UK Government's powers to intervene in M&A transactions

The National Security and Investment Act received Royal Assent on 29 April 2021. Once fully implemented, the Act will give the UK government new stand-alone powers to screen investments and to intervene in transactions giving rise to a risk to national security.

These wide-ranging powers will significantly affect how mergers and acquisitions are dealt with in the UK. The Act does not distinguish by nationality of investor and UK investors are not exempt. There is no minimum threshold for transactions caught by the new regime and the government has estimated that over 1,000 in-scope transactions will have to be notified each year.

The Act is expected to come into force towards the end of the year, though the exact date is yet to be confirmed. The Government will, however, have retrospective powers that will allow it to call in for review any qualifying transaction that is completed between 12 November 2020 and the Act's commencement date.  Investors should consider now whether any transaction completed after 12 November 2020 might raise national security concerns and could be caught by the new regime.

See our Foreign Direct Investment Regimes toolkit here which provides an overview of the various regimes in several EU countries.

Key elements of the new regime

The key elements of the new regime include:

Call-in: the Government will retain a broad 'call in' power, enabling it to select for a national security assessment, certain transactions involving 'qualifying entities' or 'qualifying assets' that do not fall within the mandatory notification regime. This power will apply to completed transactions and those in progress or contemplation where they have given rise or may give rise to a national security risk.

The call-in power will apply retrospectively for up to five years post-completion of any transaction entered into from 12 November 2020, reduced to six months if the government has become aware of the transaction. This retrospective power cannot be used until the Act comes into force. But, if the government becomes aware of a transaction that falls within the scope of the new regime before the Act's commencement date, the Secretary of State (SoS) will have up to six months from that date to exercise the call-in power.

Mandatory notification: the Act introduces mandatory notification of the proposed acquisition of certain shares or voting rights in a qualifying entity where that entity carries on activities in the UK in one of 17 "sensitive sectors" of the economy.  Transactions subject to mandatory notification cannot be completed until clearance is granted and transactions that take place without clearance will be void. It will be the acquiror's obligation to make the notification.

Voluntary notification regime: the Act includes a voluntary notification system for deals which "may raise national security concerns" and which do not fall within the mandatory regime.

Sanctions and remedies: the government will have powers to impose remedies where deals are found to create national security risks and to administer sanctions for non­compliance with the regime. Sanctions for non-compliance include fines of up to 5% of worldwide turnover for a company and for individuals, fines of up to £10 million and imprisonment.

Existing CMA regime: the new regime will be separate from the CMA' s merger regime, which will run in parallel. The CMA's merger regime will only apply to competition, media plurality, financial stability and public health emergency considerations.

Qualifying entities and assets

The regime applies if there are certain acquisitions of control of a 'qualifying entity' or 'qualifying asset' known as 'trigger events'. 

A 'qualifying entity' is (i) any UK entity (bodies corporate, partnerships, unincorporated associations or trusts); (ii) any entity that carries on activities in the UK; or (iii) any entity that supplies goods or services to persons in the UK.

"Qualifying assets' are land, tangible moveable property and intangible assets (including trade secrets, databases, algorithms, designs and software.) 

The trigger events for the government's call-in power are different from those that relate to mandatory notification (see below.)

Call-in power

As noted above, and once the Act comes into force, the SoS will be able to issue a call-in notice if they reasonably suspect that:

• a trigger event has taken place in relation to a qualifying entity or qualifying asset and
• that trigger event may give rise to a risk to national security.

Arrangements that are in progress or contemplation can also be called in where they would, if brought into effect, satisfy the trigger event and national security risk test.

The call-in power is exercisable at any time up to 6 months after the SoS becomes aware of a relevant transaction, provided this is also within 5 years of the trigger event taking place. If the acquisition was subject to mandatory notification but no clearance was obtained (see below) the 5-year time limit does not apply.

