Energy sector investors beware - the new UK national security merger control regime

The new UK national security and investment regime covers transactions in the energy sector. We summarise what businesses and investors in the sector need to know

06 May 2022

The National Security and Investment Act (the “Act”), on which we have commented previously (see here) has been in full force since 4 January 2022. The Act creates the UK’s first stand-alone national security and foreign direct investment regime, giving government the power to review, impose conditions on or even block deals where it considers the deal to pose a national security risk.

Below we summarise the key aspects of the new regime and the type of energy sector transactions that can be caught under the new regime.

Relevant transactions: ‘trigger events’

Acquisition of control

Transactions that may be caught by the regime involve a specific ‘trigger event’. This includes the acquisition of:

  • more than 25 per cent, 50 per cent or 75 per cent or more of votes or shares in of a qualifying entity or an increase in shareholding to above those thresholds;
  • voting rights that enable or prevent the passing of any class of resolution governing the affairs of the qualifying entity;
  • material influence over a qualifying entity’s policy; and
  • a right or interest in, or in relation to, a qualifying asset (e.g. land, other physical property and IP), providing the ability to use the asset, or direct control of how the asset is used (although acquisitions of qualifying assets do not form part of the mandatory regime).

‘Material influence’ is a concept that is also used in the existing competition merger control regime e.g. a trigger event could exist where the acquirer acquires only a 15% shareholding but has ‘material influence’ by the right to appoint the majority of board members of the target company (although this type of acquisition does not fall under the mandatory regime).

Qualifying entity

A ‘qualifying entity’ is an entity that carries on activities in the UK; or if it is a foreign company, it supplies goods or services to people in the UK, e.g. a regional office in the UK or exports to the UK, has staff who regularly work in the UK (even if here is no local office).

For foreign entities, the activity or supply of goods/services requires the target to be ‘sufficiently involved’ in doing so in order for the regime to apply, so more remote connections, e.g. having owners or investors who are based in the UK, even if the target is not, is unlikely to be sufficient.

Mandatory regime

Transactions involving the acquisition of

  • more than 25 per cent, 50 per cent or 75 per cent or more of votes or shares in of a qualifying entity or voting rights that enable or prevent the passing of any class of resolution governing the affairs of the qualifying entity;
  • in any of the 17 mandatory sectors,

must be notified to the Investment Screening Unit within the Department for Business, Energy and Industrial Strategy (“BEIS”), and receive clearance prior to completion.

There is also a separate voluntary notification regime for the acquisition of qualifying assets or qualifying entities that are active in other areas of the economy. It is worth noting that transactions involving the acquisition of less than 25% of shares or votes in a qualifying entity which is active in any of the mandatory sectors may fall within the voluntary regime if this constitutes an acquisition of ‘material influence’.

Mandatory sectors

The energy sector is one of the 17 mandatory notification sectors, which are defined in secondary legislation. The government has published guidance on these definitions.

What transactions in the Energy sector might be caught?

Energy sector transactions can be caught where a qualifying entity carries out any of the following activities (under Schedule 11 of the National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021):

Petroleum facilities, terminals and pipelines

“upstream petroleum facility” means a terminal, upstream petroleum pipeline or unit of infrastructure that is or will be necessary to a petroleum production project

  • Existing upstream facilities: owning, operating, enabling the operation of (i.e. the qualifying entity owns or operates) or holding a petroleum licence in respect of :
    • any existing petroleum facility (where it began operating before the first day of the month that is 12 calendar months before the trigger event took place); and
    • where it has a throughput of greater than 3,000,000 tonnes of oil equivalent, calculated to cover the 12 calendar months preceding the month in which the trigger event takes place; and
    • the facility is situated in (in whole or in part) the UK or is offshore but used in connection with the supply of petroleum to persons in the UK

  • New upstream facilities: owning, operating, developing or enabling the operation or development of (owns or operates or intends to do so) or holding or applying for a petroleum licence in respect of:
    • any new petroleum facility (i.e. one that has not begun operating on the first day of the month that is 12 calendar months before the trigger event takes place); and
    • where it has an expected throughput of greater than 3,000,000 tonnes of oil equivalent in its first 12 calendar months of operation; and
    • the facility is or will be situated in (in whole or in part) the UK or is offshore but used in connection with the supply of petroleum to persons in the UK.

This definition was amended from the original draft definition to capture future planned pipelines. This allows the government to review transactions that fail to meet the thresholds at completion of the transaction, but could nevertheless potentially affect future energy supply.

