CFIUK? UK introduces National Security and Investment Bill
The UK Government (the “Government”) has today announced comprehensive and wide-ranging proposed reforms to its powers to scrutinise foreign investment. The long-awaited National Security and Investment Bill (“Bill”) marks a step-change to the Government’s enforcement powers, by introducing a standalone CFIUS-style foreign investment regime for the first time in the UK. While strengthening the UK’s ability to intervene in transactions to protect UK national security, the Government intends the Bill to introduce a proportionate and efficient approach to screening to ensure that the UK remains a “global champion of free trade and an attractive place to invest.”
The foreign investment regime envisaged by the Bill is, in many respects, more far-reaching than the original proposals made in the July 2018 White Paper. Whereas the White Paper had contemplated a voluntary regime with an expansive power for the Government to “call in” transactions for review; the Bill provides for a mandatory notification obligation for sectors perceived to be of highest national security risk, with a voluntary regime for others. Coupled with a very broad jurisdictional scope and no safe harbours, this will capture a very wide range of transactions. The Government’s Impact Assessment estimates that the new regime would result in 1,000-1,830 transactions being notified per year; an eye-catching number given that only 12 transactions have been reviewed on national security grounds since the current regime was introduced in 2003.
The UK is almost unique amongst major Western economies in not already having stand-alone foreign investment legislation. The introduction of the Bill is consistent with the trend towards strengthened foreign investment control in a significant number of major economies worldwide following the Covid-19 pandemic and the newly-introduced EU Investment Screening Regulation, which reflects political concerns over foreign investment in critical national infrastructure and in sensitive sectors such as technology and, more recently, healthcare. While important features of the Bill (such as the hybrid mandatory/voluntary approach and use of criminal sanctions) have drawn on international comparator regimes (in particular the US and Germany), the Bill also reflects a UK backdrop of domestic political concerns over technological sovereignty and opportunistic acquisitions of undervalued UK businesses. These concerns are highlighted in new guidance published by the UK Government, aimed at British technology companies working with China.
The Bill will be subject to Parliamentary debate and amendment before being passed into law. In the interim period, foreign investors in the UK will need to be mindful of the planned reforms, given that the Government will have a retroactive ability from commencement of the Act to “call in” transactions for review where the transaction occurred following the introduction of the Bill.
The UK has traditionally been one of the most attractive destinations for FDI and has taken a permissive approach to foreign investment screening.
The Government’s powers to scrutinise transactions on public interest grounds are currently contained in the Enterprise Act 2002 (“EA02”). This allows the Government to issue a Public Interest Intervention Notice (“PIIN”) on certain strictly defined public interest considerations, but only where a transaction meets the jurisdictional thresholds under merger rules (subject to limited exceptions).
Reforms to the UK’s foreign investment screening regime have been long in the making. In 2015, the Government published its National Security Risk Assessment, which concluded that national security threats were increasing in scale, diversity and complexity. It highlighted the resurgence of state-based threats and the transformative impact of technological developments (driving, for example, the evolution of new cyber threats). In 2017, the then Prime Minister Theresa May’s Government published a Green Paper, which concluded that its existing enforcement toolkit was inadequate to address these evolving national security risks. This was followed by the publication of the Government’s reform proposals in a White Paper in July 2018. Although Prime Minister Boris Johnson reaffirmed his intention to introduce reforms in the Queen’s Speech in December 2019, the legislation has been delayed given the competing focus for Government attention of Brexit and Covid-19.
As a stop-gap measure, the Government twice lowered the thresholds for intervention for transactions involving businesses in sensitive sectors; for the military and dual-use, multi-purpose computing hardware sectors in June 2018 and for the advanced materials, AI and cryptographic sectors in June 2020. In July 2020, the Government introduced emergency reforms to the EA02 regime in response to the Covid-19 pandemic, to allow the Government to review transactions involving UK companies involved in mitigating or combating public health emergencies. Examples given include companies active in the food supply chain, healthcare (for example vaccines or PPE production) and IT supply.
Together with the Bill, the Government has published its response to the National Security and Investment White Paper consultation. The Government has stated that it has decided to make changes to the proposals it put forward in 2018, including the addition of a mandatory notification system for some transactions in specified areas of the economy. This will ensure that the Government is automatically informed of potential transactions in these crucial areas, and able to take action swiftly to investigate and address any national security risks.
