BRIEFING: UK National Security and Investment Act 2021
The new National Security and Investment Act adds a new, security-focused layer to the UK's relatively liberal merger control regime. Our briefing note provides an outline of the new powers it creates and the sectors affected.
The UK Government’s National Security and Investment Act 2021 is the biggest overhaul of policy relating to merger control and related transactions for two decades, with sweeping new powers that will apply to multiple sectors.
Seventeen sectors will be required to notify government of qualifying transactions, with other sectors expected to provide voluntary notifications.
Ministers will be able to intervene retrospectively for up to five years after a transaction has been completed.
The Act is expected to come into operation in early 2022, following the completion of secondary legislation, the publication of guidance and a ‘Statement of Policy Intent’. A new team in BEIS, the UK’s business department, will scrutinise deals.
It removes previous turnover thresholds and applies to acquisitions of minority interests of 25% or more (exceptions apply where lesser interests confer “material influence”).
Helmsley Partners considers this new regulatory regime to be a significant new source of political risk for foreign direct investment in the UK.
The UK Government has delivered the biggest shake-up of merger control policy for almost 20 years. The National Security and Investment (NSI) Act 2021, received Royal Assent on 29 April 2021 and so passed into law.
The Act gives the Government new powers to intervene in takeover or investment bids deemed to be a possible threat to national security. This regime represents a significant new layer of scrutiny and powers, rather than simply an extension of competition law, which has been the traditional territory of merger control in the UK.
The new regime will come into force later in 2021, following the passage of supporting secondary legislation. The NSI Act has been a long time coming, with its high-level framework having been explored in a White Paper published in July 2018. Small updates were made to existing legislation in both 2018 and 2020 but both of these were seen as interim measures before a later wide-ranging bill.
Calls for action from government on takeover issues has grown during the pandemic, with a notable political trend towards increased suspicion of foreign actors, especially concerning high value technology. The UK has seen three key trends converge:
Brexit and the opportunity to develop independent trade policies.
A worsening of relations with investor nations, especially China.
Monetary policy leading to a large increase in M&A activity, with low UK asset prices leading to claims of a ‘corporate raid’.
However, the Act’s early development pre-dates the pandemic and the worsening of Sino-UK relations. It reflects a response by Theresa May’s administration (2016-2019) to her predecessor David Cameron’s more liberal attitude to foreign direct investment.
The new regime will be much more in line with the USA’s Committee on Foreign Investment in the United States (CFIUS), which escalated its activities under the Trump Administration. Many key elements of the NSI Act resemble those of CFIUS.
Key elements of the National Security and Investment Act
The NSI Act will be, “a significant upgrade on [the Government’s] current powers.” Some key elements include:
A new body called the ‘Investment Security Unit’ will assess qualifying deals and will be situated within the business department, BEIS. This will be separate from the CMA, the standard competition agency.
The minimum turnover threshold for government intervention has been removed (it was previously £1m).
The Government is also free to intervene regardless of the sector, revenue or market share of the companies involved, if the condition of a potential national security risk is met. This makes the Bill a clear departure from the previous regime of merger control based almost entirely on antitrust regulations.
The Act broadens the ability of the Government to take into account assets owned by an entity, particularly intellectual property, and not just the entity itself. Ministers could, for example, prevent the sale or licensing of certain technologies in some circumstances.
Companies in seventeen identified sectors (see list on previous page) will be mandated to submit a “notification” if any merger, acquisition or takeover qualifies as a “trigger event”. These “triggers” cover any substantial increase in control over an entity or asset, whether that be a full takeover or an acquisition of shares or voting rights above 25% (though lesser interests which grant “material influence” are also covered).
The Government will have the power to “call in” transactions for assessment following any notification. Importantly, Ministers will have the right to exercise this power retrospectively for up to five years in cases with no mandatory or initial voluntary notification.
Any merger or acquisition covered by mandatory notification that is completed without the approval of the Secretary of State will be legally void.
Even outside the core sectors, companies will be encouraged to submit voluntary notifications if a trigger event occurs and there is a potential national security concern.
Penalties for compliance failure include fines of up to 10 million or imprisonment of up to five years for individuals, and five percent of global turnover for companies.
Whilst the Act empowers Ministers to act across all sectors, the screening regime particularly targets seventeen sectors in which M&A activities will automatically trigger mandatory ‘notifications’. The definitions of these sectors were revised in a consultation response in March 2021, though many definitions remain broad. Those sectors are:
Critical Suppliers to Government
Critical Suppliers to the Emergency Services
Military and Dual-Use
Satellite and Space Technologies
Impact of the National Security & Investment Bill
The Government estimates an administrative cost to businesses of around 43 million per year, including everything from early engagement with government regarding familiarisation and early advice, to legal and other costs arising from a detailed national security assessment.
The Government expects there to be between 1,000 and 1,800 notifications every year, with 70 to 95 of those resulting in detailed national security assessments. Based on analysis of M&A data and the screening regimes of other nations, the Government estimates that roughly ten cases each year will require remedies of some
description, with the proviso that the security landscape is constantly changing.
This represents a significant increase in such interventions. Since 2002, there have been only 12 public interest interventions on national security grounds.
Key risks posed by the National Security & Investment Act
We believe the Act represents a significant source of political risk for those wishing to invest in UK entities or assets, including:
Transactional: The NSI legislation presents an obvious additional risk of ministerial intervention in M&A transactions, particularly across borders. Interventions could include oversight measures (including government taking ‘golden shares’ within capital structure), limitations on access to sensitive information, behavioural conditions on the participants or even prohibition of the transaction.
Administrative: The added regulatory burden presents risks to the critical path of the transaction. A new unit in BEIS, the Investment Security Unit, will review qualifying deals. Where a transaction is subject to mandatory notifications, it will be reviewed in 30 working days, with the potential for a 45-day “additional period”, then a possible “voluntary period” by arrangement between the Secretary of State and the investor. The Secretary of State will also have the right to demand information or interviews with key personnel. Failure to comply includes heavy fines and penalties, so over-compliance could also add to administrative burdens.
Changes in security priorities: The Act allows for retrospective review of transactions, meaning that transactions with minimal security impact today could be undone or severely altered in later years, based on currently unknowable future security priorities. This risk would apply not only to the security situation in the UK, but also to its future relationships with the home countries of investors.
Changes in political priorities: It is feasible that future governments may use the NSI legislation to act retrospectively to meet their own political ends. The legislation requires the use of a ‘Statement of Policy Intent’, which will set out how the Secretary of State intends to apply the NSI powers. The Statement will be reviewed every five years. However, it is easy to imagine these being applied to evolving political priorities. For example, the former Labour leader Jeremy Corbyn was hostile towards the ownership structures of utilities companies in the UK, particularly where foreign ownership reduced transparency, and he threatened to renationalise them should he come to power. A similarly minded politician might instead use the NSI powers to alter previously completed transactions and thereby undermine foreign ownership of key assets.
Jamie Horton, Analyst at Helmsley Partners
Benedict McAleenan, Managing Partner at Helmsley Partners
For more information about this or other political risk questions, please get in touch with the Helmsley Partners Team.