The UK Government will today introduce the National Security and Investment Bill (the Bill) to Parliament, setting out significant legislative reforms which will overhaul the review of transactions on national security grounds in the UK, against a backdrop of tightening of foreign direct investment (FDI) regimes globally.
If passed, the Bill will introduce for the first time a distinct regime and standalone powers relating to the review of FDI in the UK, replacing the existing public interest merger regime insofar as national security interests are concerned.
The Government first made clear its intention to introduce a new review framework in its July 2018 White Paper (see our previous briefing), and subsequently included proposals in line with the White Paper framework in the December 2019 Queen’s Speech. However, the regime tabled before Parliament today notably deviates from the White Paper framework in a number of important ways, with potentially significant implications for investors.
We are currently analysing the detail of the Bill and its likely impact, and a further detailed briefing will follow. However, we highlight below some key initial takeaways for investors.
Key initial takeaways
- In line with the White Paper, the focus of the Bill is on intervention on grounds of “national security” (rather than a broader “national interest” test which had reportedly been under consideration).
- National security is a concept which is increasingly broadly defined and clearly goes well beyond simply defence-related interests. However, the Government has stated that it will not extend to allowing intervention for “broader economic reasons”.
- The proposed regime would apply to investors from any country, with no minimum target turnover or market share thresholds. The key question is simply whether there is an acquisition of “material influence” in a company, assets or intellectual property which potentially gives rise to national security concerns (subject to certain exceptions for transactions involving an increase in an existing shareholding).
- We understand that “material influence” will be interpreted in the same way as the concept is used for the purposes of the UK merger control regime, such that a shareholding of 25% or more would likely be caught, but it could also potentially include the acquisition of a shareholding of 15% (or even lower in certain circumstances).
- In a significant departure from the voluntary notification regime proposed in the White Paper, the Bill requires mandatory notification (to a new dedicated government unit via a digital portal) for at least some transactions in 17 specified sectors: 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.
- The Government recognises that it will be extremely important for the affected parts of these sectors and the types of transactions requiring mandatory notification to be tightly defined, and it is therefore launching a public consultation on the draft definitions alongside the Bill.
- In other sectors, notification will be voluntary. However, it is important to note that the Bill includes an on its face remarkable five-year retrospective “call-in” power allowing for post-completion review of non-notified transactions, applicable to any transaction falling within the scope of the new regime which is completed from today onwards.
- In practice, this seems likely to lead to a significant number of “failsafe” notifications being made (and indeed arguably makes the entire regime akin to mandatory filing).
- Once a transaction is notified or called in, the Bill requires the assessment to be undertaken within a 30 working day review period. This is significantly shorter than the usual timeframe for review under the existing public interest merger regime, where timelines are determined on a case-by-case basis, rather than prescribed by statute, once an intervention notice is issued.
- Clearance may be subject to conditions intended to address any national security concerns identified. These could include, for example, altering the amount of shares an investor is allowed to acquire, restricting access to commercial information, or controlling access to certain operational sites or works. The Government says it will have the power to block (and potentially unwind) transactions as a last resort.
- The new regime will be “pro-active” from today: whilst it will not be possible to notify deals for clearance under the new regime prior to formal commencement of the final Act, the Government will have powers to call-in any deal which falls within the scope of the new regime and which is completed any time from today onwards, for review on or after the commencement date. Companies will also be able to obtain informal guidance about any potential Government interest in transactions from today: the Government is promising prompt feedback.
- Sanctions for non-compliance with the new regime will be severe:
- fines of up to 5% of worldwide turnover or £10 million (whichever is the greater) and/or imprisonment of up to 5 years; and
- transactions covered by the mandatory notification requirement which proceed without obtaining clearance will be legally void.
The Bill will now begin its passage through Parliament. Today’s introduction of the Bill to Parliament marks the “first reading”, but this is merely a formality with no debate on the content. The second reading will present the first opportunity for MPs to debate the general principles of the Bill, and usually takes place around two weeks after the first reading.
This will be followed by the committee stage, where the detail of the Bill will be debated on a clause by clause basis. At this point in the process, organisations and individuals will be able to submit written submissions proposing amendments to the Bill, or supporting or opposing any amendments proposed to the Bill by others.
As noted above, alongside the passage of the Bill through Parliament, the Government has launched a public consultation seeking comments on the draft definitions of the sectors where mandatory notification will be required. Responses to that consultation must be submitted by 6 January 2021.