This alert considers the recent updates and guidance published by the UK’s Department for Business, Energy and Industrial Strategy (BEIS) regarding the UK’s National Security and Investment Act 2021 (the “Act”).
These updates include advance notice that the UK’s new foreign investment regime (the “NSI Regime”) will come into effect early next year. It is important to note that, although the commencement date is still several months away, the UK Government is already actively reviewing certain transactions, as the Secretary of State’s power to call in transactions will apply to all deals closing post-November 2020. Our recommendation is that parties ensure that they are appropriately analysing the implications of the NSI Regime on any proposed transactions.
On 20 July 2021, BEIS confirmed that the Act will come into force on 4 January 2022 (the “Commencement Date”), completing the UK’s transition into a new era of regulatory scrutiny for an economy that has seen US$750 billion cross its borders in the past decade. Starting next year, the UK Government will formally commence reviewing certain acquisitions and investments (“qualifying acquisitions”) that might raise national security concerns through the new multi-tiered filing and review regime outlined in the Act.
At the heart of the NSI Regime is, firstly, a new mandatory notification process in respect of 17 specified sensitive areas of the UK economy. Secondly, the NSI Regime includes powers for the Secretary of State to “call in” for review (i) transactions that close between 12 November 2020 and the day before the Commencement Date, 3 January 2022, and (ii) transactions that close on or after the Commencement Date. Finally, the regime provides for a voluntary notification process applicable to planned or completed acquisitions, which is aimed at facilitating deal certainty. The UK Government will have the authority to impose conditions on transactions that fall within scope of the Act and, if necessary, to unwind completed acquisitions or prevent deals from closing.
In many ways, the Act is already a feature of domestic and cross-border transactions with a UK nexus. Since the announcement of the National Security and Investment Bill in November 2020, parties contemplating transactions have been encouraged to voluntarily notify the UK Government’s Investment Security Unit (ISU) to obtain informal guidance on whether the Secretary of State would be likely to call in a given transaction. This encouragement has been driven by the retroactive effect of the Act, which as discussed above, enables the Secretary of State to call in transactions that close between the period of 12 November 2020 and the day before the Commencement Date. From the Commencement Date, the process will become more formalised; the mandatory and voluntary regimes will “go live”, and parties will be able to make notifications to the ISU through a digital portal.
BEIS has also published a revised draft statutory statement regarding the way in which the Secretary of State expects to exercise the call-in power (the “Statement”), which is available for public consultation until 30 August 2021. Guidance in this area is particularly important for foreign investors; when such investors are contemplating transactions that fall outside of the scope of the mandatory regime, the Statement will be key to gauging the likelihood of a call-in.
The Statement fleshes out the three risk factors that will comprise the foundations for assessment of the national security risk attaching to a qualifying acquisition.
Target Risk: While qualifying acquisitions across the whole of the UK economy are within scope of the NSI Regime, the Statement clarifies that acquisitions of entities in areas of the economy that are closely linked to the 17 “key sectors” that drive the mandatory regime are more likely to be called in than acquisitions of entities in other, unrelated areas of the economy. These sectors cover areas long associated with national security, such as defence, export-controlled items and government supply chains, as well as areas of critical and emerging technologies like artificial intelligence, robotics, quantum technologies and data infrastructure. For further discussion on the key sectors, please see our November 2020 client alert.
Acquirer Risk: When assessing whether an acquirer poses a risk to national security, the Statement notes that the characteristics of the acquirer will be considered, such as its sector(s) of activity, technological capabilities and whether it has links to an entity that might seek to undermine or threaten the “interests of the UK”. The Statement provides a non-exhaustive list of considerations that will be taken into account when assessing the UK’s interests, and includes familiar concepts like public safety and military advantage. It also includes the UK’s “reputation” and “economic prosperity”, neither of which were mentioned in BEIS’s previous draft statement (published in November 2020). The inclusion of these new considerations appears to have extended the factors that the Secretary of State may take into account when assessing acquirer risk beyond national security, and more in the direction of public and economic interest. Their inclusion might be explained by the fact that the UK Government is anxious to support British business particularly post-Brexit, for example, by protecting employment. If the UK’s reputation and economic prosperity remain relevant considerations in the final version of the Statement, it will be important to monitor how the Secretary of State factors them in when exercising his call-in power over time; they certainly cannot be ignored, even if we are in uncharted territory.
Control Risk: The Statement clarifies that the amount of control over an entity or asset will be taken into account when assessing risk to national security. The greater the degree of control acquired, the easier it may be to utilise the entity or asset to harm national security, or otherwise enable parties to reduce the diversity of a market or influence market behaviour, to the detriment of national security.
While asset deals are not yet subject to the mandatory regime, the Secretary of State may still call in a qualifying acquisition of an asset, and the same criteria will be assessed (including proximity to the activities of the key sectors) in making a determination as to exercise of the call-in power. This ensures that asset purchases cannot be structured with a view to circumventing the NSI Regime, although it is recognised that, in practice, asset deals are less likely to be called in.
BEIS has also published a draft of the secondary legislation that will outline the 17 sectors within scope of the mandatory notification regime. The draft definitions of these sectors were revised following a public consultation that ended on 6 January 2021, followed by further targeted stakeholder engagement. The definitions have been refined in places, particularly in respect of “Energy” and “Communications”. The UK Government expects to lay the legislation before Parliament later this year, subject to parliamentary timetabling.
With the introduction of a new regime often comes uncertainty as to interactions with existing regulators and codes. This has now been recognised by the UK Government, with efforts made to clarify how multiple bodies will interact in assessing transactions. We have highlighted a few that are likely to be of greatest interest below.
Enterprise Act 2002: The existing national security regime is centred on the Enterprise Act 2002 and is, therefore, closely aligned to merger control. While the Act serves to sever national security from merger control, the UK Government will retain its right to intervene in transactions that raise public interest concerns in relation to the stability of the UK financial system, public health emergencies and media plurality.
Competition: The Competition and Markets Authority (CMA) will remain the authority responsible for investigating any competition issues relating to a particular transaction, although the CMA will work closely with the ISU in respect of qualifying acquisitions that are being reviewed from both a competition and a national security perspective.
Export Control: While the Export Joint Control Unit (EJCU) focuses more on the export of military and dual-use assets, both UK export controls and the NSI Regime share the common objective of protecting the UK’s national security. The UK Government has clarified that, where both regimes are involved, controls and licenses issued by the EJCU will be taken into account.
Likely encouraged by the recent expansion of the jurisdiction of the Committee on Foreign Investment in the United States, a trend towards the increased scrutiny of transactions that might pose national security risks is clearly emerging in the UK. This is evident not only from the fact that the NSI Regime gives the Secretary of State retroactive powers to call in transactions that close between the period of 12 November 2020 and the day before the Commencement Date, but also from the fact that the ISU has already assumed an active role in reviewing transactions now, several months before the NSI Regime formally comes into force. Our recommendation is therefore that parties ensure that they appropriately consider the implications that the new NSI Regime may have on any contemplated transactions.
Julia Kotamäki, London trainee solicitor, contributed to the drafting of this alert.