This is a follow-up blog to our first blog on this subject, published on 19 November 2020 (see full blog here: https://www.gherson.com/blog/new-national-security-and-investment-bill).
Expected since the publication of a White Paper in 2018 and announced during the Queen’s speech on 19 December 2019, the long anticipated National Security and Investment Bill 2020 (“NSIB”) was recently unveiled by the UK Government. This new foreign investment regime is similar in character to the CFIUS policy in the US. CFIUS is an interagency committee authorized to review certain transactions in the US involving foreign investment and certain real estate transactions by foreign persons, in order to determine the effect of such transactions on US national security.
The bill, presented on 11 November 2020 will, once promulgated, replace the filtering carried out on the basis of the Enterprise Act 2002 (“EA 2002”), whose control field is still considered too narrow and ineffective.
As part of the integrated foreign, defence and security policy review, Boris Johnson’s government has indicated that it wants to endow the UK authorities with full control over foreign investments in order to “protect national security; and, provide businesses and investors with the certainty and transparency they need to do business in the UK”. In practical terms, this new law is designed to prevent overseas companies from gaining control over sensitive UK assets in order to further political agendas.
The implementation of the new screening regime will be based on three mechanisms: (i) the creation of an obligation for investors to notify UK authorities of transactions involving certain entities; (ii) the opening of a voluntary notification system for transactions that would not be subject to the mandatory notification regime; and (iii) the creation of a discretionary power of intervention called “call-in”, allowing the Secretary of State to intervene in a transaction in progress or in respect of one already completed. In addition, unlike the previous regime under the EA 2002, which made governmental intervention conditional on turnover and market share thresholds, the NSIB does not provide for any turnover or supply share threshold test below which transactions involving foreign investors (directly or indirectly) would be spared from the UK Government’s control.
Obligation to notify the authorities of a transaction before it is carried out
- Formal aspects of notification: the procedural rules relating to notification are not defined by the NSIB and will subsequently be specified in secondary legislation presented by the Secretary of State.
- Type of transaction to be notified: the NSIB provides that capital increase operations (crossing the thresholds of 25%; 50%; and 75% of the votes or shares of an entity) must be notified. Capital increases above 15% must also be notified.
- Sectors concerned: 17 sectors should fall within the material scope of this obligation to notify*
- Penalty for failure to notify a transaction: the bill provides that any transaction made in breach of the obligation to notify will be deemed null and void.
- Voluntary notification regime: the NSIB provides that parties to a transaction who do not need to be subject to mandatory notification to the UK authorities can, however, notify a transaction voluntarily. The types of transactions that can be notified are identical to those that must be notified under the mandatory notification mechanism (see above).
Discretionary intervention regime
The NSIB provides for a retroactive application of the regime with a very wide field of control – the so-called ability of the Secretary of State to “call-in”. This discretionary oversight regime will allow the Government to review any transaction which may raise a national security issue up to five years after it is completed (reduced to six months once the Government becomes aware of the transaction). According to the Statement of Policy Intent presented by the Government, this power applies to transactions regardless of the identity or nationality of the acquirer.
The examination of a transaction notified or subject to the exercise of the discretionary power left to the Government will be carried out according to the principle of “acquirer”, that is to say the extent to which the acquirer raises national security concerns. This risk will be assessed according to:
- the nationality and identity of those who have ultimate control of the acquiring entity;
- the antecedents of these persons in relation to other acquisitions or participations;
- the holding by these persons of other entities in a key sector that could give rise to synergies with the transaction sector;
- any relevant criminal offence or affiliation known to the parties directly involved in the transaction.
Once a transaction has been notified or “called-in”, the bill provides that the Secretary of State will be required to carry out the assessment within 30 working days (extendable by an additional 45 working days if the assessment requires further time). The assessment will lead to three potential outcomes: (i) approval of the transaction; (ii) approval subject to the implementation of arrangements to prevent or mitigate any risk to national security; and (iii) the prohibition (or the order to unwind the transaction if it has already taken place).
This new regime will be accompanied by a mechanism of civil and criminal sanctions. Fines can be set up to 5% of worldwide turnover or £10 million (whichever is greater) and/or imprisonment for up to five years. In addition, transactions which are covered by the notification obligation, but which are carried out without authorization, will be legally null and void.
On the face of it, the Government’s new regime is, in many ways, more ambitious than the initial proposals made in the July 2018 White Paper, which envisioned a voluntary regime with extended power allowing the Government to “demand” a review of transactions. Combined with a very wide scope and the absence of control trigger thresholds, this regime should cover a very wide range of transactions. The Government’s impact assessment estimates that the new regime will result in the notification of 1,000 to 1,830 transactions per year. By comparison, only 12 transactions have been reviewed for national security reasons since the current regime was introduced in 2003. Furthermore, the Competition and Markets Authority currently reviews around 60 cases per years. The Government announced that a new Investment Security Unit will be set up within the Department for Business, Energy and Industrial Strategy to review the relevant transactions.
The information in this blog is for general information purposes only and does not purport to be comprehensive or to provide legal advice. Whilst every effort is made to ensure the information and law is current as of the date of publication it should be stressed that, due to the passage of time, this does not necessarily reflect the present legal position. Gherson accepts no responsibility for loss which may arise from accessing or reliance on information contained in this blog. For formal advice on the current law please don’t hesitate to contact Gherson. Legal advice is only provided pursuant to a written agreement, identified as such, and signed by the client and by or on behalf of Gherson.
* civil nuclear; communications; data infrastructure; defence; energy; transportation; artificial intelligence; autonomous robotics; hardware; cryptographic authentication; advanced materials; quantum technologies; biological engineering; essential government suppliers; essential providers of emergency services; military or dual-use technologies; and satellite and space technologies. However, the NSIB does not at this stage specify the specific activities among these sectors that will fall within the scope of the notification obligation. An eight-week public consultation on this point was launched along with the presentation of the NSIB.