The National Security and Investment Act (“NSIA”) will radically overhaul the UK’s approach to screening investment. Going forward all dealmakers (irrespective of country of origin) will need to be mindful of the NSIA when contemplating transactions with a nexus to the UK.
From 4 January 2022, the NSIA will require parties to make a mandatory pre-closing notification if they are acquiring more than 25% (or the ability to pass or block resolutions at the AGM) in a target active in a sensitive sector from a national security perspective. The UK government has defined in detail 17 sensitive sectors including defence, energy, transport, artificial intelligence, satellites and space technology (among others). This requirement will prevent closing until the necessary approval has been obtained.
PE acquirers will also need to consider whether to make a voluntary notification even if the target business falls outside of the 17 mandatory sectors or involves an acquisition of less than 25%. The voluntary notification system will be accompanied by an expansive call-in mechanism, which will allow the UK government to review non-notified transactions up to five years after they have been completed.
In short, every transaction which has some nexus to the UK will, at least, need to consider the NSIA going forward, and many will involve some form of notification.
The UK has historically been an outlier among Western economies in not having a standalone foreign investment regime. So, the introduction of an investment screening regime is not itself surprising or out of step with what we have seen in other countries. Indeed, in many ways the NSIA borrows from already established regimes such as CFIUS in the United States.
However, perhaps the most material difference compared to other countries is the expansive jurisdictional scope of the new UK regime and the lack of safe harbours. The NSIA has no turnover, transaction value or other de minimis thresholds. It also applies equally to UK and overseas investors (so although many refer to it as foreign investment screening, this isn’t technically correct) and can apply to many international transactions with limited UK nexus given it requires only that an entity has activities in the UK or supplies goods or services in the UK. The UK government anticipates that between 1000 and 1830 transaction will be notified each year (i.e. ten times the largest number of cases reviewed under the German regime) which further -demonstrates the expansiveness of the new regime.
The hybrid mandatory/voluntary structure is also relatively uncommon when compared against similar regimes in Europe (only Germany operates a similar system). The extensive call-in powers and economy-wide basis on which the UK government may apply this power means greater uncertainty for acquirers than is the case with foreign investment regimes (like those in France and Italy) that either require up-front approval for in-scope acquisitions or do not require it at all.
The wide-ranging scope of the NSIA means it is critical that acquirers conduct a thorough assessment of the target’s activities at an early stage of a transaction.
The wide-ranging scope of the NSIA means it is critical that acquirers conduct a thorough assessment of the target’s activities at an early stage of a transaction. If this assessment indicates that the transaction is subject to a mandatory notification requirement then a corresponding condition will need to be included in the SPA. PE houses should be mindful of ensuring that this condition (a) only applies to the acquisition entity and not to all invested entities of the PE house as a whole (given the GP of one fund cannot contractually commit to sell investments of another fund) and (b) only reflects acceptable outcomes for the transaction to proceed (for example, unconditional clearance or reasonable remedies). Acceptable remedies for an agency in this context are, however, broader than those in a merger control context, so for example the usual remedies required are behavioural in nature (e.g. having only nationals on the board; controlling information flows; undertaking to continue to supply goods and services etc.).
Our experience is that given the breadth of the regime (applicable to both UK and non-UK acquirers) including such a mandatory NSIA condition will not impact the competitiveness of the bid (given if the target is operative in one of the 17 sectors, it will apply to all bidders). But voluntary filing conditions may hamper competitiveness in an auction scenario (at least until there is some practice to point to in terms of the ISU turnaround times and a sense of whether as promised a “vast” number of transactions will be cleared in 30 working days following acceptance of a complete filing). So with voluntary filings, the timing implications of having to wait for a clearance will need to be weighed against the sensitivity of the target and potential post-closing call-in risk.
Acquirers will also want to include an express contractual provision requiring the seller and the target to co-operate throughout the NSIA process. Similarly, purchasers should make sure that they have considered the interaction between the longstop date for satisfaction of the conditions to completion and the statutory timetable for clearing or reviewing a transaction under the NSIA.
The notification process will be familiar to those who have experienced other merger control or foreign investment processes. The first step is to notify the government of the transaction. The content of this notification will vary depending on whether it’s a mandatory or voluntary notification, but parties should expect to provide significant details about the target (e.g. company information, description of its activities (particularly sensitive contracts/customers), pre-transaction ownership structure) and information about the acquirer, including details about the acquirer’s ultimate beneficial owner. We expect that the information about the GP will be of primary interest but BEIS has not excluded the form requiring information about investors with interests in LPs of >5% from the information to be disclosed.
Once the notification form has been submitted, the UK government has an initial period of 30 working days to review the transaction.
