The UK's National Security and Investment Act (the "NSI Act") entered into full force on 4 January 2022. With the NSI Act receiving a lot of attention, in-house teams can expect to receive more questions about how it applies, and the risks arising from this:
- "Will the NSI Act apply to the planned acquisition of Target X?"
- "What if the transaction is structured to only acquire the Target's assets?"
- "What if the acquisition is made by an overseas group company?"
- "If the NSI Act applies, what does that mean for the deal timetable?"
- "What would be the risk if we didn't notify?"
- "Does the UK merger control regime apply at the same time?"
In this on-demand webinar Samuel Beighton discusses how best to navigate the new legal landscape of the NSI Act, considering its application, and exploring key issues for in-house teams to have in mind.
Transcript
David Lowe: Hello everybody and welcome to our webinar on the National Security Investment Act. I am David Lowe, one of the organisers at Thinkhouse and I am joined today by Sam Beighton, partner in our Anti-Trust team. Obviously, this is a webinar but we will be doing a physical ThinkHouse event at the end of March about supply chains so do look out for those invites. We will be issuing those invites during the course of next month.
So National Security Investment Act. It is hardly dinner table conversation is it. It's the kind of thing your children would definitely glaze over if you were to mention you were watching a webinar on the National Security Investment Act, but it is important. I mean, to date the UK government has had very limited opportunities to intervene on M&A activity asset purchases and so forth. It is quite a high bar for it to previously to be in and that is different to other jurisdictions. If you look at the States, for example, they have very wide powers for the government to lead on transactions and so, to some extent, this legislation you could say is catching up with other jurisdictions. Will it just change our attitude in the UK? Previously we did not traditionally have to worry that if were buying a big piece of kit or piece of land or buying a company whether we needed to go and tell somebody about it, unless there was an anti-trust issue, or you were in some specific areas. That has now all changed and we think you as in-house lawyers will be more frequently asked "do you want me to worry about this?" and you certainly should be at board level flagging where transactions may be at risk of being subject to this legislation.
So without further ado I am going to handover now to Sam who will take us through it.
Sam Beighton: Thanks David. I think to my mind the purpose of the session today is really just to try and give some comfort, some pointers as to the key issues, key risks to be aware of and I wanted to cover this context. I was just thinking about firstly what does the NSI Act actually change and what transactions can now be reviewed? How can transactions be reviewed in this context? What is the impact of this new regime on transaction timings? How does the NSI regime interact with the UK management control regime? That's a factor that people do need to bear in mind as they think about how transactions are being reported. And when we are talking about, thinking about risks the bottom line essentially is how can these related risks be managed in this environment we have. What steps can we take to manage these risks once they've been identified?
So to begin with by way of an overview, what we have is the NSI Act which was enacted in April 2021 and came into full force in January of this year. So there is a bit of a time lag there and in that intervening period what we have seen are various statutory instruments that were put into force. And what those will do is require extra detail around aspects of the Act and also put in place some of the framework that is required to actually work a work on the ground in terms of a practical piece of legislation. What the Act does it introduces a UK regime and what this UK regime enables is the screening of transactions on national security grounds. Now before the NSI Act, as David mentioned, issues of national security those were addressed under the UK merger control regime. What we now have is a situation where the national security grounds have in effect been excised from UK merger control regime and been packaged up, some more has been added to them and they are now addressed under the NSI Act. And what we now then have is the NSI regime existing in addition to the UK merger control regime. So NSI is not a one-stop shop. This is another regime that parties need to think about and engage with when we are planning transactions.
So in terms of who is responsible for the regime, the regime is managed by the Investment Security Unit, the ISU at BEIS and the Secretary of State is the decision maker. What we will see that a range of transactions are capable of being reviewed under the regime and the regime has a deliberately broad application. I have just picked out a couple of areas here to flag and I'll touch on these as we go through. The potential to full under the scope of the NSI Act are transactions that involve only UK entities and assets. Now that is different to a number of other regimes worldwide that focus on foreign direct investment, the UK regime is agnostic in that context and transactions that are just UK to UK those could be caught by the regime.
Also, I think this is a point that is worth flagging because I think this has not had perhaps received some of the publicity that other aspects of the regime has, and that is the corporate restructuring or organisation activities within the same group could nevertheless be caught by the NSI regime. There is no de minimis thresholds, there is no minimum deal value or transaction value, if the various criteria are satisfied that is sufficient for the Act here applicable.
There is a possibility of retrospective review so certain transactions that completed between 12 November 2020 and 3 January 2021 could potentially be reviewed. One really big difference, which I think we will all be aware of, is we now have a mandatory notification requirement and that is applicable for transactions that we completed from 4 January. And what that does is that addresses certain transactions that affect 17 high risk areas of the UK economy and where you have transactions they are addressing those areas they must be approved by the Secretary of State before being completed, and that is something we have not seen before. So that is a real new development coming out of the NSI Act.
