On November 11, 2020, the UK government published the National Security and Investment Bill (the “NSI Bill”), which, when enacted into law, will impose a new filing and clearance process for certain investments in targets with a UK nexus. Notwithstanding recent media focus on its potential impact on inbound M&A from China, the NSI Bill also applies to US companies and investors acquiring stakes in businesses with activities in the UK. Therefore, US acquirors should consider whether any current or future M&A activity involving targets with UK activities may be subject to this new process, especially if either the business of the target or the acquiror itself may give rise to a national security concern.
Key Features of the NSI Bill
Currently pending in the UK Parliament, the NSI Bill as proposed would require notice of any acquisition of 15% or more in a target engaged in certain business activities in one of 17 designated sectors to be submitted to the UK government for approval. Such acquisitions would then not be permitted to close until receipt of clearance from the UK government. A consultation paper released concurrently with the NSI Bill proposes that certain activities within the following sectors should be subject to the mandatory filing regime, the definitions of which are currently under review by the UK government:
- Critical national infrastructure (e.g., civil nuclear, communications, data infrastructure, defense, energy and transport);
- Advanced technologies (e.g., artificial intelligence, autonomous robotics, computing hardware, cryptographic authentication, advanced materials, quantum technologies and engineering biology);
- Critical suppliers to the UK government and emergency services;
- Military or dual-use technologies; and
- Satellite and space technologies.
Transactions falling outside of the mandatory filing regime could nevertheless be called-in by the UK government for review if they give rise to national security concerns, including transactions structured as asset deals—up to six months after the UK Secretary of State “becomes aware” of the transaction, so long as such review is done within five years of the closing of the transaction. To determine whether a transaction may give rise to a national security concern, the UK government will consider the nature of the business of the target, the level of control being acquired and/or the extent to which the acquiror presents national security concerns (e.g., affiliations with hostile states or organizations).
To avoid the risk of such a post-closing review by the UK government, particularly with respect to inbound M&A activity that may give rise to national security concerns, acquirors may voluntarily file for review. Following notification in either the mandatory or voluntary context, the UK government will have 30 business days from acceptance of a notification to decide whether to issue a call-in notice for the transaction. If a call-in notice is issued, the UK government has an additional 30 business days to decide whether to clear the transaction, impose remedial conditions or block the transaction. This 30-business day period may be extended by an additional 45 business days or longer, if such longer period is agreed to by the acquiror, and the review period will toll during the pendency of any outstanding information requests issued by the UK government.
The UK government may clear a transaction, impose remedial conditions on a transaction or even block a transaction when the government finds there is an unacceptable risk to national security. The UK government may impose any remedial condition that it considers necessary and proportionate to prevent, remedy or mitigate the national security risk, including restricting the number of shares being acquired, restricting access to sensitive information or technology and/or requiring the target business to maintain a UK headquarters or presence.
Failure to comply with the mandatory notification filing or any remedial conditions imposed following a call-in notice assessment, as applicable, may result in fines of up to 5% of the annual global revenue of the acquiror or £10 million, whichever is greater, and up to five years’ imprisonment. In addition, transactions subject to the mandatory notification filing that close without prior clearance will be legally void.
The NSI Bill is not expected to become law until the spring of 2021. Once the NSI Bill becomes law, however, the UK government may retroactively call in transactions for review that closed after November 11, 2020, so long as with respect to such transaction, the UK government did not use its powers to intervene on public interest grounds under the UK’s Enterprise Act 2002 (the “UK Enterprise Act”). Any transaction that has not closed before the NSI Bill becomes law and falls within the scope of the mandatory regime will trigger a filing. Accordingly, deal teams working on deals that are currently pending or still being negotiated should consider engaging with the UK government proactively and/or ensuring that their deals have appropriate outside dates, efforts standards and other risk allocation measures to cover off the risk of a mandatory filing being triggered or a voluntary filing otherwise being appropriate if the regime comes into force prior to closing or the risk of a transaction being called in post-closing.
See The UK’s new national security screening regime for more in-depth analysis of the NSI Bill by Freshfields’ London-based foreign investment review experts.
Potential impact on M&A into the UK from the US
Despite recent media focus on the NSI Bill’s potential effects on inbound M&A from China, US acquirors and other investors should not ignore the risk that it may pose to their transactions. In previous national security interventions in the UK under the existing regime, the UK government has extracted remedies from acquirors to ensure that critical capabilities, skills and manufacturing are maintained in the UK, and such concerns can, in many circumstances, be agnostic to the nationality of the acquiror. Recent fears over shortages of PPE and ventilators during the ongoing coronavirus pandemic have been brutally effective in reminding nation-states that they can no longer assume allies will be in a position to come to their aid, particularly where they are suffering similar crises or lack sufficient manufacturing capacity themselves. In fact, the UK government recently strengthened its existing UK Enterprise Act powers to give itself the ability to intervene in transactions involving businesses critical to the UK’s ability to combat, and to mitigate the effects of, public health emergencies, such as the coronavirus pandemic. This public health intervention ground (in addition to the financial stability and media plurality grounds) will continue to operate alongside the new national security regime. See UK Government widens its powers to intervene in acquisitions for a more in-depth analysis of the public health intervention grounds under the UK Enterprise Act.
Even under the existing national security powers in the UK Enterprise Act, only four of the twelve national security interventions involved Chinese investors. The remaining eight interventions involved investors from the US, Canada, Germany and Italy. US acquirors should not assume that enforcement under the NSI Bill will be any different, particularly in highly sensitive sectors, such as defense, advanced technologies and military and dual-use goods.
The UK government forecasts 1,000 – 1,830 notifications, 70 – 95 national security call-in assessments and ten transactions requiring remedial conditions each year in connection with the NSI Bill. We expect a meaningful portion of those situations will involve US acquirors or other investors. Accordingly, it is worth US acquirors consulting with counsel early and often if UK transactions are being considered and, in some cases, engagement with the UK government may be warranted – both to educate the government’s staff regarding the nature of the business or technology involved (before opinions are formed) and to gain clarity on the risk of remedial action. Foreign investment review is increasingly an area where a proactive approach yields better outcomes in most cases. We believe this will be true in the UK under the NSI Bill as well.
The broader context
The UK is only the latest country to strengthen its ability to scrutinize transactions on national security grounds. Within the past couple years, Australia, China, France, Germany, Italy, Japan and Spain, among many other countries, have introduced new and significantly more expansive review regimes, most (unlike the UK regime) focused only on investment from foreign sources. The European Union foreign direct investment regulation has also gone into effect, as of October 11, 2020, providing a pan-European framework for coordinating foreign investment screening. See the Freshfields briefing on EU Screening Regulation for a complete analysis.
These legal changes herald a new period of increased scrutiny of cross-border investment flows, driven by concerns over shifting global investment flows, increasing vulnerability of critical infrastructure, erosion of critical domestic production capabilities and increasing international technological competition, among other factors.
In this environment, transactions involving multinational companies across a broad range of sectors—well beyond those in the defense sector—are triggering reviews in multiple jurisdictions simultaneously. Unlike merger control, where the analysis is more data driven, where there is greater harmonization across jurisdictions and where precedent often is public, national security reviews are inherently subjective and often conducted under a shroud of secrecy. It has become increasingly important, therefore, that US-based companies contemplating acquisition of other multinational companies—whether those targets are based in the US or abroad—carefully consider the applicability of global foreign investment review regimes at an early stage in deal planning.