On 29 April 2021, the UK Government passed the National Security and Investment Act 2021. The Act will overhaul the Government's powers to review deals in certain 'sensitive' sectors.

The M&A activities and other types of deals that could threaten national security in select sectors are now governed by a standalone screening regime which gives the Government extended powers to scrutinise, investigate, intervene and block transactions on the grounds of national security.

Stakeholders have raised concerns that the new regime could be used by the Government as a form of protectionism. The Government has however insisted that the new regime will focus solely on national security concerns and will give much-needed certainty and transparency to investors and businesses. That said, we expect reports of potential delays in upcoming deals such as the NVIDIA's proposed acquisition of Arm Limited; a UK chip design firm that plays a key role in the UK's tech sector. The parties to such deal are now required to reconsider their deal structure and build in the proposed legal changes into their business model.

These reforms are part of a wider trend in Europe where Government interference in M&A deals is on the rise through merger controls and control over foreign direct investment (FDI). For example, in 2017, Germany and Italy completed a revision of their FDI screening mechanism. In April 2019, the EU Commission's proposal to establish a legal framework for the screening of FDI inflows into the EU came into force and has become applicable from November 2020.

What is the rationale of the Act?

The Act addresses the UK Government's concerns of foreign investors taking a 'back door' route in investing in the UK. The expanded scope has been driven by the Government's experience that "at times investors have found novel means to try to obfuscate our current regime; for example by structuring a deal in such a way that it is difficult to identify the ultimate owner of the investment by funnelling investment through a UK or ally investment fund or by buying or licencing certain intellectual property, rather than investing in or acquiring the whole company directly". Fears that the Covid-19 crisis made certain sectors and businesses vulnerable to foreign takeover also exacerbated the need for the Act.

The Screening of FDI itself is nothing new. For example, in 2015 the Government's National Security Risk Assessment revealed national security threats in certain sectors/areas, such as the technology advancement and cybersecurity threats. Two years later, the Government published a Green Paper to address these concerns. In 2018, a White Paper was then introduced with reform proposals reaffirmed by the current Prime Minister Boris Johnson in the Queen's Speech in December 2019. These reforms have been overshadowed by Brexit talks and the Covid-19 pandemic taking centre stage. As the dust settles with talks of a vaccine and recovery rates, the Government has shown its commitment by granting the Act the Royal Assent on 29 April 2021.

How are FDIs reviewed under the current regime?

The current regime is governed by the Enterprise Act 2002 under which the UK Government can intervene in deals on national security grounds in certain protected areas (i.e. military and dual-use, multi-purpose computing hardware, quantum technology) where the investment threshold (i.e. 25% share of supply or turnover of domestic company greater than £70 million or £1 million in protected sectors) is met. Mandatory notification is not required but the Government can impose obligations to undo integration. Sanctions include fines for ignoring information requests. In June 2020, the Enterprise Act 2002 (Specification of Additional Section 58 Consideration) Order 2020 was laid before Parliament and came into effect on 23 June 2020. This was to allow the Government to scrutinise certain foreign takeover deals to ensure they do not threaten the UK's ability to combat a public health emergency such as Covid-19.

Examples of recent deals caught under the current regime on the basis of national security concerns

Mettis Aerospace / Aerostar deal: Aerostar, a Chinese entity, sought to acquire Mettis Aerospace a UK based company that provides machined components in titanium, aluminium and steel.  However, on 20 December 2019, the Secretary of State (SoS) issued a public interest intervention notice relating to national security in accordance with sections 42(2) and 58(1) of the Enterprise Act 2002. The Competition and Markets Authority (CMA) subsequently prepared a report in accordance with section 44 of the Act examining the competition and national security aspects of the deal. The report was received by the SoS on 13 February 2020, however, the parties abandoned the proposed acquisition.

Impcross Limited / Gardner Aerospace Holdings Limited deal: Gardner, a Chinese entity, sought to acquire Impcross Limited - both companies are manufacturers of parts for the aerospace industry. On 5 December 2019, the SoS issued a public interest intervention notice relating to the proposed acquisition and the CMA was required to submit a report to the SoS which was delivered in March 2020. In September 2020, the SoS announced that it had accepted statutory undertakings from Gardner Aerospace confirming that Gardner Aerospace no longer intends to acquire Impcross Limited.