So in terms of red flags and key risks coming out of that. The first one, and the one that has perhaps had the most publicity, is this risk of breaching mandatory notification requirement. In those circumstances if that requirement is breached the transaction completes without Secretary of State approval then that transaction will be legally void, although it is possible to seek retrospective validation and to bring that back online after the event.
In addition, any officer of an acquirer who consented to or neglected to prevent a breach of that mandatory notification requirement, they could face criminal prosecution, possibly imprisonment or a civil penalty of up to £10 million and the acquirer, So the business itself is complicit in the breach and can face a penalty of up to the higher of £10 million or 5% of the worldwide turnover, and as is usually the case in these circumstances, that turnover is not limited to the acquirer itself, it will include businesses owner controlled by the acquirer. So there are serious sanctions arising from that breach.
There is also the risk, a more far reaching risk that a transaction is reviewed under the NSI regime. If it is the case then that gives rise to national security risks and that transaction could be subject to conditions and it may be the case that there are certain requirements imposed upon the transaction going forward for it to continue, or it could be prohibited, or if it has been completed it can actually be undone.
So this is a regime that does have serious consequences both for business and also potentially the individuals in the context of that mandatory notification requirement.
I think that is the real focus on the risks around this and I think that when we are thinking this regime, and yes there are risks, as with many things, but I think the thing is these risks should not be put on the too difficult pile. These are risks that can be thought through, they can be managed and I think what we will find is that for the vast majority of transactions they will not really be affected by the NSI regime. So, it is there, it will apply to certain transactions, some of the transactions will face difficulties, but I suspect that will be a minority of transactions. So I do not think we should think that this is something which should be impeding transactions. It is a known entity, there are risks but I think as a positive, these risks can be thought through and they can be managed when planning transactions.
So without further ado, what I would like to just quickly go through is a summary of what can actually be reviewed under the NSI regime and I think in this context you can really see how broad it is in relation to its application.
So when we are thinking about acquisitions involving entities, capable of being under the regime are those planned and completed acquisitions of qualifying entities, and a qualifying entity would be a UK entity. For example, companies, partnerships, trusts, but it would also be entities that are formed or recognised in law outside of the UK where they have a link to the UK. And that is they are formed outside the UK and they are carrying on activities in the UK and/or they are supplying goods or services in the UK. So they have a jurisdictional link to the UK even though they may be a foreign domicile or foreign registered company.
Just thinking that through the couple of examples. We have an example of the acquisition of a general partnership and the partnerships happens to have a branch office in the UK. Now that branch office will be sufficient for this to qualify as the acquisition with an entity carrying on activities in the UK by dealing through that branch office and, therefore, this acquisition will be in the scope of the NSI regime.
Similarly, if we think about the acquisition of a US company and, in this context, the company is exporting to a UK customer. What we see here, because we have a US company which is supplying goods in the UK, that establishes that jurisdictional link to the UK and the acquisition will therefore be within the scope of the regime.
I mentioned at the beginning this concept of corporate restructuring being caught. There is limited guidance on this at this point in time, but I think it is important that people have this in their minds when they are thinking about transactions and that is the fact that acquisitions are qualifying entities where they are in the same corporate group could potentially be reviewed.
So, for example, we have company A and company B who have the same ultimate owner. If company A acquires the shareholding of company B the ultimate owner of A and B has not changed but there has been a change in the chain of corporate ownership and that in itself would be sufficient to build this within the scope of the Act.
And it is also we would want to flag as well that depending upon the circumstances of the transaction, that restructuring re-organisation could trigger a mandatory notification requirement. So bear that in mind based on the activities within your group. If there are things like a corporate restructure, although this perhaps does not seem to make much sense when you think about it. Nevertheless, it is clear from the guidance that the BIES position is that these sorts of restructuring activities could be caught by the management requirements, so that is why I think worth bearing in mind.
So that's an overview of acquisitions of entities. If we think then about acquisitions of assets it is a similar picture. So it is both planned and completed acquisitions and these acquisitions of qualifying assets that could potentially be caught. Qualifying assets are broadly defined and that would include land, that would include tangible moveable property such as machinery, and that would also include ideas, information or what is described as techniques in industrial commercial or economic value. In the guidance we see as being referred to as IP, I think actually when you break that basket down what you see is there are things in there that would fall outside of what we would classify legally as IP. So this is a broad remit in terms of qualifying assets, so things that are in the last category perhaps covers a little bit more than you think.
But as with qualifying entities the qualifying assets require a connection with the UK to fall within the scope of the Act. So where we have acquisitions of land or tangible movable property, these can potentially be reviewed when the assets themselves are located in the UK or if they are outside the UK, we see that link where valued assets are being used in connection with either activities that are carried on in the UK or the supply of goods or services in the UK. And in relation to acquisitions of IP, these are constantly being reviewed. In fact IP is again being used in connection with activities in the UK or the supply of goods and services in the UK. So there needs to still be that link jurisdiction with the UK for the regime to bite on this.
