The UK has introduced new legislation that, from 4 January 2022, will require transactions in certain specified sectors to be approved by the UK government before they can be completed.
A new regime
The UK has introduced a new regime which, from 4 January 2022, requires purchasers to obtain prior approval for transactions in certain specified sectors. The new regime, contained in the National Security & Investment Act 2021, also gives the UK government the ability to “call in” for review on national security grounds transactions in all sectors of the economy (with the government having the ability retrospectively to review transactions that have taken place since 12 November 2020).
The new regime is very broad and will affect many transactions. In outline:
- There are 17 sectors for which prior approval is required. These are listed below. They include communications, computer hardware, data infrastructure, defence, energy and transport. The proposed definitions of these sectors are very broad.
- There are no materiality thresholds. If the target has any activities (no matter how big or small) in the UK in one or more of the specified sectors, prior approval will be required.
- Transactions are caught by the regime where the purchaser acquires control over the target, but the test for “control” is very low. The test will be met, for example, by any shareholding over 25% (as well as by certain increases in shareholding thereafter).
- Whilst the regime is intended to enable the UK government to review transactions on national security grounds, transactions in the specified sectors require approval regardless of whether they give rise to any national security issues. The government has estimated that around 1,800 transactions will be notified for approval each year, of which only a very small proportion will give rise to any concerns.
- Failure to obtain approval will render a transaction void and may constitute a criminal offence by the purchaser (and potentially also by its officers). In practice, failing to obtain approval may also lead to commercial challenges on future acquisitions involving the same target (for example, in the event of an exit by the purchaser).
- Where a transaction gives rise to national security concerns, the UK government will have extensive powers to take steps to address those concerns.
- The new regime is administered by a new Investment Security Unit, or ISU, which sits within BEIS.
At Shoosmiths, we are consistently in the top 5 firms ranked by Experian for the number of UK deals we advise on each year. We are therefore well placed to assess the impact of this new regime.
Our key observations include:
- The impact of this new regime is significant – many deals will require prior approval. As indicated above, the government estimates that around 1,800 transactions will be notified for approval each year – but we think that may be an underestimate given the breadth of the definitions of the 17 sectors below and the absence of any materiality thresholds.
- Describing the regime as a “national security” one is to some extent misleading - most deals that require approval will not give rise to any national security considerations at all. Whilst the purpose of the regime is to enable the UK government to screen transactions for national security concerns, most transactions that require prior approval will very clearly not give rise to any national security concerns but will require approval simply because the target is active in one of the 17 sectors (which, again, are very broadly defined).
- It will be crucial that parties and their advisers take appropriate care to establish whether approval is required – the consequences of getting it wrong are significant. Aside from the risk of criminal sanctions, any failure to obtain approval is likely to cause complications in any future sale process involving the target (and is likely to be picked up by prospective purchasers in due diligence) given that it will render the transaction void.
- When conducting due diligence on transactions, it will be important to establish whether any previous (post 4 January 2022) transactions involving the target should have been approved under the regime. If the target was the subject of a previous transaction that should have been approved, but was not, that would render the transaction in question void (which could have obvious repercussions for subsequent purchasers of the business).
- Importantly, however, the new regime is not intended to deter investment in UK businesses. Whilst the regime enhances the UK government’s ability to monitor and review transactions from a national security perspective, the expectation is that it expresses concerns about only a very small number of deals each year.
The 17 sectors for which there is mandatory notification and prior approval are:
- Advanced Materials
- Advanced Robotics
- Artificial Intelligence
- Civil Nuclear
- Computing Hardware
- Critical Suppliers to Government
- Cryptographic Authentication
- Data Infrastructure
- Military and Dual-Use
- Quantum Technologies
- Satellite and Space Technologies
- Suppliers to the Emergency Services
- Synthetic Biology
- Transport (ports, harbours and airports)
The precise scope of each sector is set out in Regulations that accompany the new regime. The regime applies where the target has activities in the UK in one or more of the above sectors.