The National Security and Investment Bill (NSI Bill) is currently working its way through Parliament. If passed, the changes introduced by the NSI Bill represent a significant expansion to investment regulation in the UK. Although the NSI Bill is not currently in force, it is already impacting M&A in certain sectors due to the proposed retroactive nature of some provisions.
The new regime
The new regime is quite a significant shift. There have been 13 public interest interventions on national security grounds under the existing regime since its introduction in 2003. In its impact assessment, the Government has indicated that it now expects between 1,000 to 1,830 notifications a year, with between 70 to 95 transactions being called in for a more detailed examination, and remedies being required in up to 10 cases.
17 key sectors
17 proposed key sectors were subject to a consultation which has now closed and we await confirmation of the affected sectors and their precise scope. The proposed key sectors include communications; transport; energy; civil nuclear; data infrastructure; defence; artificial intelligence; autonomous robotics; computing hardware; cryptographic authentication; advanced materials; quantum technologies; engineering biology; critical suppliers to government; critical suppliers to the emergency services; military or dual-use technologies; and satellite and space technologies. As currently drafted, the scope of the proposed 17 sectors is extremely wide. A Joint Working Party of the Company Law Committees of the City of London Law Society and the Law Society of England and Wales made the following observation in their response to the sector consultation:
"the sectors, as defined, are overly broad in scope and are unclear in application, with the effect that some of the sectors could potentially capture almost any business in one way or another."
Mandatory notification is required if there is a trigger event in one of these key sectors once the NSI Bill comes into force. Examples of “trigger events” include increasing control by crossing the 25%, 50% or 75% thresholds of shares/voting rights, veto rights and acquiring a shareholding/voting rights of 15% or more. There is a standstill in place once a mandatory notification has been made so the deal cannot complete until the Government (i.e the relevant person at BEIS) has reviewed it.
If a transaction involves a "trigger event" which is outside of the 17 key sectors but could give rise to national security concerns, the parties to that transaction will need to consider whether it should be voluntarily notified to BEIS. A key consideration for the parties will be the likelihood that the transaction may be called in for a national security assessment.
Call in procedure
The Secretary of State will have the power to call in for review any transaction (whether or not notified) where there is (or could be) a risk to national security. For non-notified transactions, a call-in notice may be issued at any time while the transaction is in progress or contemplation, or within six months of the Secretary of State becoming aware of the transaction, provided this occurs within five years of the transaction completing. The five-year time limit will not apply where the acquirer fails to notify a transaction that is within the mandatory notification regime.
- Although the Government has stated its powers are more likely to be used in respect of foreign investors, the regime applies to all applicable transactions and does not require an overseas entity
- There is no de minimis threshold in terms of transaction size
- Sanctions are severe. Non-compliance can result in fines of up to 5% of worldwide turnover or £10 million (whichever is higher) and/or up to 5 years imprisonment, as well as director disqualification
- Transactions covered by the mandatory regime which take place without notification or clearance will be legally void; save where retrospectively approved
- The NSI Bill is not limited to share purchases but covers transactions involving a broad range of asset types, including real estate and intellectual property.
Impact on M&A deals now
If passed in its current form, certain provisions of the NSI Bill will apply retroactively from 12 November 2020 once the NSI Bill in force (which is likely to be in Spring 2021). This means the new regime could impact transactions which are in progress now.
- The call in power is exercisable for in-scope transactions which took place on or after 12 November 2020 (for up to 5 years or up to 6 months from the commencement date of the NSI Bill if the Government is aware). Although it is not possible to use the formal notification procedures until the NSI Bill is in force, there might be merit in making an informal disclosure of a potential in-scope transaction so the Government is aware of it and to benefit from the shorter call in period of 6 months. The Government has stated in its factsheets that it does not expect many transactions to be affected by this power
- Mandatory notification does not apply to deals which have completed prior to the NSI Bill being enacted, but watch out where a transaction has a split exchange and completion, with completion taking place after the NSI Bill receives Royal Assent. We are already starting to see conditions precedent being included on deals which could exchange but might complete after the NSI Bill is in force. This may also need to be factored into deal timetables and also longstop dates.
Practical implications for investors
- The impact of the NSI Bill should be factored into deal timetables and deal costs, especially for in-scope transactions in the affected sectors
- Increased due diligence on the activities of UK businesses to identify whether there are any potential national security concerns
- Once the NSI Bill is in force, consider whether mandatory notification is necessary or voluntary notification is desirable. We expect investors to err on the side of caution initially
- New condition precedents in transaction documents to cover the notification, approval and clearance process.