Extensive FDI rules introduced in the United Kingdom
Overview
The UK Parliament has adopted a new "National Security and Investment Act", which expands the powers of the UK authorities to intervene in transactions that may affect national security.
The Act introduces (i) a mandatory notification regime for certain transactions – including those not involving a UK company – in a number of designated sectors, and (ii) powers for the Secretary of State to investigate other transactions that may impact national security.
The Act enters into force on 4 January 2022. The mandatory notification regime applies only to transactions completed after that date. However, the Act empowers the Secretary of State to initiate investigations into transactions completed after 12 November 2020. This includes both transactions in designated sectors and other transactions that may affect national security.
Control
Control over a qualifying entity is acquired when a natural or legal person increases their shareholding or voting rights from either (i) below to above 25%, (ii) below to above 50%, or (iii) below to above 75%. Although the Act refers to an "increase", this covers both situations where a person already holds shares or voting rights and subsequently acquires more, and situations where a person acquires shares or voting rights for the first time (for example, moving from 0% to 30%).
Control over a qualifying entity is also deemed to be acquired where a person obtains voting rights that entitle them – either alone or together with existing voting rights – to pass or block decisions of the qualifying entity (even where none of the thresholds above are met).
There is no exemption for intra-group transactions. Accordingly, an acquisition of control over a qualifying entity within a corporate group is notifiable if it results in one of the above thresholds being exceeded (and the other conditions for notification are met), even if ultimate control over the qualifying entity remains unchanged.
Qualifying entity
A qualifying entity may be either a UK-based company or a foreign company that carries out activities or supplies goods or services in the UK. Thus, a transaction may fall within the mandatory notification regime even if no UK-established company is involved, and the only nexus to the UK consists of business activity or supply of goods or services in the UK. The Act does not set any de minimis thresholds for the scale of activity or volume of sales in the UK. In principle, a transaction will be covered even where there is only minimal UK activity or a very low UK turnover.
Designated sectors
The qualifying entity must operate in one of the following designated sectors:
- Advanced materials
- Advanced robotics
- Artificial intelligence (AI)
- Civil nuclear
- Communications
- Computing hardware
- Critical suppliers to Government
- Critical suppliers to emergency services
- Cryptographic authentication
- Data infrastructure
- Defence
- Energy
- Military and dual-use
- Quantum technologies
- Satellite and space technologies
- Synthetic biology
- Transport
The sectors will be further defined in supplementary guidance. In March 2021, the UK Parliament published a draft of this guidance setting out definitions of the relevant activities within each sector. The final guidance – and thus the definitive sector definitions – is expected to be published before the Act enters into force.
The decisive factor in determining whether prior approval is required is whether the qualifying entity operates in one of the designated sectors. In other words, it is irrelevant whether the parties themselves consider the transaction a risk to national security.
Investigation of other transactions
If a transaction is not subject to the mandatory notification regime, the Secretary of State has discretion to investigate other transactions that are considered to raise national security concerns.
The Secretary of State may initiate an investigation if a transaction results in the acquisition of "material influence" over a qualifying entity. The threshold for "material influence" is lower than that for control under the mandatory notification regime. Although the term is not defined in the Act, it is used in UK merger control, and the Secretary of State is expected to adopt a similar interpretation. In the context of merger control, material influence may arise with shareholdings of below 15%, where other circumstances indicate that the acquirer is able to influence the policy of the target.
The Secretary of State may also investigate acquisitions of control over a qualifying asset. Qualifying assets include not only those located in the UK but also assets used in connection with UK-based activities or the supply of goods and services into the UK. Control over such an asset is deemed to be acquired where a person gains rights to (i) use the asset or increase the extent of its use, or (ii) influence or increase the influence over how the asset is used.
The power to investigate a transaction (provided the relevant conditions are met) generally lasts five years from completion. However, this period is shortened if the Secretary of State becomes aware of the transaction, for example through notification by the parties. In such cases, a six-month window applies from the date on which the Secretary of State is made aware of the transaction.
