The UK has outlined the details of its new National Security and Investment Bill, heralding the introduction of a new regime for foreign direct investments in the UK. The new regime would introduce, for the first time, a mandatory pre-screening mechanism for deals involving foreign investments in sensitive sectors. This new regime represents a substantial expansion of the foreign investment review mechanism in the UK in terms of both its scope and its powers, and is likely to result in more cases being reviewed – and conditions imposed, or deals blocked – where they are deemed to pose a national security risk.

The UK Department for Business Energy and Industrial Strategy ("BEIS") has announced that the new National Security and Investment Bill ("NSIB") will be introduced to Ministers on 11 November 2020.¹ This comes after a long period of consideration by the Government, which announced its intention to tighten up the UK’s national security rules in 2017.² The new NSIB foresees a comprehensive overhaul of the existing foreign investment review powers in the UK. Key features of the NSIB include:

• the introduction of a review mechanism designed to assess the extent to which transactions could pose a risk to UK national security based on mandatory notification of certain foreign direct investments in UK companies, assets and intellectual property in designated ‘sensitive sectors’ set to include communications, defence, transport, artificial intelligence as well as critical suppliers to government;
• no minimum thresholds for review based on either turnover or share of supply;
• potential fines of up to 5% of global turnover or £10 million (whichever is greater) for non-compliance; and
• the introduction of a five-year retrospective power to call in transactions deemed to raise national security concerns.

The proposed NSIB regime

The proposed NSIB regime

The NSIB foresees the introduction of a mandatory pre-screening mechanism for foreign investments in the designated sensitive sectors. This is a significant change from the status quo under the Enterprise Act 2002 ("EA"), which is based on a voluntary notification process. The UK’s general merger control regime will remain voluntary. The Government appears to consider that as the new regime for foreign investment in sensitive industries is sufficiently different from the general merger control regime the introduction of a mandatory notification requirement is just one aspect of the new regime to which companies will have to adapt.

Scope of the new notification requirement

As drafted, the NSIB will apply to mergers and acquisitions by foreign investors involving UK companies, as well as the acquisition of assets including land, tangible property and intellectual property.

Where the existing regime under the EA has minimum thresholds limiting its scope to target companies with UK turnover of at least £70 million or transactions that would result in a minimum share of supply of 25%, the NSIB does not include any minimum review thresholds.³

There are however, certain equity thresholds for acquisitions, below which no notification is expected to be required. These exemptions will apply to:

• Equity stakes of below 15%, unless such holding (whether alone or in combination with other rights or interests) is capable of conferring ‘material influence over the policy of the entity’ on the investor will be exempt.
• Existing shareholders will also be allowed to increase their holdings by up to 25%. BEIS gives the examples of existing shareholders with 25% equity increasing their stakes to up to 50%, or existing holders of 75% stakes increasing their holdings up to 100%. Somewhat oddly, the BEIS overview appears to anticipate a slightly different limit on equity holders in the 50-74% range, where increases are apparently only exempt up to 24%, but this inconsistency may well be addressed, as the final version of the NSIB evolves.

Powers of review and sanctions for non-compliance

Notified transactions will be scrutinised to evaluate the extent to which they may pose ‘a threat to national security’. In such cases, the UK will have the ability to impose conditions on parties, such as altering the equity level that an investor is allowed to acquire, restricting access to certain commercial information and/or controlling access to certain operational sites or works. There will also be an option to block a deal in any sector that is deemed to pose an unacceptable national security risk. BEIS has made clear that it expects that the ‘vast majority’ of transactions will require no intervention and will be cleared quickly.

Transactions that require mandatory notification that are closed without clearance will be legally void. The NSIB anticipates sanctions for non-compliance of up to 5% of global turnover or £10 million – whichever is the greater. Criminal sanctions including imprisonment of up to 5 years are also foreseen. This is a major change from the existing position where, due to the voluntary nature of UK merger control, there are no sanctions for completing deals without clearance although such transactions can be investigated post-closing and remedies imposed (including partial or full divestment) if required to address any competition, or indeed, national security issues.

Retrospective review of existing transactions

A significant feature of the NSIB is the anticipated five-year ‘retrospective power’ to review completed transactions that are deemed to raise national security concerns. This power was foreseen in the government’s consultation on legislative reform of foreign investment review in July 2018, but the anticipated period of review was expected to be six months.⁴

This power will become effective from the date of the NSIB’s introduction to Parliament (expected this week).

Sensitive sectors subject to mandatory notification

The NSIB foresees the introduction of mandatory notification in the following sensitive sectors:

These mirror all of the sectors already within the review scope of the EA, but expand upon them quite significantly. The inclusion of sectors as general as communications, transport and energy, for example, is a notable new expansion of scope. BEIS has indicated, however, that further consultation will take place on what parts of these sectors should fall within this mandatory mechanism.

Review mechanics

To handle notifications a new ‘Investment Security Unit’ has been created within BEIS. Statutory deadlines will be introduced, which is not the case under the current regime, with a target review period of 30 working days expected to determine whether a detailed review on national security grounds is required.

Next steps

The NSIB will need to make its way through Parliament and is expected to be subject to at least some level of consultation on its sectoral scope before its final adoption. The EA will continue to apply as the NSIB completes its passage through Parliament but given the new retrospective power foreseen by the NSIB, transactions that do not meet the EA thresholds may still be affected if closed after the date of the NSIB’s introduction to Parliament.

1 BEIS Press Release, New powers to protect UK from malicious investment and strengthen economic resilience, 11 November 2020
2 National Security and Infrastructure Investment Review: The Government’s review of the national security implications of foreign ownership or control, 17 October 2017
3 As an interim step, pending the new rules, the Government had reduced these thresholds to £1 million and the target alone being able to satisfy the 25% test for target companies active in military and dual-use goods, quantum technologies, computing hardware, artificial intelligence, advanced materials and cryptographic authentication.
4 National security and investment: consultation on proposed legislative reforms, July 2018, para. 6.32.

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