Review of investment screening regime in National Security & Investment Act

November 17, 2023

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.

 

Alex Kay
Alex Kay
+44 20 7466 2447

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Emma Stones
Emma Stones
+44 20 7466 2678

Notification obligations under EU Foreign Subsidies Regulation in force

October 6, 2023

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.

 

David D'Souza
David D'Souza
+44 20 7466 2779

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Shaun Lee
Shaun Lee
+44 20 7466 2513

#FDIFriday: New HSF Global FDI podcast series sharing practical insights for investors

September 22, 2023

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.

Ruth Allen
Ruth Allen
+44 20 7466 2556

Gavin Davies
Gavin Davies
+44 20 7466 2170

Veronica Roberts
Veronica Roberts
+44 20 7466 2009

 

New notification requirements where foreign “financial contributions” involved

July 21, 2023

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.

 

Julie Farley
Julie Farley
+44 20 7466 2109

Heidi Gallagher
Heidi Gallagher
+44 20 7466 2367

Siddhartha Shukla
Siddhartha Shukla
+44 20 7466 7474

Second Annual Report on the National Security and Investment Act

July 21, 2023

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.

 

Gavin Davies
Gavin Davies
+44 20 7466 2170

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Caroline Rae
Caroline Rae
+44 20 7466 2916

Half-yearly corporate update – our latest briefing

July 7, 2023

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 January to June 2023, and which are of relevance to UK listed companies.

The briefing is available here.

Heidi Gallagher
Heidi Gallagher
+44 20 7466 2367

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Siddhartha Shukla
Siddhartha Shukla
+44 20 7466 7474

 

Takeover Panel consultation on frustrating action and Takeover Code changes now in force

May 26, 2023

The Takeover Panel has published a consultation paper on possible amendments to Rule 21 on frustrating action (PCP 2023/1). The Takeover Code changes that were published in April are now in force.

Takeover Panel consultation paper (PCP 2023/1)

Rule 21.1 of the Takeover Code restricts the board of an offeree company from taking any action which may result in an offer or bona fide possible offer being frustrated, unless the target obtains shareholder approval, or the Panel gives its consent, for the action.

Overall, the Panel says it thinks Rule 21.1 operates satisfactorily and so it does not propose fundamental amendments to the Rule. However, it is proposing to:

  • give companies more flexibility for actions which are either in the ordinary course of business for the particular company (such as buying or selling assets) or not material;
  • include in the Notes on the Rule and in a new Practice Statement further guidance on when certain actions by a target board, for example employee incentivisation arrangements or share buybacks, will be considered either not to be material or to be in the ordinary course; and
  • to apply the prohibition on frustrating action to a bidder on a reverse takeover.

A company will still need to consult the Panel about any proposed action that may be restricted by the Rule.

The Panel is also proposing a number of amendments to Rules 21.3 and 21.4 to reduce the administrative burden on the parties to an offer where a request for information is made under Rule 21.3 (equality of information to competing offerors) and to enhance the target’s ability to protect its commercially sensitive information.

The consultation closes on 21 July 2023 and final amendments to the Code are expected to be published in Autumn 2023 (to come into effect approximately one month after publication).

Changes to the Takeover Code now in force

Changes to the Takeover Code came into force on 22 May 2023. The changes relate to:

  • the offer timetable in a competitive situation (RS 2022/3); and
  • various miscellaneous amendments including around the requirements for the recommendations by target directors on an offer (RS 2022/4).

For further information on the changes, see our blog post here.

The Takeover Panel has also made minor consequential amendments to some of its Practice Statements to reflect the rule changes.

Our latest public M&A podcast

In the latest episode of our public M&A podcast series, we discuss recent changes to the Takeover Code as well as current themes and trends in public M&A transactions in the UK. You can listen to the podcast here.

Mark Bardell
Mark Bardell
+44 20 7466 2575

Gavin Davies
Gavin Davies
+44 20 7466 2170

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Updated government guidance on the National Security and Investment Act

May 12, 2023

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.

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Siddhartha Shukla
Siddhartha Shukla
+44 20 7466 7474

Emma Stones
Emma Stones
+44 20 7466 2678

Revolutionary changes to the UK listing regime proposed

May 3, 2023

The FCA has proposed a revolutionary restructuring of the UK listing regime. Its consultation paper (CP 23/10) sets out a blueprint for the new ‘UK listing’. While the genesis of the rule changes is the desire to attract more companies in London, they will have a significant impact on existing listed companies.

In a change from the FCA’s previously announced reform approach (read more on the background here), it has abandoned the idea of a split between mandatory and supplementary continuing obligations in favour of a true single segment with one set of continuing obligations for normal commercial companies. As part of the new UK listing regime:

  • shareholder votes will no longer be required for significant/Class 1 transactions;
  • shareholder votes will no longer be required for related party transactions;
  • a modified sponsor regime will remain a cornerstone of investor and market protection; and
  • there will be significant changes to the eligibility requirements for new prospective IPO candidates, moving to a disclosure-based rather than rules-based regime.

