The UK government is establishing a stronger and wider-ranging regime for screening foreign investment. The proposals are set out in the National Security & Investment Bill, published yesterday. The Bill introduces a mandatory notification regime for transactions in specific sectors, with a voluntary notification regime and enhanced powers of review for all other sectors. It will allow the Secretary of State to “call-in” investments for review, to assess and address any national security risks they involve, including imposing conditions on and potentially blocking transactions considered to pose an unacceptable risk to national security. The Secretary of State will have to consider the:

  • target risk – the nature and activities of the target;
  • trigger event risk – the type and level of control being acquired and how it could be used; and
  • acquirer risk – the extent to which the acquirer raises national security concerns.

Why is the government proposing this?

Because it considers that existing legislation does not provide adequate protection against the acquisition of UK businesses, assets and technology by foreign purchasers who could pose a threat to the national security of the UK. The core areas of risk for national security are seen as national infrastructure sectors, advanced technology, military and dual-use technologies, and direct suppliers to government and the emergency services.

Who will this affect?

Buyers and sellers of businesses, companies or other entities carrying on activities in the UK, or supplying goods or services to customers in the UK, in particular where the target is active in any of 17 key sectors, whatever the turnover or share of supply of the target. The 17 key sectors are: civil nuclear; communications; data infrastructure; defence; energy; transport; artificial intelligence; advanced 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.

What transactions will be subject to review?

Transactions involving relevant activities in key sectors will be subject to mandatory notification and review. Other transactions are only expected to be “called in” on an exceptional basis.

The new regime will apply to direct or indirect acquisitions of:

  1. 15% or more, more than 25%, more than 50%, or 75% or more of the shares or voting rights in a qualifying entity (i.e. acquiring shares or rights taking the acquirer above the relevant percentage);
  2. voting rights that enable or prevent the passage of any class of resolution governing the affairs of a qualifying entity;
  3. material influence over the policy of a qualifying entity; or
  4. a right or interest in a qualifying asset, or to direct or control how it is used.

What transactions will have to be notified?

Notification for review and approval by the Secretary of State will be mandatory for notifiable acquisitions in the 17 key sectors listed above. It will be unlawful to complete them unless and until they are approved. Regulations will define specific activities within those sectors where notification by the acquirer will be mandatory. The government is consulting on the definitions of these sectors and specific activities – see:

Other transactions may be notified on a voluntary basis to obtain approval, rather than risk being “called-in” for review. Acquirers, sellers and target entities are encouraged to make formal voluntary notifications to the new Investment Security Unit of trigger events involving them which they consider could give rise to a national security risk.

What about acquisitions of assets, including land or intellectual property?

Asset acquisitions will not be subject to mandatory notification, but may be “called in”. This includes acquisitions of control over land, tangible movable property (such as machinery used to make defence components), or ideas, information or techniques which have industrial, commercial or other economic value (such as designs, source code, or software). Only assets which are within the UK, or used in connection with activities carried on in the UK, or the supply of goods or services to persons in the UK, will be relevant. Interventions for asset transactions are expected to be very rare, unless they are integral to an entity’s relevant activities in a key sector, or the land is in a sensitive location, e.g. because it is close to a military base. Gaining rights or interests over an asset which enable the acquirer to use the asset, or direct or control how it is used, will count as a “trigger event”. However, loans, conditional acquisitions, futures and options are expected to be reviewed only if and when an actual acquisition of control occurs.

Who will make the decisions?

The Secretary of State for Business, Energy and Industrial Strategy (BEIS).

Will there be any penalties for failing to notify?

Yes, there will be civil and criminal penalties for completing a notifiable acquisition without approval, including imprisonment for up to five years, fines of up to £10 million (or, if higher, 5% of worldwide turnover) and disqualification as a director for up to 15 years. Notifiable acquisitions which are completed without approval will be legally void.

What time limits will apply?

The Secretary of State may “call in” a trigger event up to six months after becoming aware of it, if that is within five years of the trigger event occurring – but if the transaction was subject to mandatory notification, no time limit will apply.

Which acquirers are at risk?

This will be assessed on a case by case basis, but a key factor will be the acquiring entity’s affiliations to “hostile parties”, rather than the existence of a relationship with foreign states, or nationality. The government says that it recognises that state-owned entities and sovereign wealth funds may have “full operational independence in pursuing long-term investment strategies with the object of economic return, raising no national security risks”.

When will this start to apply?

The Secretary of State will have power to “call in” transactions which take place from 12 November 2020, but will not “call in” transactions before the new regime has come into force. This means that relevant transactions currently being negotiated (or agreed but not yet completed) will be subject to the new regime, once it is enacted.

What will be the process for notifying transactions?

Notifications can be made via a new digital portal to the new Investment Security Unit, at BEIS. Meantime, BEIS can be contacted about potential transactions by email.

How long will these reviews take?

Notified transactions must either be cleared or “called in” within 30 working days after the notification has been accepted. If called in, the Secretary of State will have a further 30 working days – extendable in certain circumstances by a further 45 working days – to assess the transaction fully. A further voluntary extension can be agreed with the parties in certain circumstances. The Secretary of State will “stop the clock” on each of these periods while requested information or attendance is awaited.

What remedies could be imposed?

The Secretary of State will have power to impose any such remedies as are considered necessary to protect national security. This could include blocking or imposing conditions on transactions. Interim orders can also be imposed to prevent or reverse pre-emptive action.

What should you do about this now?

Businesses should therefore consider, with their advisers, whether their transactions could be subject to review. If you are in one or more of the 17 key sectors, review the proposals set out in the consultation to check whether they are appropriate.