The UK National Security and Investment Act 2021 has received Royal Assent and is expected to come into force later this year. However, as discussed further below, once in force it can apply to transactions being entered into now.
The Act will introduce significant legislative reforms which will overhaul the review of transactions and investments on national security grounds in the UK. The new regime represents an important new execution risk factor, with a similar risk profile to merger control rules.
We have been very closely involved in the passage of this legislation through Parliament, including giving evidence before the Bill Select Committee and Foreign Affairs Select Committee, suggesting amendments to the Bill, and successfully assisting members of the House of Lords in arguing for specific changes to the proposed regime.
The key points to note in relation to the new regime are:
- Transactions in scope – The new regime will apply to an acquisition of “material influence” in a company (which may be deemed to exist in relation to a low shareholding, potentially even below 15%), as well as an acquisition of control over assets (including land and intellectual property), where the acquisition potentially gives rise to national security concerns in the UK.
- Application to all buyers – It will apply equally to both UK and non-UK investors (although the Government has acknowledged that UK investors will be less likely to give rise to national security concerns in practice).
- Application to entities/assets outside the UK – It may capture acquisitions of non-UK entities or assets in certain circumstances.
- Mandatory notification – A mandatory notification obligation (and a corresponding prohibition on completion prior to clearance) will apply to certain transactions involving target entities which carry out specified activities in the UK in one of 17 sectors (including energy, transport, communications, defence, artificial intelligence and other tech-related sectors). Such transactions include the acquisition of a shareholding / voting rights of more than 25% (the threshold has been increased from the 15% or more proposed in the original Bill).
- Power to call in transactions – The mandatory notification obligation will be combined with an extensive call-in power, enabling the Government to call in qualifying transactions for review, regardless of sector. The call-in power is not subject to any materiality thresholds in terms of target turnover or transaction value.
- Voluntary notification – Acquirers will also have the option to voluntarily notify a qualifying transaction to obtain clearance, which may be advisable in the interests of legal certainty where potential national security concerns arise.
Formal commencement of the new regime will be delayed until later this year (exact date to be confirmed). However, the Government will have retroactive powers to call in for review at the commencement date (or potentially up to five years thereafter) any qualifying transaction completed between 12 November 2020 and the commencement date. This means that it is critical for investors to consider the potential application of the new regime for all transactions completed from 12 November 2020 onwards that could potentially raise national security concerns.
We have published an updated briefing on the regime which is available here.
In the latest episode in our Public M&A podcast series, we discuss when an approach to a target about a possible offer has to be announced. Continue reading
The European Union has adopted a bold new approach towards the use of the referral mechanism set out in Article 22 of the European Union Merger Regulation (“EUMR“). As a result, transactions which do not qualify for review under merger control regimes in Member States can now be referred to the European Commission for assessment and approval.
On 20 April 2021 the first referral under this revised system was accepted by the European Commission in relation to the acquisition of the US-based healthcare company GRAIL by Illumina, Inc. (“Illumina/GRAIL“).
This marks the beginning of a new chapter in merger control in Europe. Jurisdiction to assess mergers, whether at a national or EU-level, was formerly determined by applying bright-line tests which typically related to the turnover of merger parties in relevant jurisdictions. This provided a high degree of legal certainty, enabling businesses to identify in advance merger control clearances required for an envisaged transaction and evaluate related risks and timing implications for closing.
The revised use of the Article 22 referral system introduces considerable legal uncertainty and risk. It presents significant practical challenges for deal planning and execution. Merger parties will now need to consider the conditions for referral under Article 22 EUMR, assess referral risk and, in appropriate cases, consider means to mitigate such risks, for instance through informal consultation with competition authorities and the inclusion of appropriate conditions in transaction documents.
Completed transactions may be subject to referral and review under Article 22 EUMR, a notable departure from conventional practice under the EUMR.
These and other practical and strategic considerations are explored in this alert, as is the recent referral of Illumina/GRAIL.
Changes to make the Takeover Code gender neutral
The Takeover Panel has published Instrument 2021/2. It makes amendments to the Takeover Code replacing gender specific terms with gender neutral terms. The amendments do not materially alter the effect of any of the provisions and so the amendments have been made without formal consultation.
The amendments will take effect on 5 July 2021.
