Control of business and asset acquisitions under the National Security and Investment Law
The UK National Security and Investment Act 2021 (Act) received Royal Assent on April 29, 2021. When it comes into force later this year, it will give the UK government substantial powers to control a wide range of UK investments dating from November 12, 2020 and to remedy at any risk to national security they raise.
A complete and rigorous diet
The law establishes a new autonomous regime that is significantly more stringent than the old public interest regime, which was linked to the UK merger control regime, applied only to mergers and acquisitions of companies and only resulted in 12 interventions during his 17 years. life.
The new regime will cover all acquisitions of assets such as real estate and intellectual property, as well as all acquisitions of stakes or other interests in companies, which raise national security concerns. It is retrospective, as it will cover any eligible investment made from 12 November 2020. It will apply to investments made by British and non-British persons – the government stresses that it welcomes foreign direct investment.
Power to call transactions for review
The heart of the new regime is the power of the Secretary of State to call certain investments for review. This power exists wherever there has been a trigger event, i.e. a takeover of a qualifying entity or qualifying asset.
A eligible entity means any entity (including a company, partnership, association or trust) carrying on business in the United Kingdom or providing goods or services to persons in the United Kingdom. Control is a low threshold and exists when the acquisition gives the acquirer (or co-acquirers) at least the right to significantly influence the policy of the entity. As a result, it covers a wide range of situations ranging from acquisitions of significant influence (but without decisive influence) to acquisitions of 100% of the shares or voting rights in an eligible entity.
A eligible asset includes certain land or movable property acquired for use in carrying on business in the United Kingdom or the provision of goods or services to British persons, as well as ideas, information or techniques which have industrial, commercial or other value economic value (including trade secrets, databases, source codes, designs and software). Control for these purposes, it exists when the acquisition confers on the acquirer (or co-acquirers) the ability to use an asset or to use it to a greater extent than before the acquisition, or to direct or to control how the asset is used.
The Secretary of State may issue a statement of policy intent indicating how the power to issue a notice of appeal will be exercised, including sectors of the economy, trigger events, and most likely eligible entities and assets. to generate national security problems. , and the facts to be taken into account in exercising the power of appeal. A draft policy intent statement was released when the law was proposed and was subsequently amended in March 2021. The final version is expected to be adopted when the law comes into force.
Mandatory prior notification of certain transactions
The Secretary of State’s power of appeal is essentially retrospective. However, the scheme is also preventative, as it requires that certain acquisitions be notified to the Secretary of State for review and approval before they are completed.
Notification is required for any acquisition of more than 25% of the shares or voting rights in an entity and for any takeover of an asset or in either case one or more of the 17 sectors of the economy are involved. These are the only notification criteria – unlike the UK merger control regime, this regime does not make the court dependent on financial thresholds being exceeded or on the part of the offer. An acquisition subject to mandatory notification cannot be completed until the Secretary of State has approved it. Failure to notify and / or suspend completion of the transaction until it has been approved results in substantial penalties of up to £ 10million or 5% of worldwide annual revenue, depending on the amount. higher, and a prison sentence of up to five years for individuals. A non-notified acquisition meeting the above criteria is also void, unless subsequently validated by the Secretary of State, and carries an indefinite risk of notice of appeal, although this risk period is reduced to six months as soon as the Secretary of State becomes aware of the transaction.
Exceptionally, acquisitions concerning the 17 sectors which are completed as of November 12, 2020 but before the entry into force of the law (Start day) will not be subject to mandatory notification after Effective Day, but may receive notice of appeal. If the Secretary of State becomes aware of the acquisition before the start day, the notice must be issued within six months of the start day and cannot be issued thereafter. If the Secretary of State becomes aware of the transaction after the start day, the notice must be issued six months from the knowledge date, provided it is within five years of the start day.
Acquisitions outside the 17 sectors may be notified on a voluntary basis when the parties require assurance that their transaction does not present a national security risk. In the absence of notification, the transaction risks being subject to a recall notice for a period of five years from its completion, reduced to six months as soon as the Secretary of State becomes aware of it.
Assessment by Secretary of State
In assessing the risk to national security presented by an acquisition, the Secretary of State will consider three risk factors.
Target risk – the nature of the target (entity or asset) and whether it is located in one of the 17 sectors of the economy where the government considers that the risks are most likely to arise. These are spelled out in the draft policy intent statement mentioned above: advanced materials, advanced robotics, artificial intelligence, civil nuclear, communications, computer hardware, critical government suppliers, critical emergency service providers , cryptographic authentication, data infrastructure, defense, energy, military and dual-use, quantum technologies, satellite and space technologies, synthetic biology (formerly known as engineering biology) and transport.
The government generally considers that trigger events occurring in other sectors of the economy are unlikely to present national security risks, so such transactions should only be triggered on an exceptional basis. Land is generally expected to be a national security asset only where it is found or is near a sensitive site, examples of which include critical national infrastructure sites or sites. government buildings. However, the Secretary of State may also take into account the intended use of the land.
Risk of triggering event – the type and level of control acquired and how this could be used in practice. The assessment will focus on the potential of the acquisition to harm national security. Triggering events can, for example, increase the ability of a hostile actor to undermine national security or to position itself to do so. It may involve the ability to corrupt processes or systems; to gain unauthorized access to sensitive information and / or to exploit an investment to influence the UK. The risk will be assessed based on the practical ability of the party that will acquire control of the entity or asset to do so to the detriment of national security, for example by controlling the long-term strategy of the entity or by allowing others to use the sensitive assets of the entity.
Acquirer risk – the extent to which the acquirer raises national security concerns. Factors to be considered by the Secretary of State will include those which ultimately control the acquiring entity; the track record of these persons in relation to other acquisitions or holdings; whether the acquirer controls other entities within a sector or has significant interests in a core area or known affiliations of any party directly involved in the transaction. The Secretary of State will also examine the entity’s affiliations with hostile parties, rather than the existence of a relationship with foreign states in principle, or their nationality. Secretary of State acknowledges that even where a takeover may have the potential to undermine UK national security, the majority of acquirers will not seek to use it in this way, for example, funds pension fund investing in entities operating national infrastructure.
Further government work is needed before the new regime can be implemented, including drafting and enacting secondary legislation and guidance on regime application, notices of appeal and the system. notification. The policy statement outlining how the Secretary of State’s appeal power will be used must also be presented to Parliament.
Possible next steps for parties to transactions entered into on or after November 12, 2020 include making contact with the Secretary of State for informal advice or at least to ensure that the Secretary of State is aware of their transactions before the start day, so that the period in which there is a risk of appeal is minimized.
© 2021 Greenberg Traurig, LLP. All rights reserved. Review of national legislation, volume XI, number 125