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In November 2018, we published an alert (“Heightened Need to Consider CFIUS Risks”) regarding the US government’s implementation of tighter controls on foreign investors. This month, we report on new legislation proposed by the British government (the “Government”) which would give it greater powers to block or unwind corporate transactions on national security grounds, representing an intended move by the UK toward a CFIUS model. These reforms appear to be part of a wider trend of increased scrutiny of foreign investments in light of growing geopolitical tensions generally and concerns about Chinese state owned enterprises specifically.
- On 24 July 2018, the Government published the National Security and Investment White Paper (the “White Paper”), which proposed a new standalone regime for the scrutiny of foreign investments on national security grounds.
- Currently, the Competition and Markets Authority (“CMA”) has powers under the Enterprise Act 2002 to review mergers on national security and other public interest grounds. The White Paper proposes amendment of the Enterprise Act 2002 in order to end the CMA’s mandate regarding national security.
- The CMA’s role in relation to other public interest interventions under the merger control regime would remain unchanged, while national security issues would be assessed separately. Transactions caught by both regimes are likely to face dual regulatory processes.
- The key decision maker under the new regime will be a Cabinet-level minister (referred to in the White Paper as the “Senior Minister”). This definition includes the Secretaries of State, the Chancellor and the Prime Minister.
- Consultation on the White Paper concluded on 16 October 2018. The feedback from the consultation has yet to be published.
- The new regime is not expected to be introduced until 2020.
The proposed regime
The Government’s proposed reforms envisage a regime where parties are encouraged to voluntarily notify certain transactions (referred to in the White Paper as “trigger events”) if they may raise potential national security concerns. The Government may then “call in” those transactions for a national security assessment. Conversely, the Government may also scrutinise (or “call in”) transactions that were not notified/disclosed by the parties if the Government independently considers them to pose a national security risk.
It should be noted that the proposed regime would also catch transactions involving solely UK-based parties, although they are considered to be less risky than foreign states and entities based outside of the UK.
The White Paper is broad in scope; the proposed regime would catch transactions which are currently outside the Enterprise Act review process. Notably, the definition of “trigger event” is not subject to any turnover or share of supply requirements and therefore has the potential to catch smaller strategic transactions.
A trigger event involves:
- The acquisition of more than 25% of an entity’s shares or votes;
- The acquisition of significant influence or control over an entity 1;
- Further acquisitions of significant influence or control over an entity beyond the above thresholds;
- The acquisition of more than 50% of an asset 2; or
- The acquisition of significant influence or control over an asset. 3
The Government expects to receive around 200 notifications of trigger events per year. It expects that around 100 will qualify for further investigation and 50 may require remedies to address national securities concerns. For context, this is approximately three times the number of notifications currently received by the CMA.
“Call in” powers
In overview, the key elements of the proposed process are:
- Following a notification, the Senior Minister has 15 working days (extendable by another 15) to decide if a trigger event should be called in for review.
- The Senior Minister also has the power to call in non-notified trigger events (i) when they have reasonable grounds for suspecting the trigger event is in contemplation or progress; or (ii) within a prescribed period (potentially up to 6 months) after a trigger event has taken place.
- In assessing whether to call in a trigger event, the Senior Minister will have regard to:
- The target risk: Whether the entity or asset subject to the trigger event could be used to undermine national security. The White Paper highlights particular risk areas: (i) the national infrastructure sectors; (ii) certain advanced technologies; (iii) critical direct suppliers to the Government and emergency services; and (iv) military and dual-use technologies and suppliers to those sectors. In a separate Draft Statement of Policy Intent the Government has also published a long list of “core areas” of the economy which will be presumptively within the regime. The White Paper makes it clear that this is not an exhaustive list and national security concerns may arise in any sector of the economy.
- The trigger event risk: Whether the acquisition itself could provide the means or ability to undermine national security. The White Paper specifies the key means by which acquisitions can give rise to national security risks: a greater opportunity to undertake disruptive or destructive actions or worsen the impact of such action, an increased ability and opportunity to undertake espionage activities, and/or the ability to exploit the acquisition to dictate or alter services or utilise ownership or control as inappropriate leverage in other negotiations.
- The acquirer risk: Whether the acquirer is a party who may seek to use their acquisition to undermine the UK’s national security. The White Paper considers “hostile states” and “other hostile parties” most likely to pose a risk to national security, and UK-based parties least likely to do so.
Notably for deal participants, the Senior Minister will have powers to request information from any party to help with their assessment on whether to call in a trigger event.
The Review Process
Once a trigger event has been called in by a notice, the Senior Minister will have up to 30 working days to conduct their review (extendable by a further 45 working days if necessary, with a further extension if the parties involved in the transaction agree). These time periods can be suspended by the Senior Minister at any time if a party does not fully respond to information requests.
RFIs: To assist with the review process, the Senior Minister will have powers to issue requests for documents or information (“RFIs”) to any entity or individual involved in the trigger event. The Senior Minister will also have the power to require an individual to attend as a witness.
RFIs may include information about the target entity or asset, the acquirer’s other holdings or the acquirer’s planned use of the target entity or asset. The White Paper notes that, as the RFIs will vary with each specific case under review, the proposed regime will not impose limits on the types of information which the Senior Minister may request; instead, the Senior Minister may seek any information they reasonably consider to be relevant to their review.
Outcomes: There will be three potential outcomes of a review: (i) confirmation to proceed with the transaction; (ii) approval subject to conditions; and (iii) blocking or unwinding a transaction (where the transaction has already taken place).
The proposed regime envisages some tough penalties for those in breach:
- A maximum custodial sentence of 5 years for major offences (e.g. breach of conditions/failure to unwind a transaction), with lesser custodial sentences of up to two years for less serious offences (e.g. failure to provide information or attend as a witness).
- Civil financial penalties for failure to provide information of up to £30,000. For more serious breaches, penalties could run up to 10% of worldwide turnover for businesses, and up to the higher of 10% of total income or £500,000 for individuals.
- Company director disqualifications of up to 15 years
Disputing a Decision
Parties will be able to challenge the Senior Minister’s decisions under the new regime through judicial review in the High Court.
The Government will be able to use Closed Material Proceedings (i.e. a procedure where all or part of a claim can be heard in private) to protect information which, if disclosed, would be harmful to national security.
We continue to monitor this developing area, and would welcome any questions you may have regarding its implications for your business.
1. The White Paper notes that significant influence or control over an entity is unlikely to arise unless there is some degree of direct or indirect ownership being acquired.
2. The definition of an asset is very broad and includes real and personal property, intellectual property and contractual rights. Property situated outside of the UK is also captured by the regime.
3. This includes the acquisition of a licence (e.g. a call option) related to an asset
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