And just by way of example, if you are thinking about assets outside the UK. So if we can think about the plan acquisition of machinery located in Switzerland, and this is used to produce equipment which is then used in the UK, or we have an acquisition of assets on offshore windfarm and those assets are used to generate electricity which is then supplied to customers in the UK. Because we have that link with the UK, notwithstanding the assets are outside the UK, acquiring those assets would fall within the scope of the NSI regime. So it does have this broad jurisdictional reach and transactions that perhaps at first blush you think may not have much to do with the UK but when you dig a bit deeper you would find more transactions than you perhaps think would have sufficient links to the UK can be caught by the reach of the Act.
So having thought about all sorts of transactions that can be reviewed, I think the next thing to touch upon is how can transactions be reviewed. We touched upon the mandatory notification requirement and that being of itself effectively assumes that national security risks are likely to arise by being in one of the 17 areas. So that requirements means that the Secretary of State should be receiving notification and that will then enable a review. So that is one way in, is the mandatory notification requirement.
What about transactions that fall outside of that? Well, another possibility is that the parties themselves voluntarily decide to notify. So they have a transaction that they think it is something they would like to get Secretary of State's view on and they voluntarily notify. So that is another way in for the regime to apply and to review transactions. The last one, the catch all as it were, is that certain un-notified transactions can be called in for review by the Secretary of State. That is if the parties themselves don't voluntarily inform the Secretary of State, there is a possibility the Secretary of State calling in transactions and then reviewing them. So a number of ways the transactions within the ambit of the Act can then reviewed under the Act.
The one I would like to focus on first, perhaps unsurprisingly, is the mandatory notification requirement. What we see here is that the requirement to make a mandatory notification and it is triggered if the acquirer is acquire a certain level of control in qualifying entities. Asset transactions fall straightaway outside of the mandatory notification requirement. This is only in relation to qualifying entities and that qualifying entity needs to undertake specific defined activities in the UK. What we have from regulations we have 17 high-risk areas as to specific activities. I call them notifiable activities for the purposes of this presentation and that is what really turns on in terms of this notification requirement.
As mentioned before where this is applicable, the requirement imposes a standstill obligation and that means that the acquirer must notify and obtain approval from the Secretary of State before completing that transaction.
So one factor mentioned there is control. I think it is worth us just seeing what is meant by control in the context of the mandatory notification requirement. And subject to limited exceptions what we see here is that acquiring control of the qualifying entity means if you are acquiring a shareholding or equivalent of a business that does not have shares in a qualifying entity of more than 25%. Where acquiring voting rights in that qualifying entity of more than 25% or acquiring the ability to pass the block resolutions that govern the affairs of qualifying entity. If it is the case that acquisitions of low levels of control are being made, those could still be reviewed but they would fall outside of the mandatory notification requirements. So if you were to draft a transaction and the acquiring say at 23% of the shareholder, yes it would be outside mandatory requirement but nevertheless that could still potentially be reviewed by the Secretary of State. It does not take it outside the ambit of the regime itself. It just needs to be moved outside the mandatory notification requirement.
And thinking about the high risk areas, the notifiable activities, so let's assume that we have the relevant level of control being satisfied by the transaction, the acquirer is going to take 100% shareholding in the target. Then does that qualifying entity does that target undertake any notifiable activities? And what the regulation has established is 17 areas of the UK economy deemed to be high risk. I will not read through them but I think as you read through them on the screen, you will pick up a flavour. These are not general areas of the economy, they are quite specific. They are quite focused in terms of what they are covering and you can instinctively see how national security concerts could arise just by reading the various category headings in those particular areas.
As I mentioned before the aspect around mandatory notification really hinges upon the notifiable activities and we have these now set out in the notifiable acquisition regulations, and will certainly have guidance from BEIS which summarises how the regulations will apply going forwards. What cannot be emphasised enough is that detail is absolutely critical and what we have certainly found as external advisors is when we are thinking about these notifiable activities, we absolutely need the input and expertise from the commercial and technical teams, and that may be on the client side or that could be on the other side of the transaction. Because without that in depth knowledge of what is actually happening, what the activities are, who is doing what, where, how etc. we as lawyers we simply cannot advise of what this all means. You need to have the right people giving you the right steer of the application of the activities and what is actually going on.
And just by way of example, just picked out a couple of examples here so we have the quite broad heading of cryptographic authentication and what you will find is you will spend your time going through the regulations, headings can be quite broad, the activities really quite specific. It may look at first blush as something would fall within a category and then you realise the notifiable activities are defined primarily and therefore other things perhaps fall outside of that. We are just focusing upon cryptographic authentication so what we see here in terms of notifiable activities these include where the qualifying entity is researching, developing or producing in the UK any product which has various characteristics. There is a lot in that in terms of even things like research and development that may not be apparent. You may need to get inter-teams to work out is that research and development activity going on. Does it cover those aspects and that could take a bit of time to work through so I think it is worth making sure that when you are making those assessments you have the right people feeding into that process and when it comes to aspects of notifiable activities that will not be lawyers. That will actually be commercial technical people.
