In an era of heightened focus on economic and national security, new and strengthened investment screening regimes are increasingly seen by legislators around the world as an effective means of maintaining control over critical infrastructure.
The UK is no exception with the new National Security and Investment Act 2021 (NS&I Act) having come into force on 4 January 2022. As set out in our previous blog posts and briefings (see our blogs covering an update on key issues for investors and key issues under debate in the new regime), the NS&I Act introduced for the first time in the UK a mandatory and suspensory notification requirement for certain transactions, with heavy penalties for non-compliance, as well as broad powers for the UK Government to call-in transactions that fall below the mandatory thresholds but may still give rise to national security concerns.
As you would expect, the regime has significant implications for deals and investments involving UK infrastructure. We have set out below the key issues to consider – please get in touch for more details.
What types of transaction are in scope?
The regime is primarily focused on transactions in 17 sensitive areas of the economy (known as the ‘mandatory sectors’) (see details of the relevant sectors set out in government guidance). Broadly speaking, mandatory notification requirements can be triggered by minority and majority acquisitions in entities carrying out activities in the UK in any of the 17 mandatory sectors which result in either: (i) the buyer’s shareholding in the target passing through any 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 (ii) the buyer being able to secure or prevent the passage of any class of resolution governing the affairs of the target. Given the number of infrastructure assets held by a consortium of investors, and the increasing number of stake sales and ‘upstairs’ syndication, investors will want to consider early in transaction design if the thresholds will be tripped.
Transactions falling within the mandatory regime which complete without clearance are void and buyers are liable for significant criminal and civil penalties.
The UK Government is also able to call-in deals which fall outside the mandatory regime but which may give rise to national security risks. This power extends to lower levels of control over target entities (the lowest level being ‘material influence’ which can arise at shareholdings of 15% and, exceptionally, less) and certain asset deals. The UK Government has indicated that deals involving assets or entities ‘closely linked’ to the mandatory sectors are more likely to be called in. The regime allows investors wishing to pre-empt a possible call-in to notify deals voluntarily and seek clearance.
What types of infrastructure investments are in scope?
While historically interventions in deals on national security grounds have been largely confined to defence assets, the new mandatory regime covers investments in a wide range of infrastructure providers (including those active in the Civil Nuclear, Communications, Data Infrastructure, Energy and Transport sectors), as well as entities involved in Critical Supply to Government, Defence or Satellite and Space Technology. The wide range of infrastructure assets within the scope aligns with a broader global trend and with other jurisdictions such as the US, Germany and France.
Specific thresholds or tests often apply to determine whether infrastructure assets are in scope of the mandatory sectors (e.g. numbers of passengers for airports or tonnes of cargo for ports within Transport, or throughput for upstream petroleum activities, capacity in relation to electricity generation or the holding of specific licences for electricity distribution networks within Energy).
The mandatory regime does not cover all infrastructure sub-sectors. Some sub-sectors (such as water) were omitted on the basis of existing regulations and controls over investments and exits. This does not mean, however, that investments in these sectors will never be called-in. Given the constantly evolving national security risk landscape, the Government has left this possibility open through its wider call-in powers and continual review of the mandatory sectors.
What approach can we expect the Government to take to infrastructure assets?
When exercising its power to call-in deals and impose conditions, the UK Government will want to strike the right balance between avoiding a risk to national security on the one hand and securing much-needed investment in UK infrastructure on the other:
- Government guidance explicitly references ‘the potential impact of a qualifying acquisition on the security of the UK’s critical infrastructure’ as a possible reason to use its call-in power and the current geopolitical situation suggests that the political will behind increased foreign investment scrutiny is only likely to increase, particularly when thinking about energy supply.
- However, the Government has also been clear that ‘the call-in power will be used solely to safeguard the UK’s national security and not to promote any other objectives’ and that the UK continues to welcome foreign investment – illustrated by the launch of the Office for Investment in November 2020. The critical importance of foreign investment in the UK has only been amplified by the ongoing pressure placed on public funds by the COVID pandemic.
