Out-Law News | 17 Nov 2020 | 11:34 am | 4 min. read
The UK government has introduced new legislation which will strengthen its powers to intervene in mergers and acquisitions on national security grounds.
The National Security and Investment Bill (52 page / 448KB PDF) will subject acquisitions of companies in a number of sectors, including energy, telecoms, data centres, ports and airports and civil nuclear, to mandatory notification. The government will also gain intervention powers in deals outside the mandatory notification requirements.
The new regime will sit alongside the merger control regime, but will replace current rules relating to national security.
Mandatory notification will apply to transactions involving the acquisition of more than a 15% stake or voting rights in an entity, as well as certain acquisitions involving the buyer moving from one level of interest to a significantly higher level of interest. Unlike the UK’s current merger control and national security regime, there will be no turnover or share of supply thresholds.
The government is consulting on secondary legislation (71 page / 440KB PDF) that will set out the scope of the sectors to be covered by mandatory notification requirements.
Competition law expert Giles Warrington of Pinsent Masons, the law firm behind Out-Law, said the consultation suggested that the legislation would catch a wide range of entities within each sector.
A voluntary regime will apply where transactions are not notifiable, with certain similarities to current merger control and national security regime rules.
Companies will be able to notify the government of a deal if they are concerned about national security issues arising or, if a deal is not notified, it may be called in for a national security review by the Department of Business, Energy & Industrial Strategy (BEIS). BEIS will have the power to call in a transaction within five years of completion, and impose remedies where it has national security concerns.
Pinsent Masons’ Warrington said the range of transactions potentially caught under the call-in regime was much wider than that for transactions subject to mandatory notification. The sort of transactions which can be called in include most of the share and voting rights transactions which would be notifiable transactions, but for the fact that the target is not active in a key sector; the acquisition of material influence in an entity; and the acquisition of certain rights or interests in ‘qualifying assets’ giving control or use in relation to the asset.
Qualifying assets could include land, moveable property, and ideas, information or techniques. Transactions which could be conceivably caught include those involving software licences; acquisitions of moulds; or acquisition of source code.
“Unlike the mandatory notification provisions, the call-in provisions are sector agnostic and apply, in theory, across the whole economy. However, the provisions are still based on national security and so priority is likely to given to asset acquisitions in, or related to, the key sectors, and other core sectors which are more likely to give rise to national security risks, such as core infrastructure,” Warrington said.
The government will be able to impose conditions on deals posing a risk to national security, including 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.
There will also be sanctions for non-compliance with the regime, which include fines of up to 5% of worldwide turnover or £10 million – whichever is the greater – and imprisonment of up to five years. Transactions covered by mandatory notification which take place without clearance will be legally void.
Warrington said the rules were not targeted at a particular category of acquirer or country.
“There has been speculation as to whether entities which are ultimately owned by state-backed entities or sovereign wealth funds will come under particular scrutiny. BEIS says that this is not necessarily the case as there is no reason to rule out acquisitions by state-backed entities, particularly where they are investing for financial reasons and have a degree of independence from the state,” Warrington said.
“The regime is designed to mitigate the risks of ‘hostile actors’ acquiring key interests or leverage. An acquirer’s past behaviour, the degree of leverage it will hold and its affiliations will be relevant. However, it is clear that acquisitions by state-backed entities, in particular, may be at risk of scrutiny,” Warrington said.
The government said it wanted to ensure the UK was an attractive destination for inward investment, but the bill would bring the country’s rules in line with equivalent regimes in jurisdictions such as the US and Australia.
“We would expect some uncertainty as to when concerns are likely to arise until the regime has bedded in, but ultimately it is not expected to lead to large numbers of transactions being blocked or subject to very intrusive remedies,” Warrington said.
Warrington said the new rules could, however, lead to an increased regulatory burden, with the government impact assessment suggesting there would be a significant increase in cases considered from the current national security regime.
The legislation is expected to be passed by Parliament in 2021, but some aspects of the new rules will have a retrospective effect from 12 November 2020. However, the mandatory notification regime will only apply once the legislation enters into force and will not have retrospective effect.
“Once it enters into force, and to a limited extent beforehand, the regime is likely to increase the need to consider national security issues on transactions in certain sectors, and potentially pre-notify a greater number of deals,” Warrington said.
The consultation on the scope of the sectors to be caught by the new regime closes on 6 January 2021.
The introduction of the National Security and Investment Bill follows amendments to the Enterprise Act in summer 2020 enabling the government to intervene more easily on national security grounds in acquisitions involving businesses active in artificial intelligence; cryptographic authentication; and advanced materials sectors; as well as a number of previous, similar amendments to the existing national security regime.
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