Another point to flag is that within the regulations there are a few anomalies and one that we have come across is breaking down the definitions actually structured, suppliers to emergency services, notifiable activities in that context that could trigger a mandatory notification will include the supply of fuel cards to the county council in Wales. I don't for a moment think that is how the regulations intend to function but that is something that if you read them as in black letter law that is how they do apply, and it is worth having in mind the clear steer you are having with the full overview of the activities of the qualifying entity. They do have some perhaps little niche businesses, little niche activities just to understand what those are so you have a full picture of what is going on and how that then potentially applies under the NSI regime.
So as I mentioned before when assessing risk obviously we need to have a clear picture of the rights that have been acquired and the implications of these in relation to control. So we are hitting the control threshold that is going to pull us into the mandatory notification requirement. Again as I have just touched upon you really need to carefully consider the full extent of the target's activities and whether these constitute notifiable activities.
For some transactions it is going to be really, really quick. You can just have a quick look, you have got the full picture and you can say with confidence no there is not a requirement here to notify on a mandatory basis, but others they will require more consideration. I think it is really important to factor time in to complete that assessment. What you don't want to be doing is to rush this at the eleventh hour, someone is up to three in the morning to work out what is going on with this. You want to have a clear picture of this at an early stage given that if there is a mandatory notification requirement that is going to shape things like negotiations, but also a timetable on how that moves forward as the transaction progresses.
If it is the case that the requirement is triggered and the transaction then does proceed, detailed information will need to be gathered and submitted. That will also take time. I think that when this is described in the guidance, if you read it as someone who has not had to look at these forms, it seems like it is quite simple. It is not really a big deal to fill out the form and if you have got all the information, as is ever the case, it is very simple but quite often businesses just will not have the information in the form that is required and that takes time obviously then to gather, to make sure it is accurate, to put in the right format. That needs to be factored in to the transaction timetable.
There is some good news though and that means there is no fee payable. I am not aware that there has been any talk of that changing at any point in the future, so that is a bit of a difference to the UK merger control regime, so there is no fee payable if you are submitting a mandatory notification.
And outside of that particular area, transactions can generally be completed without a obtaining the Secretary of State approval. so if you are not required to notify and take clearance generally you get a complete as you wish. However, and there is always a but, certain transactions will be at greater risk of being called in if they are not approved by the Secretary of State.
What a voluntary notification does it enabled parties to confirm whether a transaction could be called in, and completion can then be conditional upon specific outcomes once that notification has gone in so you can structure the transaction around the voluntary notification.
What we also see outside of the mandatory notification requirement is that a broader range of transactions are capable of being notified voluntarily, and also being called in so this is the fall-back, this is the general wraparound we see here of the Secretary of State's powers is to call in transactions and parties to notify voluntarily under the regime.
And just to pick up on that point so we are looking for under the mandatory notification requirement of acquiring control in relation to a qualifying entity so we know those thresholds. The new aspect here being read is this ability to exercise material influence, so if the acquirer is acquiring the ability to exercise what is known as material influence over the strategic direction of a qualifying entity's ability to define and achieve its commercial objectives. That level of control would enable parties to notify voluntarily, they will also enable the Secretary of State to call in and review that transaction.
So what does that mean in terms of material influence? Where has that come from? This is a concept which we see arising under the UK merger control regime and guidance issued by BEIS makes clear that when it is thinking about material influence, it will apply the CMA's guidance in relation to merger control material influence and it will do so having in mind the NSI regime. So what does that then mean?
Well the CMA guidance makes really clear that when you are thinking about material influence, because it is quite a nebulous concept, it is factor specific, it is case by case, it does require a holistic assessment of all the facts. But the guidance give some general indications of where things are more or less likely to be problematic so the CMA guidance says if you are acquiring a shareholding of between 15% to 25% typically that is less likely to confer material influence. If you have a shareholding of less than 15% that has rarely been found to confirm to an influence, and if all you are doing is acquiring as a minority shareholder nothing more than those rights that are normally accorded to minority shareholders so for example rights in the concept of liquidation then that is something where a situation of material influence is unlikely to arise.
Some commentators have been referring to this as almost a safe harbour in the context that the NSI, if you can get in a position yourself as a party who is minority shareholder, less than 15%, typical standard rights that are accorded to minority shareholders that should then fall outside of the ambit of the NSI regime. So with that although it is not set in stone that CMA guidance is helpful when thinking about voluntary notification and also the risk of call in when you are outside of that mandatory notification requirement.
