Proposed new UK foreign investment and listing restrictions

Foreign investment controls 

On 11 November 2020, the National Security and Investment Bill (the "NSI Bill") was introduced to the UK Parliament. The NSI Bill is separate from the existing UK merger control regime and would give the Government power to scrutinise foreign investments in the UK that involve the acquisition of control over certain types of entities and assets, on the grounds of national security.  

The proposed changes envisaged by the NSI Bill apply to investors from any country and primarily to investments and acquisitions in critical sectors of the UK economy. There is also some element of extra-territorial effect for entities and assets with links to the UK.  

The proposals include:

• mandatory notifications in certain sectors. A Government consultation on which sectors to include within these new powers will run until 6 January 2021. Sectors expected to be affected include energy, data infrastructure, communications, defence, transport, artificial intelligence, computing hardware, advanced materials and quantum technologies. Transactions subject to the mandatory notification regime will be legally void if not notified and approved (unless retrospectively validated); and
• voluntary notifications by businesses in other sectors, where the transaction does not involve a listed sector but may still have a national security element. Transactions which are subject to the voluntary regime and are not notified may still be 'called in' for review by the Government where it reasonably suspects a risk to national security as a result of the transaction. 

The new regime is intended to be retrospective in effect. Therefore, whilst the NSI Bill remains subject to Parliamentary debate and amendment before it becomes part of law, the Government (via the Secretary of State for Business, Energy and Industrial Strategy (the "Secretary of State")) will be able to retrospectively ‘call in' transactions for review where such transactions took place after the introduction of the NSI Bill (i.e. after 11th November 2020). As such, businesses in and investors into the UK should be mindful of the important reforms planned under the new regime. 

Listing securities on UK public markets 

A proposal to introduce a precautionary power to prevent securities listings on UK public markets on national security grounds was also announced by the Economic Secretary to the Treasury on 11 November 2020, as part of the Government’s 2019 Economic Crime Plan. The Government plans to consult on this new power in early 2021.

Foreign Investment Controls 

1. Background and current position

The Government's existing powers to scrutinise transactions on the grounds of public interest and national security are set out in the Enterprise Act 2002 (the "EA 2002"). Under powers in the EA 2002, the Secretary of State can give a public interest intervention notice to the Competition and Markets Authority ("CMA") under narrowly defined public interest considerations (including "interests of national security" under section 58(1)). The EA 2002 was amended in 2018 and again in 2020 to provide for lower merger thresholds – in terms of UK turnover and combined share of supply – for certain sectors, including military and dual-use products, computer processing units, quantum technology, artificial intelligence, cryptographic authentication and defined types of advanced materials.   

Following a lengthy review of the protections afforded by the EA 2002, including a National Security and Investment White Paper in 2018 (the "White Paper"), the Government has concluded that the powers contained in the EA 2002 are no longer sufficient to address the risks to national security faced by the UK. Together with the NSI Bill, the Government published its Response to the White Paper last week, outlining proposed reforms to the current legislation to bring the UK regime in line with other jurisdictions and allow the Government further powers to intervene in transactions on the grounds of national security. 

There are three broad areas of reform under the NSI Bill:

1. Scope: Broadening the range of investments that fall under the scope of the regime, including the inclusion of asset acquisitions.  
2. Thresholds: Removing the special arrangements for sensitive sectors (including thresholds on an enterprise's UK turnover and share of supply of products) from the merger control regime under the EA 2002. 
3. Process: Reforming the process, including the introduction of a mandatory notification system and the separation of the national security screening regime from involvement of the CMA, so that security concerns are addressed entirely under the new regime. 

2. Overview of proposed changes

Mandatory and voluntary notification system for a range of investments

Under the NSI Bill, it is proposed that there will be a system of mandatory notification for transactions in certain sectors. The Government has outlined 17 key sectors in which it expects that some transactions will be affected: civil nuclear; communications; data infrastructure; defence; energy; transport; artificial intelligence; autonomous robotics; computing hardware; cryptographic authentication; advanced materials; quantum technologies; engineering biology; critical suppliers to government; critical suppliers to the emergency services; military or dual-use technologies; and satellite and space technologies. Whilst the NSI Bill does not currently specify which parts of these sectors will be subject to mandatory notification, the Government is undertaking an eight-week Consultation on this question, due to end on 6 January 2021.

