by Michael Reiss, Partner
The UK Government has launched a consultation on the UK’s national security and investment screening regime. This follows direct engagement between officials, the business community and advisors, in which Euclid Law has participated.
The consultation, which comes just shy of the regime’s two-year birthday, is designed to cover procedure and substance. Its call for evidence includes:
- The regime’s impact on business
- Its scope and requirements
- What national security risks are posed by investments
Oliver Dowden, Secretary of State in the Cabinet Office, who oversees the regime, notes that the consultation could lead to legislative amendments and guidance. However, changes to primary legislation are not in prospect, which indicates that the overall structure of the regime is unlikely to change.
A number of areas of the consultation caught our eye.
Mandatory notification exemptions
First, the Government is considering “targeted exemptions” from the mandatory notification regime where the acquirer gains minimal levels of control or the transaction does not present any change in control. This chimes with competition merger control regimes. However, it is not exactly clear where the Government will go with this, given that key shareholding thresholds of 25%, 50% and 75% are currently hard-wired into the National Security and Investment Act as notification triggers.
Promisingly, given our own advisory experience, the Government is considering whether certain – but implicitly not all – intra-group re-organisations could be exempted from mandatory notification. These are typically excluded from modern investment screening regimes, such as the new Irish one coming into force next year. This is because, absent a change in beneficial owner, such re-organisations are highly unlikely to raise any national security concerns.
Other investment screening regimes, such as CFIUS in the US, have exemptions for non-controlling acquisitions by investors in certain “white list” countries – including the UK. The UK legislation already entitles the Government to make such exemptions. However, it has expressly said it is not considering this at present. It is also not considering an exemption for acquirers whose previous acquisitions have been cleared. This is because each transaction depends on the sensitivity of the target business.
Scope of the mandatory notification sectors
The Government is considering specific technical amendments to the scope of the 17 industry sectors, in which the acquisition of a target business triggers a mandatory notification. Some may be too wide, others too narrow. For example, the “Artificial Intelligence” sector captures a lot of companies which do not identify as “AI businesses”, whereas the Government is concerned that generative AI – hot topic that it is – may not be caught.
There is a hint that the “Defence” sector may be capturing too many transactions – implicitly, because sub-contractors, and not merely direct Government contractors, are currently caught. At the same time, the Government has floated expanding the “Suppliers to the Emergency Services” sector to catch sub-contractors.
The Government may widen the data centre sector to include “entities that own, operate, manage, or provide services to, colocation data centres”. This could capture far more transactions. The Government may also add new sectors. For example, semi-conductors could be given their own set of definitions, as opposed to being captured, piece-meal, by “Advanced Materials” and “Computing Hardware”. “Critical Minerals” may also become a new sector.
Better engagement for detailed assessment cases
At the urging of business and advisors, the Government is already offering better engagement with investigated parties when their transactions are called in for a more detailed assessment. This includes more state of play calls, as well as parties being granted a named senior contact within the Investment Security Unit. The Government is open to other suggestions for improvement.
Final thoughts
As the Secretary of State notes in his foreword, over 90% of notifiable transactions have been cleared without a detailed assessment. If some of the sector definitions framing a mandatory notification could be sharpened, and certain no-issue transactions removed entirely from the regime’s clutches, this would be a good start. For the small number of cases referred to a detailed assessment, greater and more granular engagement between the Government officials and the parties would also be welcome, given our experience. Realistically, we expect this consultation to lead to some helpful improvements, but no radical change.
The Government has issued a specific form for responses to the consultation. Euclid Law will be responding.