undertaking to be acquired, one of the merging undertakings or the joint venture is established in the EU and has aggregate EU turnover of €500 million or more (including via one or more subsidiaries); and
- the aggregate amount of the foreign financial contributions received by the undertakings concerned is more than €50 million over the three years prior to notification.
Failure to notify when required could result in significant fines being imposed on companies by the European Commission, as well as a risk that the transaction could subsequently be investigated and ultimately unwound if the Commission concludes that it distorts the EU internal market.
Read more about the new EU foreign subsidies regime on our competition team’s blog here.
We are delighted to launch our new #FDIFriday podcast series, bringing together experts from our Global Foreign Investment Regulation Group to discuss the rapidly-evolving FDI regulatory landscape in accessible, digestible podcast episodes.
Decision-making by FDI agencies tends to be characterised by a lack of transparency, with typically very limited information made publicly available in respect of individual cases. As a result, it can be difficult for investors to understand how the review process is likely to play out in practice and to gauge the potential execution risk for a particular transaction.
Join us as we share our experiences gained from dealing regularly with FDI agencies around the world, offering valuable insights into the review process and identifying some key themes and trends that we are seeing in practice.
We will initially focus on the UK National Security and Investment regime, including the implications for M&A in specific sectors which are particularly in the spotlight at the moment, including tech, energy, pharma and private capital.
We will then go on to consider the most important recent developments in FDI regimes in other jurisdictions across the world, highlighting the key points that transacting parties need to be aware of and offering practical guidance for investors.
The first three episodes in this series are now available to download here, with an introduction to the UK NSI regime sharing our practical insights gained from regularly dealing with the Investment Security Unit, plus spotlight episodes focusing on the tech and energy sectors.
New episodes will be released every Friday, so bookmark the #FDIFriday homepage or follow us via your preferred podcast service to ensure you don’t miss the latest episodes!
Please do contact us with your feedback on this series, any suggestions for topic areas of interest or for any further information.
In November 2022, the EU adopted a new Foreign Subsidies Regulation (FSR). The FSR applies to transactions with an EU nexus signing on or after 12 July 2023, with the notification obligations commencing from 12 October 2023.
The FSR is intended to level the playing field between EU operators and their competitors from non-EU Member States which are not subject to the same kind of strict subsidies disciplines as EU Member States are under the EU State Aid rules.
It seeks to do this by creating new subsidy control tools for the European Commission to address foreign subsidies, including a notification-based tool in relation to potentially subsidised mergers and acquisitions, “concentrations”. Concentrations need to be notified to the European Commission where: (i) the undertaking to be acquired, one of the merging undertakings, or the joint venture, is established in the EU and has aggregate EU turnover of €500 million or more; and (ii) the aggregate amount of the foreign “financial contributions” received by the undertakings concerned is more than €50 million over the three years prior to notification.
Although the aim of the FSR is to address foreign subsidies that distort competition in the EU, the notification obligations are triggered by foreign financial contributions, a much wider concept. A foreign “financial contribution” may include any transfer of financial resources from non-EU public authorities to the undertakings concerned, including, for example, payment by a non-EU public authority or state-owned enterprise for goods and services (even where those payments were made on arm’s length market terms so there is therefore no subsidy).
Failure to notify when required could result in significant fines being imposed on companies by the European Commission, as well as a risk that the transaction could subsequently be subject to investigation and ultimately unwound if the Commission concludes that foreign subsidies in the concentration distort the EU internal market.
Read more about the new EU foreign subsidies regime on our competition team’s blog here.
The Cabinet Office has published the second Annual Report on the National Security and Investment Act 2021 (NSIA), covering the period from 1 April 2022 to 31 March 2023 (the Report).
The NSIA introduced a new framework for the review of transactions and investments on national security grounds in the UK with effect from 4 January 2022, updating the UK regime in line with the global trend to strengthen foreign direct investment screening.
The NSIA requires the Secretary of State to present a report on the operation of the regime to Parliament each year. The first report, published on 16 June 2022, provided a limited overview of the first three months of the NSIA’s operation. The latest Report covers the full 12-month period to 31 March 2023 and offers valuable insights for investors into the work of the newly established Investment Security Unit in enforcing the NSIA regime, including:
- Notifications – There were 866 notifications received in the relevant period, of which 671 were mandatory filings, 180 were voluntary notifications, and 15 were retrospective validation applications. The vast majority (93%) were cleared within the initial 30 working day preliminary review period.
- “Call-ins” – 65 transactions were “called-in” for further investigation by the Secretary of State. Over half of the call-ins related to mandatory filings, and around one quarter were in relation to voluntary notifications. Importantly, 10 non-notified transactions were called-in during the review period, illustrating that the Government is pro-actively monitoring deal activity and making use of its powers to call-in transactions for review on its own initiative.
