The December 2019 Queen’s Speech announced that a National Security and Investment Bill is to be introduced, giving the Government enhanced powers to scrutinise and intervene in transactions in the interests of national security. The proposals are thought necessary in light of the increasingly complex and interconnected international political and economic landscape and advances in technology which present new security challenges.
The Government currently has limited powers to intervene in transactions on public interest grounds (including national security) within the merger control regime. Under the Enterprise Act 2002, the Competition and Markets Authority (CMA) has jurisdiction to review a transaction on competition grounds where a “relevant merger situation” has been created, generally by reference to turnover or market share thresholds.
The Government first announced its intentions to reform its powers in September 2016, following which an initial consultation was launched and short term reforms primarily related to the turnover threshold were introduced. These lowered the turnover threshold for the CMA to claim jurisdiction to review a transaction from £70 million to only £1 million in three sectors: where the company is developing or producing items for military or military and civilian use, quantum technology and computing hardware. More recently in July 2018, a White Paper was published setting out proposed long term measures which are expected to be introduced in the new bill.
The reforms will bring the UK regime closer in line with that of other countries such as Germany, Japan, the United States and Australia who have recently introduced new systems for screening foreign investments in critical infrastructure and sensitive industries.
What has been proposed?
The new legislation will replace the existing limited powers of the Government under the Enterprise Act 2002. As the new regime will be separate from the merger control framework, it will mean that any transaction in any sector could be captured regardless of the parties’ turnover or market share. The “trigger events” that may be reviewed on national security grounds, as proposed in the July 2018 White Paper, include the acquisition of: (i) more than 25% of the shares or voting rights of an entity, (ii) significant influence or control over any entity, (iii) further influence or control of an entity beyond the above thresholds, (iv) more than 50% of an asset, including land and IP and (v) significant influence or control over an asset. The draft guidance sets out examples of trigger events that could give rise to national security concerns including the acquisition of control over a business providing data-hosting services to a defence contractor or land that is adjacent to national infrastructure sites.
It was anticipated in the White Paper that the new regime would involve a voluntary notification system and an expanded call-in power. Parties to a transaction that may give rise to national security issues will be encouraged to make a voluntary notification of the trigger event to the Government. A senior minister will undertake a screening review to decide whether to call it in for a full assessment. While the assessment is ongoing, parties will be required to provide information and the transaction will not be able to complete. The Government will be able to intervene in any relevant transactions that have not been notified by calling in a deal, either before it has completed or post completion for a specified period (expected to be six months).
Following the assessment, if the Government concludes that national security is at risk, it will be able to impose conditions to mitigate risks, for example, limiting access to certain information to individuals with appropriate security clearances. It will also have the power to block deals or order that transactions already implemented be unwound. Failure to comply will be a criminal offence liable to unlimited fines and up to five years imprisonment. In addition, civil financial penalties could be imposed of up to 10% of worldwide turnover for a business.
What will the impact be?
It is expected that there will be around 200 notifications a year, around half of which after screening will be subject to a full assessment. Compared to the current position which sees only a handful of transactions being reviewed under national security grounds in any given year, this is a significant increase and is likely to require increased resources.
Whilst the bill is widely framed in terms of modernisation, it is generally believed that it is primarily aimed at addressing concerns with Chinese investment. In light of Brexit, it might initially appear at odds with a Government that now has an internationalist agenda. However, it is no coincidence that the Queen’s Speech also specifically referenced the Five Eyes intelligence alliance that exists between the UK, Australia, Canada, New Zealand and the United States. In the recent changes to the US foreign investment regime, specific exemptions have been granted to the Five Eyes countries, so perhaps we can expect to see reciprocal arrangements and strengthening relationships between these countries in the National Security and Investment Bill, particularly as the UK needs to develop its trade alliances outside of the EU. It might also mean that we see a coordinated review of transactions which raise national security issues across multiple jurisdictions.
The Government has stated that the bill will protect the UK’s national security and enhance transparency for business, ensuring that the UK remains one of the most open countries in the world for innovative and dynamic investment. We will have to wait to see if the detail of the new regime and how it is applied in practice achieve these aims.