National Security and Investment Act
The Act introduces three regimes which will affect transactions.
The National Security and Investment Act received royal assent on 29 April this year and introduces a new regime by which the government can vet transactions that may give rise to a risk to national security. You might think that this will have little to do with the insurance sector but the Act has much wider implication than you might expect.
Although the Act is not yet fully in force – that is not expected to happen until the end of the year - it has implications for transactions happening now and, indeed, for any transaction that happened on or after 12 November 2020, (the day after the bill was introduced into Parliament). It does therefore have a slightly unusual retrospective effect but this was intended to stop transactions being pushed through ahead of the Act coming into force.
Once fully implemented, the Act will allow the Secretary of State for Business, Energy and Industrial Strategy to review transactions after 12 November 2020 which they believe may give rise to a risk to national security. There is no definition of what national security means but some guidance is to be provided by way of a Policy Statement. A draft of this has already been published but it is subject to further review. The Policy Statement gives some guidance on the factors that the Secretary of State will consider relevant when deciding whether a particular transaction has such an impact but there is no real detail as to what effect there might have to be or which parties might be of particular interest. Understandably, this is in order to provide some flexibility given the speed with which national security implications can change over time but it does lead to an element of uncertainty. The formal consultation on the Policy Statement is due to start soon now that the Act has received royal assent. In the meantime, it is possible to obtain non-binding guidance from a new government unit that is being set up to assess transactions - the Investment Security Unit.
The Act introduces three regimes which will affect transactions. These are a mandatory notification regime for transactions in certain sectors, a voluntary notification regime for any other transactions and a “Call In” process whereby the Secretary of State can call in any transactions where they believe there might be a national security risk and make appropriate orders to deal with that risk.
The Mandatory Notification Regime
If any transaction in certain specified sectors is to take place then the parties are required to notify the Secretary of State and obtain clearance before the transaction completes. If that is not done the whole transaction will be void. This is not simply a case of a transaction subsequently being unwound, it is void from the start, and this will naturally have some confusing consequences if parties believe that they have properly completed a transaction. Whilst there are provisions which would allow a void transaction to be subsequently sanctioned by the Secretary of State that, in itself, may also have some rather strange implications.
There are currently 17 sectors which the government contemplates will be covered by the mandatory notification regime. This means that transactions other than those that would naturally be considered to affect national security could be caught. For example, the original proposal is that any transactions involving artificial intelligence, communications or cryptographic authorisations would be caught. There are no threshold tests, (as there are for the current regime under the Competition and Markets Authority), nor is there any requirement for the transaction itself to have reasonably foreseeable national security implications. If it is in that sector then the transaction has to be notified and cannot be completed until clearance is obtained. This means that there will be transactions which could otherwise be completed on the same day which will now probably need to be implemented by way of a split exchange and completion, conditional on clearance, which will add a number of complications which would not otherwise need to be dealt with. There has been some initial consultation on the 17 sectors and it is likely that there will be some further modifications to them, more in order to better define their scope rather than to cut any of them out.
This regime captures any transaction where an acquirer of an “entity”, (i.e. a company or other similar organisation), acquires shares or votes which take it above a threshold of 25%, 50% or 75% of the shares or votes. It also catches any transaction where the acquirer obtains an ability to materially influence the entity. Again this will lead to the need to consider carefully whether any proposed transaction would be caught and no doubt the parties are going to be taking a cautious approach.
Part of the caution will be because of the significant penalties for failing to make a notification, not merely that the transaction itself would be void. Fines can be levied of up to 5% of worldwide turnover or, if more, £10million. There are also criminal penalties which could catch directors of the relevant entities in their personal capacities as well. Clearly this is something that everyone needs to be aware of where they are conducting transactions.
The Voluntary Regime
Even where the transaction does not involve any of the 17 sectors, there is the ability for the parties to voluntarily notify the Secretary of State about a proposed transaction. The reason for this is because of the third element of the new regime, i.e. the ability of the Secretary of State to call in any transaction that they become aware of, (whether notified or not). This can happen at any time within 5 years of the transaction taking place, or within six months of the Secretary of State becoming aware of the transaction, (whichever is less). Again, this will introduce considerable uncertainty into transactions and therefore there will clearly be a temptation for parties to make voluntary notifications.
The call in regime, and the voluntary notification procedures cover not just transactions where an acquirer is taking a stake in an “entity” but also where they are acquiring any asset. The mandatory regime just relates to the acquisition of an entity.
The Act makes some effort to limit the consideration period in respect of any transaction notified – the Secretary of State has to determine within 30 days whether the transaction is to be properly considered or waived through and then has a further period of 30 days in which to make a final order. However, the Secretary of State has the ability to extend this time period and, in particular, if there is a lack of information then the clock can be stopped.
Where a transaction is called in and the Secretary of State is inclined to make an order then there are very wide powers as to what that order may contain. The Secretary of State can order any party to do or refrain from doing anything that the Secretary of State may think appropriate, (e.g. not to use certain information, keep matters confidential, etc). These obligations can be unlimited in time. In respect of completed transactions the Secretary of State can order that the transaction is unwound. It will be interesting to see how a transaction can be unwound possibly 5 years after it was originally completed.
The concept of the National Security and Investment Act brings the UK in line with other countries in allowing the government to levy some amount of control over transactions that affect national security. A number of the provisions are similar to those found in other countries. Nevertheless, this will introduce a certain amount of uncertainty into transactions and also create further hurdles that will need to be navigated, in particular introducing the further complexity of having split exchange and completion. For some sectors, such as insurance, where transactions are often already subject to regulatory approval, this may not have too much material effect and of course it is highly unlikely that transactions would have a national security implication in any event, but the Act must still be taken into account when structuring deals.