The mandatory regime will also be supplemented by a voluntary notification system, designed to encourage businesses to submit a notification of a 'trigger event' where the transaction does not involve a specified sector but may still have a national security element. Parties are encouraged to review the Statement of policy intent (the "Statement") to help in assessing transactions that may raise national security concerns. 

Trigger events 

The NSI Bill defines a number of 'trigger events', namely:

• where a person acquires (or increases an existing shareholding to) more than 25%, 50% or 75% of the shares or voting rights in an entity (and can therefore 'control' the entity by blocking or passing certain types of corporate resolution under UK law); 
• for entities other than companies, the acquisition of voting rights that enable or prevent the passage of any class of resolution governing the affairs of the qualifying entity; 
• where a person acquires material influence over a qualifying entity's policy without necessarily having the number of votes or shares to reflect this. This is to be interpreted in a manner consistent with the existing merger control rules in the EA 2002, and material influence is therefore likely to be presumed where a person acquires (or increases an existing shareholding to) more than 25% of the shares or voting rights in an entity and could include, depending on the circumstances, acquiring (or increasing an existing shareholding to) more than 15% of the shares or voting rights in an entity; and
• where a person gains certain rights, interest or control of a qualifying asset, including land, tangible moveable property and intellectual property (being any idea, information, or technique with industrial, commercial or other economic value). This would include where the right or interest gives the person (i) the right to use the asset, (ii) the right to use the asset to a greater extent, or (iii) the ability to direct or control how the asset is used (or direct and control it to a greater extent).

Where a sector is subject to the mandatory notification requirements, the acquiror will need to notify the Government of the first two trigger events listed above (i.e. shares and voting rights) and receive clearance before the relevant transaction can take place. The third and fourth trigger events (i.e. material influence and rights, and interest/control over assets) do not give rise to mandatory notification, but voluntary notification will still be possible and may be advisable in some cases. Whilst not included as a ‘trigger event’ under section 5(1) of the NSI Bill, the Government will also require mandatory notification for an acquisition of 15% or more of the votes or shares in an entity (that falls within the mandatory sectors). 

‘Call-in’ power

The Secretary of State will also have the power to 'call in' transactions and undertake a national security assessment where it reasonably suspects that there is – or could be – a risk to national security as a result of the transaction. The Secretary of State must have regard to the Statement when exercising the call-in power, and will consider: 

(i) the target risk - the nature of the target and whether it is in an area of the economy where risks are more likely to arise; 
(ii) the trigger event risk - the type and level of control being acquired and how this could be used in practice; and 
(iii) the acquirer risk - the extent to which the acquirer raises national security concerns.

The call-in powers of the Secretary of State may extend to (i) entities formed and recognised outside the UK (where such entities carry on activities or supply goods or services to persons in the UK), and (ii) assets located outside the UK (where such assets are used in connection with activities taking place in the UK or for the supply of goods or services to persons in the UK). Further extra-territorial powers will apply to transactions which are required to be mandatorily notified.  

Where a trigger event is subject to the mandatory notification regime but has not been notified, the Secretary of State can call in the transaction for review at any time.

Where a trigger event is not subject to the mandatory notification regime (and was not voluntarily notified), the Secretary of State can call in the transaction up to six months after it became aware of it (e.g. following coverage of the transaction in a national publication), provided that this is done within five years of the trigger event occurring.  

The assessment process 

The NSI Bill will separate national security assessments from the merger control analysis of the CMA. The Secretary of State will be the key decision-maker for all decisions under the new regime, with a new Investment Security Unit established to provide a single point of contact for businesses wishing to notify the Government of transactions.

When assessing transactions, the Government has noted that it will take a targeted, proportionate approach. The NSI Bill provides that the Secretary of State can only call in a transaction where it reasonably suspects that there is – or could be – a risk to national security as a result of the transaction, and the Government will not be able to use these powers to intervene in business transactions for broader economic reasons.
The regime will apply to investors from any country, with the Secretary of State considering who controls entities, their track record and history, and their other investments in the sector.

