The National Security and Investment Bill (the Bill) is shortly due to receive Royal Assent. If granted, it will become law and could have a significant impact on the UK's cross border inward investment and M&A activity. Despite its far-reaching impact for UK and non-UK business it has attracted very little press attention, its wide-reaching implications buried (perhaps unintentionally) under Brexit and Covid-19.
The Bill seeks to intervene in business transactions which could impact national security, enabling the UK Secretary of State (SoS) to investigate acquisitions of sensitive entities and allowing the SoS to undertake a national security assessment, for up to 5 years after the transaction. The Bill will also establish a requirement for proposed acquirers of said sensitive entities and assets to seek prior authorisation and to obtain approval from the SoS before completing their acquisition. All a bit odd given the recently created Office for Investment which is driving 'inward investment.... through a single front door' to support the Government in attracting foreign investment, with a key focus being infrastructure, clean technologies and research and development. This office, created in November 2020 "will support the landing of high value investment opportunities into the UK which align with key government priorities, such as reaching net zero, investment in infrastructure and advancing research and development." It will be interesting to see how this office works in tandem with the Bill.
The Bill marks a substantial change in the UK's cross border deal making system. It creates a business backdrop in the UK unlike anything I have seen before in my 25-year career. I recall the heady days when we sold our ports to Canadian pension funds, to Singapore and to Hong Kong without batting an eyelid. Now there could be a mandatory notification obligation for sectors perceived to be of highest national security risk; an (arguably) subjective risk assessment for sectors such as energy, technology, and life sciences. In seeking to protect the UK's technology against third party opportunistic acquisitions of undervalued UK businesses there is a, not insignificant, danger that beneficial opportunities - not merely financial, but of scale too - will be lost. The mandatory notification together with the proposed broad jurisdictional scope and lack of safe harbours could scupper a wide range of transactions.
There will be a voluntary notification system to encourage parties who consider that their trigger event may raise national security concerns to notify and separate powers to impose remedies to address risks to national security, sanctions for non-compliance with the regime and mechanisms for legal challenge. The UK Government has already estimated that up to 1800 transactions may be notified to them annually, a significant leap from the 12 transactions have been reviewed on national security grounds since 2003. Clearly the foreign investment reforms have arisen as a result of, but not exclusively, concern over investment from China. This was reflected by the recent decision in relation to Huawei's involvement in Britain's 5G networks.
The UK has been one of very few Western economies without foreign investment legislation historically and the Bill will align the UK's foreign investment control with a significant number of major economies worldwide. The EU have also introduced EU Investment Screening Regulation, reflecting political worries over foreign investment in national infrastructure and in sensitive areas.
Prior to the Bill's enactment, investors in the UK will need to consider the planned reforms. The UK Government will have a retroactive ability to investigate transactions which occurred following the introduction of the Bill, before it even became law, ushering in a whole new meaning to the phrase 'Buyer beware'.
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