Once the initial review is over there are four possible outcomes: (i) unconditional clearance; (ii) clearance subject to remedies; (iii) prohibition; and (iv) an extension of the review period by a further 45 working days (we anticipate this will be reserved for the most complex transactions).
Corporate restructurings that include a sensitive business may be caught by the NSIA. This includes scenarios where the ultimate beneficial owner of the companies being restructured remains the same. Therefore, it is vital that companies consider the potential NSIA implications of any corporate restructuring before proceeding.
Similarly, PE houses also need to be mindful of the NSIA in the context of consortium transactions. For example, if a new co-investor is added to a consortium then this could give rise to a filing under the NSIA (particularly if the target is active in one of the 17 sensitive sectors). In this type of scenario, we recommend making the introduction of the co-investor conditional on receiving clearance. Alternatively, in order to avoid the execution risks from being caught by the foreign investment screening process, existing consortium parties may wish to negotiate a pre-emption right provision whereby existing consortium parties must first be offered the shares which would be sold to a new co-investor, whose involvement may be risky from a government intervention perspective.
We anticipate that compliance with the NSIA, like has been the case with similar regimes in other countries for some time, will become just one (albeit important) factor that transaction parties must consider when planning a transaction.
The EU does not have a standalone approval system requiring foreign investment to be notified and approved at an EU level (instead, this is handled by individual Member States). Currently 18 of the 27 Member States have foreign investment regimes with a further five Member States having similarly legislation in draft. To supplement this, last year the EU introduced a new framework to allow Members States and the Commission to cooperate when reviewing foreign investment.
The NSIA is comparable in terms of the overall scope of sectors typically considered relevant. The expected review timetable is also largely in line with that of other European regimes and in many cases can be expected to be shorter than most. A major difference is that the regime applies equally to UK and foreign nationals (where nationals in other countries are not captured by their own regimes). The residual “call-in” power discussed earlier also introduces a layer of complexity that transaction parties will need to align on how best to address (while in most other countries the decision is more binary).
Procedurally, however, the NSIA is likely to be simpler when it comes to cross-border transactions than filings in EU countries. This reflects the fact that under the EU co-operation mechanism Member State reviews are now commonly subject to additional questions/inputs from other Member States (including those which did not require a notification themselves) and the Commission which pause the review timelines. The procedures have thus become more protracted and unpredictable.
As we have outlined above, the NSIA represents a significant change to the way in which the UK will approach investment screening. It sees the UK move from having one of the most permissive approaches to foreign investment to one of the most expansive regimes globally. Consequently, we expect that it will have some impact on investment in the short term as investors grapple with the procedural implications and heightened risk of greater scrutiny and the potential for remedial action.
That said, the UK government has continually reiterated that its aim is to implement a highly efficient and effective review process that does not deter firms from investing in the UK. It remains to be seen in practice but this indicates that the level of intervention (i.e. transactions subject to remedial action) is likely to be exceptional rather than the norm.
Over the longer term we would not expect the NSIA to be a significant deterrent on investment into the UK. We anticipate that compliance with the NSIA, like has been the case with similar regimes in other countries for some time, will become just one (albeit important) factor that transaction parties must consider when planning a transaction.
About the Authors
Nicole Kar, Head of Antitrust and Foreign Investment U.K and Ireland at Linklaters
Nicole is head of the UK antitrust & foreign investment group. Nicole is specialist adviser to the foreign affairs committee of the UK Parliament and has advised clients on national security reviews under the Enterprise Act as well as being responsible for advising the FAC committee on the National Security and Investment Bill as it underwent debate in the Commons and Lords. Nicole advised on the FAC’s report on UK national security: “Sovereignty for Sale”.
Nicole has significant experience advising private equity houses, sovereign backed funds and pension fund investors AT and foreign investment issues and advised the PE acquirer of Cobham Aviation Services, an important supplier to the UK and US military; the seller of the key part of the UK government’s vaccine rollout strategy and the US acquirer of Inmarsat, a leading satellite provider.
Nicole is ranked in Tier 1 of Chambers.
Neil Hoolihan, Counsel – Antitrust & Foreign Investment at Linklaters
Neil is a counsel in our Antitrust & Foreign Investment Group, based in Brussels. He advises on the full range of competition matters with particular emphasis on global merger control and foreign investment filing requirements. Neil frequently advises financial sponsors in relation to investments/disposals across a range of sectors including healthcare, manufacturing, energy and telecommunications infrastructure.
Neil assists clients with navigating complex issues raised by merger control and foreign investment procedures covering both European and international jurisdictions, with particular experience involving the European Commission and the UK’s Competition & Markets Authority. Neil has repeatedly been ranked as a Future Leader in Who’s Who Legal: Competition and in 2021 was named as a Rising Star in Competition/Antitrust by Expert Guides.