The Bill: Overview of the proposed changes
How will the hybrid notification system work?
The Bill provides for a hybrid system, with a mandatory pre-closing notification obligation for the acquisitions of certain shares or voting rights in entities in certain sensitive sectors (termed “notifiable acquisitions”). The Bill does not specify what parts of these sectors will be subject to mandatory notification, which will be consulted on (an 8-week consultation is being launched in parallel with the Bill) and defined via secondary legislation. To respond to evolving national security risks, the Government will have the ability to update the definition of mandatory sectors via regulations going forward and also to exempt certain acquisitions based on the characteristics of the acquirer.
The Government expects some transactions in the following 17 key sectors will face mandatory notification: civil nuclear; communications; data infrastructure; defence; energy; transport; artificial intelligence; autonomous 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.
The mandatory regime will be reinforced by a voluntary notification system whereby parties are encouraged to notify “trigger events” they consider may be of interest from a national security perspective. This will be accompanied by an expansive “call-in” mechanism to enable the Government to review non-notified transactions up to five years post-completion (a period equivalent to the Italian, French and German regimes), reduced to six months if the Government has become aware of the transaction. The Secretary of State (“SoS”) is expected to issue a statutory statement in relation to the exercise of its call-in power, to help businesses with the process of self-assessment.
The Bill defines a set of “trigger events” which enable the Government to scrutinise a broad range of transactions including low levels of minority shareholding, namely:
- Where a person acquires more than 25%; 50%; and 75% of votes or shares in an entity (or is able to block or pass a corporate resolution);
- Where a person’s shareholding or voting rights increase above 15%;
- For the voluntary regime, a lower threshold applies for acquisitions involving “material influence”. This is a familiar concept from the UK merger control context (and can be triggered by acquisitions of shareholdings as low as 10-15%).
The Bill will also cover transactions involving a broad range of asset types, including land, tangible moveable property and, with respect to IP, any idea, information, or technique with industrial, commercial or other economic value.
There will be no turnover or market share safe harbours below which transactions will fall outside the remit of the Government’s national security review procedures.
How will the national security assessment be undertaken?
As proposed in the White Paper, the Bill entirely separates the national security assessment from the merger control analysis, ensuring that the CMA will no longer have a role in the former. The BEIS SoS (currently Alok Sharma) will be the key decision-maker for all decisions under the new regime in a quasi-judicial capacity. A new 100-person strong Investment Security Unit within BEIS will provide a single point of contact for businesses wishing to understand the Bill and notify the Government about transactions.
In assessing a transaction, the Government notes that it will adopt a targeted and proportionate approach. The legislation provides that the SoS can only call in a transaction for review where there is a reasonable suspicion that it may give rise to a national security risk (although this concept is not defined in the Bill). In addition, the Bill provides a legal safeguard that a transaction may only be assessed on “national security” grounds, and not for reasons of broader economic interest.
There will be three potential outcomes of the assessment: (i) approval; (ii) approval subject to conditions to prevent or mitigate any national security risks; and (iii) prohibition (or ordering the transaction to be unwound if already implemented). As with the current regime, the SoS will be able to impose a broad range of remedies where necessary and proportionate to mitigate national security risks provided that a clear legal test is met.
The Bill provides for an appeals process to the High Court based on judicial review principles whereby appeals are brought against the lawfulness of a substantive decision.
Timetable for review
The Bill provides that, where a proactive notification is made (either mandatory or voluntary) the SoS has 30 working days to issue a “call-in” notice. Where a “call-in notice” is issued (including for non-notified transactions), the Government determines whether to impose remedies or take no further action within a 30 working day preliminary screening period. This would be extendable by a further 45 working days if the SoS believes that a national security risk has arisen that warrants further investigation.
During the Government’s review of a transaction, the Secretary of State may issue interim orders (similar to the Interim Enforcement Orders currently issued under the EA02) to prevent parties from taking pre-emptive action, such as completing a transaction, where this might prejudice the imposition of remedies. These interim orders may have extra-territorial effect. Further extensions beyond 75 working days may be agreed between the acquirer and the SoS.
