Nina Searle, Corporate Partner at TLT LLP, talks about the UK’s new national security screening regime and its impact on M&A … which is much greater than you might expect.
The UK’s National Security and Investment Act 2021 (Act) was passed into law on 29 April and creates a new screening regime for transactions which might raise national security concerns in the UK.
Its intended purpose is to protect the UK’s national security from hostile foreign parties using ownership of, or influence over, UK businesses and assets. However, it goes far beyond this and impacts domestic transactions.
The following sets out the current state of play but things may change as the regime is not expected to come into force until Autumn 2021 (although note the UK Government’s “look back” powers outlined below).
Why is the Act causing so much interest?
- It goes much further than its stated intention and catches domestic (i.e. UK only) transactions;
- It doesn’t define “national security” – but lists 17 “sensitive” sectors considered strategic enough to require a mandatory notification to the UK Government when a trigger event (see below) is proposed;
- Trigger events go far beyond a simple change of control (≥50%) of a relevant business or company; and
- It has retrospective effect so that transactions after 11 November 2020 can be called in for review.
What are the “sensitive” sectors?
The 17 sensitive sectors (as they currently stand) are set out here and capture:
- Advanced Materials
- Advanced Robotics
- Artificial Intelligence
- Civil Nuclear
- Communications
- Computing Hardware
- Critical Suppliers to Government
- Critical Suppliers to the Emergency Services
- Cryptographic Authentication
- Data Infrastructure
- Defence
- Energy
- Military and Dual-Use
- Quantum Technologies
- Satellite and Space Technologies
- Synthetic Biology
- Transport
These continue to be the subject of interrogation because of their breadth.
If the target business or assets fall within a “sensitive” sector, what do you need to do?
- You need to see if the proposed transaction constitutes a “trigger event”.
The wide scope of the proposed regime has generated much interest because we are not just talking about a change of control (≥50%) of the relevant business or assets. It also captures:
- minority investments;
- follow on investments;
- intragroup transactions; and
- acquisitions of an interest in land, tangible moveable property (such as physical designs and models, technical office equipment, and machinery) and “ideas, information or techniques” (such as intellectual property), and
Note too that it largely does not distinguish between solvent and insolvent transactions.
Additionally, it may extend to transactions which on the face of it involve only foreign parties/assets, where the target carries on activities or supplies goods/services to persons in the UK.
- Establish whether the transaction is one giving rise to a mandatory notification obligation or if a voluntary notification is advised. This will depend on the nature of the trigger event.
If the target business/assets fall outside the “sensitive” sectors”, can you progress as normal?
With care – although the transaction may not trigger mandatory notification, a buyer is still encouraged to make a voluntary notification if they think it might otherwise be of interest from a national security perspective.
Additionally, The UK Government can “call in” transactions that were not notified but which raise national security concerns for up to five years after the transaction happened.
What if we need to make a notification, or voluntarily choose to do so?
The proposed buyer/investor, will need to contact the Investment Security Unit (ISU), a newly created division set up by the UK Government. The ISU has 30 workings days to decide whether to clear the transaction or undertake an in-depth review, in which case they then have a further 45 working days to assess the transaction.
For more detail on this, please look at our published guidance here.
What happens if you go ahead without ISU approval?
If your transaction requires mandatory notification and you go ahead without ISU approval, then:
- the transaction will be legally void;
- a fine of up to 5% of worldwide turnover or £10 million (whichever is greater) can be imposed on the acquirer; and
- imprisonment of up to five years for the acquirer (or their officers, if the breach happened with their consent, connivance or neglect).
If your transaction triggers only a voluntary notification obligation, the sanctions do not apply but the ISU can “call-in” your transaction subsequently for review. If the ISU does this and decides that a national security risk has arisen, it can impose necessary and proportionate remedies.
Next steps
There are still several moving parts to the new regime. It is important to have it in mind for current transactions but also any which have taken place since 11 November 2020.
Do have a look at our Frequently Asked Questions for a more in-depth discussion of the regime. We have already made submissions to the ISU and would be happy to discuss our experience.