Changes relating to conditions to an offer and the offer timetable
In the latest episode of our public M&A podcast series, we discuss the changes to the Takeover Code which were published in April 2021 (see our blog post here). These changes will:
- update the rules on regulatory clearances, including removing the historical, special status for EU merger clearance and UK Competition and Markets Authority (CMA) clearance;
- simplify the timetable for contractual offers; and
- introduce a flexible contractual offer timetable, to accommodate regulatory timetables which run for longer than 60 days.
These changes will come into force on 5 July 2021.
To listen to the full conversation please visit SoundCloud, Spotify or iTunes.
The Takeover Panel has published its response statement (RS 2020/1) setting out changes to the Takeover Code relating to the conditions to an offer, particularly those relating to regulatory / merger control clearance, and to the offer timetable.
The rule changes will come into force on 5 July 2021 and will apply to all firm offers which are announced (Rule 2.7 announcement) on or after that date. Firm offers announced prior to that date (or in competition with an offer announced prior to that date) will continue to be subject to the existing rules.
The key changes are:
- Conditions relating to clearance by the European Commission and CMA – The Takeover Code will no longer distinguish between EC/CMA conditions and other merger control clearance conditions, and a bidder will only be able to invoke a condition to an offer relating to merger control clearance in the EU and UK if the circumstances on which it is seeking to rely are material in the context of the offer (as is already the case for merger control conditions in jurisdictions outside the EU/UK);
- Offer timetable –There will be a number of changes to the offer timetable, including a requirement that all conditions to an offer must be satisfied by Day 60 (rather than Day 81), but there will be a greater ability to freeze the offer timetable if there is an outstanding official authorisation or regulatory clearance.
- Long-stop date – A contractual offer will have a long stop date, that is a date on which a bidder can seek to lapse an offer if not all the conditions are satisfied. In contrast to the long-stop date on a scheme, it is not an absolute walk right, but a bidder should have the expectation of normally being able to obtain consent from the Panel to lapse its offer where there is a material regulatory issue as at the long-stop date.
- Guidance on when a condition can be invoked – Panel Practice Statement No. 5 will be updated to set out additional guidance on the factors that will be taken into account in deciding whether a bidder should be able to invoke a condition, in particular where the condition relates to an official authorisation or regulatory clearance.
Further information on the rule changes can be found in our public M&A e-bulletin.
In the latest episode in our public M&A podcast series, we look at recent situations where we have seen shareholders influence a bid situation, including by:
- encouraging M&A;
- affecting M&A; or
- threatening M&A.
The government has published its response to the consultation on the sectors where mandatory notification will be required under the proposed new national security screening regime contained in the National Security and Investment Bill.
The Bill was published in November 2020 (see our blog post here) and is currently making its way through the House of Lords. It is expected to enter into force in autumn 2021.
A wide range of stakeholders had expressed concerns that many of the sector definitions originally proposed in the consultation document were drafted too broadly, and in many cases were not sufficiently specific to enable acquirers to identify whether a particular transaction would fall within scope of mandatory notification.
The government has now published revised definitions for each of the 17 sectors, with a significant narrowing of scope in many areas.
We have published a briefing which gives an overview of the key changes made to each of the 17 sector definitions, and related next steps.
The Pension Schemes Act 2021 introduces significant reforms of the regulatory regime for defined benefit (DB) pension schemes.
The Act introduces new criminal offences and civil sanctions which could be applied to company directors, lenders, investors, sellers, purchasers and advisers who take action which, broadly speaking, is materially detrimental to a DB scheme and where they do not have a reasonable excuse for their actions.
These new offences and sanctions are broad and have the potential to:
- impact corporate activity, including M&A and the payment of dividends in certain circumstances;
- restrict the scope for distressed businesses with DB pension schemes to secure fresh investment or take on additional debt, particularly where the scheme has a material deficit; and
- impact the feasibility, manner and desirability of restructuring a business or group with a DB scheme.
These new powers are not expected to come into force until mid-2021 at the earliest to give the Pensions Regulator time to consult on and issue guidance on how and in what circumstances it plans to exercise them.
Our pensions team has published a briefing which discusses the implications of the Act in more detail.
We have published our new M&A report, which we have titled “M&A in 2021 – Resilient, agile and coming off mute”, here.