The legislation specifies that oil equivalent means petroleum and for the purposes of assessments of throughput, where petroleum is in a gaseous state 1,100 cubic meters of this petroleum at a temperature of 15 degrees Celsius and pressure of one atmosphere is counted as equivalent to one tonne.

Electricity and gas licence holders

  • holding a transmission licence, distribution licence or interconnector licence under section 6 of the Electricity Act 1989 or carrying on any activity in pursuance of an exemption from section 4(1)(b), 4(1)(bb) or 4(1)(d) of the Electricity Act 1989 granted to the qualifying entity by order under section 5(1) of the Electricity Act 1989 or
  • holding a licence under section 7 of the Gas Act 1986 or 7ZA of the Gas Act 1986 or carrying on any activity in pursuance of an exemption from sections 5(1)(a) or 5(1)(aa) of the Gas Act 1986 granted to the qualifying entity by order under section 6A(1) of the Gas Act 1986;

This definition picks up any entity licensed by Ofgem (or exempt from licensing requirements by virtue of statute) to transmit or distribute electricity or act as an interconnector or to act as a gas transporter or interconnector. Gas interconnectors are considered to be any pipeline used to transfer gas between Great Britain and another country or territory.

Electricity generating assets including renewable energy assets

Where a qualifying entity holdsa generation licence under section 6 of the Electricity Act 1989 or carries on any activity in pursuance of an exemption from section 4(1)(a) of the Electricity Act 1989 granted to it by order under section 5(1) of the Electricity Act 1989 or where the qualifying entity carries on aggregation, and where the qualifying entity:

  • owns or operates any individual generating asset that has a total installed capacity of 100 megawatts or more onshore or offshore; or
  • has a relevant capacity of 1 gigawatt or more

“Relevant capacity” captures the sum of the total installed capacity of generating assets owned or operated by the purchaser, including its wider group (“group undertakings”) and the qualifying entity.

For aggregation, the relevant capacity is the amount of customer load and generated electricity available to both the purchaser group and the qualifying entity for aggregation.

This definition is extremely broad, as it captures capacity of both the purchaser and the target group. It does not, however, capture future projects in the definition, which will be helpful for companies acquiring assets that will not become operational for several years.

Gas processing

  • owning or operating—
    • any gas processing facility in Great Britain where the gas processing facility has the technological capacity to carry on gas processing operations in relation to greater than 6 million cubic metres of gas per day; or
    • any LNG import or export facility where the LNG import or export facility has the technological capacity to carry on the importation, regasification or liquefaction of greater than 6 million cubic metres of gas per day

LNG import or export facilities do not include facilities that are in the territorial sea adjacent to Great Britain or the sea in any area designated under section 1(7) of the Continental Shelf Act 1964.

Supply of fuel in the UK

  • where the qualifying entity supplies petroleum-based road, aviation or heating fuels (including liquefied petroleum gas) to persons in the United Kingdom and
    • the qualifying entity carries on any downstream oil activity; and
    • the qualifying entity—
      • has capacity of greater than 500,000 tonnes; or
      • owns a facility in the United Kingdom that has capacity of greater than 50,000 tonnes.

The definition of downstream oil activity is very broad, covering the import or storage any of crude oil, intermediates, components and finished fuels; the production of intermediates, components and finished fuels through refining or blending processes; the distribution of petroleum-based fuels to storage sites by road, pipeline, rail or ship; and the delivery of petroleum-based fuels to retail sites, airports and end users.

The definition looks at past production capacity, not just existing capacity. It states that a qualifying entity or a facility “has capacity of greater than” a specified number of tonnes if any downstream oil activity was carried/if the facility was used for the purposes of any downstream oil activity on in the United Kingdom by that qualifying entity in relation to greater than that number of tonnes of oil in at least one of the three calendar years preceding the year in the transaction takes place.

It is worth noting that the Act and definitions do not require a foreign acquirer element; even relatively small UK-to-UK transactions (i.e. acquisitions by UK entities) can be caught.

Call in power

Transactions completing on or after 4 January 2022

Transactions which are caught by the mandatory regime must be notified in each case (and even if notified, call-in notices can then be issued, as described below).

For transactions not caught by the mandatory regime:

  • the Secretary of State has the power to call in transactions for review if it considers that the transaction may give rise to a national security risk.
  • the call-in power can be exercised for up to five years from the trigger event taking place, however this can be reduced to 6 months where the Secretary of State is made aware of the transaction (which will be the case where a voluntary notification is made).

