The New UK National Security and Investment Merger Control Regime

We summarise the key aspects of the new UK national security and investment regime, which came into full force on 4 January 2022

17 February 2022

The National Security and Investment Act (the 'Act'), on which we have commented in previous posts (see here), has now 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.

We summarise the key aspects of the new regime below.

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

(i) 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; or voting rights that enable, or prevent the passing of any class of resolution governing the affairs of the qualifying entity;

(ii) 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.

Mandatory notification sectors

The 17 key sectors are defined in secondary legislation. The government has also published more detailed guidance on these definitions. The sectors covered are:

  • Advanced Materials
  • Advanced Robotics
  • Artificial Intelligence
  • Civil Nuclear
  • Communications
  • Computing Hardware
  • Critical Suppliers to Government
  • Cryptographic Authentication
  • Data Infrastructure
  • Defence
  • Energy
  • Military and Dual-Use
  • Quantum Technologies
  • Satellite and Space Technologies
  • Suppliers to the Emergency Services
  • Synthetic Biology
  • Transport (including ports, harbours, airports and air traffic control)

Voluntary regime

Transactions involving the acquisition of qualifying assets, qualifying entities involved in the 17 mandatory sectors but that do not meet the definitions, or all other areas of the economy, can be voluntarily notified to BEIS if they involve a ‘trigger event’ (i.e. an acquisition of certain thresholds of shares or voting rights, material influence or a qualifying asset).

Qualifying assets

The acquisition of a qualifying asset (e.g. land, other physical property and IP), will fall under the voluntary regime where the asset is in the UK or used in connection with activities carried on the UK, or in connection with the supply of goods and services in the UK. This makes the potential scope of the regime very broad - for example, it may capture the acquisition of machinery located overseas used to produce equipment in the UK or an offshore windfarm that generates electricity supplied to the UK.

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.

Alignment with other regulatory regimes

The regime replaces the national security provisions under the Enterprise Act 2002. However, the public interest regime will remain: transactions may be called in by the Secretary of State if they might affect certain specific public interest grounds such as the stability of the UK financial system, maintaining the capability to address public health emergencies and media plurality.

The Competition and Markets Authority (the 'CMA') remains responsible for competition assessments of transactions and BEIS has specified that where transactions require consideration from both a national security and competition perspective, the ISU will work closely with the CMA. Where a final order is in force or a final notification that no further action is to be taken has been given under the NSI Act, the government can issue a direction to the CMA to do or not do anything (although it will consult with the CMA in advance before doing so).

Although the Takeover Panel has not amended the Takeover Code as a result of the Act, acquirers will still need to consider its requirements before proceeding with a transaction. The government guidance notes that the Takeover Code currently provides the framework allowing acquirers (offerors) awaiting a decision under the NSI Act to suspend or pause the offer timetable prescribed by the Code.

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 each type of notification 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, mandatory transactions 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, and this can be extended by a further 45 working days if more time is needed. Based on this guidance, 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, and transactions which are covered by mandatory notification which complete without clearance will be legally void.

For transactions that should have been notified under the mandatory regime but were not, a retrospective validation notification may also need to be made to so that the transaction can have legal force.

How can we help?

Burges Salmon has significant experience advising domestic and international investors on the new national security and investment regime. 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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