In addition to qualifying entities it is also possible for acquisitions qualifying assets to be voluntarily notified or called in by the Secretary of State, and when we are thinking about control in relation to qualifying assets, that effectively means acquiring a right or an interest in or in relation to assets whereby the acquirer is then able to use the assets or to do so to a greater extent than the called in transaction or the acquirer is able to direct or control the use of the assets or again to do so to a greater extent than before the transaction.
Use of an asset for the purposes of the NSI regime includes exploitation, alteration, manipulation, disposal or destruction so again we are seeing a really, really broad approach that you are taking here in terms of the sort of asset transactions that could be looked at by the Secretary of State or could be notified voluntarily by the parties.
By way of an example, I have included here a Japanese company and its funding a research project being conducted by a UK university and the company will receive a non-exclusive licence and that licence would be to project specific IP that is being used for further RND by a UK university. The company is therefore acquiring the ability to control the use of IP. It is a non-exclusive licence. The IP is being used for activities in the UK as part of research been undertaken by a UK university, and therefore that transaction would be in the scope of the NSI regime.
And that is something that at first look you might not think had anything to do with NSI, but in terms of the breadth of the application when we think about qualifying assets that is something that would fall within the scope of the regime. Now whether that gives rise to national security concerns and should be voluntarily notified or be at risk of being called in, it is a completely separate issue but I think it is worth flagging that this broad approach to assets does mean that this would cover a range of different transactions and acquisitions that perhaps at first glance you would not expected necessarily to do so.
So having thought a little bit about what can be called in, I would like to now focus upon the call in power. As mentioned previously un-notified transactions they can be called in for review. That can happen post completion. It can also happen while transactions are in progress or contemplation.
So for example if a deal has been publicised it would be possible for the Secretary of State to call in a transaction and they will be calling for a review if the Secretary of State reasonably suspects the transaction gives rise to national security risks. And un-notified transactions that are completing on or after 4 January when the regime went into full force, what we see here is well you know the first place if it is an un-notified mandatory notification these must be called in by the Secretary of State, the Secretary of State must do so within six months of becoming aware and there is no longstop date for that so mandatory in sense of a different kettle of fish for want of a better expression.
Other transactions, voluntary notifiable transactions, those can be called in, not must but can be called in within six months of a Secretary of State becoming aware. There is a longstop date to that power and that is five years post completion so wherever mandatory it hasn't been notified, the Secretary of State must call that in for other transactions that fall outside of that, the Secretary of State can call it in, has the option to call in those transactions.
So when applying that call in power, what do we know about the exercise? Well what we have so far, we have a statement that has been publishing and that really sets out in quite high level terms how the Secretary of State expects to exercise the call in power. What is clear from that is that the assessment will be undertaken on a case by case basis having regard to three categories of risk. The first is the target risk, the key question here for the Secretary of State to think about whether the qualifying entities or assets are being used or could be used in a way that raises a risk to national security.
The Secretary of State will also focus upon the acquirer risk. So is there anything about the acquirer in terms of its characteristics that suggests there may be a risk to national security. Does it have certain capabilities, does it have certain links to entities known to be hostile to the UK? The acquirers will also take into account what is also clear in the guidance. I think again this should provide comfort to a good many organisations is that there are characteristics of the acquirers that where they are long term investors, they have a history of making passive investments, that this really should indicate a low or no acquirer risk still a require risk again case by case that there are clearly certain types of the acquirer that are already been acknowledged in the guidance as one's who should not give rise to concerns from a national security perspective.
The last factor that would be considered by the Secretary of State is the control risk, and a higher level of control may increase the level of risk that seems to arise in the context of a given transaction.
What is clear as well from the guidance is although the Secretary of State would expect all three of these risks to be present when calling in a transaction, they don't all need to be, there is not a legal requirement to tick all of them. It could be the target risk in on itself is sufficient for a transaction to be called in for example.
The guidance also makes clear that there are certain types of transaction that are more likely to be called in and perhaps unsurprisingly those that are at a higher risk of being called in are those that relate to notifiable activities. So we touched on the possibility of structuring a transaction when you are acquiring qualifying entity undertaking notifiable activities to fall below the control threshold in 24% shareholder.
If you requiring top influence a qualifying entity undertaking notifiable activities, that is more likely to be called in so if that has not been notified voluntarily or is outside the mandatory requirement that could then be called in by the Secretary of State and would be more likely to be called in by the Secretary of State.
Where a party is acquiring control over a qualifying entity that is undertaking activities that are closely related to notifiable activities that is also more likely to be called in. There is ambiguity in the guidance around this particular concept. The guidance gives the example of activities that are related to transport but not within the definition of transport. I think that is something that parties will need to consider in terms of how close is closely related?
I think what is helpful given that we are at an early stage in the regime is that ISU have been willing to give guidance on certain issues, and I think that this type of issue is one that he will be quite apt in terms of taking steer if there are activities that could be closely related and how closely it is related.
