The UK’s National Security & Investment Act Regime: Emerging Themes in Practice

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.

To learn more about the 2022 changes, click here.

Countdown running for entry into force of new UK national security investment screening regime

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:

Advanced materialsCritical suppliers to governmentMilitary and dual-use
Advanced roboticsCritical suppliers to the emergency servicesQuantum technologies
Artificial intelligenceCryptographic authenticationSatellite and space technologies
Civil nuclearData infrastructureSynthetic biology
CommunicationsDefenceTransport
Computing hardwareEnergy 

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. 

To download and read the full paper, click here.

Webinar: Foreign direct investment in Germany and the investor status of the UK

On 13 May, Oliver Bretz hosted our monthly live webinar #FDI on the European Foreign Direct Investment Screen #EUFIS, which affects most mergers and investments at this critical time. Oliver had the pleasure of chairing the Microsoft Teams debate alongside Dimitri Slobodenjuk who provided an interesting update on the changes to the German FDI control system.

The discussion also focused on the status of UK investors and UK Private Equity in the EU during the Transition Period.

Notes from the webinar can be found here.

Oliver Bretz will be speaking at the GCR Live Foreign Investment and Protectionism event

The inaugural GCR conference taking place on Thursday 2 April 2020 will discuss the rapidly evolving landscape of foreign investment review at a global level. Oliver will be involved in the session focusing on the practical impact of EU screening mechanism and “how practitioners can balance the tension between attracting global capital and protectionism in Europe?”

The debate will focus on key emerging themes as the speakers will no doubt shed light and help participants navigate the complex and transient area of law across jurisdictions.

The session will be chaired by John Davies, Brunswick and Jonas Koponen, Linklaters.

Click here for more information and to register.

ARISE EUFIS, SON OF CIFIUS

Dr. Alan Riley and Oliver Bretz

This article argues that EUFIS, the EU Foreign Investment Screening is modelled on CIFIUS, in that it is a political rather than an administrative process. Merging companies should take it into account if there is a risk of their long-stop date being extended beyond the autumn of 2020. Early engagement with DG Trade, especially in relation to remedies, will be an important step

Compared to CIFIUS on this side of the Atlantic, the adoption of the EU Foreign Investment Screening (EUFIS) has gone almost unnoticed. This may be due to the fact that it is seen as a distant threat, coming into force in late 2020. However, for deals that are currently being negotiated with long-stop dates into 2020 one may need to start looking at this issue quite seriously.

It should also be noted that the European Commission will have no formal decision-making powers. Instead, it will be the coordinating entity between the different foreign investment review systems of the Member States. That co-ordinating role will give it a significant influence over the process. That influence is underpinned by the Commission’s right to publish opinions of its view of the proposed transaction. Given also the Commission’s role as defender of the overall European interest, and its technical capacity it is also likely to become the focal point for the development of acceptable remedies. It is also clear from the experience of CFIUS in Washington that the investment review process will be far less administrative and technical and far more political, with all the uncertainties that this brings.

EUFIS will also for the first time put DG Trade on a par with DG Competition in merger cases, including in relation to remedies. Under the EU Merger Regulation, Member States may take “appropriate measures” to protect public security, the plurality of the media, and prudential rules. Any other public interests must be approved by the European Commission on a case-by-case basis.It will need to be seen how the review period will fit with the timelines of the EU Merger Regulation and national Takeover codes. DG Trade will have to evolve specific procedures for pre-notification and the negotiation of potential remedies.

