The UK’s current merger control regime can be found in the Enterprise Act 2002 (the “Enterprise Act”) and is administered under the auspices of the UK Competition and Markets Authority. It is premised on the basis of voluntary notifications, though the Secretary of State for Business, Energy and Industrial Strategy (the “Secretary of State”) can intervene in certain foreign takeovers on the basis of four specified public interest grounds.

Unlike the Enterprise Act, the NSI Bill proposes mandatory notification requirements for certain transactions within sensitive sectors. It also does not include minimum turnover or market share thresholds in relation to in-scope transactions, and there are currently no proposed safe harbours.

The UK government has also established a new agency, the Investment Security Unit, which will be solely responsible for assessing transactions under the new regime involving national security concerns, and has a broad range of review, information-gathering and remedial powers available at its disposal.

Following the passage of the NSI Bill into law, the existing UK merger control regime under the Enterprise Act will no longer apply to the review of national security transactions, but will continue to apply to certain transactions within its current remit, such as those involving competition, financial stability and public health considerations.

Sectors within scope of the mandatory notification regime

The NSI Bill establishes a mandatory notification requirement for proposed acquirers of shares or voting rights in companies and other entities operating in 17 sensitive sectors of the economy to seek authorisation and obtain approval from the Secretary of State before completing their acquisition.

These sectors are expected to include: 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.

The specific products and services to which the new regime applies, as well as a detailed list of sub-sectors, will be determined following a public consultation on the scope of the draft legislation which was launched on 11 November 2020 and is available here.

Mandatory notification

A transaction (known as a “notifiable acquisition”) that falls within one of the key sectors described above will be subject to a mandatory notification requirement in circumstances where a person obtains control of a qualifying entity by:

• acquiring shares or voting rights in that entity resulting in the relevant percentage held by them increasing from:
• obtaining a right or interest in that entity resulting in the percentage of shares or voting rights held by them increasing from less than 15% to 15% or more; and
• acquiring voting rights in that entity which (whether alone or together with other voting rights held by such person) enables them to secure or prevent the passage of any class of resolution governing the affairs of the entity.

A qualifying entity is broadly defined as any entity that is not an individual, and includes a company, a limited liability partnership, any other body corporate, a partnership, an unincorporated association and a trust.

It is also worthwhile noting that asset transactions will not be caught within the scope of the mandatory notification regime.

Call-in rights

The NSI Bill also proposes extensive powers for the Secretary of State to review transactions that do not require mandatory notification, but nonetheless raise security concerns and fall within certain “trigger events.”

A “trigger event” occurs where a person:

• obtains control of a qualifying entity (as outlined in the mandatory notification regime) or obtains the ability to materially influence the policy of a qualifying entity (note that the concept of material influence is mirrored in the UK merger control rules and therefore likely to be interpreted in a similar way); or
• obtains control of a qualifying asset by acquiring a right or interest in, or in relation to, such asset and is able to use it, or direct or control its use, to a greater extent than prior to its acquisition.

A “qualifying asset” is defined broadly to include land; tangible moveable property; and ideas, information or techniques which have industrial, commercial or other economic value. Examples of assets in the latter category include trade secrets, databases, source code, algorithms, formulae, designs, plans, drawings, specifications and software.

A call-in notice may be issued up to five years after a “trigger event” has taken place, which period is reduced to six months once the Secretary of State becomes aware of the transaction.

Voluntary notification

In addition, the NSI Bill includes a voluntary notification regime for transactions that do not meet the mandatory notification criteria, but where the parties to the transaction nonetheless consider that it could raise national security concerns and may constitute a “trigger event” (as described above). Voluntary notification could bring some certainty to a deal timetable, as it would avoid the risk of the Secretary of State unexpectedly issuing a “call-in” notice.

Retrospective application to transactions

Notwithstanding that parties are currently unable to make notifications under the proposed rules, once the final legislation comes into force, the Secretary of State will be able to issue call-in notices for any transaction falling within the scope of the new regime that is completed at any time on or after 12 November 2020.

Review period

Once a transaction has been notified or called-in, the NSI Bill sets out a requirement for the Secretary of State to undertake its review within a 30-working-day period (which may be extended by an additional 45 working days in the event that the transaction calls for a detailed national security assessment).

Territorial scope

The new regime applies to transactions regardless of the identity or nationality of the acquirer.

In addition, non-UK entities are considered qualifying entities if they either carry on activities, or supply goods or services to persons, in the UK. Non-UK assets are considered qualifying assets if they are used either in connection with activities carried on, or the supply of goods and services to persons, in the UK.

Proposed remedies and sanctions

If the Secretary of State determines that a risk to national security arises from a notifiable acquisition or trigger event, the Secretary of State will also have the power to impose final orders to prevent, remedy or mitigate such risk, including blocking a transaction, requiring it to be unwound, or imposing operating or other conditions. The Secretary of State also has the power to issue interim remedies while it is carrying out its assessment.

Sanctions for non-compliance under the new regime include fines of up to 5% of worldwide turnover or £10 million (whichever is the greater) and/or imprisonment up to five years. In addition, transactions subject to a mandatory notification requirement that proceed without obtaining clearance will be void.

Conclusion

The NSI Bill represents a fundamental change in the UK’s approach to the review of transactions involving national security concerns. The UK government anticipates that the new requirements, once enacted, will result in between 1,000-1,830 transactions being notified to it per year. This represents a huge increase compared to the 12 transactions in which the UK government has intervened on national security grounds since the commencement of the Enterprise Act.

The NSI Bill will require further scrutiny in Parliament before being passed into law, but it nonetheless has some immediate implications due to the retrospective application to transactions completed on or after 12 November 2020. The UK government has also advised that it will offer informal guidance on potentially relevant transactions until the final legislation comes into force.

In practical terms, there is likely to be an impact on the timing and structure of transactions that fall within the scope of the new regime, including in relation to deal timetables and documentation and overall execution risk. Parties to the transactions and their advisers will therefore need to assess the potential applicability of the new regime to the transaction early on in the deal process, particularly in complex cross-border transactions that may involve UK group entities, UK assets, or the supply of goods and services to persons in the UK in sensitive sectors, and in circumstances that require pre-clearance from a number of national security review agencies.