Acquiring control of that qualifying assets that are or could be used in connection with notifiable activities or closely linked activities or acquiring control of the qualifying assets that are themselves sensitive sites or approximate to sensitive sites. So for example critical national infrastructure sites or government buildings and in this context the Secretary of State may opt to consider the actual or the intended use of land. So those types of transactions would be more likely to be called in.
The flip side of that would obviously then be transactions are unlikely to be called in. If the qualifying entity does not undertake notifiable activities or closely related activities if the assets are not and could not be used in connection with notifiable activities or closely linked activities and the assets are not sensitive sites and not approximate to sensitive sites. So I think what that puts in play is paints quite a clear picture that when you take notifiable activities particularly if you had that entity acquisitions and have those as a bit of a benchmark. The closer you get to those activities or activities of that description the even more at risk you are of being called in and more clear blue water you have between what the entity does and those activities, the less likely this risk advancing of the transaction and being called in by the Secretary of State.
So what does all this mean? Well at the moment we see a picture where ISU is actively monitoring transactions and where a transaction is likely to be called in, it may well be the parties preference is to notify voluntarily and then structure that completion being conditional on specific outcomes following a notification. Other transactions voluntary notification may not be a perfect approach. It may be something whereby the risk is so low or the commercial timetable as such it does not allow for notification and clearance, that this is not seen as a viable option.
If it is the case that voluntary notification is to be made you have to gain unsurprisingly this will require detailed information to be gathered and submitted and time again needs to be factored in to enable that preparation. The level of information is less than under a mandatory notification but it is still a pretty substantial amount of data added together and as I mentioned before businesses don't keep that data in that format as a matter of course, that will acquire resource to be allocated to enable that to be put together in the process of deal preparation. Again no fee is payable, the same as mandatory notification with a voluntary notification again no fee is payable in that regard.
What I think is helpful and something that I know I am certainly looking forward to is that we were expecting guidance later this year and that guidance was set out based upon experience to date within the regime and factors for parties to consider when deciding whether or not to notify voluntarily. so I think there is implicitly an acknowledgement of the guidance that is available, perhaps full as it could be because we had a new dawn with the regime. There will be follow up guidance to this during the course of this year, which should hopefully provide parties with additional parameters to have in mind when they are making that decision around voluntary notification.
With that background in mind I quickly wanted to touch upon what makes notification can need for timing, and within this context what we see as we go through this is although there are references in guidance to time periods being 30 working days. There is actually quite a bit of room for extension around that. So if you are to notify that transaction the route notification once you put the time into the prepare it is it gets submitted online.
The notification must be confirmed as accepted as complete, so if you send something incomplete that is going to come back to you with an explanation as to what is missing, and you have to go and re-do the work on that to that to a state of being complete so that must be confirmed as being complete ad accepted. Once that happens so from the date of acceptance there is then a review period of up to 30 working days and in that period information may be requested where you would hope to land following that review period of 30 working days is no further action, so the green box on the left hand side there.
However, what is possible is that after that initial 30 working day review period you may find that the transaction is called in for a more detailed assessment so they are calling notice issued by the Secretary of State. What the Secretary of State can also do at that point in time is put in place an interim order and that interim order may impose certain restrictions, certain conditions that prevent pre-emptive action being taken. So what the Secretary of State does not want that to happen while the transaction is being looked at it is for parties to take certain steps then negate whatever the decision is a the end of the investigation. So the Secretary of State is able to put in place an order which could require the parties to effectively hold themselves separate and during that investigation period.
When we think about the call in investigation period there is a further initial period of up to 30 working days for assessment, that is capable of extension so if information is sought, if a meeting is requested then that clock will stop. So that 30 working day period is not set in stone but it is capable of extension and it can also be extended by a formal period of 45 further working days which again the clock on that will stop if information is requested, if meetings are requested and if at the end of that additional period the Secretary of State feels more time is still required then it is possible for further periods to be agreed with the party consenting to that. Once you have been through that process of the call in detailed assessment then you either end up with that green box, final notification, no further action good news or the red box of a final order by the transaction being subject to conditions are potentially prohibited.
So what we see from that is when we are notifying that can result in relatively open ended timelines and those actions that result in that open-endedness about some of the parties control, so that is something I need to bear in mind at the outset. That then means that when you are thinking about conditionality, conditions of completion, timings and longstop dates, those need to be carefully thought though having regard to where this could land in theory and making sure that those timings are captured in transaction documents and if something is taking longer than expected that has either been factored in so they all can carry on or that has been factored in and the deal is going to fall over because we didn't want to take it in as certain period of time and we have structured it in that way. So you need to think through those aspects.
What is also important is in addition to NSI is also addressing the transaction documentation, any relevant conditions and associated timings in relation to UK merger control regime and also any other applicable investments screening or merger control regimes.
