Investors and the Government veto

On 11 November 2020 the UK Government published its National Security and Investment Bill (“the Bill”). The Bill is intended to strengthen the Government’s powers to scrutinise and interfere with investment on the grounds of national security. “National security” is not defined, allowing the Government wide discretion for intervention.

The Bill introduces the following powers:

• enabling the Secretary of State to “call in” acquisitions of sensitive entities and assets (“trigger events”) for the purposes of conducting a national security assessment. This can happen up to five years after a trigger event has taken place;
• establishing a requirement for proposed acquirers of sensitive entities and assets to seek authorisation and to obtain approval from the Secretary of State before completing their acquisition;
• creating a voluntary notification system, to encourage notifications from parties who consider that their trigger event may raise national security concerns; and
• creating a power to impose remedies to address risks to national security, sanctions for non-compliance with the regime and mechanisms for legal challenge.

The Bill is due to have its report stage and third reading in the House of Commons, on a date yet to be announced.

Background

The Government’s existing powers to intervene in mergers and acquisitions on the grounds of national security are set out in the Enterprise Act 2002 (“EA”). These powers were extended in 2018 to amend the “share of supply” and “turnover” thresholds in the EA, allowing the Government to intervene in more mergers on public interest grounds in three sectors of the economy: military or dual-use goods which are subject to export control, computer processing units and quantum technology. Two further amendments were enacted last year to make three further sectors of the economy subject to the lower intervention thresholds: artificial intelligence, cryptographic authentication technologies, and advanced materials.

In referencing the unfitness of the EA to combat national security threats, the Government cited by way of example that it cannot be used to intervene in asset acquisitions where a hostile actor wants to buy sensitive assets, such as intellectual property, rather than acquiring the business that owned them. The introduction of the Bill therefore represents a logical, albeit significant, extension of the UK's screening powers.

The UK has traditionally been an attractive country for foreign direct investment (FDI), which recognises the advantages of the language, legal system and time zone of the UK. The Government has been keen to stress that this Bill is not intended to undermine this reputation but is a necessary strengthening of FDI screening powers to ensure that FDI is not used as a method of threatening the state, for example through cyberattacks, and that the Bill is in line with measures other countries, such as the USA, France and Germany, have adopted.

Core powers

The Bill introduces new powers requiring mandatory notification for certain transactions in a proposed list of 17 sectors. The scope of the notification obligation and the sectors impacted will be clarified in secondary legislation following a consultation, but the proposed list of sectors for mandatory notification can be found in a UK Government consultation which closed on 6 January 2021. 

Mandatory notification will be required where a transaction involves the acquisition of 15% or more of the votes/shares in an entity, or where the acquisition of voting rights in the entity enables the acquirer to secure or prevent the passage of any class of resolution governing the affairs of the entity. Mandatory notification means that the Government is automatically informed of potential transactions in these sectors and is able to take action accordingly to investigate and mitigate any national security risks. A voluntary notification regime is imposed for other sectors. The Government has published a flowchart setting out how the process works.

Impact

The Bill will create a certain degree of uncertainty and have an immediate impact on business. Acknowledging this, the Government has sought to reassure business that the proposals are intended to minimise any potential costs “by creating a proportionate and focused regime with strict statutory deadlines”. As the Government may “call in” certain transactions up to five years from the date they were effected, the Bill will have an immediate impact. Recognising this, since 12 November 2020 parties have been invited to share information about relevant trigger events with the Government, which will engage in an “informal discussion” about business planning and the exercise of the call-in power.

The Bill will apply to all sizes of company and to all investments, whether by UK or foreign acquirers.

Sanctions for non-compliance with the regime include fines of up to 5% of global turnover or ￡10 million (whichever is greater). Individuals face imprisonment of up to five years for infringing the Bill.