National security bill set to ring changes for real estate M&A
Published on 17th Dec 2020
Investors in real estate will need to assess whether new interventions powers apply to their deals
The National Security and Investment Bill, which creates a new stand-alone regime for the UK government to intervene in a broad range of transactions on national security grounds, has potential implications for the real estate investment (REI) sector, particularly in relation to corporate real estate transactions. (For an overview of the regime and the implications for businesses in other sectors, see here.)
Types of acquisition
Acquisitions of any type of entity (for example, companies, LLPs, partnerships and trusts) and acquisitions of many types of assets (such as land, moveable property and intellectual property) fall within the scope of the Bill. This is a wider range of qualifying entities and qualifying assets than was previously anticipated. From an REI perspective, the regime captures entities that are often used as corporate vehicles in corporate real estate transactions (for instance, LLPs) and land deemed to give rise to national security concerns (for example, where it is located near Ministry of Defence sites).
Acquisitions of qualifying entities in 17 high-risk sectors will face mandatory notification, subject to certain criteria being met. If these transactions are completed prior to clearance being granted, they will be legally void (of no legal effect). Voluntary notifications will be available for qualifying acquisitions of assets in the specified sectors.
Acquirers of entities holding real estate assets or the actual real estate assets should assess at the outset whether the land will be used for activities in any of the specified sectors (for instance, data infrastructure or nuclear sites) or if a national security risk is likely to arise. If so, they will need to factor the notification process (whether mandatory or voluntary) into the transaction timetable. This could lead to an increase in split exchange and completion transactions, or increase the period between exchange and completion (as an additional element of conditionality will be incorporated into the transaction documents). The transaction documents are also likely to include additional confidentiality and conduct of notifications provisions. This will affect costs and deal certainty for the parties.
Crucially, the Bill includes powers to retrospectively capture any acquisition that take place after 11 November 2020. Therefore, any acquisition that takes place from now could be called in for a national security assessment. Acquirers should consider the regime when making current investment decisions and not rely on the fact that an act has yet to come into force. This point is further reinforced by the substantial sanctions that will apply to anyone that falls foul of the regime: namely, an acquirer who, without reasonable excuse, completes an acquisition subject to mandatory notification before clearance is given will commit an offence that attracts a fixed penalty of the higher of 5% of total worldwide turnover or £10 million and imprisonment.
The Bill specifies that the Investment Security Unit within the Department for Business, Energy and Industrial Strategy will handle notifications and questions and that the business secretary will be the ultimate decision maker. Given the number of transactions that will potentially be affected by the regime, further detail is required on the practicalities of dealing with the volume of notifications and the expected lead times for processing applications. The government currently has 30 working days to respond; however, acquirers must wait for positive clearance before proceeding so there is potential for delays to occur. The timing could affect investment decisions, particularly in relation to transactions that contain some high-risk flags but are principally of no concern to the government. As corporate real estate transactions and their structures are often likely to fall within this category, it may be hard for investors to make the initial judgment call about whether the regime is applicable to them, based on the Bill's current form.
Osborne Clarke comment
The Bill in its current form is a substantial change to the UK mergers and acquisition landscape but one that is consistent with other countries. Some commentators have argued that the Bill, in their opinion, does not go far enough. If the scope of the Bill is widened further to include economic reasons for restricting or blocking a transaction, it could have a further impact on the REI sector, particularly for corporate real estate vehicles.