The Government wants “greater safeguarding powers to ensure that a small number of investments that may aim to harm the UK’s national security cannot do so”. It says its new National Security and Investment Bill will “strengthen the UK’s ability to investigate and intervene in mergers, acquisitions and other types of deal that could threaten our national security”.
This sounds reasonable but, if enacted (and we have no reason to suppose that it will not be enacted as drafted in the first half of this year), the bill will have a significant impact on all deals within the technology sector. Anyone undergoing or planning any M&A activity must be aware of the challenges this bill will bring. Tech businesses in particular need to know whether a transaction is notifiable, as well as how to deal with the risk of the deal being delayed, becoming subject to conditions, or even being voided.
What does the bill mean in practice?
It gives the government the power to:
- stop or regulate and even undo any acquisition of any UK-based businesses or assets which it perceives to carry national security risks; and
- require advanced notice and approval of all deals in 17 “sensitive” but broadly-defined sectors of the UK economy.
It places the burden of managing and mitigating the risk of government intervention on all involved in M&A deals, as well as those involved in deals related to significant technology, intellectual property or land.
The bill, which has its second reading in the House of Lords in early February 2021, gives no clear guidance as to what deals could be affected, and will delay and add costs to many deals. The new law can also be applied retrospectively, meaning that deals completed since 11 November 2020 could be cancelled. Additionally, and in contrast to most controls on mergers, the bill is subject to few mitigating aspects such as minimum deal-sizes or turnover thresholds.
How will the new law work?
The soon-to-be-enacted law will:
- allow the Secretary of State for Business, Energy & Industrial Strategy (SoS) to assess whether, and act if, a deal is a national security risk;
- require buyers in the sensitive sectors to seek approval before completing their deal;
- require notice even for an increase in shareholding which passes the threshold of 15%, 25%, 50% or 75% of the votes or shares or which gives ‘material influence’. (Most buyers, especially PE houses, and many funders will have material influence);
- encourage voluntary notice in other sectors; and
- impose remarkable financial and criminal sanctions for non-compliance – and the ultimate sanction of invalidating any deal.
The sensitive sectors in which notice is mandatory are widely defined. They include advanced materials and robotics, AI, nuclear, communications, computer hardware, critical supplies to government, cryptographic authentication, data infrastructure, defence, energy, engineering biology, military, quantum satellite and space technologies and transport.
Many deals which few think have any strategic relevance will therefore be subject to mandatory notice.
Thirty working days
Where mandatory, notice gives the SoS 30 working days to review and clear the deal (which can be extended by a further 30 or even 45 working days). If no notice of a deal has been made (whether notice was mandatory or merely voluntary or merely because the bill had not yet become law), the SoS can call in the deal for review up to five years after completion. They can also review notified transactions within six months of their completion.
Impact on all transactions
It is not only company acquisitions that may be reviewed: the new regime also applies to any assignment or licence of an asset (eg, intellectual property, technology or information) and any acquisition, occupation or assignment of potentially strategic land. The new law will also have extra-territorial effect, as it applies to any asset, wherever located, so long as it’s used in an activity in the UK, or to supply goods or services in the UK.
What is a national security risk?
The only real test is whether the SoS is satisfied that, on the balance of probabilities, the deal poses, or would pose, a national security risk. The SoS can only base any decision on national security grounds, not general economic or political interests. A ‘statement of policy intent’ will set out and influence how the SoS uses their powers and include illustrative examples of factors that may be considered.
What happens if a national security risk is found?
The SoS may prohibit or undo the deal, or impose conditions with no limit on the conditions that could be imposed. For example, the acquirer and the target may be obliged to change the terms of the deal or how the target operates, to supply information to the government from time to time, or be forced to undertake not to deal with, or transfer property or information to, certain countries or parties.
Is there a penalty for non-compliance?
Where the mandatory notice regime applies and a transaction is completed before it is cleared, the transaction will be void and the parties can be subject to fines of up to the higher of 5% of worldwide turnover and £10 million. Individuals may also be imprisoned for up to five years. Other penalties also apply for non-compliance with information requests or other aspects of the review process.
The obligation to notify (and hence the penalty for failure to notify) falls on the buyer. If the deal is voided or conditions are imposed, the practical consequences will fall on all involved (including advisers to the deal and especially introducers who have received fees on the basis of a done deal). How parties mitigate that risk is yet to be seen and will be subject to much negotiation. It is very likely that more deals will be notified than the c.1000 p.a. which the Government has said it expects.
How best to deal with the deal
If enacted, all deals within the UK’s tech sector will be impacted. It is therefore imperative that anyone involved in any M&A deals take good legal advice. We can advise you on whether a transaction is notifiable and how to deal with the risk of that deal being delayed or becoming subject to conditions.
