The UK government is currently consulting on reforms which would substantially increase its powers to scrutinise M&A transactions for the purposes of protecting national security.
Under the reforms, the government would have the power to "call in" transactions for review where a "trigger event" gave rise to a reasonable suspicion of a national security risk.
A trigger event is broadly defined in the consultation paper as any event which results in:
- the acquisition of more than 25% of shares or votes in an entity;
- the acquisition of more than 50% of an asset; or
- the acquisition or increase in significant influence or control over an entity or an asset.
So, potentially a wide range of deals would be in scope.
National security risk factors
When assessing whether there was a reasonable suspicion of a trigger event posing a threat to national security, the government would consider three risk factors:
- The target risk: could the entity or asset pose a threat to the UK's national security?
- The trigger event risk: could the trigger event give the acquirer the means or ability to undermine the UK's national security through disruption, inappropriate leverage or other means?
- The acquirer risk: could the acquirer seek to use their acquisition of control over the asset to entity to undermine the UK's national security?
In considering the target risk factor, the government considers that targets in the following sectors are more likely to pose a national security risk than in other parts of the economy:
- national infrastructure (particularly the core areas of civil nuclear, defence, communications, energy and transport);
- advanced technologies (particularly the core areas of advanced materials and manufacturing science; artificial intelligence and machine learning; autonomous robotic systems; computing hardware; cryptographic technology; nanotechnologies; networking and data communication; quantum technology; and synthetic biology);
- critical direct suppliers to the government and emergency services sectors;
- military and dual-use technologies; and
- critical suppliers who directly and indirectly supply the above sectors.
In a small number of cases, real estate transactions may also be caught: for example, if the land was located next to a sensitive site and a hostile party acquiring the land could gain insight into sensitive information.
Notification and assessment process
In the consultation paper, the government implicitly acknowledges that the risk of a transaction being called in could lead to a great deal of uncertainty in the M&A landscape. In order to mitigate the risk, a notification system would be introduced so that trigger events could be voluntarily notified by parties and pre-cleared, though the government would reserve the right to call in any transaction or event, whether or not it had been notified.
The assessment process would take up to 30 working days, potentially extendable by a further 45 working days. If, following its assessment, the government concluded that national security is at risk, it could impose such remedies as necessary and proportionate. For example, it could impose conditions in order to prevent or mitigate the risks, allowing the trigger event to proceed. As a last resort, the government would be able to block or unwind the trigger event.
The government expects to receive about 200 notifications a year. It expects around 100 of those to raise concerns of national security and be subject to a full assessment, and around 50 deals to eventually be subject to an intervention. By contrast, over the last two years there has only been one national security-related review per year.
The consultation closes on 16 October 2018 and will ultimately need new primary legislation to come into effect.
Osborne Clarke comment
This intervention forms part of a package of measures which the government has been considering to address concerns that the UK has insufficient controls over foreign investment into the country. The UK is by no means unique in this: many other countries – including the United States, Australia, Germany, France and Japan – are similarly looking to modernise their powers in this area.
And of course, these controls are being introduced with the ever-present backdrop of Brexit. Whilst this is a UK policy and therefore not directly impacted by Brexit, the political negotiations around Brexit may well influence the final decision on how these proposals are implemented.
Given the wider political landscape, it is likely that a national security control regime along these lines will be brought into effect during the life of this Parliament, notwithstanding the possibility of delay caused by Brexit legislation filling the Parliamentary timetable.
Once enacted, this will be a substantial change to the UK M&A landscape. Businesses will need to adjust M&A processes to incorporate an assessment of whether a transaction is reasonably likely to give rise to a national security risk and whether, tactically, a pre-completion notification should be made. Notifiable transactions will need to factor the assessment process into their timetable, likely leading to an increase in the number of split exchange and completion deals.
The changes will be of particular interest to those sectors identified by the government as more likely to give rise to national security concerns.