An update on the key issues for investors and businesses
On 20 July 2021, the UK Government published new guidance and updated draft sector definitions for mandatory notification under the National Security and Investment Act 2021 ('the Act') and confirmed when the new regime will commence fully.
We set out below the key takeaways from these latest developments. Further details on the new regime can be found in our three blog posts from April and March 2021, and November 2020 (the month the draft legislation was first published).
Timing – new regime will commence fully on 4 January 2022
The Government has confirmed that the Act – the 'biggest shake up of the UK’s national security regime for 20 years' – is set to commence fully from 4 January 2022. This means that:
- any deals falling within scope of the new mandatory notification regime that have not completed by that date will need to be notified to (and cleared by) the new Investment Security Unit (ISU) before closing. Parties should ensure any such deals have appropriate conditions to address the risk of a mandatory filing and that long-stop dates can accommodate a national security review; and
- any deals falling outside the mandatory notification regime, but which may raise national security concerns, may be called in for review from that date. The Act grants the Government a five-year retrospective power to call in deals completing from 12 November 2020 (reduced to six months from when the Secretary of State became aware of the transaction, or six months from 4 January if parties have made the ISU aware during the transitional period).
The term 'call in' refers to a decision to carry out a full national security assessment of a deal. The Secretary of State for Business, Energy and Industrial Strategy can exercise this power if they reasonably suspect that a qualifying acquisition has given rise to, or may give rise to, a risk to national security. This may follow a mandatory or voluntary notification – or contacts from the ISU.
Transactions taking place over the next five months up to 4 January 2022 that raise national security concerns remain subject to the current public interest intervention regime. Given the need to act quickly in these cases, we expect the Government to make full use of those powers during this interim period – as illustrated recently by the Government’s intervention in NVIDIA/Arm and the Competition and Markets Authority continuing to bring relevant cases to the Government’s attention (recent examples being Imprivata/Isosec and Advanced Micro Devices/Xilinx).
As we get closer to January, the decision as to whether the Government will use the existing or new regime will become more finely balanced as both the Government and parties may want to take advantage of the Act’s statutory timeframes and new review infrastructure.
In the meantime, many parties continue to consult the ISU for informal guidance on the proper interpretation of the Act and whether a particular transaction is likely to give rise to a risk of call in. Most of these transactions concern target entities active in one of the 17 sensitive sectors identified for the mandatory regime, but some parties are contacting the ISU on a more precautionary basis. In either case, the ISU continues to demonstrate a clear willingness to engage with parties on the scope of the regime and to provide non-binding assurance on the likelihood of a call in.
Assessing the risk of a deal being called in – Government publishes updated draft policy statement
The Act requires the Government to publish, consult on and regularly review a statement on how the Secretary of State expects to exercise their power to call in transactions for a full assessment. This so-called Section 3 Statement is of fundamental importance to investors and businesses in the absence of any definition of national security in the Act and the rapidly developing nature of security threats facing the UK.
The Government has been keen to stress that the regime will be targeted and proportionate. While it will enjoy wide powers to impose certain conditions on an acquisition or, if necessary, to unwind or block it, the Government has made it clear that it expects to do this only rarely and the vast majority of deals will be able to proceed without delay. A key goal for the Government is for the new regime to provide certainty and clarity for investors while promoting the UK’s 'gold-star reputation as an attractive place to invest'.
The latest draft statement retains the previous approach of assessing risk on the basis of three primary factors: (i) target risk; (ii) acquirer risk; and (iii) control risk (previously, trigger event risk) but makes some helpful clarifications underlining the Government’s targeted approach. The key changes are as follows.
- Target risk – the updated draft makes clear that acquisitions of entities or assets within, or closely linked to, the 17 sensitive sectors subject to mandatory notification are at the highest risk of being called in for a full assessment. Asset acquisitions not linked to the 17 sensitive sectors are rarely expected to be called in. This replaces – and helpfully narrows – the position in the previous draft, which broadly divided the economy into three categories with a different likelihood of call in:
- core areas (national infrastructure, advanced technology, military and dual-use technologies and direct suppliers to government and emergency services);
- core activities (activities within the core areas that will be subject to mandatory notification); and
- the wider economy (where transactions would be called in on an exceptional basis).
