In November 2020, the United Kingdom Government published its long-awaited National Security and Investment Bill, which establishes a new screening regime for transactions that might raise national security concerns.
Several countries have long-standing investment screening regimes, such as the Committee on Foreign Investment in the United States. The Government has long been able to intervene in deals on grounds of national security and certain other limited grounds, but it was almost unique among major Western economies in not having a stand-alone investment regime. The National Security and Investment Bill changes that and will have a significant impact on transactions.
The new rules require mandatory notification and clearance of transactions involving the acquisition of shares or voting rights above certain thresholds (so-called “trigger events”) in a number of sensitive sectors.
The 17 sensitive sectors are:
The Government has been consulting on the proposed definitions for each of the sectors listed above and the activities undertaken by entities within each sector. In due course, refined definitions will be published, which will enable parties to self-assess whether they need to notify a transaction.
The British Venture Capital Association (BVCA) has responded to the latest consultations issued by the Government, which closed on 6 January 2021, calling for the scope of the sensitive sectors requiring mandatory notification to be narrowly and clearly defined. Whilst supporting the National Security and Investment Bill in principle, the BVCA is concerned that a lack of clear guidance and precise definitions will delay and increase the costs of venture capital transactions which do not otherwise pose a genuine threat to national security.
In sectors not subject to mandatory notification, transactions will be subject to a voluntary regime where there is an impact on national security.
The new rules will not just capture an acquisition of a controlling interest but also a number of other “trigger events”, including:
Material influence can be found with a shareholding as low as 15%.
It’s important to note that the new regime applies to transactions regardless of the identity or nationality of the acquirer of any target that has UK activities or customers. This means that that non-UK targets will potentially fall within its scope.
Once a notification is made to the Secretary of State for Business, Energy and Industrial Strategy, the Secretary of State will have 30 working days to decide whether to clear the transaction or undertake an in-depth review, in which case it will have a further 45 working days to assess the transaction.
The Government will also have the power to 'call in' transactions that were not notified but which raise national security concerns. This right applies for a period of five years following the date of the transaction as long as the Secretary of State acts within six months of becoming aware of the transaction (for example from a press announcement). For acquisitions subject to mandatory filing and that were not notified, the five-year limit does not apply, and transactions cannot be completed until approval has been given.
Following notification, several outcomes are possible: (i) approval; (ii) approval subject to conditions; or (iii) prohibition (or unwinding of the transaction).
Ultimately the Government will have the power to block deals, or to require transactions that have taken place to be divested or unwound. The Government also has wide powers to impose conditions to address national security concerns. These may include reducing the number of shares an investor is allowed to acquire, the transfer of intellectual property or restricting access to commercially sensitive information.
The new regime will be backed-up by significant penalties. Transactions requiring mandatory notification which are implemented without approval will be legally void unless later validated.
Non-compliance may result in civil and criminal sanctions, including fines of up to 5% of worldwide turnover or £10 million, whichever is higher, and imprisonment of up to five years.
The National Security and Investment Bill is part of a wider trend in which many countries have implemented strengthened national security rules. The new regime will result in a wide range of deals in cutting-edge sectors – including venture capital investments – being reviewed by the Government. The Government estimates that up to 1,800 deals a year will be screened each year with perhaps as many as 100 being reviewed in greater detail.
Here are a few key takeaway points:
Our authors, James Baillieu and George Mason and our wider Venture Capital and Competition & EU Law teams are on hand to assist you in determining whether the new regime impacts your proposed transaction and, if it does, to help you navigate the new regime as quickly and efficiently as possible.
Oct 03 2023
Oct 02 2023