Transactions which completed before 4 January 2022

The power to call in transactions also applies to those transactions that completed in the period 12 November 2020 – 3 January 2022, i.e. before the regime came into full force:

  • This call-in power is limited to 6 months after the Act came into force for those transactions the Secretary of State was made aware of prior to 4 January 2022, i.e. July 2022
  • If the Secretary of State was not made aware of the transaction until or after 4 January 2022, then the 6 month period runs from when the Secretary of State is made aware of the transaction
  • If the Secretary of State is not made aware of the transaction, the call-in power can be exercised for up to five years from 4 January 2022, the day the Act came into force.

Statement on exercise of call in power

There are no defined criteria as to which types of transactions are most at risk of being subject to a call-in notice. The call-in power statement issued by BEIS provides further guidance on when the call-in power might be used, but notes that each case will be assessed individually to see if it presents a national security risk.

Some of the factors that will be considered as part of the assessment include:

  • transactions that take place in the mandatory notification sectors (but are not notifiable under the regime), or even related to those sectors, are more likely to be of interest from a national security perspective e.g. qualifying assets located near sensitive sites;
  • the amount of control being acquired, as a greater degree of control might increase the possibility of a target being used to harm national security;
  • whether the acquirer has ties or an allegiance to states that are hostile to the UK; and
  • the status of any pre-existing holdings; and
  • the activity of the target and whether such activities could affect national security.

What types of information need to be provided?

Mandatory, voluntary and retrospective notifications need to be submitted via the ISU’s online portal. The information required for all types of form is broadly similar, requiring information about the acquiring parties, the target entities/assets, the activities of each party (including identifying if the target entities are active in any of the mandatory notification sectors) and details of both the acquirer and target’s structure pre/post acquisition. Acquiring parties are also required to provide details of shareholders and directors.

There is also no filing fee charged by BEIS for submission of a notification.

How long will reviews take and what are the possible outcomes?

The regime (including the mandatory notification requirement) came into force on 4 January 2022.

Once a notification has been made

If a transaction is notified under the mandatory or voluntary regimes and it has been accepted, the government then has 30 working days from the day the notification is accepted to decide if it will

  • take no further action; or
  • call in the acquisition for a national security risk (at which point a further 30 working day period would be triggered, as outlined below).

Until BEIS has finished its assessment, transactions subject to mandatory notification cannot close.

If the transaction is called in

If the transaction has been called in (either following a notification or simply because the government considers it necessary), the government can:

  • take up to 30 working days to assess the national security risk (this can be extended by a further 45 working days if more time is needed; more complex transactions could take several months for BEIS to approve); and
  • clear the transaction at any time during this further 30 working day period.

By the end of this 30 working day period, the government will confirm if

  • the transaction is cleared and can go ahead;
  • the transaction can go ahead with certain conditions;
  • the transaction is prohibited; or
  • a further 45 working days is required to assess the transaction.

Sanctions

Sanctions for non-compliance with the new regime include fines of up to 5 per cent of worldwide turnover or £10 million (whichever is the greater), director disqualification for up to 15 years, imprisonment for up to 5 years.

Transactions which are covered by mandatory notification which complete without clearance will be legally void and a retrospective validation notification may also need to be made so that the transaction can have legal force.

What does this mean for businesses and investors in the energy sector?

Parties in the energy sector who are planning transactions should consider conducting initial assessments to check whether the Act’s requirements apply to their transactions. Even completed transactions may be at risk:

  • Transactions that have completed after 12 November 2020 but before the regime came into force are still subject to the call in power by the Secretary of State.
  • Transactions that were underway but have completed after the regime came into force may become legally void and parties may be subject to sanctions if it transpires that those transactions were subject to the mandatory notification regime and were not notified to BEIS. Even if they are not subject to mandatory notification, the Secretary of State still has a call in right if it considers that they may pose national security risks.

Parties contemplating energy transactions that may be caught by the mandatory regime should therefore seek appropriate legal advice and consider the inclusion of conditions relating to the Act in relevant transaction documentation.

How can we help?

Burges Salmon has significant experience advising domestic and international investors on UK merger control and foreign investment matters in the energy sector. If you have any questions in relation to the issues raised in this article, please contact Chris Worrall or your usual Burges Salmon contact.

This article was co-written by Chris Worrall, Shachi Nathdwarawala and Sandra Mapara

Key contact

Chris Worrall

Chris Worrall Partner

  • Head of Competition
  • Mergers and Acquisitions
  • Financial Services

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