CFIUS style overseas investment regime for the UK: the National Security and Investment Bill

Introduction

On 11 November 2020 the National Security and Investment Bill was presented to the House of Commons for its first reading and is due to receive its second reading on 17 November 2020. 

The purpose of the Bill is to introduce new legislation which will enable the UK Government to scrutinise the acquisition of, and investment into, UK businesses and assets (direct or indirect) for the purpose of protecting national security (the NSI Regime). 

While the Enterprise Act 2002 already provides the UK Government with powers to scrutinise transactions on public interest grounds the scope of those powers is largely defined by the size of the transaction (based on turnover and share of supply thresholds). In contrast, all sectors of the UK economy will be within the NSI Regime and, while there will be a number of key sectors where national security risks are more likely to arise, which go beyond defence (see below), no minimum turnover or share of supply tests will apply. The NSI Regime will also apply to investors from any country (whether or not they are in the EU).

How will the NSI Regime function? 

Mandatory notification regime

An acquirer of shares in a company that carries on activities in the UK or supplies goods and services to persons in the UK (even if the company is not UK incorporated) will be required to seek authorisation and obtain approval from the UK Government before completing its acquisition or investment if that acquisition or investment falls within a key sector and has given rise to a Trigger Event. A Trigger Event refers to the increase in the acquirer’s percentage of shares or voting rights in a company and it is foreseeable that even a minimal increase in the percentage of shares or voting rights the acquirer holds in a company could give rise to a Trigger Event. 

The key sectors that have been initially flagged are Civil Nuclear, Communications, Data Infrastructure, Defence, Energy, Transport, Artificial Intelligence, Advanced 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, Satellite and Space Technologies, but these are subject to a public consultation so may be updated in due course. 

It is important to note that the NSI Regime is not solely concerned with the acquisition of shares in a company or other type of corporate vehicle but has also been designed to catch an acquisition of assets such as intellectual property that is integral to a key sector or land which is in close proximity to a sensitive site, such as critical national infrastructure or Government buildings. 

Voluntary notification regime

The mandatory notification regime will be supported by a voluntary notification process. This is designed to encourage the parties to a transaction, which satisfies the definition of a Trigger Event but does not fall within the mandatory notification regime (because the transaction is not in a key sector), to notify the UK Government of a transaction that may still raise national security concerns.

Call-in mechanism

The NSI Regime also gives the UK Government the power to “call in” and review non-notified transactions up to five years post-completion. Importantly, on or after commencement of the new legislation, the UK Government will have the power to call-in any transaction that completed on or after 12 November 2020 for assessment under the NSI Regime (even though the legislation has not yet been passed). 

Outcomes and remedies

Upon notification, if the UK Government decides that there may be a national security concern it will have the power to issue orders to prohibit the transaction from completing or make completion of the transaction conditional on the parties taking certain actions to prevent or mitigate national security concerns. In extreme circumstances (and most likely to be exercised when the UK Government exercises its call-in powers over non-notified transactions) it may unwind the transaction. If an acquirer has notified the UK Government of a notifiable transaction it must not be completed until clearance is given to the parties.

Non-compliance with the NSI Regime may result in fines of up to 5% of worldwide turnover or £10 million (whichever is the greater) and imprisonment of up to 5 years.  Transactions that take place without clearance will be legally void. 

What impact is the NSI Regime likely to have?

The NSI Regime became active from 12 November 2020 – whilst the Bill has not yet been passed into UK law, the UK Government will be able to call in deals executed on or after that date.

There are likely to be additional costs to businesses as they engage professional advisors to help them understand the NSI Regime, engage with the UK Government prior to notification and make the required notifications. Given the sanctions that could be imposed and the extreme consequences of transactions being unwound we do expect that there will be a spike in notifications on commencement of the NSI Regime as parties take a more cautious approach.

The NSI Regime is extremely wide and covers both direct and indirect investments into corporate bodies that carry on activities in the UK or supplies goods or services to persons in the UK.  This means that the NSI could cover transactions not directly involving UK companies.  For example, the acquisition of a shareholding stake in a US incorporated entity that has either a UK subsidiary or has customers in the UK would be covered by the NSI Regime.

The NSI Regime will be an important consideration for foreign investors who will no doubt need to consider what impact the regime will have on transaction timelines, deal feasibility and negotiations on contractual conditions to completion. The UK Government has attempted to mitigate some uncertainty by making the NSI Regime subject to strict statutory time limits, rather than the Government setting time limits on a case by case basis. So, for example, the Secretary of State has up to 30 days to make a decision once it has accepted the acquirer’s notification (although this can be extended in some circumstances). The NSI Regime also has the potential to alter the commercial deal agreed between the parties, especially if conditions imposed by the UK Government reduce the number of shares that can be acquired or restrict access to certain commercial information. 

Similar national security investment screening regimes have already been implemented by some other advanced economies, including Germany and the CFIUS regime in the United States and so, if anything, the UK is playing catch-up in this area to ensure it has standalone foreign investment legislation. The UK benefits greatly from foreign direct investment. It contributes to businesses, creates new jobs and can boost research & development activity and, during the course of its journey through Parliament, we can expect a lot of questions about what impact the NSI Regime will have on investment opportunities into the UK. 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2020. Specific advice should be sought for specific cases. For more information see our terms & conditions