United Kingdom Government Intervention on National Security Grounds
January 16, 2019
In July 2018, the UK Government published proposals for legislative reform that would give it significantly greater powers to intervene in transactions on national security grounds. These proposals have been seen, in part, as a response to Brexit, which is likely to give the United Kingdom greater freedom to determine its own merger policy than is currently permitted under E.U. law. They also follow the debate on foreign investment in the Hinkley Point nuclear power station, the Hytera/Sepura and GKN/Melrose transactions, where the UK Government required undertakings to address national security concerns, the attempted takeover of AstraZeneca by U.S. company Pfizer in 2014, and wider public concerns about national defense and cyber security.
The proposals describe a “voluntary” notification regime whereby parties to a transaction notify the UK Government when a potential “trigger event” is contemplated or in progress. The UK Government would also have the power to “call in” trigger events that have not been notified by the parties.
Consultation on the proposals closed in October 2018 and greater clarity on the anticipated timeline for enactment of the new regime is expected in the coming months when the UK Government publishes its response. The regime is not likely to come into effect until 2020.
Scope of the Proposed Regime
The scope of “national security” is explained in a draft statutory statement of policy intent; however, the term has not been defined precisely. National security threats may include acts of terrorism or actions of hostile states related to: cyber-warfare; supply chain disruption of certain goods or services; disruptive or destructive actions or sabotage of sensitive sites; and espionage or leverage.
The regime will not be limited to any particular sectors, nor will there be turnover or market-share thresholds to place certain transactions out of scope. However, the following aspects of the UK economy have been identified as particularly likely to give rise to national security risks:
- core national infrastructure sectors such as the civil nuclear, communications, defense, energy, and transport sectors;
- certain advanced technologies, including computing, networking and data communication, and quantum technologies;
- critical direct suppliers to the UK Government and emergency services sectors; and
- military or dual-use technologies.
The range of transactions covered includes acquisitions of businesses, companies or assets as well as new projects and (in “exceptional instances”) loans. The proposals set out the following potential trigger events:
- the acquisition of milestone thresholds of voting rights, shares or equivalent ownership rights (25%, 50%, 75%);
- the acquisition of significant influence or control over an entity or asset; and
- the acquisition of more than 50% of an asset, particularly where the asset is land in close proximity to a sensitive location.
For a trigger event to be called in, the entity or asset must carry on activities in the United Kingdom or supply goods or services to the United Kingdom or be used in connection with activities taking place in the United Kingdom. Therefore, activities relating to entities incorporated outside of the United Kingdom, assets located outside of the United Kingdom and rights governed by foreign law may all fall within the scope of the regime.
The regime does not only apply to the acquisition of control by a foreign entity (although that could be a factor as to whether a transaction creates a national security threat).
Notification and Calling In of a Trigger Event
Following voluntary notification by the parties to a transaction when a potential trigger event is contemplated or in progress, a preliminary screening will facilitate the decision to call in the event for further review. However, the UK Government also has the power to call in transactions where there was no voluntary notification. Transactions that were not notified voluntarily may be called in within six months of completion.
If called in by the Government, the parties must provide any information required by the UK Government and the trigger event must not occur until approved (i.e., the transaction would be blocked from closing). In the event that the trigger event has already taken place, the parties must neither take any further measures that increase the acquirer’s control, nor take steps that would make it more difficult for the trigger event to be unwound. The UK Government would have up to 30 working days to complete the assessment, but the UK Government may “stop the clock” while parties respond to information requests. If it is determined that there is a risk to national security, the review period could be extended by an additional 45 working days to further consider the extent of the risk and decide upon appropriate remedies.
Remedies and Sanctions
The proposals envisage three possible outcomes of an assessment: (i) confirmation that the deal can proceed; (ii) clearance of the deal subject to conditions preventing or mitigating the national security risk; or (iii) blocking the transaction. Potential remedies to mitigate the risk include limiting access to certain sites and carving out divisions or assets of a business.
Sanctions for non-compliance could include the introduction of criminal offenses, most of which could carry a maximum custodial sentence of five years, and civil sanctions such as fines.
Practical Implications of the Proposals for Boards of Directors
The proposed regime will introduce additional complexity and uncertainty around investments, including the possibility of delay, remedies or outright prohibition. The regime would apply to transactions that would not otherwise require regulatory approval prior to closing. Boards should carefully consider the allocation of risk in purchase agreements and the potential impact on transaction timetables. There remains uncertainty surrounding the interaction of the new regime with existing merger control, E.U. law, and the UK Takeover Code.
To the extent a board is considering a transaction with a timetable likely to extend beyond the enactment of the regime, the board may consider separating or divesting sensitive businesses, mitigating sensitive operations (via firewalls or transaction structuring) and pursuing non-controlling investments. Boards would be well advised to engage early, frequently and transparently with the relevant UK Government authorities.