Sanctions and other procedural aspects
The new foreign investment regime will be backed up by a robust enforcement toolkit and underpinned by civil and criminal sanctions. Non-compliance with statutory obligations may result in fines of up to 5% of worldwide turnover or £10 million (whichever is higher) and up to 5 years imprisonment. These sanctions will apply to breaches of the mandatory notification obligation and also instances of non-compliance with interim orders and information requests. Transactions covered by the mandatory regime which take place without clearance will be legally void; although the SoS will have the power to retrospectively validate a transaction.
The Government will have wide-ranging powers to gather information from any party or to require the attendance of a witness to help inform its assessment. To address confidentiality concerns, the Government may apply for “closed material procedures” (where all or part of a claim can be heard in private) to protect information sensitive from a national security perspective.
The Bill contains a number of gateways for information sharing with other agencies along with accompanying safeguards and will remove the restriction on UK public authorities, including the CMA, disclosing information to overseas public authorities that comes to them in the exercise of their merger functions. However, the UK will not be part of the EU Investment Screening Regulation (which became fully operational on 11 October 2020) to facilitate information sharing between EU Member States.
What will the transitional provisions be?
Whilst the Government will not be able to scrutinise transactions before the new regime comes into force, the Government will be able to retroactively “call in” transactions for review where they occur after the introduction of the Bill to Parliament (as recently also seen in the Netherlands). This may create complexity for foreign investors during the intervening period who will have to consider the potential application of the Government’s existing public interest powers and also whether their transaction could be retroactively called in under the Bill. To help mitigate this uncertainty, the Government has advised that it will offer early informal advice to help minimise disruptions.
Conclusion: Key implications for investors
The Government has emphasised that the UK remains open for investment and that the proposed foreign investment regime is designed to mitigate national security risks in a proportionate manner given a government’s first duty is to protect the security of its citizens. Indeed, earlier this week, the Government announced the creation of an Office for Investment to support the Government’s ability to attract foreign investment, particularly in infrastructure, clean technologies and research and development. The Government believes the Bill will enable the fastest and most proportionate foreign investment screening in the world. It will also ensure that the UK is well positioned to maximise the benefits that flow from free trade agreements with international partners. However, the Bill clearly signals the end of the UK’s lighter touch approach to foreign investment screening and brings the UK into line with its international peers.
Given the wide range of transactions that will be subject to review and the absence of any jurisdictional safe harbours, the Government will have a broad jurisdiction to review M&A transactions with a UK nexus. If the 1,000-1,830 notifications per year forecast in the Impact Assessment is accurate, this would be more than the number of transactions reviewed by comparator regimes such as Germany and significantly more than the number of merger cases reviewed by the CMA which average around 60 per annum. As such, we anticipate that foreign investment rules (in the UK and internationally) will be an increasingly important consideration for international investors and will need to be factored into deal feasibility, contractual conditionality and transaction timetables at an early stage of the process.
Given the scope of the reforms, the Bill will also impact a wide range of investors. It is clear that the foreign investment reforms are driven in part by perceived concern over investment from China. This was reflected by the SoS’s acceptance of undertakings from Gardner Aerospace not to re-bid for a period of a year in September 2020; Government’s recent concerns in relation to Canyon Bridge (backed by Chinese state-owned China Reform holdings) to obtain creeping board control over UK semiconductor chipmaker Imagination Technologies, and the recent decision in relation to Huawei’s involvement in Britain’s 5G networks. However, interventions have not been limited to Chinese investors. The SoS also intervened in the past year in deals involving North American private equity and financial investors (such as Cobham / Advent and Inmarsat / Connect Bidco).
In announcing the Bill, the Government has emphasised that the regime will address national security risks; not economic nationalism and that this will be enshrined in the Bill. This will likely be welcomed by businesses and wider stakeholders, given that there was a concern that government intervention on national security grounds in UK M&A activity was increasingly being used in a political context. This was evidenced in Advent / Cobham where the Government accepted commitments related to the preservation of UK headquarters, jobs and R&D spend in addition to conventional security related commitments. It remains to be seen whether the introduction of a standalone regime under the Bill will address these concerns by in fact delivering a swift and proportionate review for the majority of cases based on clear national security concerns.