The UK Government adopts the National Security and Investment Act on 29 April 2020
The National Security and Investment Act (the NS&I Act) introduces a significant reform of the way in which the UK Government can scrutinise foreign investment in business and assets. Aimed at bolstering the Government’s ability to intervene in transactions which may give rise to national security concerns, the Act provides for the first time in the UK a mandatory notification regime for seventeen sensitive sectors, with other sectors covered by a voluntary notification regime. Notifiable transactions which are not notified will be legally void by application of the legislation. The new regime will work in parallel to the existing (voluntary) UK merger control regime, which focuses on whether a transaction substantially lessens competition, and whether a transaction gives rise to public interest considerations such as media plurality and financial stability.
As opposed to the (only) twelve transactions reviewed on national security grounds under the current public interest regime, the Government suggests that between 1,000 and nearly 2,000 transactions per annum will be subject to notification under the new regime, with possibly a further 10 non-notified transactions that get called in. This is clearly a significant uplift, and demonstrates the significance of the Act. While the Act still requires further secondary legislation and is likely to enter into force towards the end of 2021, once it does the Secretary of State will have retroactive enforcement powers applicable to any transaction that took place since 12 November 2020.
Mandatory and voluntary filings
The Act imposes a mandatory notification regime for seventeen sectors, with transactions in these sectors having no legal effect until clearance is obtained: 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. Details as to the precise definitions of qualifying entities and assets within these sectors are still being finalised and will be part of the secondary legislation following numerous submissions made during the consultation period (for example it is now clearer that communications networks will only be public ones).
Outside of these sectors, parties will be encouraged to voluntarily notify the Government of “trigger events” which could be of concern to national security, including the acquisition of low levels of shareholdings or control – for example, where a person’s shareholding or voting rights increase to over 25%, or even lower if there is an acquisition of material influence. Furthermore, the regime will cover foreign to foreign transactions that could impact national security, for example the potential acquisition by a Chinese investor of a data storage company in India performing services which impact on national security in the UK.
Not only does the NS&I Act significantly widen the scope of transactions subject to national security review, but it also does not provide for any turnover or market share safe harbours under which transactions cannot be reviewed, and allows the Government to review non-notified transactions. This right exists for up to five years post-completion of a trigger event (although this power is limited to a period of six months after the Government becomes aware of the transaction, for example through coverage of the transaction in a national news publication). Where the transaction was subject to mandatory notification, the 5 year limit does not apply.
The Role of the Department for Business, Energy and Industrial Strategy
The Secretary of State for Business, Energy and Industrial Strategy (the SoS) will act as a quasi-judicial decision-maker in assessing risks to national security, taking the baton from the Competition and Markets Authority which has current responsibility for equivalent public interest (including national security) assessments. The SoS’ assessment will result in either approval of the transaction, prohibition or approval subject to conditions to prevent or mitigate national security risks.
Importantly, the SoS will only be able to call-in a transaction for review if there is reasonable suspicion of a risk to national security, and not simply if there are wider economic concerns. While the NS&I Act does not define the concept of national security risk, the SoS has issued a draft Statement of Policy Intent on 2 March 2021, making it clear that national security risks are most likely to arise when the acquirers are hostile to the UK’s national security, or when they owe alliance to hostile states or organisations, although it clarifies that the regime does not regard state-owned entities, sovereign wealth funds, or other entities affiliates with foreign states, as being inherently more likely to pose a national security risk.
After parties make a mandatory or voluntary notification, the SoS will be required to issue a call-in notice within 30 working days. Where such a notice is issued – whether for notified or non-notified transactions – the Government will then have a 30 working day preliminary screening period to either impose remedies or to take no action. If the SoS believes that a transaction raises a national security risk that requires further investigation, this preliminary period can then be extended by another 45 working days. Extensions beyond this will then need to be agreed between the SoS and the parties involved.
Non-compliance with this regime will lead to civil and criminal sanctions, and these are sufficiently high not to be taken lightly. In particular, non-compliance with the mandatory notification obligation will result in the invalidity of the transaction and breach of interim orders or requests for information, will result in fines of up to 5% of the party’s worldwide turnover or GBP10 million (whichever is higher), along with a maximum of five years in prison.
The UK is embarking on a serious journey to toughen foreign investment rules in line with other major economies in a move prompted by concerns surrounding foreign investment in critical or sensitive sectors such as the technology and – following COVID-19 – medical sectors. Once it comes into force this NS&I Act will provide the Government with unprecedented jurisdiction over acquisitions of UK businesses, meaning UK foreign investment rules will invariably become an important issue for parties when evaluating deal feasibility and transaction timetables. In the Government’s view, however, this regime is not simply a form of over-protectionism. It is seeking to ensure that the UK remains “a global champion of free trade and an attractive place to invest” 1. Whether this is to be the case remains to be seen.