Introduced to Parliament on 11 November 2020, the NSIB will, if passed, radically change the UK's approach to reviewing foreign investments.
Over the past decade, the UK has seen foreign direct investment worth three-quarters of a trillion dollars. One of the key elements of the UK government's strategy for 2021 and beyond must inevitably be to maintain and enhance the UK's attractiveness as a place to invest and conduct business.
Unsurprisingly, the 1,246 pages of the EU-UK Trade and Cooperation Agreement (together with its summaries, side agreements and additional political declarations on a range of sensitive issues), dated 25 December 2020, are undergoing close scrutiny by stakeholders both in the UK and abroad to assess how open, wide and strong a gateway to the EU single market the UK will in fact retain post 1 January 2021.
However, the EU-UK Trade and Cooperation Agreement is not the only piece of UK legislation that existing and future investors should be keeping a close eye on.
On 6 January 2021, the consultation period ended for, amongst others, the sectors of the economy in relation to which the UK government considers that trigger events are more likely to give rise to a national security risk for the purposes of the UK National Security & Investment Bill (NSIB).
Introduced to Parliament on 11 November 2020, the NSIB follows hot on the heels of the EU's efforts to avoid having the COVID-19 crisis result in a loss of European critical assets and/or technology by tightening the foreign direct investment (FDI) regimes of its members states.
If passed, it will radically change the UK's approach to reviewing FDI.
Integrating concepts used by some of the EU's member states and the Committee on Foreign Investment in the United States (CFIUS), the NSIB introduces new stand-alone powers for the UK government and a regime for the review of foreign direct investment that:
- Allocates the ultimate responsibility for all relevant decisions to the Secretary of State for the Department for Business, Energy & Industrial Strength (BEIS) rather than the Competition and Markets Authority, with a new BEIS unit, the Investment Security Unit, being created to manage day-to-day matters.
- Creates a hybrid notification system for so-called trigger events that have occurred or are in progress in relation to either a qualifying entity or a qualifying asset and which give rise to or may give rise to a risk to national security.
- Defines "trigger event" widely as the gaining of control of a qualifying entity or qualifying asset, in any sector of the economy, with "control" for the purposes of a qualifying entity meaning: (i) the acquisition of more than 15 percent of economic ownership or voting rights; (ii) the increase of economic ownership or voting rights held from 25 percent or less to more than 25 percent, 50 percent or less to more than 50 percent, or 75 percent or less to more than 75 percent; (iii) the acquisition of voting rights sufficient to pass or block resolutions of the entity; or (iv) the acquisition of an interest or right enabling material influence on the policy of the qualifying entity.
- Extends the applicability of the regime to entities formed or recognised under the laws of countries other than the UK if such entities either carry on activities in the UK or supply goods or services to persons in the UK.
- Provides for mandatory notification of a wide range of transactions through which a person or persons gain control or acquire a right or interest in qualifying entities or qualifying assets in, currently, 17 sensitive economic sectors, with government approval being required for any relevant transaction prior to its completion.
- Gives the ability to voluntarily notify transactions that fall outside the mandatory notification provisions.
- Provides the government with the power to call in any trigger events not already voluntarily or mandatorily notified for review within five years of their occurrence, always provided that such call in must be made within six months of the Secretary of State becoming aware of the relevant trigger event.
- Provides the Secretary of State with power to issue information provision and/or attendance notices to persons both in the UK and outside, with the failure to comply with any such notices constituting a criminal offence.
- Gives the government power to impose such remedies as it considers necessary, including the blocking of a transaction, the imposition of conditions on a transaction and the issue of interim orders to ensure that the status quo is preserved pending its final decision.
- Makes transactions that are subject to the mandatory notification system void if they are not duly notified and approved.
- Imposes harsh penalties on both entities (fines of up to the higher of £10 million or 5 percent of annual global turnover) and their directors (fines of up to £10 million and up to five years' imprisonment) for breaches of the legislation.
The NSIB will enable the Secretary of State to call in for review transactions that have taken place between 12 November 2020 and the date the bill ultimately comes into force. The NSIB may therefore not yet be law; however, participants of ongoing transaction involving UK targets or assets are well advised not to ignore it, in particular where the entity or asset operates in any of the designated sensitive sectors.
Pending the outcome of the government's consultation, these sensitive sectors include:
- Advanced materials
- Advanced robotics
- Artificial intelligence
- Civil nuclear
- Computing hardware
- Critical suppliers to government
- Critical suppliers to the emergency services
- Cryptographic authentication
- Data infrastructure
- Engineering biology
- Military and dual use
- Quantum technologies
- Satellite and space technologies
The government also expects the new regime to result in between 1,000 and 1,830 notified transactions per year (and for it to review as many as 95) and will consequently take a much more active role in the review of foreign direct investment than it has done in the last two decades.
Prime Minister Boris Johnson stated in November 2020 that the intention behind the legislation was to crack down on a handful of hostile agents while retaining the UK's transparent, legitimate, business-friendly approach and to double-bolt the back door while keeping the front one wedged wide open. It remains to be seen whether the government successfully strikes the right balance in this regard once the NSIB comes into force.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.