In it we look at the prospects for M&A in 2021 – whilst the significant regional and global questions from last year may not have gone away, there are reasons for optimism. Issues we discuss in the report include:
- the lessons learnt from the impact of the pandemic that we are building into deal process and documentation, in particular around termination rights, for whatever black swan event next comes along;
- the continued rise of FDI regimes and their deployment by governments in the pandemic;
- the significance of shifts taking place in ESG, and the energy transition agenda in particular as a driver of M&A;
- the rebound in activity in the public markets as bidders seek to take advantage of lower valuations; and
- the distressed deals that we might expect to see in 2021, when governmental support necessarily runs out and the true impact is felt in the most damaged sectors.
Colleagues from our offices around the world also share their views and experiences of M&A in 2020, and their outlook for 2021.
The UK ceased to be a Member State of the European Union on 31 January 2020. A transition period then applied until 31 December 2020. During the transition period, EU law continued to apply in and to the UK, and the UK continued to trade as part of the Single Market.
The Brexit transition period ended on 31 December 2020, with the EU and UK having agreed to the terms of their future relationship through a Trade and Cooperation Agreement – you can read more about the implications of the agreement here.
Retained EU law
As of 1 January 2021, EU law no longer applies in the UK. By virtue of the European Union (Withdrawal) Act 2018, directly applicable EU law in force in the UK at the end of the transition period is retained as part of the UK statute book. Retained EU law has broadly the same status as any other UK enactment and is subject to the same rules/processes for amendment as any other UK primary or secondary legislation (or if made under devolved powers, the rules of the relevant legislature in Scotland, Wales or Northern Ireland).
EU Exit statutory instruments
The Government has made secondary legislation dealing with a range of corporate law matters to ensure that both Retained EU law and existing UK law and regulation (for example that referenced EU concepts or bodies) could operate effectively once the transition period ended. These regulations include:
- Company law – the Companies, Limited Liability Partnerships and Partnerships (Amendment etc.) (EU Exit) Regulations 2019 make a range of miscellaneous amendments in relation to EEA companies with a UK establishment or branch, and revoke the Companies (Cross-Border Mergers) Regulations 2007;
- Accounts – the Accounts and Reports (Amendment) (EU Exit) Regulations 2019 amend the Companies Act provisions on the preparation and filling of accounts, to remove the preferred treatment for EEA companies and limit the scope of certain exemptions to UK companies with UK parents;
- Market abuse and inside information – the Market Abuse (Amendment) (EU Exit) Regulations 2019 address deficiencies in the market abuse regime arising from Brexit. The regulations amended Retained EU Law relating to market abuse, including UK MAR, to ensure that the relevant legislation continues to operate effectively.
- Listing regime – the Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019 underpin the changes to the Listing, Prospectus Regulation, Disclosure Guidance and Transparency Rules necessary for Brexit.
- Prospectus regime – the Prospectus (Amendment etc.) (EU Exit) Regulations 2019 ensure the UK has a coherent and functioning prospectus regime, including transferring the UK prospectus supervisory functions from ESMA to the FCA.
- Contract – the Law Applicable to Contractual Obligations and Non-Contractual Obligations (Amendment etc.) (EU Exit) Regulations 2019 ensure that EU rules that determine the law applicable to contractual and non-contractual obligations continue to operate effectively in domestic law after Brexit by incorporating the substantive rules in Rome I and Rome II into UK domestic law.
- Enforcement of judgments – the Civil Jurisdiction and Judgments (Hague Convention on Choice of Court Agreements 2005) (EU Exit) Regulations 2018 implement the UK’s international treaty obligations as an independent contracting party to the Hague Convention on Choice of Court Agreements 2005, ensuring that the Convention can work effectively between the UK and all the existing contracting parties to the Convention, and allowing the UK to operate the Convention with any future contracting parties.
- Competition – the Competition and Markets Authority was granted the power under the Competition (Amendment etc.) (EU Exit) Regulations 2019 to review mergers that affect the UK market (even where the transaction is also being reviewed by the European Commission), where the UK jurisdictional thresholds are met. There are transitional provisions for proceedings and investigations that were already under way at the end of the transitional period.
The FCA has made a number of changes to its Handbook that apply with effect from the end of the Brexit transition period, including changes to the Listing, Prospectus Regulation, Disclosure Guidance and Transparency Rules.
The impact of the rule changes for UK incorporated companies which have securities admitted only to a UK regulated market will be minimal. Issuers which have shares admitted to a regulated market in the UK and in an EEA state will have to adjust their systems and controls and, for example, make additional notifications to regulators for certain matters, including in relation to PDMR transactions.
The Takeover Panel has similarly made a number of changes to the Takeover Code that were required as a result of Brexit. The changes will not have a significant impact on transactions.