Britain’s new national security and investment regime: 10 things to know | Cooley LLP
On January 4, 2022, the UK’s National Security and Investment Act 2021 (NSI Act) will come into full force, with some provisions applying retroactively to November 2020. The NSI Act creates a stand-alone foreign direct investment (FDI) review. national security oriented system with defined processes and statutory deadlines. Importantly, it introduces for the first time a mandatory notification and pre-closing authorization requirement for transactions in specific sectors, bringing the UK FDI review system into line with screening regimes FDI from its intelligence allies, including the United States, Australia, Canada and New Zealand.
Like the US Committee on Foreign Investment in the United States (CFIUS) scheme, the UK scheme also contemplates a ‘voluntary’ filing process and broad authority for the UK government to identify and review ( “Call-in”) transactions for which the parties have not made a voluntary or mandatory notification. It also expands the power of the UK government to impose conditions and potentially block transactions that could pose national security risks.
Although the new regime represents a significant departure from the existing UK national security framework, the government is keen to stress that the UK remains ‘open for business’ and ‘the vast majority of deals can be reached without delay’. So what is the likely impact of the new NSI regime on transactions? Below, we demystify some of the rules and summarize our top 10 takeaways.
- The new regime is independent from the country and has extraterritorial reach – it applies to any investor and to investments in non-UK targets. The UK regime captures investors with various business activities in its jurisdiction, provided that there is a sufficient link with the UK, including investments in non-UK targets which supply UK customers or operate in the UK. United. It may also apply to domestic UK-to-UK transactions, as well as transactions involving non-UK targets (for example, the acquisition of a French target company that has a subsidiary in the UK ).
- The mandatory notification regime only applies to the acquisition of certain levels of ownership and / or control in companies active in one or more of the 17 specified sectors in the UK. Called “trigger events”, the relevant levels of ownership or control are based on objective criteria. More specifically, mandatory notification may be required if an investor acquires any of the following:
- Shares or voting rights in a company of more than 25%, more than 50% or 75% or more.
- Voting rights in a company which (alone or in combination with other voting rights held by the investor) enable the investor to guarantee or prevent the adoption of any category of resolution governing the affairs of the company.
However, if none of these ‘trigger events’ are present, then a mandatory notification is not required, regardless of the specified industry in which the target company is active in the UK.
- If one or more of the above ‘trigger events’ are reached, a mandatory filing will only be required if the target company is active in one or more of the 17 specified sectors in the UK. The list of 17 specified sectors has been refined since the first draft definitions published in November 2020. See the latest definitions in the National Security and Investment Act 2021 (Notifier Acquisition) (Specification of Qualifying Entities) Regulations 2021. Important to note that the specified sectors cover traditional industries such as defense and military, as well as critical infrastructure (i.e. biology). This emphasis on infrastructure and technology is no different from other foreign investment screening regimes around the world, reflecting a growing desire to protect critical industries and advanced technologies from “hostile actors”.
- If the transaction falls outside the scope of the mandatory scheme, the parties should assess the risk of being ‘called out’ by the UK government and whether a voluntary deposit may be appropriate. Under current law, agreements will be “called” by the government when there is a perceived risk to the “national security” of the UK. Unfortunately, there is no definition of “national security” in the legislation, although the government has issued a statement of intent explaining the three risk factors it will take into account when assessing the risk. for national security, namely:
- The target risk (that is, the technology and business activities of the target that could present a vulnerability to national security).
- The risk of the acquirer (i.e. the characteristics of the entity making the investment or acquisition).
- Control risk (i.e. the nature of the influence and actions that the foreign actor could take vis-à-vis the target company depending on the level of control acquired, and the impact exploitation of the assessed vulnerability).
Early due diligence can provide insight into the extent of perceived risk for a given transaction that can be ‘called’. Before concluding its review of any ‘called’ transaction, the UK government has the power, which may extend extraterritorially, to issue interim orders to prevent or mitigate the effects of actions contrary to UK national security.
- Acquisitions of assets are not subject to mandatory notification and should rarely be ‘called’ by the UK government. “Assets” have been specifically defined in legislation to cover real estate (ie algorithms, formulas, designs, plans, drawings and specifications and software). This definition would cover, for example, the licensing of intellectual property. If the government perceives that the acquisition or license of an asset poses a risk to national security, it could “call” the transaction. However, in its guidelines, the government has made it clear that it rarely expects to “call” on asset acquisitions, compared to acquisitions or investments in companies.
- Businesses should exercise FDI diligence early on to assess whether a transaction falls under the mandatory regime and negotiate relevant contractual protections, where applicable. When defining the scope of due diligence, it is important to take the time to consider the application of the UK NSI regime (as well as other applicable foreign investment screening regimes) at the start of the transaction or transaction. the investment. As with other regulatory clearance requirements, relevant closing conditions should be incorporated into transaction documents to address potential deposits in the UK and elsewhere.
- The United Kingdom has set up a unit dedicated to processing FDI notifications. The Investment Security Unit (ISU) is an operational unit within the Department for Business, Energy and Industrial Strategy (BEIS) responsible for identifying, addressing and mitigating national security risks for the UK. The USI is fully staffed and resourced in anticipation of the regime’s entry into force on January 4, 2022.
- As of March 2021, companies can contact the ISU and receive advice on how the scheme works. This has made it easier for the public to understand the NSI Act and, to date, ISU communications have stressed that the aim of UK policy will be to exercise its regime to address national security concerns in good faith and to do not arbitrarily interfere with the investment.
- INS’s new timeline and review process. Once a mandatory or voluntary notification is submitted and accepted as complete, the UK government will have an initial 30 working days to review the notification and provide authorization. It is expected that the government will authorize the majority of transactions at this stage, and only a minority of agreements will go through a more detailed and lengthy type of “phase II” review.
- Businesses should take their obligations seriously, as penalties may apply for non-compliance. The NSI Act contemplates heavy penalties for failure to comply with a mandatory deposit requirement, including buyer fines of up to 5% of worldwide turnover or £ 10million, depending on the highest amount, and a jail term of up to five years for directors. Additionally, the transaction itself would be void due to a missed mandatory deposit. Penalties may also be imposed on the parties to the transaction for failure to comply with an interim or final order, or for failure to comply with obligations to provide accurate information.
- Businesses should contact the ISU promptly if they have any questions. The UK government has repeatedly stated that it is ready to provide informal advice on the new regime. If companies have specific questions and / or aren’t clear on how the new rules work, it’s best to email the ISU and ask for advice, even without a name. The advice given by the UIS may be non-binding, but it is a useful way to assess the level of “call” risk and gain clarity in a new and evolving regime.
For more details on the NSI law, see our May 2021 and July 2021 alerts. Please contact us if you would like to discuss the implications of the new regime for your business.