New UK foreign direct investment review regime to commence in January 2022

29th July 2021

On 20 July 2021, the UK Government announced that the National Security & Investment Act 2021 (the Act) will come into effect on 4 January 2022. From that date, as previously reported (see here):

• a mandatory filing regime will apply to acquisitions of interests in entities operating in 17 “Key Sectors” in the UK; and
• the Secretary of State will have the power to call in for review any “trigger event” which closed on or after 12 November 2020 if he/she reasonably suspects that it has given rise to or may give rise to a risk to national security.

The Government has also published four guidance documents, including one on the extra-territorial application of the new regime, a draft statement on how the Secretary of State will use its call-in powers under the Act and a draft statutory instrument which further refines the definitions of the 17 Key Sectors that will fall within the mandatory notification regime.

We set out below a reminder of the principal features of the new regime, followed by the key points to note from the materials published last week.

Principal features of the new regime

From 4 January 2022, a transaction will have to be notified to the Secretary of State if the target entity carries on activities in the UK in a Key Sector and the transaction either:

• increases the acquirer’s percentage of shares or voting rights in the target to over 25%, 50% or 75% of the total, or
• enables the acquirer to pass or block a corporate resolution of the target.

If a transaction which is subject to the mandatory filing requirement is completed without or before approval being obtained, the acquisition will be void and the acquirer and its officers will face significant fines and/or imprisonment.

The Secretary of State will also have the power to call in a transaction for review if he/she reasonably suspects that:

• a “trigger event” has taken place or is in progress, and
• it has given rise or may give rise to a risk to national security.

In relation to share acquisitions, a trigger event will occur where the acquisition:

• increases the acquirer’s percentage of shares or voting rights in the target to over either 25%, 50% or 75%,
• enables the acquirer to pass or block a corporate resolution of the target, or
• enables the acquirer to “materially influence” the policy of the relevant entity.

In relation to asset acquisitions, a trigger event will occur where:

• the target assets include land, tangible moveable property or “ideas, information or techniques which have industrial, commercial or other economic value” (e.g. trade secrets, databases, software); and
• the acquirer, as a result of acquiring rights or interest in the assets, is able to either:
  • use the asset, or use it to a greater extent than prior to the acquisition, or
  • direct or control how the asset is used, or do so to a greater extent than prior to the acquisition.

The call-in power will only be effective once the new regime comes into force but will apply to any transaction which completed on or after 12 November 2020.

New Guidance

Four guidance documents published by the Government provide advice on:

• how to prepare for the new regime (available here),
• how the Act could affect people or acquisitions outside the UK (available here),
• how the Act interacts with other regulators and codes (available here), and
• how the Act may affect the higher education and other research-intensive sectors (available here).

Of particular interest to many businesses is likely to be the second document, which provides some useful additional guidance on when transactions involving target entities which are not incorporated in the UK or target assets which are not located in the UK may be caught by the regime. By way of reminder:

• transactions involving a target entity incorporated outside the UK may be subject to the mandatory filing regime or the call-in power if the target carries on activities in the UK; they may also be subject to the call-in power if the target supplies goods or services to the UK; and
• transactions involving target assets located outside the UK may be subject to the call-in power if the assets are used in connection with activities in, or the supply of goods/services to, the UK.

The guidance explains that:

• For an entity to be “carrying on activities in the UK”, there needs to be an activity (such as a business) being carried on in, or partly in, the UK and the entity must be sufficiently involved in that activity to be said to be carrying it on, whether alone or with others. An example is given of an overseas company that does business from a regional office or R&D facility in the UK. An entity is also likely to carry on activities in the UK if it has staff who travel to the UK for business and they undertake business activities similar to working in a regional office (for example, by performing services for a UK client on a regular basis). If those staff are solely conducting market research or are part of a sales team seeking new clients, the entity is likely not to be carrying on activities in the UK for these purposes.
• For an entity to be “supplying goods or services to the UK”, goods or services must be being provided from one person to another, and the recipient needs to be in the UK. The entity needs to be sufficiently involved in that supply to be said to be making the supply, whether alone or with others. For example, this would generally be treated as including an overseas company that produces goods for exporting to a company in the UK or is responsible for distributing them to the UK company.
• For an asset to be “used in connection with activities carried on in the UK”, there needs to be an activity carried on in the UK (regardless of who is carrying on that activity, or where they are based), and that asset needs to be used in connection with that activity. For example, this would include an asset such as machinery located overseas used to produce equipment that is used in the UK.
• For an asset to be “used in connection with the supply of goods or services to people in the UK”, there needs to be a supply of goods or services to people in the UK and the asset must be used in connection with that supply. For example, this would include an offshore wind farm which is used to generate electricity which is supplied to the UK.

