Foreign Investment: A Question of National Security

On 11^th November, the Government introduced to Parliament its new “National Security and Investment Bill” (“the Bill”). 

The Bill seeks to introduce a new regime to govern foreign direct investment (“FDI”) into the UK, with a view to giving the Government the power to block proposed transactions in the interests of “national security”.

Once passed, the Bill will require companies / their advisors to notify the Government about any planned M&A transaction involving FDI and which falls within one of seventeen “Specified Sectors” of the economy, insofar as that transaction involves the acquisition of a “material influence” in a UK company, or the acquisition of material assets or intellectual property owned by a UK company.

The term ‘national security’ is not defined and so potentially gives the Government the discretion to look well beyond traditional ‘defence-related’ issues when deciding whether to intervene in M&A transactions.

The Bill will now begin its journey through Parliament, with a public consultation on the exact scope of the “Specified Sectors” running alongside it. 

Overview

We would consider the following to be the key points to note from the Bill as presented to Parliament for its first reading:

• The new regime will apply to investors / purchasers from any country.
• There is no proposed minimum threshold for deals, meaning that transactions involving target companies of any size and/or market share will prima facie be caught and be notifiable to the Government, provided they involve the acquisition of a “material influence” in the target company (a “Qualifying Transaction”).
• The term “material influence” will be given the same meaning as it is given under the existing UK merger control regime; that is, there will be a presumption that the acquisition of a shareholding of 25% or more (which gives the purchaser the ability to block special resolutions) will be caught.  However, the wording of the Bill suggests that the Government may also wish to examine a share acquisition of as low as 15% where the terms of the deal might otherwise result in the purchaser gaining “material influence” over the target as a matter of fact.
• Where there is a ‘Qualifying Transaction’ relating to a UK-based target company which operates in one of the seventeen ‘Specified Sectors’, it will be mandatory for a notification to be made to the Government’s newly established ‘Investment Security Unit’ (the “ISU”).
• The “Specified Sectors” are broadly defined in the Bill’s accompanying consultation document as “advanced materials”, “advanced robotics”, “artificial intelligence”, “civil nuclear”, “communications”, “computing hardware”, “critical suppliers to government”, “cryptographic authentication”, “data infrastructure”, “defence”, “energy”, “engineering biology”, “military & dual use”, “quantum technologies”, “satellite and space technologies”, and “transport”.
• Where a Qualifying Transaction does not fall into one of the “Specified Sectors”, notification to the ISU will be on a voluntary basis.
• Interestingly, however, the Bill provides that the Government may undertake a retrospective review of any ‘non-notified’ ‘Qualifying Transaction’ which completed on or after 11^th November 2020.  This “call-in” power creates scope for parties to be penalised after the event and, potentially, for such transactions to be ‘unwound’.
• Where a notification is made to the ISU, the ISU will have a period of 30 working days to assess the transaction and issue a decision notice.  In addition to being able to block a transaction, the ISU may grant a “conditional clearance” under which certain conditions are imposed on the parties which must be met if the deal is to proceed.
• The potential sanctions non-compliance with the new regime are eye-catching and can include:
  • fines of up to 5% of worldwide turnover (or £10m, if higher);
  • five years’ imprisonment for individuals involved in completing a transaction in breach of the regime;
  • the voiding of transactions which should have been notified prior to their completion.

Comments

Passage of the Bill will constitute a significant overhaul of the UK’s approach to foreign direct investment, implementing a standalone regime which looks similar in its approach to those already introduced in the USA, France and Germany.

It is likely that a key objective of the Government (as in the USA, France and Germany) is to increase the control which it has over Chinese investment into wide areas of technology which involve the flow of data out of the UK. 

However, there is clearly potential for the legislation to ‘bite’ in a much wider range of areas than just ‘technology’, and so parties (and their advisors) involved in any M&A transactions should have the impact of the regime in their minds going forward.

A good example of this will be across the logistics and supply chain sector.  Any Qualifying Transaction involving a target company / asset which is engaged in the “Transport” sector would be required to submit a mandatory notification to the NSU and await approval.  The “Transport” sector covers investments into the following three areas:

• Maritime – major ports or harbours which handle (i) at least one million tonnes of cargo annually or (ii) vessels capable of carrying at least 12 passengers;
• Aviation – airports with ‘significant’ annual throughput of (i) six million passengers and/or (ii) 100,000 tonnes of freight (in each case according to CAA published figures); and
• Air traffic control in any respect.

In addition, we note that the “Energy” sector covers investments into:

• the UK's gas and electricity networks;
• the UK’s oil sector, from extraction through to distribution;
• any manner of “power generation” (including renewables); and
• “green” technologies such as battery storage

The new regime will, accordingly, need to be a consideration for any parties / advisors involved in the logistics / supply chain sectors when assessing their M&A activity going forward.

Given the responsibility of the corporate lawyer to mitigate risk in any transaction, and the potentially severe consequences of non-compliance, the effect of the new regime may well be that notifications of any potentially ‘qualifying’ transaction in any sector are made to the ISU as a matter of course.  Clearly this would create a significant administrative burden on the ISU and delay its issuance of decisions, which would in turn need to be factored into the agreed timescales of the parties to M&A transactions.

We shall be monitoring the progress of the Bill (and the associated public consultation) and shall provide updates ahead of its proposed passage into law, which is expected to occur early next year. For more information on the topic, please contact Alex Thow.