The UK’s National Security and Investment Act (the NSI Act), which came into force on 4 January 2022, introduced a new investment screening regime which significantly enhances the Government’s powers to intervene in transactions on grounds that they could threaten the UK’s national security. Certain types of investment are subject to mandatory pre-notification obligations with heavy penalties for non-compliance, and a broader range of transactions may be “called-in” for a national security review either before or after completion.
The regime has significant implications for deals and investments in the life sciences sector, which is not an area that has traditionally attracted national security scrutiny in the UK. However, healthcare has come into increased focus as a sector that has the potential to raise national security risks during the pandemic. For example, even before the NSI Act came into force, the UK Government in 2020 introduced a new public interest ground under the UK’s existing public interest regime, allowing the Government to intervene in transactions to preserve its capabilities to combat and mitigate the effects of public health emergencies.
We have set out below the key issues to consider under the new NSI Act for life sciences deals – please get in touch for more details.
Which types of transaction trigger mandatory notification obligations?
Transactions require mandatory notification to the Government’s new Investment Security Unit (ISU) if:
- the acquirer’s shareholding or voting rights in the target increase through one of the statutory thresholds (25% or less to more than 25%, 50% or less to more than 50% or less than 75% to 75% or more); or if the acquisition enables the person to secure or prevent the passage of any class of resolution governing the affairs of the entity; and
- the target is carrying on specified activities in the UK within one of 17 sensitive sectors. Notably for life sciences transactions, the 17 sensitive sectors include the potentially broad area of synthetic biology, as well as a number of other advanced technologies (advanced materials, advanced robotics and artificial intelligence) and data infrastructure.
Transactions falling within the mandatory regime which close without clearance are void as a legal matter; and the buyer is liable for significant criminal and civil penalties.
What types of life sciences activities can be caught by the mandatory regime?
The synthetic biology sector definition, although it has been narrowed following the Government’s consultation process, is still broad and captures “the process of applying engineering principles to biology to design, redesign or make biological components or systems that do not exist in the natural world”.
Relevant synthetic biology activities include: (i) the design and engineering of biological-based parts of enzymes; genetic circuits and cells; novel devices and systems; (ii) redesigning existing natural biological systems; (iii) using microbes to template materials; (iv) cell-free systems; (v) gene editing and gene therapy; and (vi) the use of DNA for data storage, encryption and bio-enabled computing.
Helpfully, there are some notable exceptions, for example for general services not related to core synthetic biology and for certain specific (therapeutic) uses of gene and cell therapy.
The sector definition is intentionally drafted to capture various levels of the value chain, bringing into scope not just companies that carry on basic scientific research into synthetic biology or are active in the development of synthetic biology, but also potentially their upstream suppliers (who are active in the provision of services that enable research into and development of synthetic biology) and downstream customers (who are active in the production of goods using synthetic biology).
In addition to the synthetic biology sector definition, dealmakers will need to be mindful of other potentially relevant sectors. While the definitions have been significantly narrowed following the Government’s consultation process, certain targets active in the med-tech, medical devices and digital health sectors could be within the scope of the advanced materials, advanced robotics, artificial intelligence and data infrastructure sector definitions.
The assessment of whether a target’s life sciences activities are within the scope of the mandatory regime is highly fact-specific and will need to be conducted at an early stage in the deal negotiations.
Which types of transaction may be “called in” under the broader powers?
Transactions falling outside the mandatory regime may still be “called in” for review and – if national security risks are deemed to arise – face potential prohibition or remedies being imposed if:
- the investment enables the acquirer to “materially influence” the policy of an entity (a concept borrowed from the UK’s merger control regime). This could arise from a shareholding as low as (or occasionally lower than) 15%; or
- a party acquires control over or the right to use certain assets (including intellectual property), especially if the IP and/or licensed assets (e.g. technology) are involved in or closely linked to one of the 17 sensitive sectors. This potentially brings various pure licensing, as well as licensing and collaboration agreements, which are integral to investment and innovation in the life sciences sector, into scope; and
- the Government reasonably suspects that a national security risk could arise – most likely where the target entity or assets are involved in, or “closely linked” to, activities in one of the 17 sensitive sectors.
When could licensing of IP be a trigger event?
A “qualifying asset” includes ideas, information or techniques which have industrial, commercial or other economic value. This could include, for example, trade secrets, intellectual property (e.g. patent-protected compounds, molecules, methods, or technologies), databases, source code, algorithms, and software.
A trigger event will occur in relation to an asset where a person acquires a right or interest in, or in relation to, the asset and as a result they are able to use the asset, or direct or control how the asset is used (or if they increase their ability to use or control it). The IP licensing arrangements typically employed to collaborate in the development and commercialisation of new life sciences assets, products and technologies could be caught by this. For example, licensing IP from universities or research institutes and even licensing on a non-exclusive basis:
- the grant of a licence over IP is a trigger event: an exclusive licence provides a right to control, and a non-exclusive licence a right to use, an asset;
- the subsequent grant of an assignment (or conversion of a non-exclusive to an exclusive licence) is a further trigger event as it gives control over the asset; and
- the exercise of options to increase rights in and/or acquire IP throughout the course of a product’s life cycle could be further trigger events.
Parties will need to consider the potential for such IP licensing arrangements to give rise to national security concerns, particularly if the asset is involved in or closely linked to one of the 17 sensitive sectors. If so, the parties should consider voluntary notification or contacting the ISU for informal, non-binding advice.
- Where notification is mandatory, a transaction cannot complete until clearance is received. This has the potential to impact on transaction timetable and delay completion. The parties involved in a transaction subject to mandatory notification should ensure their deal timetable accounts for an initial 30-working day review period, an additional 30-working day assessment period if the acquisition is “called-in” and – if the transaction is likely to raise national security issues – a possible 45-working day extension and an additional extension with the agreement of the buyer. Additional days are added to the review timetable if, once an acquisition has been called in, the Government issues information requests to the parties. There are serious penalties for failure to notify and/or closing prior to receipt of mandatory NS&I clearance, including criminal sanctions.
- Specific due diligence is required to understand if a life sciences target company’s activities fall within any of the sector definitions under the mandatory regime. It may not always be possible to fully assess this without constructive target engagement.
- Common industry investment, licensing and collaboration structures could be subject to the Government’s call-in powers and may therefore benefit from voluntary notification (to avoid the risk of call-in and review at a later time).
- While the grant of option rights over life sciences businesses are unlikely to be subject to mandatory notification at the time of grant, they could (depending on the target’s activities and size of stake) require mandatory notification and approval before they can be fully exercised.
- Life sciences businesses with activities that are within the scope of the mandatory regime should be aware that internal restructurings can also be caught by the mandatory regime even if the ultimate parent company remains the same.
- Where a transaction is likely to raise national security concerns, parties should carry out remedies planning at an early stage of the process. Potential remedies could include governance requirements (e.g. board composition), onshoring requirements, HQ location/headcount commitments, security of supply commitments, R&D spend commitments and – where data and/or other sensitive information is involved – data/information access or ringfencing obligations and enhanced data/information security protocols and monitoring.
If you are interested in joining our discussions on this topic, or hearing more from our global experts, please get in touch.
We explore the impact of the increasingly complex global regulatory landscape on companies in innovative industries in more detail in our 10 Key Themes 2022 publication.