FI Monitor Issue 4, 2022
On 4 January 2022, the new Investment Security Unit (ISU) set up within the UK government to screen transactions for national security risks braced itself for an influx of notifications as the UK’s first mandatory and suspensory notification regime, combined with broader "call-in" powers, went live.
Four months on, we reflect on our experience so far and highlight the key practice points for investors and companies.
A simpler and quicker screening process designed to give investors and businesses the certainty they need?
The government promised to “bring the UK’s regime into the 21st century” by making the screening system “slicker and quicker for investors, providing certainty and transparency by working to clear timelines for decisions and making administrative procedures smooth.” Despite what we understand to be a heavy volume of notifications, initial indications are that the ISU is largely delivering on the government’s stated intentions.
- The online notification portal is simple to use. Acquirers complete the form, which asks for information about each party and the transaction. The prescriptive requirements of the form can complicate submissions in less-than-straightforward transaction structures with multiple direct and indirect acquirers, but these challenges can generally be resolved by work-arounds.
- In our experience, the ISU is accepting notifications quickly (usually within one to two working days) and is clearing most deals with time to spare in the initial 30-working-day period. However, as the ISU is unable to “stop the clock” for information requests during the initial review, parties must make sure any additional information they are asked to provide is given promptly and accurately to avoid pushing the transaction into a call-in.
- Following a call-in, the government will have an additional 30 working days to review the transaction with a possible 45-working-day extension and additional extensions if agreed to by the parties. It is too soon to tell the extent to which extensions will be used and whether the process will live up to the government’s promises of efficiency in cases where national security concerns have been identified and remedies may be required.
- The ISU remains open to informal discussions with parties and is taking a pragmatic approach where possible to help investors navigate the administrative elements of the process and interpret the statutory rules.
Investors should however be warned that the regime captures a wide range of transactions – and the potential sanctions for non-compliance are severe
Notification is required if the target’s activities fall within one of 17 “strategic sectors” defined in regulation and if the transaction involves a relevant change of control.
- The sector definitions are highly technical and can require significant upfront diligence on the target. The sectors can generally be grouped into advanced technologies, critical national infrastructure, defense and critical suppliers to the UK government. The focus of these definitions is the best indication of the areas where the government sees risks to UK national security. However, while some of the definitions were significantly streamlined over the course of the government’s consultation process on the regime, others remain wide enough to catch companies with only tangential activities in these sectors which do not obviously raise any national security concerns.
- Investors should be aware that the assessment of changes of control under the legislation is not on all fours with the approach that investors will be accustomed to under merger control regimes and the legislation is full of bear traps for the unwary. For example, mandatory filings can be triggered in purely internal reorganizations where the ultimate beneficial owner remains the same and - unlike some merger control regimes - there are no exemptions for stakebuilding in the context of a public bid. Investors should therefore familiarize themselves with the idiosyncrasies of the UK rules and exercise caution in any reorganizations or share purchases to avoid any breaches.
For transactions where the target’s activities are closely linked to the mandatory sectors or the target’s activities are in scope but an investor will only acquire material influence in an entity, or the transaction only involves the acquisition of assets, it may be advisable to submit a voluntary notification for the sake of legal certainty. Transactions can otherwise be subject to call-in for five years.
Failing to notify a qualifying transaction attracts significant penalties.
- The Secretary of State can impose financial penalties on companies and individuals (for example directors) up to the maximum amounts set out in the legislation (£10m for individuals or for businesses the higher of 5 percent of total global turnover of the business including its controlled subsidiaries).
- In serious cases, the Secretary of State can refer both companies and/or individuals (for example directors) to the police for possible criminal investigation.
- The transaction will be deemed void in law, impacting both the buyer and the seller and resulting in significant complications.
An evolving picture – more details will emerge as the ISU publishes its annual report and experience to date
The regime is still in its infancy and direct experience remains key to understanding the nuances of its application. This is particularly the case given the relative lack of transparency over the ISU’s decision-making and processes.
Over the next few months, more information will emerge on the overall volume of notifications, the timings, the sectors involved and the outcomes when the ISU publishes its first annual report – and as cases raising concerns following an in-depth national security assessment are finally determined with remedies. The legislation obliges the ISU to publish certain information in its annual report, but the only statutory obligation on the ISU to publish details of individual cases is when “final orders” (i.e. remedies) are imposed to resolve national security concerns.
In addition to the statistics required in the annual report, the ISU is expected to publish market guidance notes with more details on the types of notifications it has received and the transactions that have been called-in to help parties assess whether a deal should be notified.
The ISU continues to welcome feedback on the regime, particularly in relation to any issues arising where clarification of the rules is needed to improve investor confidence or, if necessary, where the government should use its powers to exempt certain types of transaction or acquirer on the grounds that concerns are highly unlikely to arise.
If you would like to discuss any issues arising in practice, or how the regime applies to a particular deal or transaction structure, please get in touch.