Trigger events

In relation to the government's call-in power, trigger events for a qualifying entity are defined as:

• an increase in the percentage of shares or voting rights that a person holds in the qualifying entity from (i) 25% or less to more than 25%, (ii) 50% or less to more than 50%, or (iii) less than 75% to 75% or more;
• the acquisition of voting rights in the qualifying entity that enable the acquirer to secure or prevent the passage of any class of resolution governing the affairs of the entity; or
• the acquisition of "material influence" over the policy of the qualifying entity.

'Material influence' will be interpreted in the same way as the term is used in the UK merger control regime, where the CMA is likely to presume that a shareholding of more than 25% (giving the ability to block special resolutions) will confer material influence. A share acquisition of 15% to 25% will also be examined to see whether it might result in the ability to exercise material influence.

Trigger events for qualifying assets will include acquiring a right or interest as a result of which the person can (i) use the asset, or use it to a greater extent than before the acquisition; or (ii) direct or control how the asset is used, or direct or control how it is used to a greater extent than before the acquisition.

 National security

The government's call-in powers can be used when there is reasonable suspicion that a trigger event may give rise to a risk to UK national security.

"National security" is not defined in the Act, but limited guidance on the government's intended use of its call-in power has been included in a draft statement of policy intent. In summary, the government will focus on three key considerations when deciding whether to call-in a transaction:

• the target risk - the nature of the target and whether it is in an area of the economy where the government considers risks more likely to arise
• the trigger event risk - the type and level of control being acquired and how this could be used in practice
• the acquirer risk - the extent to which the acquirer raises national security concerns.

Mandatory notification

As noted above, the Act introduces mandatory notification of certain transactions (known as "notifiable acquisitions") even where there are no national security concerns.  Mandatory notification only applies to specified trigger events in relation to qualifying entities (and not to qualifying assets) where that entity carries on activities in the UK of a specified description in one of 17 "sensitive sectors."

The relevant mandatory notification trigger events are:

• an increase in the percentage of shares or voting rights that a person holds in the qualifying entity from (i) 25% or less to more than 25%, (ii) 50% or less to more than 50%, or (iii) less than 75% to 75% or more; or
• the acquisition of voting rights in the qualifying entity that enable the acquirer to secure or prevent the passage of any class of resolution governing the affairs of the entity.

The original draft Bill included the acquisition of shareholding/voting rights of 15% or more in an entity as a mandatory notification trigger event. However, concerns were raised that this would result in a huge number of notifications and the threshold was increased to more than 25 % during the Bill's passage through Parliament.

Transactions subject to mandatory notification cannot be completed until clearance is granted and transactions that take place without clearance will be void.

Sensitive sectors

Mandatory notification is only relevant where the qualifying entity carries on specified activities in one of 17 "sensitive sectors."

The government published a consultation paper on the proposed 17 sensitive sectors in November 2020. In the response to the consultation (published 02 March 2021) the Government took on board the concerns of many of the respondents that the original sector definitions had been too broadly drafted. The government has now published revised definitions for each of the 17 sectors and these represent a significant narrowing of scope in many areas. The revised definitions remain in draft form, however, and may be subject to further amendment prior to the new regime coming into force. The sectors are:

• Advanced Materials
• Advanced Robotics
• Artificial Intelligence
• Civil Nuclear
• Communications
• Computing Hardware
• Critical Suppliers to Government
• Critical Suppliers to the Emergency Services
• Cryptographic Authentication
• Data Infrastructure
• Defence
• Energy
• Engineering Biology
• Military and Dual Use
• Quantum Technologies
• Satellite and Space Technologies
• Transport

Voluntary notification

Voluntary notification is available for any transaction which could potentially be called in for review - i.e. for any call-in trigger event (see above) which may give rise to a risk to UK national security.

The likelihood of any transaction being called in for review is likely to be the main deciding factor when considering whether to make a voluntary notification.  Where a transaction involves any trigger event and there is a potential risk to national security, it may be in the interests of legal certainty to voluntarily notify the transaction. This avoids the risk of a relevant transaction potentially being called in by the SoS at any time up to 5 years post-completion.