To briefly touch on how the NSI Act interacts with UK merger control, what we see is that where a transaction could be reviewed it is capable of review under both the NSI and the UK merger control regimes. The ISU and BEIS and the CMA will work closely to manage cases. However, there is a role for parties in that context. We don't assume that the authorities themselves will be working, I'm sure they will be, but don't assume they will be and take an active role in that process. In terms of engaging, in terms of updating, keeping that in train in terms of that assessment and being proactively involved. The CMA may also share confidential advice with the Secretary of State to facilitate coordination where you have cases that are being investigated in parallel.
And where we have a final order being made or a final notification being given under the act so it went through Secretary of State call in, we've had that detailed assessment and final order or final application has been given then the Secretary of State is able to direct the CMA to take or not take such action under the merger control regime as the Secretary of State considers necessary and proportionate.
So the Secretary of State can trump the CMA and would be able to direct the CMA to say we have reached a decision, there should be no investigation under the UK merger control regime. The Secretary of State will consult the CMA before issuing such a direction, but again I think in that context it is not something the parties should assume but necessarily be happening. I think you would want to try and actively involve yourself in any such process.
So to close before moving on to questions, just touching then at the end on risk management. So what we should keep in mind when planning transactions, whether it is a buyer or a seller?
The first thing is to consider whether this transaction actually has sufficient links to the UK, does it fall within the NSI regime and don't assume it does necessarily and check it does and also if you are thinking about corporate restructuring reorganisation just have in mind NSI regime could that be caught. It may not seem at first blush like it should but could it be as a matter of law.
If it is the case the transaction moving forward in the scope you know think about the rights being acquired and the implications of these in relation to that concept of control that we discussed, but really importantly dedicate appropriate resources and time and always critical time to consider the full extent of qualifying entities activities and the uses of qualifying assets.
With all this in mind gather that background information, would the Secretary of State be able to review this transaction and if so is that because it falls on to the mandatory notification requirement or is it the case that the Secretary of State potentially call in this transaction?
What is the risk of the transaction being adversely affected? So if it was reviewed, it was called in at the end of a review under the NSI regime what is the risk to this transaction? Would it still be standing, would it have to be modified? What does that risk look like?
Are there any other risks this faces? So again into that mind-set of NSI is not a one stop show, does it face any other risks under the applicable regime, could UK merger control bite on this or what risk did it face in that context?
And in view of all these risks the key question is, is the transaction still viable? Is that level of risk commercially acceptable? If it is not then you have a steer in terms of where the transaction proceeds. If that risk is acceptable I think then you need to go into considering the requirements or a strategy regarding notification but it is not a mandatory notification and that could include particularly for perhaps some transactions that would be seen to be more problematic.
The possible PR campaigns and not just focussing on the legal aspects of this but thinking about PR campaigns or the need to be perhaps certain discussions, position a transaction a certain way, the good news to talk about the transaction. Also potentially engaging with ISU and CMA as might be relevant in the context of UK merger control.
I think really critically is ensuring that obviously conditions to completion have been properly through and are captured in deal documents and that the associated timelines bearing in mind how open some of those aspects can be around the NSI regime having factored into the deal timetable.
Well we have cantered though a fair amount of content there in a relatively short period of time but I will take my screen off now and questions David?
David: We have had some questions coming in. One of the questions that has come in is about how early you can put in a voluntary notification in I mean for example do you need to exchange?
Sam: That's a really good question and we don't have 100% clear guidance on that. So what the guidance makes clear is that if the parties have heads of terms for a transaction that is something which BEIS considers could then be sufficient to call in that transaction to say the Secretary of State will have jurisdiction to review, contemplated the transaction, here are the heads of terms we want to call this in. I think the flip side of that then has to be whether that could be called in, that should also capable of voluntary notification so it has got to the point of heads of terms I think based on the guidance heads of terms should be sufficient to go in and voluntarily notify and that's not a million miles away from where the CMA is. The CMA has made it clear that the heads of terms, mean that would be sufficient to notify a transaction under the UK merger control so I think it not is going to be stretch to apply that same view and the context of the NSI regime.
David: You sort of talked about the parties sort of anticipating the risk of mandatory notification and therefore might want to actuary do a voluntary notification. I mean is a voluntary notification likely to be quicker than a mandatory one?
Sam: We have seen nothing to suggest that would be the case and I think it also depends upon what you are notifying, so I think I would say as a rule of thumb you would always have a quicker route with voluntary notification. I do not think that is the case. I think it will be a fact specific assessment of the transaction and you could voluntarily notify something which may actually give rise to quite significant concerns around national security and could be subject to a full assessment on the basis of the call in notice, various questions, the clock being stopped so it could actually be that you have some transaction that did take a long time to get an outcome even though they had voluntary notified
David: And are the notifications confidential?