- Acquirer risk – the updated draft sets out a range of characteristics of the acquirer (and its ultimate controller) that the Government will take into account. These include the acquirer’s sectors of activities, technological capabilities and any links to entities that may seek to undermine the integrity of the UK’s democracy, public safety, military advantage, reputation or economic prosperity. The Government will not 'make assumptions based on an acquirer’s country of origin. However, an acquirer’s ties or allegiance to a state or organisation that is hostile to the UK will be considered when assessing whether their qualifying acquisition has given, or may give, rise to a risk to the UK’s national security.' The updated draft also clarifies that 'some characteristics, such as a history of passive or longer-term investments, may indicate low or no acquirer risk.'
- Control risk – replacing the previous 'trigger event risk', the newly formulated test confirms that a higher level of control is likely to increase the level of national security risk and therefore the risk of an acquisition being called in.
The three factors will be considered together – so a 100 per cent acquisition of an entity closely linked to the 17 sectors by an acquirer with links to entities threatening to undermine UK interests will be high risk. However, the updated draft also makes clear that a transaction may be called in if any one factor raises the possibility of a national security risk. The draft statement is currently under consultation with input requested by 30 August 2021.
Notifiable Acquisition Regulations
The Government has published a set of updated draft definitions for the 17 sensitive sectors that will fall within scope of the mandatory notification regime. These are contained in the draft Notifiable Acquisition Regulations (NARs) and have been published for information purposes only as the regulations are still subject to change (as well as parliamentary approval).
The Government has engaged extensively with stakeholders on the definitions since the first drafts were published in November 2020 (with the Government’s response published in March 2021) and since then with further targeted stakeholder engagement. This has enabled the Government to refine and develop the proposed definitions further and ensure they use well understood terms and statutory definitions wherever possible in order to tightly define their scope. As a result, all the definitions have been modified to some extent – with more substantial changes in the data infrastructure, energy and suppliers to emergency services sectors – although the types of activities caught within each of the 17 sectors remains broadly in line with what we have seen previously.
The final version of the NARs will be laid before Parliament for approval later this year.
New guidance published
With the aim of helping improve certainty for investors, the Government has published four new pieces of guidance (with further guidance expected later this year):
- How the National Security and Investment Act could affect people or acquisitions outside the UK
- National Security and Investment Act: guidance for the higher education and research-intensive sectors
- Preparing for new rules about acquisitions which could harm the UK’s national security
- The National Security and Investment Act alongside regulatory requirements.
The guidance helpfully explains certain aspects of the regime with a number of worked examples. These illustrative examples are of particular use for businesses considering whether their activities related to the UK are sufficient to meet the UK nexus test. This nexus test is noticeably broader than other regimes as it catches any entity that 'carries on activities in the UK' or 'supplies goods or services to people in the UK'. The guidance sets out a number of factors that are unlikely to bring an entity within the new rules (eg staff working remotely in the UK for a non-UK office, owners and investors based in the UK, buying goods or services from UK suppliers, having a parent company that has other subsidiaries carrying on activities in the UK or it is listed on a UK exchange).
The guidance also sets out the anticipated interaction between the regime and other UK regulatory regimes (eg merger control, export control, the Takeover Code and the Financial Conduct Authority and Prudential Regulation Authority). For example, in relation to public bids, the guidance highlights the possibility of offerors who are waiting for a decision under the Act to suspend the offer timetable prescribed by the Takeover Code (as such clearance is expected to be treated as a 'material official authorisation or regulatory clearance'). As the Takeover Panel recently made clear following its consultation on the latest edition of the Code (which came into effect on 5 July), offerors will be expected to ensure that all appropriate notifications have been made, conditions have been included in the offer and transactions have not closed (or mandatory offers triggered) before clearance is received.
A number of further developments are expected over the next few months. In particular:
- The Section 3 Statement will be further refined following the current consultation period ending on 30 August 2021. The statement will then be laid before Parliament before the end of the year.
- We can expect additional statutory instruments to be laid before Parliament, including the form and content of the notification forms.
- The ISU will continue to scale-up in terms of staff and skills to ensure the regime is fit for purpose by January and able to handle the expected 1,800 plus notifications per year. As part of this, the ISU will continue to engage with stakeholders to ensure various aspects of the regime run as smoothly as possible when it goes live. This includes the ambitious new online portal comprising a newly designed, fully digital case-management system to enable parties to notify transactions using an online form, which will be held confidentially with other case materials. The ISU continues to develop and test the portal with potential users (including us) to ensure it is intuitive and easy to use.
If you have any questions about these latest developments – or steps to take over the next few months to ensure your business is ready for the new regime – please get in touch.