Making a notification

No notifications (whether mandatory or voluntary) can be made until the Act formally commences later this year. From that date, all notifications should be submitted to the new Investment Security Unit (ISU), which is an operational unit within BEIS. Submissions to the ISU will be via a new online portal that is currently in development.

In relation to mandatory notifications, the notification must be submitted to the ISU prior to the acquisition of control. For voluntary notifications, the notification can be submitted from the point at which arrangements are in progress or contemplation which, if carried into effect, would result in a trigger event taking place.

Despite the Act not yet being in force, businesses are already able to contact the ISU should they require advice on any aspect of the new regime. This is particularly relevant in relation to the government's ability to potentially call in, from the Act's commencement date, any qualifying transaction completed on or after 12 November 2020. The government is encouraging investors to seek the ISU's guidance now on transactions which are due to complete prior to the Act's commencement where questions arise as to the potential application of the new regime.

Timing and outcome of assessment

Once a mandatory or voluntary notification is accepted, the SoS has 3o working days to clear the transaction or to issue a call-in notice. (The SoS may initially reject a notification on several grounds, including where the notification does not include all necessary information.)

If a call-in notice is issued (including for non-notified transactions), the SoS has a further 30 working days to carry out a detailed assessment, which may be extended by an additional 45 working days. This means that the total review time is potentially 105 working days.  Pending the conclusion of any in-depth investigation of the transaction, the SoS may impose an interim order prohibiting pre-emptive action, such as completing the transaction.

The potential outcomes of an assessment by the SoS are: (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).

M&A implications

Based on our experience on recent French, Italian and German acquisitions, (those countries having already introduced FDI restrictions) the following areas may have to be considered:

• In scope of mandatory regime: is the transaction caught by the mandatory regime (i.e. is it within the prescribed sensitive sectors and is the proposed holding / level of control caught)? With this in mind, sellers may well need to carry our greater due diligence on the prospective buyer and buyers may need to perform additional specific diligence on the target.

• Structuring: structuring around the regime doesn't typically work (e.g. acquiring an overseas entity higher up the chain).

• Voluntary notification: if voluntary, what steps should be taken now (if any) and what actions should be anticipated (if any) in the deal documents. Both parties to a transaction will want to be satisfied that a transaction is not within the mandatory notification regime and will want protection against the transaction being called in before or after the deal has completed.

• Likelihood/timing: what is the likelihood, and related likely/longstop timing, of obtaining the required approvals?

• Conditions: what are the potential conditions to obtaining the required approval, including divestitures or support agreements that could be required by the SoS - and will the buyer's rationale for the deal hold up in light of those conditions/requirements?

• Enhancing deal certainty and allocating risk in the SPA - key provisions to consider are:

  • Standard of efforts: the standard for the efforts that the parties (particularly the buyer) have to make to obtain any approval - such as best or reasonable efforts; or "hell-or-high-water" - which requires the parties to take any and all efforts to obtain the relevant approval;

  • Divestitures cap: if there is an obligation to divest assets, what is the maximum amount of required divestitures, and whether there are specified assets that would have to be divested and/or specified assets that would not have to be divested;

  • Longstop date: the longstop date (i.e., the date beyond which the efforts to obtain approval would no longer have to be made and the deal would terminate if the necessary approval has not been obtained by then); and

  • Reverse termination fee: will a "reverse termination fee" (RTF) be payable by the buyer to the seller if approval is not obtained and the deal is terminated, the amount of the fee and any local law rules that impact on the size of the fee. RTFs are less common in non-US deals, but they are seen in UK and European deals from time to time. In its most common construct, an RTF is a specified amount that is paid if regulatory approval cannot be obtained by the longstop date or can only be obtained by divesting assets that the buyer is not willing to dispose of.