The Council on Foreign Investment in the United Kingdom
- Deal Intelligence and Due Diligence - Target and Management
The Council on Foreign Investment in the United Kingdom
The UK government in November made the most significant overhaul to its foreign investment regime for decades. The National Security and Investment Bill (NSIB) changes fundamentally the UK government’s ability to review and intervene in mergers and acquisitions on national security grounds.
The UK government is in good company, with many other governments adopting similar measures to limit the national security risks posed by foreign ownership and control of personal data, emerging technologies, and assets and infrastructure they consider to be sensitive. The US has set the tone in recent years, with reviews of foreign investment conducted by the inter government agency the Council on Foreign Investment in the United States (CFIUS). However, the measures adopted by other countries during the pandemic have an additional objective of granting governments the ability to protect domestic companies from foreign acquirers given that many companies are financially vulnerable after the economic stresses and strains of the pandemic and repeat lockdowns.
What is new in the NSIB?
Firstly, the NSIB creates an investment security unit within the Department for Business, Energy and Industrial Strategy (BEIS) to review mergers and acquisitions in accordance with the bill. It will work in tandem with the Competition and Markets Authority (CMA), adding additional bureaucracy and notification requirements for parties to transactions. It is mandated to coordinate the efforts of different government entities to review national security issues in the economy, though it must consult with the CMA before making final recommendations. The ultimate decisions about whether and how transactions are cleared under the NSIB remain the responsibility of the Secretary of State, a political appointee in the UK administration.
Secondly, the NSIB creates a mixture of mandatory and voluntary notification requirements and grants the UK government additional power to “call in” transactions that it considers a threat to national security. The notification requirements are based on the (i) risk posed by the target or sell-side company, which is primarily a function of its sector of activity (17 sectors require mandatory notifications) and its exposure to national security or trade secrets; and (ii) whether specific trigger events, which are largely the extent to which ownership and control thresholds, are met.
It is worth noting that the bill prioritises the national security risk of the target in the UK rather than the profile of a foreign or domestic acquirer. This is likely in part a political concession to demonstrate that the NSIB is not intended to target particular countries, and to emphasise – as the UK government has sought to do in its communications about the bill – that the UK remains open and receptive to foreign investment.
What happens next?
The UK government has opened consultation with industry about the proposed bill, which lasts until 6 January 2021. We expect the NSIB to come into law in the months following this. Given the government’s majority in parliament and a lack of notable opposition to the measures among the governing Conservative Party’s members of parliament, the NSIB is unlikely to change much between now and then.
The UK government has said that its retrospective call-in power will not be used until the NSIB has been implemented. However, transactions that take place after 12 November 2020 will be in the scope of the regime, even if they conclude before the bill comes into effect. Corporates and investors should therefore act as if the bill is in-place from a practical perspective, even if the specifics around when and how to notify the government about transactions have not been finalised.
What should I do?
Buy- and sell-side corporates and investors considering transactions need to factor the NSIB – and other governments’ comparable regulations – into their deal strategies and execution plans. We have provided advice in previous updates, which builds on our experience with transactions in the US, the UK and Europe. The detail of the NSIB does not fundamentally change this advice.
Our advice is to:
1. Ensure that thorough diligence has been conducted on the corporate structure of the parties to a transaction; their source of wealth, supply, and distribution chains; and the locations of their assets and infrastructure. The NSIB places greater emphasis on the asset this is being bought or sold, rather than the acquirer, though ultimately both will be factored into consideration by the UK authorities.
2. Consider whether the political dynamics around a transaction will encourage stakeholders outside the formal review process to raise their concerns with a deal. For example, the potential for job losses and supply chain vulnerabilities because of a deal could be raised by political parties, labour unions or trade bodies, either with legitimate national security concerns or to score political points. As we have previously argued, important dates or geopolitical developments in the UK’s political calendar could cause an elected government (namely the Secretary of State, who is a political appointee) and a technocratic bureaucracy in the BEIS and CMA to disagree about the risk profile of a transaction, either for domestic or foreign policy reasons.
3. Corporates and investors should build alternative scenarios for responses to their deal and consider the consequences of each scenario for execution risk. These scenarios should consider the requirements or commitments imposed by the UK government, and indeed other countries with an interest in the deal. This should help to pre-empt regulators’ expectations, allowing proactive engagement with them on issues that might concern them, inform cost planning for possible mitigation options required by the UK government, and develop plans to deliver the requirements imposed by the agency. These can be informed by precedent, which is limited in the UK and Europe; best practices from countries with more established frameworks, such as the US; and an understanding of the UK and other relevant countries’ political systems and policy drivers.