The Government has stated that it wants the UK to be the best place in the world to work and do business, but the introduction of this new regime creates another layer of complexity for those investing in the UK. These new rules will need to be navigated carefully. Further detail on the regime can be found in our earlier pieces Strengthening the defences: the new UK national security investment screening regime and UK National Security and Investment – now is the time to Act.
For a recently closed transaction, you may already be aware of the potential retroactive implications that this new regime coming into force has for your deal, but, in any event, there will be no concerns about having missed a mandatory notification requirement. However, if you are trying to complete a transaction by the year end and are concerned that the timing might slip, or you already know closing will not occur until 2022, you need to determine proactively now what impact the regime will have and understand whether a notification will be required or advisable in the new year.
Below we set out six key aspects of the regime of which would be acquirers and investors should be aware.
Regime goes live on 4 January 2022, but can look back to 12 November 2020
Until 4 January 2022, the regime is still not fully live and it is not possible to make a notification – mandatory or voluntary – to the Investment Security Unit (ISU) of the Department for Business, Energy and Industrial Strategy (BEIS). However, the regime has retroactive application in that the Government will have the power to call-in for review transactions which closed on or after 12 November 2020. BEIS has indicated that transactions closing prior to 4 January 2022, which would have been caught by the mandatory notification regime if they had closed on or after that date, are more susceptible to being called in for national security review than other deals.
Missing a mandatory notification requirement has criminal ramifications
From 4 January 2022, mandatory notifications will be required for ‘qualifying transactions’ in the 17 most sensitive sectors of the economy (see our earlier piece Strengthening the defences: the new UK national security investment screening regime). Missing a mandatory notification can result in substantial civil and criminal penalties (at worst, up to 12 months in prison), in addition to the deal being legally void from the outset.
You may have conducted an NSI assessment previously where the need to make a mandatory notification was ruled out on the basis that the deal was due to close before the year end. Should there be any concerns about the deal timetable slipping such that it could close in the new year, now is the time to re-evaluate. The interests of investors, acquirers and targets are unlikely to be aligned on the sharing of any risk, so it is crucial to understand the implications the regime may have for you and your deal.
Mandatory regime requires non-UK targets to ‘carry on activities’ in the UK
Ostensibly the NSI regime applies to both UK-domiciled and non-UK targets, the latter being caught on the basis of either (i) carrying on activities in the UK or (ii) supplying goods or services to persons in the UK. However, in the context of the mandatory notification regime, the Government has now highlighted that it is a pre-requisite that a non-UK target ‘carries on activities’ in the UK before any need to make a mandatory filing arises. Therefore, where a target only supplies goods or services to customers in the UK, this is not enough to be caught by the mandatory regime. This is an important point to appreciate on the limits of the mandatory regime which was not immediately apparent from the legislation itself. This clarification should help reduce unwarranted mandatory notifications from being made and remove unnecessary deal conditionality.
A point of nuance on the above is that certain of the 17 key sectors, as defined in the regulations (which are currently still in draft), involve an element of ‘supply’ in the description, such as critical suppliers to government and suppliers to the emergency services. Deals in these sectors may therefore still be caught, even in instances where the target does not carry on activity in the UK.
Regime is agnostic as to the nationality of investors
The application of the NSI regime is purposefully not limited to investment from overseas; it applies equally to domestic acquirers and non-UK ones. Furthermore, while one may consider that investors from certain jurisdictions could be of more interest to BEIS than others (for example, the Centre for the Protection of National Infrastructure (CPNI) cites Russia and China as being countries where domestic information-gathering laws may be problematic from a UK national security perspective: https://www.cpni.gov.uk/informed-investment), generalised assumptions about particular countries (negative or positive) should be resisted. Indeed, under the existing national security screening rules, the Government has intervened on a number of occasions in the past 20 years where the acquirer was from other jurisdictions, including the United States – most recently in the on-going reviews of the acquisitions of defence and security group Ultra Security and aerospace and defence firm Meggitt, both of which involve US-based acquirers.
Low intervention threshold
An acquisition of 25% or more in a target active in the 17 key sectors will be subject to the mandatory notification regime. However, it should also be kept in mind that transactions in, or closely linked to, those key sectors involving the acquisition of ‘material influence’ in the target may still be called in for review by the Government if it has any national security concerns – as it may do given the sensitive nature of these sectors.
Material influence is a relatively low bar and may arise well below that 25% threshold, allowing the Government to establish jurisdiction over a potentially wide range of transactions. This is particularly relevant given that there are no turnover or other materiality thresholds in the NSI regime.
A recent example of material influence from last year was in a merger review of an investment by Amazon in Deliveroo, where the UK Competition and Markets Authority determined that Amazon had acquired material influence over Deliveroo with a 16% shareholding and a single director on the Deliveroo board. Thus, even in the context of a minority investment, where the target is active in a potentially sensitive sector, it is prudent to assess whether material influence is being acquired, such that there is a risk of a call-in by the Government.
Lenders may also fall within scope of the regime
The regime may also catch lenders and financing parties, even in circumstances where they themselves are not immediately acquiring control over a target. In the context where, for example, it is possible to enforce security taken over shares in the event of a default, that enforcement may itself trigger a notification requirement. Problems can then arise if such an enforcement action requires a mandatory notification (at least from a timing perspective) or the lender enforcing security itself gives rise to national security concerns.
There may be further difficulties for lenders if, at the outset, mandatory notifications required to be made by borrowers have been missed. In such circumstances security may have been taken in respect of an underlying transaction which is itself legally void. Careful checks should therefore be made prior to lending to ensure that any mandatory notification obligations have been met so that any security taken is not compromised.
While the regime does not apply in the context of insolvency proceedings, the decision to take security over shares should thus be given careful consideration.
How we can help
Please get in touch with us to discuss the impact that the NSI regime could have on your business. Hogan Lovells practises law at the intersection between business and Government and is particularly well placed to help – having a deep understanding of the regulatory landscape and the detail of the NSI regime. We also have extensive experience of working inside Government, and advising corporations on the machinery of Government and its policy priorities. Let us help you navigate the new regime and, if necessary, engage with Government and relevant stakeholders.
Authored by Christopher Peacock and Mark Jones.