Once the national security assessment has been concluded, the relevant parties will be informed of all decisions. Broadly speaking, there will be three potential outcomes of an assessment:

(i) approval of the transaction;
(ii) approval of the transaction subject to conditions (to prevent or mitigate any risks to the national security of the UK); or 
(iii) prohibition of the transaction. 

Timeframe for assessments

Following receipt of a notification, the Secretary of State will have up to 30 working days to decide whether to call in a transaction and subject the transaction to further scrutiny on the grounds of national security.   

Where the Government decides to investigate a transaction, it will have up to 30 working days in which to undertake a detailed national security assessment. This period can be extended by a further 45 working days where the Secretary of State reasonably considers that a trigger event has taken place or that the additional period is required to assess the trigger event further. 

Businesses and investors can continue to progress the transaction during the assessment period (unless otherwise ordered by the Government), but a notifiable transaction must not be completed until clearance is given to the appropriate parties. If clearance is not sought for a transaction subject to the mandatory notification regime, it will be legally void. 

Sanctions

The proposed legislation creates a number of sanctions, both civil and criminal. Non-compliance with statutory obligations under the NSI Bill may result in fines of up to five per cent of worldwide turnover or £10 million – whichever is the greater – and imprisonment of up to five years. These sanctions have extra-territorial effect. Further, where the transaction was subject to the mandatory notification regime, but clearance was not sought, the transaction will be legally void (unless retrospectively validated by the Secretary of State).   

Transitional provisions 

Whilst the Government will not be able to actively scrutinise transactions before the new regime comes into force, the Secretary of State will be able to retrospectively call in transactions that occur after the introduction of the NSI Bill to Parliament (i.e. those occurring on or after 12 November 2020). 

3. Commentary

The Government has highlighted that it wishes the UK to remain "a global champion of free trade and an attractive place to invest", and emphasised that it will remain targeted and proportionate in its approach under the new regime so that most transactions will be cleared without any intervention. This appears to be in line with the UK Government's commitment to foreign investment – in the same week as publishing the NSI Bill, the Government announced the creation of an Office for Investment (OFI), designed to attract high value investment opportunities in infrastructure, clean technologies and research and development.   

Whilst the introduction of the new regime will perhaps mark an end to the UK's lighter touch approach to foreign investment screening, it will bring the UK into line with other jurisdictions. The NSI Bill is largely consistent with current international legislation, including the EU Foreign Investment Screening Regulation, under which jurisdictions are strengthening controls over foreign investment in certain areas of political concern. A number of countries have long-standing investment screening regimes of this nature, including Australia (under the Foreign Acquisitions and Takeover Act 1975), Canada (under the Investment Canada Act 1985, as amended in 2009), and the USA (where the Committee of Foreign Investment in the United States (CFUIS) has been in place since 1975). Further countries such as Japan are also in the process of legislating for the creation of such a regime. 

Given the wide-ranging powers under the new regime, the Government will have increased powers to intervene in, and review, corporate transactions in the UK or with a UK nexus. If the figures outlined in the Government's Impact Assessment (which estimates 1,000 to 1,830 notifications per year, and 70 to 95 national security assessments) are accurate, this would mark a significant increase from actions brought under the existing regime – reports show that there have been just 12 public interest interventions on the grounds of national security since 2002. The new regime will also impact a wide range of investors, with the NSI Bill applying to investors from any country. 

As such, we anticipate that foreign investment rules (both in the UK and internationally) will be an increasingly important consideration for international investors and will need to be considered at an early stage of the deal process. In terms of immediate implications for investors, we again note that the Secretary of State will be able to retrospectively call in transactions for review where such transactions occurred after the introduction of the NSI Bill, and as such, encourage investors and businesses to be mindful of the new regime even before it is passed into law. 

Listing securities on UK public markets 

The new proposal to introduce a precautionary power to prevent securities listings on UK public markets on national security grounds forms part of the Government’s 2019 Economic Crime Plan. The proposal follows recommendations from the Treasury Select Committee, which reviewed the existing legislative framework, including the UK’s post-Brexit sanctions powers under the Sanctions and Anti-Money Laundering Act 2018.

The proposed power is intended to maintain London’s reputation for clean and transparent markets and as a world-class listing destination.

The Treasury will publish a full consultation on the new power, which it expects to launch in early 2021.