A two page summary with further details is available below. Our full briefing on the proposals is available here.

VIEW IN FULL HERE

FTSE Russell, which maintains the FTSE indices, has not yet commented on the FCA’s proposals and in particular what they would mean for index inclusion going forwards.

The FCA has said that following this consultation (which closes on 28 June 2023) it expects to publish a second paper containing draft rules in the autumn, and plans to accelerate its final rule making processes. For existing listed companies, transitional provisions will be made in due course.

In our view, this is an important step towards improving the competitiveness of the UK market from a regulatory perspective and should have the dual benefits of making the UK a more attractive listing destination and improving the competitiveness of UK listed companies in international M&A processes. However, challenges remain, in particular as regards the depth of liquidity, perceptions on valuation gaps, extent and quality of research coverage and consistency of investor appetite for IPOs in the UK (especially from UK investors). These will also need to be addressed if the UK is to materially improve its competitive position as a listing venue. In addition, the loss of established protections, particularly around related party transactions, will concern some investors and, taken together with the other relaxations on eligibility (which are being modified to a disclosure-based approach) and on the separate prospectus and secondary issuance reforms (which will enable significant undocumented capital raises), will decisively place the emphasis on investors to manage risk. The FCA will also need to have the powers and capacity to ensure the new disclosure-based regime is adhered to, as well as deal with rule breaches and ensure that the high standards of market conduct that attract investors to the London market are retained. All eyes will now turn to investors for their responses to the proposals given that the FCA has gone down a radical route.

 

Mike Flockhart
Mike Flockhart
+44 20 7466 2507

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Michael Jacobs
Michael Jacobs
+44 20 7466 2463

Changes to the Takeover Code published

April 14, 2023

The Takeover Panel has published two response papers on the offer timetable in a competitive situation (RS 2022/3) and on miscellaneous amendments to the Code (RS 2022/4). The amendments to the Code will take effect on Monday, 22 May 2023, and will apply to all transactions from that date, including transactions that are already live.

The amendments are broadly as proposed in the consultation papers PCP 2022/3 and PCP 2022/4.

The offer timetable in a competitive situation (RS 2022/3)

In the new rules, the Panel has clarified how the offer timetable applies in certain competitive situations where one of the bidders is proceeding by way of scheme and official authorisations or regulatory clearances are required by one or both of the bidders:

  • Official authorisation or regulatory clearance required – Where one or more official authorisations or regulatory clearances cannot be obtained in the normal 60-day timetable for contractual offers, the Panel will not normally introduce an auction procedure under Rule 32.5 until after the last condition relating to a relevant official authorisation or regulatory clearance has been satisfied or waived by each of the bidders.
  • Bidder wishing to complete its offer prior to the introduction of an auction procedure – Where one bid is proceeding faster than another (in terms of obtaining the requisite clearances) and the faster bidder does not wish to wait for the other bidder to obtain its clearances and the subsequent Panel auction procedure before completing its bid:
    • If the faster bidder is proceeding by way of contractual offer, it can make an acceleration statement and bring forward the unconditional date of its offer (provided it is willing to waive any outstanding conditions etc as required by Rule 31.5). Otherwise, its Day 60 will effectively be suspended (such that its offer will not lapse on its acceptance condition on the 60th day after publication of its offer document).
    • If the faster bidder is proceeding by way of scheme (which has been approved by target shareholders) and the target board (with the agreement of the faster bidder) wishes to complete the scheme prior to the Panel auction procedure, the target board should consult the Panel as to whether the sanction of the scheme would, without an additional shareholder vote, be restricted by Rule 21.1 on frustrating action (although the Panel will generally agree to disapply Rule 21.1 in these circumstances).
  • Setting Day 60 where there is a competing offer and scheme – Where one competing offer is by way of scheme and the other by way of a contractual offer, Day 60 on the contractual offer will normally be set for a date after the shareholder meetings and before the court sanction hearing in relation to the scheme.

Miscellaneous Code amendments (RS 2022/4)

This response statement contains a variety of minor amendments to the Code including the following:

  • Companies in financial difficulty – The Panel will have greater flexibility to grant a derogation or waiver from the Code in exceptional circumstances, for example to facilitate a rescue of a company which is in serious financial difficulty.
  • Rumour or speculation following a DTR 5 disclosure – Where a potential offeror is actively considering an offer, and there is rumour or speculation, or an untoward movement in the target’s share price, the potential offeror will have to make an announcement under Rule 2.2 of the Code, even if the rumour or speculation, or share price movement, is caused by a public statement such as a disclosure under DTR 5.
  • Recommendations by the target board – The target board must make a recommendation to shareholders (and to holders of convertible securities, options and subscription rights) as to the action that they should take, and where there are alternative offers, the target board circular must state which alternative (if any) the directors intend to elect for in respect of their own shares (and why). Examples of language which a target board could use are set out in Appendix C of Response Statement 2022/4.
Alex Kay
Alex Kay
+44 20 7466 2447

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Robert Moore
Robert Moore
+44 20 7466 2918