What are the key features of the Act?

Specified sectors             

Subset of transactions within 17 specified sectors have been identified by the Government for the time being. These are: (i) civil nuclear; (ii) communications; (iii) data infrastructure; (iv) defence; (v) energy; (vi) transport; (vii) artificial intelligence; (viii) autonomous robotics; (ix) computing hardware; (x) cryptographic authentication; (xi) advanced materials; (xii) quantum technologies; (xiii) engineering biology; (xiv) critical suppliers to Government; (xv) critical suppliers to the emergency services; (xvi) military or dual-use technologies; and (xvii) satellite and space technologies. Investments in entities within these sectors will be subject to mandatory notification obligations however, investments in assets in these sectors (as opposed to legal entities) are not subject to mandatory notification obligations.

Transactions  caught under the regime – trigger event 

Transactions that results in the foreign investor having, directly or indirectly:

(a) votes or shares of the target legal entity that exceed a threshold of 25%, 50% or 75%;

(b) voting rights that enable or prevent the passage of any class of resolution governing the affairs of the target (seemingly by reference to the classes of resolution that could be vetoed or determined with a 25%, 50% or 75% interest under the Companies Act 2006); or

(c) material influence over the target's policy, which the Government intends to be interpreted consistently with the test for material influence under the UK's merger control regime, are caught under the regime (the "Trigger Event").

However, it should be noted that the SoS' powers to scrutinise a range of transaction is not limited to the above, unlike the current regime, there is no minimum turnover level or asset value or market share in relation to the acquisition.

Mandatory notification                

For mandatory notifications bullet point (a) and (b) above will apply but (c) will be replaced by a threshold of 15% of the target's shares or voting rights. The SoS will have the power to amend sectors and activities which fall within the mandatory notification system.

Voluntary notification  

For transactions not caught by the mandatory notification system, the parties are encouraged to notify the Government of 'Trigger Events' that may raise national security concerns. The SoS will also have a five-year retrospective power to call in transactions for review.

Ascertaining trigger events       

In ascertaining whether a Trigger Event could lead to a national security risk, the Government will consider three factors:

• Target risk –  the nature of the target and whether it is in an area of the economy where the Government considers risks more likely to arise.
• Trigger event risk – the type and level of control being acquired and how this could be used in practice.
• Acquirer risk – the extent to which the acquirer raises national security concerns.

Review period  

The Government anticipates a large number of notifications or call-ins of transactions and has set a 30 working day 'initial' review period which may be extended by an 'additional' 45 working day period if the transaction requires detailed national security assessment.

Sanctions 

Sanctions imposed for breach of the mandatory notification requirement could be criminal or civil, including imprisonment of up to 5 years and/or fines of up to 5% of worldwide turnover or £10 million – whichever is greater.

Territorial Scope             

The new regime will apply to direct investments in the UK. Non-UK entities will fall under the scope of the Act if they either carry out activities, or supply goods or services to customers in the UK. Non-UK assets will also be caught under the Act if they are linked with activities carried out in the UK or the supply of goods or services to customers in the UK.

Examples of deals that could be caught under the new regime on the basis of national security concerns

• NVIDIA's proposed acquisition of Arm Limited, a UK chip design firm that plays a key role in the UK's tech sector for £30 billion. The Government has stated that it will closely monitor this deal. The parties have confirmed that Arm Limited will remain at its Cambridge headquarters and with the possibility of site expansion. On 19 April 2021, the UK Government issued a “public interest intervention” notice that targets the proposed acquisition. The notice stated that Secretary of State believes that it is or may be the case that the interests of national security, being a public interest consideration, are relevant to a consideration of this relevant merger situation. The CMA is required to investigate and report on this merger by midnight at the end of 30 July 2021.
• Allied Universal's £3.8 billion purchase of  the British private security firm G4S – a Government contractor at prisons and nuclear power stations. The deal was announced on 5 April 2021, following a three-month-long bidding war with Canada's GardaWorld.

Looking ahead

With the welcome news of Covid-19 vaccine and as M&A deal activity continue to pick up, investors will need to factor in the proposed legal changes into their business model. Specially that the Act has an extra-territorial impact on non-UK entities and assets used either in connection with activities carried out in the UK, or the supply of goods and services to customers in the UK.