On November 11, the UK published its National Security and Investment Bill (NSI), which strengthens the government’s powers to screen investment activities on the grounds of national security. Mandatory notification is required for acquisitions in at least 15% of qualifying entities active in sensitive sectors, including communications, data infrastructure, and artificial intelligence.
The bill has a significant call-in mechanism allowing the government to flag and screen any transactions that are not voluntarily notified. The government has six months to call in a transaction once it becomes aware of the trigger event, subject to an overall limit of five years from that trigger event occurring.
What prompted this?
For several years now, various national security reports have suggested the formation of a national security bill in the UK. Theresa May’s Conservative government openly recognised the fact that the intervention mechanisms of the Enterprise Act of 2002 were not sufficient in protecting national security. This led to a 2018 white paper.
While there has been a recognition for many years that the UK required a better screening mechanism, Mark Daniel, managing associate at Linklaters, argues that Covid-19 has been a significant catalyst for the creation of the NSI. “A number of countries have stepped up their enforcement regime due to Covid-19 out of a concern that companies might be undervalued, which might allow foreign investors to buy up domestic assets cheaply,” he says.
So it can be said that the NSI has been a combination of long-term pressures and the immediate impact of the pandemic – though not everyone agrees.
“The Bill is limited to national security concerns, so would not allow the government to intervene on broader policy or economic grounds, for example concerns around non-UK investors acquiring under-valued businesses in the wake of Covid-19,” says Dominic Long, partner at Allen & Overy.
What is it really about?
Despite the government being careful not to mention specific countries, many have speculated that the bill is part of the global pushback against Chinese investments and, as such, increased protectionism from hostile foreign takeovers. The new laws do apply to all investments, however, whether by domestic or foreign acquirers.
“It’s interesting because people have referred it to a foreign investment regime,” says Daniel, “but it also captures acquisitions by UK companies. The government will take a case-by-case analysis to transactions, but obviously, Chinese investments have a been a focus at least politically."
Who is most likely to be affected?
It appears that the UK has been behind the curve with some of its allies in introducing an foreign investment protection bill. After all the US warned the UK back in December 2019 of the potential dangers of accepting 5G networks from Huawei. The US has the Committee on Foreign Investment in the US (Cfius), Australia has the Foreign Investment Reform, and Germany the Foreign Trade Regulation; which was further expanded upon in 2018.
It can be reasonably expected that investments from China will be under large scrutiny, as already has been the case for Huawei, where the UK government issued a press release in July 2020 stating that buying new Huawei 5G equipment will be banned after December 31 2020. In addition, by the end of 2027, all Huawei equipment will be removed from 5G networks.
Davina Garrod, competition partner at Akin Gump in London, explains: “China is absolutely front and centre of what the UK government currently seems most worried about, but it’s not all about China. Links with any state that might be considered in some way ‘hostile’ or otherwise perceived to be at odds with the UK’s world view could be viewed as a risk to national security.”
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What is the likely impact on deals?
The NSI’s impact on deal timelines will depend on the nature of the deal in question and what is included in the final draft of the bill. Timelines could potentially be affected as transactions in the mandatory regime await government clearance. Ultimately, it will depend on the size and efficiency of screening mechanism set up by authorities.
Even for countries that are usually under scrutiny, Garrod predicts there won’t be a significant difference. She adds “in the big cross-border deals we work on, we’re looking at merger control and FDI approvals in 10 to 15 different jurisdictions. It’s the likes of China, India and Mexico that tend to be the timing outliers, even where there are no substantive issues in those jurisdictions.”
Long from Allen & Overy agrees that there will not be a significant burden on deal timelines. "For transactions in the mandatory notification sectors but where there aren't any obvious national security concerns, the government's position is that the review would be very quick," he said.
The rules do capture a significant proportion though. By the government’s own estimates, between 1,000 and 1,800 transactions will need to be notified every year. In contrast, since 2003, only 12 transactions have been reviewed on national security grounds.
Is it just a sign of the times?
The rhetoric from the UK government around the NSI has always been to stress that the country remains open to foreign investment. Britain is still considered one of Europe’s friendliest countries in which to do business, though the bill has prompted some investors to question whether the UK will lose this status over time.
Jasper Helder, international trade partner at Akin Gump, believes that there is unlikely to be major resistance. “It’s something that many clients have accepted,” he says. “It’s the sign of the times in a world where countries’ political and foreign policy objectives are more polarised.”
However, what many clients have been concerned with is the significant discretion needed for the government to call in a deal. This makes it difficult to predict whether a deal would be affected, making planning more difficult.
Dealmakers may start to voluntary notify their deals in order to circumvent this uncertainty.
How does it compare to Cfius?
While the NSI has been in the works for over a decade, it can be said that moves by the US have accelerated its formation. The UK has been behind the curve in implementing a security investment regime.
“I don’t think it will be a hard and fast rule that any investments by Chinese entities will be problematic. It will be a case-by-case assessment. The UK is still looking to attract inward investment,” said Daniel. So it’s likely that the UK will take a softer stance on China compared to the US.
However, Helder warns that parties should not assume their deal is out of scope. “I worked on a deal recently within the hospitality sector where the US’ Cfius stepped in and imposed conditions because it included US consumers’ personal information,” he says.
The similarities between Cfius and NSI will also largely depend on the geopolitical strings pulled by the respective administrations.
What about Brexit?
The creation of the bill was not prompted or likely related to Brexit. The political focus of Brexit may have slightly delayed its creation though.
Plus, as the UK prepares the leave the EU, a continuation of foreign direct investment is key to the health of the economy – which may be why rhetoric around the launch of the bill has been that the UK remains open for business.
Before the NSI, the UK government has only intervened in 12 transactions since 2002 on the grounds of national security. Until the NSI bill comes into effect and the grounds of national security concerns are more clearly defined, it’s difficult to predict how many investors, both present and future, will be affected.