The National Security and Investment Bill represents a major change in UK regulation of takeover and investment transactions, giving the Government power to intervene in a wide range of transactions on national security grounds. The new powers can be applied to any business but a mandatory notification regime applies to 17 sectors and transactions in those sectors are more likely to be subject to intervention.
Technology and life sciences businesses are heavily represented in the mandatory notification sectors and may face a considerable compliance burden even if actual Government intervention in transactions proves to be rare.
The legislation is still going through Parliament and there are ongoing consultations on some aspects but it is expected to become law in the first half of 2021. Based on the current draft legislation, key takeaways for those involved in the technology and life sciences sectors include:
The bill reflects growing concerns (well-founded or otherwise) in the UK and beyond about the national security implications of takeovers or foreign investment. Recent controversies over Huawei, WeChat and TikTok are examples.
The legislation gives the Secretary of State power to call in certain transactions (trigger events) where they reasonably suspect that the trigger event may give rise to a risk to national security.
If, having investigated the trigger event, the Secretary of State is satisfied that on the balance of probabilities the trigger event poses, or would pose, a national security risk, they can make an order prohibiting the transaction or imposing conditions to the transaction – eg on access to sensitive sites, access to confidential information, supply chains, intellectual property transfer, compliance, monitoring and personnel.
The powers apply regardless of transaction value and ignore the thresholds (eg for turnover or share of supply) which have typically given jurisdiction for competition investigations into takeovers (or the limited existing national security powers that exist). And they can kick in at levels significantly below ‘control’ as businesses may usually understand it.
The regime therefore will need to be considered in a significantly wider set of circumstances than competition-based merger control.
A mandatory notification regime applies in certain sectors for acquisitions of shares/votes from 15% upwards. Completing a transaction subject to mandatory notification before it is cleared renders the transaction void and parties can be subject to criminal penalties.
The regime applies in principle to any UK entity and to any overseas entity carrying on activities in the UK or supplying goods and services to persons in the UK, regardless of sector. However, certain sectors are subject to an enhanced mandatory notification regime and may be considered the more likely targets for scrutiny under the new regime.
It also applies to the acquisition of qualifying assets which can include land, tangible property or ideas, information or techniques which have industrial, commercial or other economic value (eg trade secrets, databases, source code, algorithms). Again, this can apply to overseas assets if they are used in an activity in the UK or used to supply goods or services in the UK.
Trigger events in relation to an entity are:
‘Material influence’ will generally be the most difficult condition to interpret. It will be interpreted in the same way as under the UK merger control regime where the Competition and Markets Authority (CMA) generally presumes that a shareholding of more than 25% gives material influence and will look carefully at holdings of 15% to 25% and perhaps less than 15%. Relevant factors in deciding whether those lower shareholdings could give material influence include the distribution of shareholdings and voting patterns (eg if shareholdings are widely distributed or many do not vote, an active investor may have an outsize influence), the existence of any special veto powers, board representation and whether there are any additional agreements.
Given the nature of the rights which venture capital investors in growth businesses seek, it is quite possible that they could be found to have material influence at shareholding levels below 25%, which would not usually be a concern in a competition-based regime but could require notification under this regime.
Trigger events in relation to an asset are where a person acquires a right or interest in, or in relation to, the asset and as a result they are able to use the asset or direct or control how the asset is used (or they increase their ability to use or control it). This could include licensing (including on a non-exclusive basis) of intellectual property.
There are expected to be 17 sectors subject to the mandatory notification regime. These are broadly drawn and the Government proposes to more precisely define what is in scope in secondary legislation. The Government is currently carrying out a consultation (which closes on 6 January 2021) concerning these definitions.
The 17 sectors are:
If an entity falls within the sectors subject to the mandatory notification regime, it must notify certain potential transactions:
Note that acquisition of material influence is not a mandatory notification, presumably because this is too difficult for someone to assess under threat of criminal sanctions; but acquisition of 15% of the shares or votes is a mandatory notification, even though it is not a trigger event (but could be regarded as a rough proxy for the material influence test).
A transaction subject to mandatory notification must not be completed prior to being cleared.
Where mandatory notification does not apply, parties can make a voluntary notification if they are concerned that there might be an issue and do not want to risk the transaction being called in after the event.
There is expected to be the potential for businesses to have early informal engagement with the Government to seek guidance on whether or not notification is required or a transaction is likely to be called in but that guidance would not be binding on the Government.
Once a notification has been accepted by the Government (which may call for further information before it is happy with the notification), the Secretary of State has 30 working days to decide whether to call in the transaction or take no action.
If no notification has been made, the Secretary of State can call in completed transactions up to five years after completion.
If the Secretary of State does issue a call-in notice, they have a period of 30 working days (which can be extended by up to a further 45 working days or more in certain circumstances) within which to review the transaction and decide whether or not to clear it.
During the review process the Secretary of State has powers to require the provision of relevant information – similar to the powers the CMA has in relation to competition investigations.
The Secretary of State may either clear a transaction, clear it subject to conditions or prohibit it (or order a completed transaction to be unwound).
Where the mandatory notification regime applies and a transaction is completed before it is cleared, the transaction will be void and parties can be subject to fines of up to the higher of 5% of worldwide turnover or £10 million and up to five years’ imprisonment. Penalties also apply for non-compliance with information requests or other aspects of the review process.
The obligation to notify (and therefore the penalty for failure to notify) sits with the acquirer so in cases where it is unclear whether or not the mandatory notification regime will apply it is expected that acquirers/investors will take a cautious approach.
The Secretary of State can only base their decision on national security grounds, not general economic interests, so this may not answer the concerns of some who want to protect ‘national champions’ from foreign takeovers.
There will be a statutory ‘statement of policy intent’ which sets out how the Secretary of State intends to use the powers and includes illustrative examples of factors that may be considered. The Secretary of State must have regard to this statement while exercising the call-in power.
While this limits the scope for intervention, there is still the risk of some uncertainty since events have shown that the assessment of what constitutes a national security risk can be politically charged.
When thinking about whether there could be considered to be a national security risk, a degree of paranoia may be required about what sort of use technology could be put to in worst case scenarios. Or to ask the question another way - what could a James Bond villain do with this?
The Government’s impact assessment estimates that the new regime would result in 1,000 to 1,830 transactions being notified per year. This is likely to be a significant under-estimate, particularly given the breadth of the sectors covered by mandatory notification. While far fewer transactions are likely to be called in for review than are notified, and still fewer subject to intervention by the Secretary of State following review, the legislation will impose a burden on businesses to consider the potential application of this complex legislation, notify where necessary and factor it into timetables.
It will have a significant impact on many businesses within the technology and life sciences sectors, particularly those which fall within the mandatory notification sectors. It will particularly need consideration in the context of funding and M&A transactions as well as intellectual property licensing and assignment.
Compliance will involve considerable costs and potentially delays to transaction so will need to be considered at an early stage. The consequences for non-compliance are severe so parties are unlikely to want to take risks in grey areas.
As the legislation has yet to be finalised, we continue to monitor the progress of consultations and the secondary legislation. In the meantime, our team is happy to discuss the potential implications of these changes for businesses and investors.