28 January 2021 Mark Daniel - Jennifer Willis -  Tim Castorina Foreign Investment - Technology

UK’s National Security and Investment Bill proceeds unscathed to the House of Lords

Introduction

Last week, the National Security and Investment Bill (the “Bill”) reached the Report Stage in the House of Commons and proceeded unamended to the House of Lords, taking the Government one step closer to implementing its radical upgrade of the UK foreign investment regime. As discussed in our update in November, the Bill introduces a far-reaching and standalone national security screening regime requiring mandatory notification of transactions in the most sensitive sectors of the economy and a voluntary regime for others. It provides for an expansive “call in” power to enable the Government to review non-notified transactions up to five years post-completion and the power to impose serious sanctions for non-compliance.

Since the Bill was introduced to Parliament in November 2020, many interested parties and stakeholders have provided views, comments and recommendations to the House of Commons Public Bill Committee, including a report prepared by the House of Commons Foreign Affairs Committee. Over 30 amendments to the Bill were put forward by Members during the Bill’s passage through the House of Commons. However, these amendments were all ultimately withdrawn following debate or defeated on division.

What is national security? A question unanswered by the Bill

A concern highlighted by many stakeholders is that the concept of “national security” is not defined in the Bill. The Foreign Affairs Committee’s report raised several concerns resulting from the lack of clarity over what constitutes national security, including a lack of transparency, the risk of politicisation and uncertainty for investors and businesses.

Two amendments to the Bill aimed at clarifying the concept of “national security” were tabled by various Members and debated at the Report Stage in the House of Commons last week, with cross-party support. Both amendments were materially similar, albeit that one was described as a “framework” for understanding national security and the other as a “national security definition”. Both proposed a non-exhaustive range of factors that the Secretary of State would have to consider when assessing the risk posed by transactions to national security. These factors included:

  • the impact on the UK’s defence capabilities and interests;
  • whether it would enable a hostile actor to gain control or significant influence over ‘critical’ supply chains, national infrastructure or natural resources, or to conduct espionage or obtain access to sensitive sites or corrupt processes or systems;
  • foreign governments’ control or direction over acquirers;
  • any adverse impact on the UK’s ability to maintain security of supply or strategic capability in critical sectors;
  • the preservation of sensitive data, technology or IP in strategically important sectors within the UK;
  • compliance with modern slavery legislation or the UN Genocide Convention;
  • any involvement or facilitation of illicit or subversive activities (e.g. terrorism, organised crime, money laundering, tax evasion); and
  • the impact on the UK or its citizens’ safety and security.
Debate over national security definition

During the debate, it was argued that a framework for assessing national security risks would provide businesses with certainty and bring more clarity, helping to shape long-term strategy more effectively and improving understanding of the opportunities and risks that face the UK in the years ahead.

However, Nadhim Zahawi, Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (“BEIS”) and the sponsoring Minister, argued that an overly specific definition of national security could serve to limit the Government’s ability to protect UK businesses from unforeseen security risks. He dismissed the concern that, absent a definition, there would be a lack of clarity on what constituted legitimate national security risks, which could lead to some transactions being missed or the Investment Security Unit a BEIS being inundated with “benign transactions”.

The Minister also rejected concerns that the Investment Security Unit’s decisions might become politicised, acknowledging the importance of these decisions being “technocratic, dispassionate and well judged”. He reaffirmed that the Government will not use its powers to intervene for broader economic or public interest reasons and it will not seek to interfere in deals on political grounds.

The factors that the Secretary of State expects to take into account when deciding whether to exercise the call-in power will be set out in the Statement of Policy Intent, a draft of which was published alongside the Bill in November 2020 (available here). This statement is provided for under Clause 3 of the Bill and it must undergo consultation prior to being laid before Parliament.

The rejection of both amendments means that, if it passes through the House of Lords unamended, the Bill will differ significantly from Australia’s Foreign Acquisitions and Takeovers Act and the United States’ Committee on Foreign Investment in the United States, both of which contain a detailed list of factors to be taken into account in considering national security implications.

What happens next?

The Bill is scheduled for its second reading the House of Lords on 4 February 2021. While the legislation was previously anticipated to become law by Spring 2021, we understand that the Bill is now expected in legislation in Autumn 2021. 

The Government consultation on the 17 sectors expected to be subject to mandatory notification under the Bill closed on 6 January 2021, and we expect a report on the outcome of this feedback in due course.

While the Bill will not become law for several months, it is already an important consideration for UK investors. Due to the retroactive provisions in the Bill, once it becomes law the Government will have the power to “call-in” transactions for review that completed on or after 12 November 2020. Similarly, for transactions in a mandatory sector, investors must also consider the need to make a mandatory filing if there is a possibility that the transaction may close only after the Bill becomes law.