On 11 November 2020, the National Security and Investment Bill 2019-21 was introduced to the House of Commons and given its first reading. The Bill will establish a new statutory regime for government scrutiny of, and intervention in, investments for the purposes of protecting national security and follows the government’s 2017 and 2018 Green and White Papers on the national security and infrastructure investment review.
National Security and Investment Bill Purpose
The Bill will enable the Secretary of State to “call in” statutorily defined acquisitions of control over qualifying entities and assets (trigger events) to undertake a national security assessment (whether or not they have been notified to the government). Proposed acquirers of shares or voting rights in companies and other entities operating in sensitive sectors of the economy will be required to notify to and obtain approval from the Secretary of State before completing their acquisition. The National Security and Investment Bill also creates, where there is no requirement to notify, a voluntary notification system to encourage notifications from parties who consider that their trigger event may raise national security concerns. It includes five-year retrospective call-in powers, allowing for post-completion review of non-notified transactions, and, where parties fail to notify a trigger event that is subject to mandatory notification, a call-in power at any time.
The following would trigger a requirement to notify the Secretary of State:
- The acquisition of more than 25% of the votes or shares in a qualifying entity.
- The acquisition of more than 50% of the votes or shares in a qualifying entity.
- The acquisition of 75% or more of the votes and shares in a qualifying entity.
- The acquisition of voting rights that enable or prevent the passage of any class of resolution governing the affairs of the qualifying entity.
- The acquisition of material influence over a qualifying entity’s policy.
- The acquisition of a right or interest in, or in relation to, a qualifying asset providing the ability to:
- use the asset, or use it to a greater extent than prior to the acquisition; or
- direct or control how the asset is used, or direct or control how the asset is used to a greater extent than prior to the acquisition.
A qualifying entity is an entity engaged in the sectors referred to below.
National Security and Investment Bill Consultation
The government has published a consultation on proposed draft definitions of 17 sensitive sectors in which it will be mandatory to notify and gain approval for certain types of transactions, covering, for example, energy, telecommunications, artificial intelligence, defence, engineering biology, cryptographic authentication, computing hardware, and military and dual use. It invites comments on these definitions by 6 January 2021.
The government has also published a Statutory Statement of Policy Intent describing how the Secretary of State expects to use the call-in power, and the three risk factors (target risk, trigger event risk and acquirer risk) that the Secretary of State expects to consider when deciding whether to use it. Once a transaction is notified or called in, assessment should be carried out within a 30-working day review period (which is extendable in certain circumstances).
The National Security and Investment Bill gives the Secretary of State powers to impose remedies to address risks to national security (including the imposition of conditions, prohibition and unwinding) and sanctions for non-compliance with the regime, which include fines of up to 5% of worldwide turnover or £10 million (whichever is the greater) and imprisonment of up to five years. Transactions covered by mandatory notification that take place without clearance will be legally void.
The Bill also sets out provisions for interaction with the Competition and Markets Authority (CMA) and amendment of the Enterprise Act 2002. These include removal of section 23A, which sets out the criteria for a merger to be a “relevant merger situation”, thereby qualifying it for investigation by the CMA and repeal of the Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2018, the Enterprise Act 2002 (Turnover Test) (Amendment) Order 2018, the Enterprise Act 2002 (Share of Supply) (Amendment) Order 2020 and the Enterprise Act 2002 (Turnover Test) (Amendment) Order 2020.
National Security and Investment Bill Specified sectors
The list of specified sectors will be set out in secondary legislation, the definitions of which will be kept under review to reflect any changes in the risks facing the UK.
The government is consulting on proposed draft definitions to set out the parts of the economy in which it will be mandatory to notify and gain approval for certain types of transactions. These cover 17 sectors:
- Advanced materials.
- Advanced robotics.
- Artificial intelligence.
- Civil nuclear.
- Computing hardware.
- Critical suppliers to the government.
- Critical suppliers to the emergency services.
- Cryptographic authentication.
- Data infrastructure.
- Engineering biology.
- Military and dual use.
- Quantum technologies.
- Satellite and space technologies.
The consultation document sets out the government’s proposed definitions for the types of entity within each sector that could come under the National Security and Investment Bill’s mandatory regime. The definitions differ from those in the 2018 and 2020 Enterprise Act merger control amendments, which, as noted, were only ever intended as short-term measures and will be repealed by the Bill.
The deadline for commenting on the proposed definitions is 6 January 2021.
To date, very few transactions have been reviewed on national security grounds under the current UK framework, most recently Gardner Aerospace/ Northern Aerospace, Advent/ Cobham, Connect Bidco/ Inmarsat, Gardner Aerospace / Impcross and Aerostar/ Mettis. The Gardner/Impcross and Aerostar/Mettis transactions were abandoned following government opposition.
Currently, the Secretary of State has the right to intervene and take decisions on mergers only in strictly defined circumstances, where a defined public interest is at stake. National security is one of the grounds set out in the Enterprise Act upon which the Secretary of State can intervene. The government lowered the thresholds for intervention for the development or production of military items and dual-use items, and computing hardware and quantum technology sectors in June 2018 and for the advanced materials, Artificial Intelligence and cryptographic authentication sectors in June 2020.
Competition and Markets Authority
The CMA currently has a role in assessing jurisdictional and competition aspects of such mergers, providing advice to the Secretary of State. Under the National Security and Investment Bill, the CMA will no longer have a role in national security reviews. The Bill separates the national security assessment from the CMA’s merger control assessment. However, it also gives the Secretary of State power to overrule the CMA, meaning that, in the event of a conflict, the national security review may take precedence over the merger control assessment.
If you have any questions on the National Security Investment Bill or corporate law more generally please contact our specialist corporate lawyers.