Sam: Yes. I think one thing that puts this in a different category to UK merger control if parties have had experiences before engagement of the CMA they would know that the way you have things even things like initial enforcement orders would be published certainly have a merger decision been published which sets out full reasons behind the CMA's decision. The NSI Act went into what it is covering is different in terms of publications, so even if you have a final order for example you would not expect that to go into detail of the reasoning setting out national security risks. You would have quite a concise summary of the transaction and the action being taken which in notifying something certain notifications would not be made public and the steps around so you can have orders put in place. Now the guidance in the case that is a matter of course, those would not be published so when we can get output from ISU around this. I think it is going to get a lot less than we see from the CMA and UK merger control regime.
David: So the final decision note would be published albeit with the brief decision.
Sam: You would be looking at a brief order setting out parties, what was actually meant but in terms of the detail substantial analysis it would not be something you as a party might set to have a good look at and say well that was the concern. That is exactly how we mapped it, that's how they worked it all through, we can apply that to our thinking. I think there will be much more concern around the sensitive information and it will be removed before being made public.
David: Talking of confidentiality obviously if it is a listed transaction or one that needs to notify to the stock exchange it becomes a public transaction. There are lots of transactions out there that are not true, not very public or maybe entirely private. How is the Secretary of State going to know about them?
Sam: That is a really good question. I think that where we have seen interactions around this is the ISU looking at what has been going on in the marketplace picking up on press releases. We will expect or can expect is that the ISU will have a team which is dedicated to looking at transactions. We know the CMA has its own mergers intelligence team, we know that the CMA actively monitors transactions. It may be the case that there is a possibility of information being exchanged with CMA and ISU in terms of monitoring market activities, it my be the case that ISU decides to build up its own powers in that respect, but I think what we do know is there is market monitoring that is taking place and quite what that looks like and quite what the numbers are in terms of what is involved in that. We do not have visibility of it at the moment.
David: So if it is a mandatory notification, but it's a private transaction, it is going to be quite big risk to take isn't it, hoping nobody is going to spot it.
Sam: I think that's right and in particular as well when you have no longstop date, so this could be something that sits in theory dormant in the background Companies House documents for decades and then it is then flagged. We have seen transactions that were kept quiet were then publicised perhaps on the back of the reports on the local paper. The CMA where they looking back years down the line. You can see a similar thing happening here and I think it has been the case that that mandatory requirement has deliberately been avoided and it has been deliberately suppressed you can see then the possibility of some of the sanctions perhaps being applied perhaps with a view to deterring that kind of activity.
David: But it could be a factor in deciding whether or not to make a voluntary notice, how public it's going to be.
Sam: Yes I think that is right. Some parties may wish to consider a round how decision press releases. Are they inviting effectively a call in by talking about certain activities? Could they perhaps play this in a slightly different way, and obviously you would want to get that scenario in terms of worst case scenario we get called in, this happens, we can then if we having to order we could run the acquired business hold it separately in this way, we have got our bases covered there for it's a viable strategy to keep quiet and not notify and wait and see because five years sounds like a long time, it can fly by if other things crop up and perspectives change around particular areas, so it could be about the strategy.
David: So you've taken us through what the legislation says, what the guidance says and what you can draw from that and the analogies you can draw from the UK merger regime as well, but I know from talking to you on the transactions, it is not entirely clear and of course we haven't had much caseload happening have we so are you able to approach the Secretary of State for guidance as to whether something is notifiable and how it should be approached and what the interpretation of the regulations are from their point of view?
Sam: I think that's a really interesting facet of having a new regime, particularly one in which when you will have indemnity output from the authority. It may be the case that you do not really see the sorts of judicial challenges are necessarily set, how the framework of legislation should be applied where you have in other areas. So what we have found from our own experience is that ISU where we are at this point in time this new dawn are happy, I say happy, are willing to respond to requests to clarify certain aspects. In some recent transactions, we flagged a couple of points in the notifiable acquisitions regulations where we can't quite work out what was the intention behind the drafting and we then approached ISU and asked them if they could clarify how this was meant to operate and they talk about a week and a half, two weeks but it did come back then with their perspective on how that should be interpreted, how this would apply and obviously that is not going to be binding in a court of law, but I think it is helpful if you don't receive on the basis of their interpretation you have taken the time to then go and assume and discuss with them so on that basis. If anything comes out from that transaction you at least have the comfort of, you have tried to play it by the book here. You have actually gone and sought advice from ISU, so not legally binding but helpful nevertheless at this point in time to have that access to ISU and to have that willingness to actually give a view on how this regulation should be applied.
David: Great. Well Sam thank you very much. I am sure the audience and I certainly found that a really useful comprehensive view. You as to firstly whether you need to worry about it and when you need to worry about it but then if you do need to worry about what we need to do, I'm sure everyone will find that this very useful. I know we have not got to all of the questions you will have received and we will be looking at those ones we have not done afterwards and as I said the copy of this webinar will be available so you will be able to re-watch it at your leisure or indeed share it with colleagues. So thank you very much. Thank you very much for joining is today and look out for our invitations to the Spring ThinkHouse. Thank you.
Sam: Thank you.
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