- As a more general observation, transactions resulting in an investor acquiring sole control over a target entity are likely to be subjected to greater scrutiny than minority acquisitions.
What do infrastructure investors need to be thinking about?
Infrastructure investors need to be familiar with the regime to be able to identify early on in the transaction planning:
- whether mandatory notification obligations are triggered, or whether a voluntary filing is advisable;
- the potential outcomes of a review; and
- how to efficiently manage stakeholder engagement and the review process.
Where a transaction may raise national security concerns, parties should identify the steps they could take to pre-empt and resolve those concerns. As investments in infrastructure were never assessed under the previous public interest regime, there are no direct precedents. However, the types of remedies which could be relevant include controls on the target’s governance, considerations around security of supply for the UK (particularly in the context of energy given the conflict in Ukraine) and limits on investors’ access to sensitive information. If the Secretary of State concludes at the end of a review that the deal does raise concerns, an order may be made which imposes conditions on the parties or in rare cases prohibits or unwinds the deal.
Other particularities of the regime infrastructure investors should be aware of?
- Nationality agnostic: While the nationality of the acquirer will be a feature of any substantive national security assessment with a focus on entities with links to hostile states or organisations, the notification obligation and the potential sanctions apply equally to all investors irrespective of nationality (i.e. including UK based investors).
- Consortium and joint venture bids: When parties are investing via a consortium vehicle, the notifying party will tend to be that vehicle, and the notification form will need to disclose information regarding any investors holding more than 5% of the shares or voting rights in the consortium vehicle and indirect acquirers up the chain. Subsequent changes in shareholdings which take investors above the relevant thresholds (directly or indirectly) may also trigger notification obligations and will need to be assessed.
- Joint arrangements and common purpose: Investors also need to carefully assess whether their investments would be treated as being subject to a ‘joint arrangement’ (as investors have agreed to exercise their rights jointly) or could be deemed to be subject to a ‘common purpose’ (as – absent an agreement – investors will co-ordinate their rights in practice to achieve a shared aim). Where either scenario arises, each party to the joint arrangement or acting with a common purpose will be held to hold the combined interests of all parties which can push investors over the notification thresholds. The test for common purpose is particularly broad and should be assessed carefully.
- Internal reorganisations: Reorganisations can trigger a mandatory filing even if the ultimate parent company of the relevant entity remains the same. While most internal reorganisations are unlikely to trigger substantive concerns, they will still need to be notified if the mandatory notification thresholds are met. Investors with interests in entities carrying out mandatory sector activities in the UK need to keep under review any internal reorganisation up the chain which could be caught.
- Close assessment of the indirect chain of ownership under the Act: Investors need to carefully assess the majority chain of ownership down to the actual target entity carrying out the relevant mandatory sector activities in the UK and consider whether notification is required or advisable as a result of any proposed changes in ownership. For example, while minority and non-controlling investments in foreign holding companies with no activities in the UK may not trigger mandatory notification even where one of the wholly owned UK subsidiaries’ activities are within one of the mandatory sectors, a voluntary notification may still be advisable in these circumstances.
What have we seen so far?
The Investment Security Unit (ISU) which sits within the Department for Business Energy and Industrial Strategy (BEIS) has been clear that they are looking to make the process as efficient and user friendly as possible and are keen to hear from notifying parties to continue to improve the process.
We understand that the ISU has already received a significant number of notifications in line with its initial impact assessment - around 1,000-1,830 notifications each year (excluding transactions where the UK Government chooses to intervene of its own accord). Despite this, the ISU has been (i) quick to accept notifications as complete to start the 30-working day initial review period and (ii) has cleared transactions in advance of the 30-working day deadline.
Later this year, BEIS will publish an Annual Report and market guidance notes which should provide helpful insights into the number of notifications received, the types of notification (i.e. mandatory or voluntary) and the sectors covered by the notifications and call-in notices.
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.