New UK National Security and Investment Bill

On 11 November 2020, the UK Government announced the new UK National Security and Investment Bill (“Bill”); it is expected to come into force by mid-2021. The Bill marks the culmination of a period of change from the previous “light touch”, and wholly voluntary, regime to what is now a more robust approach to national security concerns in the context of foreign direct investment, creating new powers for the UK Government to scrutinise and impose remedies, or in certain particularly egregious cases, block, M&A transactions. Most notably, the new regime provides for a mandatory notification obligation for certain sectors considered to be the highest national security risk for the UK, with a voluntary regime for others.

Considering the broad jurisdictional applicability to the regime and the lack of any safe harbours, it is expected that a large number of potential transactions will be affected. In fact, in its impact assessment of the proposed measures, the UK Government states that it envisages around 1,000-1,830 notifications being made each year, with 70-95 detailed national security assessments undertaken under both the compulsory and voluntary regimes. In strict contrast, in the 18 years since the previous Enterprise Act regime was introduced, there have only been 12 national security interventions. In the context of this shift in the UK Government’s approach, it is important for investors to understand the implications for executing such transactions in the UK, including from a timing, risk (including potential civil and criminal penalties) and deal-certainty perspective.

Practical steps for investors to consider:

1. Does the transaction fall within the mandatory regime for notification?

The new regime creates a mandatory notification regime in 17 specified sensitive "core" sectors, which are considered to be the most relevant for potential national security concerns. For a transaction within the scope of those "core" sectors, the Secretary of State will need to give clearance to the transaction before any sale and purchase can complete.

The range of transactions that will be caught under the mandatory regime is very extensive, as there are no minimum turnover levels, market share or values to determine whether the transaction is notifiable. A notifiable acquisition takes place, broadly, where an entity gains "Control" of a "Qualifying Entity" of a specified description.

2. If a target company does not meet the criteria for the mandatory regime, the parties to the transaction should consider whether to make a voluntary notification

Parties to transactions that do not meet the criteria for mandatory notification may submit a voluntary notification to the Secretary of State if they consider that their acquisition may constitute a "trigger event" that could raise national security concerns. The Government will also have the power to "call-in" transactions for review post-closing, that are not subject to mandatory notification for a national security assessment. To help inform this assessment, the Secretary of State has published a draft statement on how he expects to use the "call-in" power.

The Government will potentially "call-in" transactions which give rise to "trigger events" i.e. where a person:

• gains control or material influence over a qualifying entity; or
• gains control of a qualifying asset (including land, tangible moveable property or ideas, information or techniques which have industrial commercial or other economic value).

The "call-in" power is available up to five years after the "trigger event". Practically, it is possible to obtain greater certainty by making the Government aware of a transaction - this reduces the call-in period to six months from the date of awareness (or six months from the date the law is passed if the Government is made aware before the law is passed).

Investors should consider the voluntary regime where acquisitions do not meet the mandatory criteria. If the acquisition could potentially either give rise to a trigger event or raise potential national security issues, the transaction parties should seek advice as to whether to submit a voluntary notification to the Secretary of State, to ensure deal certainty from the outset.3. When might the Government "Call-In" transactions?

3. When might the Government "Call-In" transactions?

The Government has intentionally not defined “national security” or identified particular jurisdictions as hostile. The Secretary of State will also have the power to amend the scope to capture evolving national security threats. When deciding whether to “call-in” a transaction and in assessing whether a transaction raises national security threats, it will consider three risk factors (as set out in the UK Government’s draft statement of policy intent).

Investors should consider the risk factors from the outset of any potential transaction.

Consideration of the wider commercial implications – how might an investor/transaction be affected?

Impact on Deal Timetables

Review of transactions by the Secretary of State will take up to 30 working days from notification. If, following that initial review period, the transaction is called in for a detailed national security assessment, the assessment will last an initial 30 working days, extendable by a further 45 working days (with scope for further extensions).

Reduction in deal certainty and increase in execution risk

• The cost of compliance with the regime will need to be considered when discussing pricing of the transaction.
• Impact on bargaining positions, in particular from the perspective of the target. Where one prospective buyer is more likely to raise national security issues than another, that buyer may be in a weaker position vis-à-vis other buyers and the seller(s)/target company.
• The transaction documentation will need to factor in condition precedent wording within transaction documentation to obtain clearance in respect of the mandatory regime.

Acquirer risk assessment will look through to ultimate shareholders

• An investor contemplating acquiring a company in a core, sensitive area will need to consider whether it, its co-investors or its debt providers are likely to be deemed to raise an acquirer risk (to national security) and if so whether to notify a proposed transaction.
• Assessment of the acquirer may require more detailed compliance checks at the outset of negotiations. This should be factored in to deal timetables.

Wide-reaching applicability of the legislation

The regime covers both domestic and foreign acquirers.

There is no turnover or market share thresholds; it is only necessary for the target to carry on activities or supply customers in the UK.

The regime can catch transactions involving non-UK entities if they carry on activities in the UK or supply goods or services in the UK. The regime will also catch transactions where UK subsidiaries are not the direct targets.

Remedial powers

Remedies are likely to include:

• prohibiting or unwinding the transaction;
• access conditions - for example, limiting access to a particular site or dual-use technology to named individuals;
• information/operating conditions, requiring that only persons with appropriate UK security clearance have access to confidential information or may be part of operational management; and
• conditions requiring the retention of UK staff in key roles at particular sensitive sites.

'EU framework for screening foreign direct investment'

EU framework regime

Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 established a framework for the screening of foreign direct investments into the Union (the “EU Screening Regulation”). The mechanism provides for an obligation to exchange information between Member States and the European Commission as well as the possibility for the Commission and Member States to issue comments and opinions on specific transactions up to 15 months after the foreign investment has been completed.

Nevertheless, the ultimate power to review and potentially block such investments on security and public order grounds will remain with the Member States. In addition, the Member States are not obliged to adopt national screening mechanisms and the decision on whether to set up such a mechanism remains the sole responsibility of the Member States. However, where a Member State has adopted a screening mechanism, it needs to comply with certain requirements, in particular as regards transparency of rules and procedures, non-discrimination among foreign investors, time frames, protection of confidential information, the right to seek recourse against screening decisions and measures to identify and prevent circumvention by foreign investors.

The Member States are obliged to notify the Commission of their screening mechanisms and any amendments thereto and the Commission will make publicly available a list of such national screening mechanisms. Moreover, each Member State must submit to the Commission an annual report including aggregated information on foreign direct investments that took place in their territory and provide aggregated information on the application of their screening mechanism if such a mechanism is in place. National regimes within the Member States Although Member States are not obliged to adopt national screening mechanisms, since the outbreak of the Covid-19 pandemic, certain jurisdictions have tightened their foreign investment regimes.

Please find an overview here of the regimes in place in, among others, some EU countries.

Authors: Braeden Donnelly, Partner; Jacob Gold, Senior Associate; Jorge Vázquez, Partner and Francisco Vázquez Oteo, Counsel.