Barri Mendelsohn London Office King & Wood Mallesons
Foreign investors seeking acquisition or business expansion opportunities in the UK must, with effect from 11 November 2020, be mindful of new government measures to review such transactions in certain circumstances. The legislative position on FDI in the UK has now been overhauled following the Governments’ publishing of the National Security and Investment Bill 2020 (the “Bill”) for a second reading in Parliament.
The provisions of the Bill remain substantially in line with the Government’s previous draft although there are some key aspects that should be noted as below:
- The Bill is actually now in effect through a retrospective review process – a means to prevent fast tracking deals to circumvent the new rules.
- The Government has done away with minimum target turnover and market share thresholds for areas of concern but is seeking to capture any activity in the UK that could be a risk to national security.
- The Government is principally focused on core areas that are the headline sectors in which national security risks are more likely to arise and where mandatory notification applies for relevant trigger events. These are certain national infrastructure sectors, advanced technology, military and dual-use technologies, and direct suppliers to Government and the Emergency Services that were principally covered by previous legislation.
- Acquisition of interests involved in core activities will also be subject to mandatory notification. Core activities are primarily within the core areas although BEIS has identified 17 key sectors that it is consulting upon until January 2021 to develop detailed definitions and sub-sectors to be adopted in secondary legislation. The current key sectors are (a) Advanced Materials, (b) Advanced Robotics, (c) Artificial Intelligence, (d) Civil Nuclear, (e) Communications, (f) Computing Hardware, (g) Critical Suppliers to Government, (h) Critical Suppliers to the Emergency Services, (i) Cryptographic Authentication, (j) Data Infrastructure, (k) Defence, (l) Energy, (m) Engineering Biology, (n) Military and Dual Use, (o) Quantum Technologies, (p), Satellite and Space Technologies and (q) Transport. The Government’s consultation paper contains far more detail to give one a very good idea as to what it is expecting to be covered and its reasons for covering them.
- Acquiring “control” of an entity will typically start at 25% of the shares (or similar) of a target entity (or increases through 50% and 75% levels) but could apply if a person will acquire shareholder blocking rights (or similar) or a deal enables a person “materially to influence” the policy of the entity by other means. There are also provisions covering where a person acquires a right or interest in an entity over 15%.
- Although not subject to mandatory notice provisions, assets have been added for the first time, with particular scrutiny if they are in core areas. The Government remains focused on intellectual property and know-how, such as trade secrets, databases, source code, algorithms, designs, plans and software. Transactions to acquire these outright or by licence or other commercial arrangement will now be caught as was not previously the case under the past regime. Land is now also covered in certain circumstances.
- In impacted sectors, the Government will itself (and will expect market participants to do so) make an assessment of potential from the transaction to increase the risk of disruptive or destructive actions, espionage activities such as the ability to have unauthorised access to sensitive information or the use of inappropriate leverage to exploit an investment to influence the UK. This line of enquiry may necessitate extensive front-loading of information to allow views to be taken. There is a risk that some transactions will be delayed or ultimately derailed if an assessment is not able to be quickly made.
- Assessing acquirer risk currently carries the most uncertainty although the Government states that it expects parties to do their due diligence on acquirers and notify BEIS if they have concerns. We expect that to proceed swiftly through the early stages of a transaction the onus will be on the acquirers to be forthcoming with information. We anticipate that sophisticated acquirers may pre-empt enquiries and have information packs for this purpose.
- It’s difficult to second-guess whether there will be national security concerns with a particular acquirer. Past criminality appears to be a factor – the consultation lists serious organised crime and cyber-criminals alongside hostile state actors without any indication as to which states the Government deems (or will deem) hostile. No individual states have been named and there are no express criteria to determine what makes a state hostile. Clearly the Government is giving itself maximum discretion to make an appropriate assessment at any given time, although the ambiguity as to what the Government of the day will determine, is potentially opening the review process to subjective will and politics of the day.
- BEIS has the power to call in a trigger event which has taken place up to 6 months after they became aware of it (such as via press) so long as it is done within 5 years of the trigger event occurring. Where the acquisition was subject to mandatory notification, the 5-year time limit does not apply.
- There is now an initial 30 working day assessment period for BEIS to review a transaction (the CMA previously had up to 4 months). This may not be overly burdensome if the parties wish to go for better deal certainty or are prepared to sign conditional deals and wait for the outcome of a review. However, the initial period may be followed by an additional period of 45 working days or an even a lengthier voluntary period if agreed with the acquirer. We expect some parties to err on the side of caution and take up the offer of earlt BEIS consultations and voluntary notices.
- If BEIS finds that national security is indeed at risk following its review of the transaction, it is expected to impose necessary and proportionate remedies or potentially void the deal if it has already occurred. It may also limit access to certain information to persons with the requisite security clearances. It could ultimately block a deal.
- Where there is a failure to comply with this new regime, necessary sanctions will be imposed, such as criminal sanctions of imprisonment up to five years or fines up to 5% of worldwide turnover or £10 million (whichever is higher).
- There are also criminal penalties for failure to comply with information or attendance notices, the intentional or reckless alteration, suppression or destruction or information or the provision of false or misleading information. For failure to comply with an order by the Government on a particular transaction there are also various monetary daily rates that could apply.
The way forward
We will be watching the passing of the Bill through the Parliamentary readings with great interest and will evaluate the final Act when passed. As with most new legal regimes, we expect that eventually, market practice will develop to alleviate most of the uncertainty in these new measures, with the UK remaining “open for business” and attracting legitimate corporate and commercial players as has been the case for centuries.
For further consideration of the key aspects of the Bill, please click on the link below or contact the partners listed here.
Barri Mendelsohn Greg Stonefield Joseph Newitt Stewart Worthy Mark Schaub Mike Wang