- Outcomes – 72 called-in transactions were subject to final determination by the Secretary of State during the relevant period (with 11 transactions being withdrawn before the end of the review process). Most of the called-in transactions eventually received unconditional clearance, with only 20.8% resulting in a final order. There were 15 final orders issued by the Secretary of State during the review period (one of which was subsequently revoked due to the acquirer deciding not to proceed with the transaction). Five of these resulted in prohibition or forced divestment of the acquisition, with the rest involving the imposition of conditions.
Read a more detailed summary of the Report, including key practical takeaways for investors, on our competition team’s blog here.
The government has published updated Market Guidance on the National Security and Investment Act 2021 (NSI Act).
The NSI Act came into force in January 2022 and gave the UK government power to scrutinise a wide range of transactions on national security grounds, and made notification of relevant transactions in 17 specified sectors mandatory (see our detailed briefing on the regime for more detail).
The additions and clarifications in the latest version of the Market Guidance include:
- additional guidance in relation to issues such as acquisitions involving parties who are in material financial distress, the timing of a notification, the stages of the NSI Act review process, and the government’s powers to provide financial assistance to businesses and other parties affected by a final order under the NSI Act; and
- for the 17 specified sectors where notification is mandatory, some more detail on how to engage with government if there is significant uncertainty about whether an acquisition is notifiable.
For further information on the updated guidance, and other developments including that the government will be seeking to make the NSI Act regime more open and transparent, see our competition team’s blog post here.
We have published our half-yearly update briefing which summarises the major developments in UK corporate law and regulation that have occurred over the last six months, that is from July to December 2022, and which are of relevance to UK listed companies.
The briefing is available here.
We have published our latest annual global M&A report titled ‘M&A in 2023: Headwinds, tailwinds and fog’.
2022 was a ‘tale of two halves’ for M&A activity. While global M&A saw record levels of dealmaking in the first half of the year, the second half experienced a considerable slowdown as the market was impacted by the war in Ukraine, inflationary pressures, rising interest rates and political uncertainty.
The question now is whether the markets can fully absorb our current perma-crisis state, with once-in-a-generation events erupting with disturbing frequency. M&A markets are not closed, and we are seeing a rebuilding of experience of transacting M&A within more challenging conditions. There also remain good reasons that transactions have proceeded amid a turbulent environment.
Our report explores some of the most important legal issues for dealmakers in the current disruptive environment:
- political considerations playing out through national security regimes;
- geopolitical issues driving operational repositioning;
- carve-out transactions, a key M&A tool in portfolio realignment;
- the growing voice of shareholders in M&A; and
- themes we are seeing in M&A transactions and their terms.
If you download the full report, you will also find insights from colleagues around the world on their experiences of M&A in 2022 and the outlook for 2023, as well as a closer look at M&A in various sectors including pharma, energy, tech and insurance.
The Financial Conduct Authority (FCA) has published market guidance for issuers, on a range of topics, in Primary Market Bulletin 42 and for firms, on insider lists, in Market Watch 71.
Primary Market Bulletin No. 42
Topics covered in Primary Market Bulletin 42 include:
- Unlawful disclosure of inside information – The FCA describes the situations and types of behaviour that crop up repeatedly in enquiries by the FCA’s Primary Market Oversight department into suspected unlawful disclosures of inside information by issuers, directors, advisers and other parties. It flags in particular social and mainstream media, the leak of information around fundraisings and analyst briefings.
- TCFD reporting – The FCA reminds both standard and premium listed companies of the guidance published by the FCA and the Task Force on Climate-Related Financial Disclosures (TCFD) on TCFD reporting (see our briefing here on the reporting requirements). In particular, the FCA refers companies to the TCFD’s Guidance for All Sectors and, where relevant, the Supplemental Guidance for the Financial Sector and Non-Financial Groups (as cross-referred to in LR 9.8.6BG and LR 14.3.28G). The FCA also comments on areas for improvement from its review of the first year of premium listed companies’ TCFD reports, particularly around net zero commitments and transition planning.
- Structured electronic reporting – Companies are reminded of the September 2022 FRC Lab report “Structured Digital Reporting – Improving Quality and Usability” and the lessons to be learned from the first year of mandatory structured digital reporting.
- NS&I Act – When acquisitions are subject to review or assessment, or where interim or final orders are made, under the National Security and Investment Act 2021, companies should consider their obligation to disclose inside information under the UK Market Abuse Regulation (see our briefing here on the NS&I Act).
Market Watch 71
In Market Watch 71 the FCA makes a number of observations about changes in advisory firms’ insider lists since the publication of Market Watch 60 (which was published in August 2019 and focused on controlling access to inside information in advisory firms). It notes that the number of individuals on firms’ permanent insider lists has on average reduced. The FCA also reminds firms they must follow the mandatory template for insider lists and, in particular, include all relevant personal information for the individuals on the list.
We have published our half-yearly update briefing which summarises the major developments in UK corporate law and regulation that have occurred over the last six months, that is from July to December 2021, and which are of relevance to UK listed companies.
The briefing is available here.