On January 4h a new investment-screening law came into effect, heralded by the government as “the biggest shake-up of the uk’s national-security regime for 20 years”. That is no exaggeration. It marks a shift away from economic openness towards suspicion and intervention. Kwasi Kwarteng, the business secretary, said it would show members of the public that “their security remains our number one priority”. What could go wrong?
The government is seeking to stop assets vital to national security falling into hostile hands. A report in 2017 warned that “ownership or control of critical businesses or infrastructure could provide opportunities to undertake espionage, sabotage or exert inappropriate leverage”. The context is concern about Chinese investment, and pressure to fall into line with allied countries such as America, Australia and Germany that have already tightened up.
Becket McGrath had the pleasure of discussing the UK’s new National Security and Investment Act with The Economist. “Just over a week in to the scheme, it’s a relief to see that the Government’s notification platform is working and the Investment Screening Unit is doing a good job at processing filings quickly […]. The really interesting thing now will be to see which deals get called in for more detailed review”.
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For a law which does not fully come into force until 4 January 2022, its approaching footsteps have been making plenty of noise before it walks through the door. The Euclid Law team has been advising many clients on whether their transactions are caught, assessing substantive risk, liaising with the Department for Business, Energy & Industrial Strategy (BEIS) and submitting filings. Some themes are already emerging from our experience which we are sharing here. We welcome views and reactions from others.
The Christmas rush
As well as the mad dash to buy a turkey before supply chains crash, some deal-makers have been rushing to complete transactions before 4 January 2022. This makes a lot of sense when all other aspects of the deal point to simultaneous exchange and completion. Complete on or after 4 January 2022, by contrast, and this deal timetable is out of the question if the target business happens to fall into one of the 17 mandatory filing sectors. And where the deal obviously raises no substantive national security concerns, the extra time and cost of a mere technical filing is best avoided. So, if it’s not too late, it’s worth completing certain transactions during the first days of the New Year.
Arrangements involving current and potential future events, such as taking security and agreeing options, require careful scrutiny under investment screening regimes. It is not safe to assume that a trigger will operate in the same way as under another more developed regulatory regime, such as merger control. Moreover, taking a security or agreeing an option needs to be considered upfront and not just when the security is about to be enforced or the option exercised.
In this piece we consider the position under the UK’s forthcoming National Security & Investment Act (NSI Act) regime and briefly compare this to the position under the recently reformed German regime. We assume that the other requirements for triggering are satisfied and focus on whether a security or an option could in itself take the transaction over the jurisdictional threshold.
When a security is actually enforced, then this may well trigger an investment screening regime, as enforcement will typically involve the lender gaining control over the relevant target or its assets which are the subject of the security. The more difficult question, which will likely arise many years earlier at the initial transaction stage, is whether merely taking the security is sufficient.
The UK’s new national security investment screening regime will enter fully into force on 4 January 2022. From that date, the National Security and Investment Act 2021 (the ‘NSI Act’) will give the Government the power to review a wide range of investments in businesses that are active in the UK or acquisitions of related assets. While the new regime has the ultimate objective of preventing transactions that could harm the UK’s national security, it will impact a much wider range of deals.
Under the new regime, investments in entities that are active in the UK in 17 specific sectors will have to be notified to the Government and cleared before completion. The notification obligation applies regardless of whether the investor is foreign or UK-based and severe civil and criminal penalties will apply if notifiable transactions are not notified. The underlying transaction will also be void as a matter of English law.
Although 4 January may feel like a long way off, it is now less than three months away. The new NSI regime will have a potentially significant impact on timetables and deal certainty for transactions where closing is due to take place after that date. As a result, it may well be relevant to transactions that are currently being negotiated. It is also notable that, once the regime is in force, the Government will have the power retrospectively to review and call in any transaction that completed on or after 12 November 2020 (the date on which the bill was originally introduced to Parliament).
Filings will be mandatory where the target is active in any of the following sensitive sectors:
Critical suppliers to government
Military and dual-use
Critical suppliers to the emergency services
Satellite and space technologies
The assessment of whether a qualifying entity is involved in a specified sector will involve careful analysis of the target’s business alongside the relevant statutory definitions. These are extremely detailed and prescriptive, with some running to several pages.
Response to the Public Consultation by the Department for Business, Energy and Industrial Strategy
Proposals on Markets and Merger Control Jurisdiction
Euclid Law Ltd
We are submitting this paper from the position of practitioners who strongly believe that consumers, businesses and practitioners benefit from rational, predictable and up to date competition and consumer law regimes. The views stated are our own and do not necessarily represent the views of any client of our firm.
While the Government’s reform proposals are extremely wide-ranging, we have focused this response on the two areas where the proposed changes cause us most concern, namely the markets and merger control regimes.
[…] The Government’s consultation looks at strengthening the somewhat unique feature of market investigations. This allows the CMA to impose remedies in markets where there is no evidence of wrongdoing. It is essentially the exercise of a Ministerial power delegated to the CMA, enabling the CMA to regulate parts of the economy without any Ministerial or Parliamentary involvement. Few other competition authorities enjoy such wide-ranging powers. The flipside of that coin is that the process involves a lengthy and rigorous review by independent Panel Members, only at the end of which remedies can be imposed – so-called “Market Investigation References”. The Panel Members are part-time and are independent of the CMA and its Board. It is that independence that is seen as an integral part of the system.
While the CMA has the ability to conduct Market Studies without a full market investigation (and thus without the involvement of independent Panel Members), it lacks the power to impose a binding remedy in such cases. If the CMA wishes to impose remedies, the only option is for the Board of the CMA to refer the matter to an independent Panel for a market investigation. Of course, the CMA already has other options available to it short of imposing remedies, such as seeking voluntary undertakings from market participants in lieu of a reference or making recommendations for others to take action (including other regulatory bodies or Government).