A thorough analysis of how this guidance applies in transactions involving target entities or assets outside the UK will be key to ensuring a proper assessment of the need for a mandatory filing or the risk of the transaction being called in for review.

Draft statement on use of the call-in power

The Government has also published a draft statement setting out how the Secretary of State expects to use the call-in power (the Section 3 Statement). Running to a mere 38 paragraphs, this does not provide the detailed guidance businesses and their advisors may have hoped for on this crucial question but does clarify some aspects of the previous draft document published in November 2020.

In common with the previous draft document, the Section 3 Statement begins by setting out the areas of the economy in which an acquisition is most likely to be called in. It clarifies that acquisitions “could be more likely to be called in” where the target is active in:

• one of the 17 Key Sectors which are subject to the mandatory regime, or
• an area of the economy which is closely linked to these 17 Key Sectors but is not subject to the mandatory regime (for example, an area related to transport but not strictly within scope of the definition of transport given in the regulations).

Qualifying acquisitions which occur outside the above areas of the economy are “unlikely to be called in”.

The Section 3 Statement then goes on to outline the three risk factors the Secretary of State will take into account when deciding whether to use the power. These remain as previously described, namely the target risk, the acquirer risk and the control risk (previously referred to as the ‘trigger event risk’).

In relation to the target risk, the statement explains that the Secretary of State will consider what the target does, is used for, or could be used for. Assessment of the target risk may also involve consideration of any national security risks arising from the target’s proximity to sensitive sites. Overall, the Secretary of State expects to call in acquisitions of assets rarely and significantly less frequently than acquisitions of entities.

In relation to the acquirer risk, further details are provided of the types of acquirer characteristics which the Secretary of State is likely to consider. These include its sector(s) of activity, technological capabilities and links to entities which may seek to undermine or threaten the interests of the UK, including the integrity of the UK’s democracy, the UK’s public safety, the UK’s military advantage and the UK’s reputation or economic prosperity. Some characteristics, such as a history of passive or longer-term investments, may indicate low or no acquirer risk.

Finally, in relation to the control risk, the Section 3 Statement explains that a large amount of control may increase the possibility of a target being used to harm national security and therefore increase the risk of an acquisition being called in.

The statement is subject to public consultation until 30 August 2021, after which the final version will be published and laid in Parliament.

Revised definitions of some of the 17 Key Sectors

Finally, having previously consulted on the definitions of the 17 Key Sectors and published a response in March this year, the Government has now published draft regulations (available here) setting out revised definitions for some Key Sectors. The sectors themselves remain the same:

• 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
• Synthetic Biology
• Military & Dual Use
• Quantum Technologies
• Satellite & Space Technologies
• Transport

Businesses should note that the draft regulations are subject to further amendment before a final version is laid before Parliament later this year, although further significant changes are not expected.

Practical advice for businesses considering deals with a UK nexus

Now that the commencement date of the Act has been fixed, businesses can better judge how the regime may apply to any deals with a UK nexus they are currently considering.

For transactions which are likely to complete before 4 January 2022, the parties should consider whether an informal submission to the Investment Security Unit would be appropriate. This may particularly be the case for transactions which would be caught by the mandatory regime or which the Section 3 Statement suggests may otherwise raise potential national security concerns.

For deals likely to complete on or after 4 January 2022, the parties will need to determine whether a mandatory filing is required or a voluntary filing may be advisable.

However, parties should be aware that, provided that the necessary filings are made, the new regime is not expected to have a substantive impact on many deals. The Government says it expects the vast majority of notified deals to be cleared unconditionally within 30 working days of notification and the main impact will therefore be a potential short delay to the transaction timetable to allow for a filing or informal submission between signing and closing.