On 14 February 2019 Trade Commissioner Cecilia Malmström said: “I’m very pleased that the European Parliament has given its backing to this initiative. Foreign investment is essential to the health of the European economy. At the same time, it is clear that we have to address the concerns about the security risk posed by certain investments in critical assets, technologies and infrastructure. Member States and the Commission will have a much better overview of foreign investments in the European Union and, for the first time, will have the possibility to collectively address potential risks to their security and public order.” (emphasis added)

In summary, EUFIS creates a cooperation mechanism where Member States and the Commission will be able to exchange information and raise concerns related to specific investments. The Commission will be able to issue opinions when an investment threatens the security or public order of more than one Member State, or when an investment could undermine an EU project or programme of interest to the whole EU. There are also provisions for cooperation on investment screening, including the sharing experience, best practices and information on issues of common concerns. EUFIS also sets out some minimum requirements for Member States who wish to maintain or adopt a screening mechanism at national level, whilst leaving the ultimate decision to Member States.

The EUFIS process is intended to take around 35 working days and contains the following steps: (i) the Member State where the investment takes place has to provide information on the investment and upon request has to notify cases which undergo national screening (ii) other Member States can then request additional information and provide comments (iii) the European Commission can request additional information and issue opinions (summarising its views and the comments from other Member States).

The Regulation also lists several EU funded projects and programmes which may be relevant for security and public order, and which will deserve a particular attention from the Commission. That list includes for instance Galileo, Horizon 2020, Trans-European Networks and the European Defence Industrial Development Programme. The list will be updated as necessary.

The Regulation sets an indicative list of factors to help Member States and the Commission determine whether an investment is likely to affect security or public order. That list includes the effects of the investment on critical infrastructure, critical technologies, the supply of critical inputs, such as energy or raw materials, access to sensitive information or the ability to control information, the freedom and pluralism of the media.

Member States and the Commission may also consider whether the investor is controlled by the government of a third country, whether the investor has previously been involved in activities affecting security or public order, or whether there are serious risks that the investor could engage in criminal or illegal activities.

The Regulation does not require Member States to introduce investment screening mechanisms. Member States may maintain their existing screening mechanisms, adopt new ones or remain without such national mechanisms.

Only 14 EU Member States currently have national investment screening mechanisms. Several are in the course of reforming existing schemes or of adopting new ones. The precedent from the adoption of the EU Merger Regulation in September 1990, was that almost all Member States rapidly adopted their own national merger regime. As all Member States would want to be able to credibly influence other states investment decisions and the Commission process, it is likely in the run up to the coming into force of EUFIS those states without an investment regime will create one. This in turn could create a further hazard for smaller deals affecting only a national market, where clearance will be required in almost all Member States by the merger and the foreign investment regulator.

The Regulation does provide for some key requirements for national screening mechanisms including transparency of rules and procedures, non-discrimination among foreign investors, confidentiality of information exchanged, the possibility of recourse against screening decisions and measures to identify and prevent circumvention by foreign investors. Member States with current screening procedures include Austria, Denmark, Finland, France, Germany, Hungary, Italy, Latvia, Lithuania, Netherlands, Poland, Portugal, Spain and the United Kingdom (until such time as it leaves the European Union and becomes a foreign investor under EUFIS).

From the CFIUS experience it can be assumed that Member States will have to evolve sophisticated national review systems that are able to make complicated assessments on very fast-moving technologies in a very short timeframe. That is not an easy endeavour, it can be expected that the Commission will increasingly take some of the burden. That raises the question whether DG Trade is itself equipped to make these assessments and whether it needs additional staff and expertise.

Where EUFIS could make a significant difference is in the area of remedies. Where a merger triggers multiple national reviews, the Commission will almost inevitably become the coordinator on remedies. Experience suggests that the Commission will need to evolve remedies that can deal with these issues through measures such as (i) appropriate black-boxes and information barriers (ii) independent board directors with national security clearance (iii) appropriate national oversight. How these factors will be used is up for grabs in a process that is likely to be intensely political. However, as there is an obligation not to discriminate between investors, a body of precedent is likely to start evolving, perhaps even through the adoption of guidelines and remedies templates – in exactly the same way as has happened under the EU Merger Regulation.

Despite the fact that the decisions will ultimately be taken at national level, the mere existence of EUFIS will give the Commission a degree of oversight and power in the process, which should not be underestimated.