The National Security and Investment Bill could have a chilling effect on UK transactions

What is the National Security and Investment Bill?

Briefly, the Bill seeks to establish a comprehensive system for the review of transactions that the Government might wish to question on national security grounds. It extends beyond M&A, including investments above specified thresholds, IP licensing or sale and real estate transactions. Combining mandatory and voluntary notification schemes, with call-in powers and tough sanctions, the proposed law threatens to change UK investment and M&A activity profoundly.

While the focus is on an identified list of sectors, this list is extensive and broadly drawn, and remains so after the consultation process discussed below.

The concept of national security is not defined, with Government resisting Parliamentary efforts to introduce a definition on the basis that this could limit the scope of the new powers.

Where notification is required, transactions may not go ahead without clearance, meaning that a six week time lag is baked in.

We discuss the essentials of the proposed system here.

Concern over chilling effect

There is widespread concern over how the legislation will affect UK business, particularly among those sectors included in the mandatory notification list. Many business and industry groups have expressed concerns on the impact it is likely to have, particularly in the innovative industries that the UK is currently seeking to develop and expand. The UK BioIndustry Association, for example, has said that:

“The regime with these definitions and control thresholds would place an undue burden on hundreds of businesses in our sector and make the UK a less attractive place globally to start and build life sciences companies.”

Too many transactions likely to be referred

Many commentators consider that the scope of the proposals is too wide and will interfere with far too many transactions. There are also worries that a newly established Investment Security Unit within the Department for Business, Energy and Industrial Strategy (BEIS) will be overwhelmed, meaning that deadlines are not met and transactions are held up in the pipeline.

Initial estimates predicted that the scheme would see around 1,800 notifications annually. However, many criticised that figure, with much higher numbers widely expected on basis of the legislation as drafted. There is no threshold for smaller transactions, meaning that many innovative start-ups could be faced with a forbidding compliance burden and delays in obtaining investment.

The policy objective focuses on non-UK entities gaining control over UK assets. However, in order to prevent sophisticated avoidance structures, the regime does not require any overseas entity to be involved. This means that many entirely UK transactions will need to be notified even where it is clear that there is no foreign involvement at all.

A recent Government amendment would see the threshold for a “notifiable acquisition” increased from 15% to 25%.  This will be welcome news for smaller businesses and start-ups, many of whom were concerned that the 15% threshold would inhibit much vital fundraising activity. However, it will still be possible for Government to call in the transaction for review where it reasonably suspects that material influence has been or will be acquired.

Despite this change, the breadth of the mandatory notification requirement is still of concern.

Consultation has not narrowed down the scope

The sectors listed for mandatory notification were opened up for consultation in November 2020. The results of that process are now available. Concerns were expressed about the broad and vague nature of the sectors as defined, and the response to the consultation indicates that the definitions have been clarified and narrowed in scope. The definition of Engineering Biology has been changed to Synthetic Biology, for example. However, the list is long and covers a very broad range of activities under the following headings

• advanced materials
• advanced robotics
• artificial intelligence
• civil nuclear
• communications
• computing hardware
• critical suppliers to Government
• critical suppliers to the Emergency Services
• cryptographic authentication
• data infrastructure
• defence
• energy
• military and dual use
• quantum technologies
• satellite and space technologies
• synthetic biology
• transport

It is worth noting that the definitions will be included in regulations, and so will be subject to further refinement after the system begins to operate.

What next?

The Bill is moving swiftly through the Parliamentary process and is expected to become law shortly, taking full effect later in 2021.

The ability of the Government to look back to 12 November 2020 and call in transactions completing from that date onwards means that the legislation is already affecting business activity.

We can expect the process to become more efficient and streamlined as the Investment Security Unit develops its experience. Refinement of the system to focus on transactions that are of real concern can be done through regulations and practice. Initially, however, there is likely to be considerable friction and uncertainty as the regulator, business and professional advisers become accustomed to the system. Proposed transactions will need to be analysed at an early stage for possible notification requirements, and the impact on timing and cost built in.

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