It is intended that, prior to the Act’s entry into force, a voluntary notification regime will be introduced for transactions falling outside the mandatory notification regime, allowing parties to pre-empt a later investigation. The framework for this voluntary regime will be laid down in supplementary regulations expected before the Act’s entry into force.
Review process
If a transaction falls within the mandatory notification regime, it must not be completed until approval has been granted. Applications must be submitted digitally to the Secretary of State, who will then review the application.
Upon receipt, the Secretary of State must either accept or reject the application. An application may be rejected if it fails to meet formal requirements, in which case a new application must be submitted. Once accepted, the Secretary of State has 30 working days to review the transaction and either approve it or issue a "call-in notice" if further examination is required.
If a call-in notice is issued, the Secretary of State has 30 working days to conduct a detailed review. This period may be extended by a further 45 working days if there are reasonable grounds to suspect that the transaction poses national security concerns. Further extensions may be agreed between the Secretary of State and the parties to the transaction.
The same timelines apply to transactions outside the mandatory notification regime, where the Secretary of State chooses to investigate.
The Secretary of State has the power to request any relevant information and to compel individuals – whether within or outside the UK – to give evidence. Failure to comply or the provision of false information or evidence constitutes a criminal offence.
The review ends with either a "final notification" or a "final order". A "final notification" is a decision that no further action is required - i.e., unconditional clearance.
A "final order" may impose conditions or prohibit the transaction. Such orders may include requirements that the acquirer (i) performs or refrains from specific actions (for example, completing the transaction), (ii) appoints a monitor to ensure compliance, (iii) refrains from disclosing or sharing certain information, or (iv) adopts other measures deemed appropriate by the authorities.
The Secretary of State may also issue "interim orders" where necessary to preserve the integrity of the investigation. Such orders may require the acquirer temporarily to take, or refrain from taking, certain actions.
Sanctions
A transaction covered by the mandatory notification regime that is completed without prior approval will be unlawful and automatically void. However, the acquirer may request retrospective approval.
The acquirer may also be fined. For companies, the maximum fine is the greater of 5% of global turnover (including that of subsidiaries and controlled entities) or GBP 10 million. For individuals, the maximum fine is GBP 10 million.
Fines may also be imposed for non-compliance with interim or final orders, or for breaches of information or testimony obligations. This applies both to transactions within the mandatory notification regime and to other transactions that the Secretary of State decides to investigate. The levels of such fines are set out in the Act.
Individuals may be imprisoned for (i) completing a notifiable transaction without prior approval, (ii) failing to comply with interim/final orders, or (iii) breaching information or testimony rules. For the first two categories, the maximum penalty is 12 months’ imprisonment in England, Scotland, and Wales (6 months in Northern Ireland) for less serious offences, and up to 5 years for more serious offences. For the third category, the maximum penalty is 12 months (6 in Northern Ireland) for less serious offences and up to 2 years for more serious cases.
Plesner’s remarks
The new UK FDI rules constitute one of the most comprehensive investment screening frameworks globally. It is particularly far-reaching that the rules apply even to transactions not involving a UK-established company, where the sole connection to the UK is business activities or supply of goods or services in the UK. Since the rules do not contain any de minimis thresholds, a transaction may be caught even if the UK nexus is minimal.
The rules are expected to add significant complexity to transactions, particularly during the planning phase, when parties must assess whether a transaction requires prior approval. It is insufficient to assume that the rules do not apply simply because no UK entity is involved. If a transaction falls outside the mandatory notification regime, parties must still consider the risk of subsequent investigation. If such a risk exists, it may be advisable to notify the Secretary of State in order to limit the investigation period to six months.
Notably, from 4 January 2022, the Secretary of State has been empowered to investigate transactions completed as early as 12 November 2020. This may create potential uncertainty for past transactions. However, it is already possible to approach the Secretary of State to seek clarification as to whether a transaction is likely to be reviewed.
Finally, the rules raise important enforcement questions. It remains unclear how the Secretary of State will, in practice, enforce the regime in relation to wholly foreign transactions that are caught solely by virtue of business activities or sales in the UK.