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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
United Kingdom | Publication | aprile 2021
The National Security and Investment Bill (the Bill) is currently making its way through the legislative process in the House of Lords. It is not yet in force – however, if enacted in its current form it will be relevant to transactions entered into or otherwise completing on or after 12 November 2020, which could be called-in for review after the new regime enters into force.
The main focus of the Bill is on corporate M&A transactions – certain acquisitions of entities active in 17 “sensitive” sectors (many of which are heavily focused on technology and innovation, such as artificial intelligence, or critical infrastructure / services, such as communications) will require mandatory notification and approval before they can be implemented. Our briefing covering the mandatory notification regime is available here: The UK’s new NSI regime: What do you need to know? There will also be a voluntary notification regime for other types of transactions, which could also be called-in for review if not voluntarily notified. In this briefing, we focus on acquisitions of intangible property (including intellectual property rights licensing transactions), which are among the transactions subject to the voluntary notification regime.
In broadening the application of the new regime to cover acquisitions of rights and interests in intangible property, the Government appears to acknowledge that:
What does this briefing cover?In this briefing we consider the following in relation to intangible property and the voluntary notification regime:
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The headline points to note are:
In what follows, we consider some of these aspects in more detail.
As mentioned above (and explained in more detail in our briefing, The UK’s new NSI regime: What do you need to know?), the Bill sets out a mandatory and suspensory notification regime in respect of certain M&A transactions. Even where the mandatory notification regime does not apply, there is a voluntary notification regime and the Secretary of State will be able to call-in relevant transactions where they reasonably suspect that a “trigger event” has given rise to, or may give rise to, a national security risk.
Transactions that are notified (under the mandatory or voluntary regime) will be subject to an initial assessment resulting in the transaction either being cleared or, if there are potential national security concerns, called-in for a full assessment. Transactions within the voluntary regime that are not notified but are nonetheless called-in will proceed straight to a full assessment.
A call-in notice therefore initiates a full national security assessment – which could result in the Secretary of State imposing remedies or even blocking the transaction if national security concerns are ultimately found. The Secretary of State will have the power in this regard to make orders they reasonably consider necessary and proportionate for the purpose of preventing, remedying or mitigating the risk to national security (and will also be able to issue interim orders they reasonably consider necessary and proportionate to prevent or reverse pre-emptive action, or to mitigate its effects, pending the outcome of their review). However, a full assessment could alternatively result in the transaction being cleared without remedies if no concerns are ultimately found.
The types of qualifying trigger events are expansive, and what qualifies as a “national security risk” is undefined and therefore extremely broad. We consider each of these issues in turn.
What constitutes a trigger event in relation to intangible property?One of the key points to note is the significant expansion of the types of transactions that will be covered by national security reviews:
The new regime will apply to all acquisitions completing on or after 12 November 2020 (the day after publication of the Bill). The policy driver for giving the legislation retrospective effect is to negate the risk of parties pushing through, prior to enactment, transactions that would otherwise be subject to the regime. As made clear in the Government’s November 2020 response to its 2018 White Paper, the purpose of expanding the regime to the acquisition of assets is to close a loophole that could be otherwise exploited – since parties could seek to acquire an interest in an entity’s national security sensitive asset(s) rather than acquiring votes, shares or material influence in the entity itself. |
All transactions captured by the regime are potentially subject to the risk of an order being made imposing remedies where the Secretary of State is satisfied, on the balance of probabilities, that a risk to “national security” has arisen from the relevant trigger event or would arise from the trigger event if carried into effect.
The need for a definition of “national security” (and a proposed draft definition) has been debated in the House of Lords. As noted by Lord Callanan, the Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (BEIS) (the department that will be responsible for administering the power), the current draft of the Bill is deliberately vague in its lack of a definition for “national security”:
The Bill does not set out the circumstances in which national security is or may be considered at risk. That reflects long-standing Government policy to ensure that national security powers are sufficiently flexible to protect the nation. National security risks are multi-faceted and constantly evolving. What may not constitute a risk today may do so in future.
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The ability of the Secretary of State to safeguard national security would be limited if the Bill set out the circumstances in which national security is, or may be considered to be, at risk. By defining what national security is, we would, of course, also define what it is not. This could have grave implications and deliberately show hostile actors where the Government could not intervene. It would also have unintended consequences for other national security legislation.1
Although the Bill provides for the Secretary of State to publish a statement that sets out how the Secretary of State expects to exercise their power to give a call-in notice (and a draft of such a “Statement of Policy Intent” has already been published), the only obligation on the Secretary of State in relation to such statement with respect to a call-in notice is to “have regard” to this.
In other words, the fact that a transaction clearly falls outside the published statement will provide no safe harbour.
Similarly, the voluntary notification regime is not limited to the 17 sectors expressly caught by the mandatory regime. Those sectors are relevant in that they are sectors where the Secretary of State considers that trigger events are more likely to give rise to a risk to national security, but the call-in power is not limited to such sectors, meaning the Secretary of State could call-in transactions in other sectors.
The current draft Statement of Policy Intent suggests that the following are the focus areas for the Secretary of State:
Some examples in-scope acquisitions of intangible assetsExamples of acquisitions of intangible assets contemplated by the Government in its 2018 White Paper and the draft Statement of Policy Intent include:
Although the first three examples set out above have clear relevance to national security, the fourth example is not so clear-cut. While the Government would presumably be concerned about transactions concerning a communications app that could give a third party the ability to intercept communications between, or to harvest personal data in relation to, UK users of the app, this may not be the limit of the Government’s potential concerns. During Parliamentary debate the Under-Secretary of State for BEIS stated that “sales of software products to consumers by a software company would not be caught by the regime, but – this is important – it would not prevent a transaction involving the software company selling the underlying code base supporting that software to a buyer acting in a professional capacity from the possibility of call-in under the regime, where that might give rise to a national security risk.” If, then, the deliberate intention is that the regime could apply even to transactions concerning the acquisition of control in relation to consumer software, the potential scope of the regime is very broad indeed and raises questions such as to how the acquisition of control in relation to common enterprise software would be treated under the regime if that software is being used within UK Government, for example. |
The Secretary of State will be able to exercise their call-in power no later than five years after the relevant trigger event takes place or (if earlier) no later than six months after they become aware of the trigger event. The draft Statement of Policy Intent indicates that coverage of the transaction in a national news publication may be sufficient for the Secretary of State to be deemed to have notice.
A seller or acquirer can notify the Secretary of State about a trigger event. If the notification meets the requirements as to sufficiency and form, once accepted, this will trigger a 30 working day review period in which the Secretary of State must either:
Ostensibly, the incentive for making a voluntary notice is for parties to gain certainty that a transaction will not be called-in for review, potentially many months or even years after the relevant trigger event, and national security orders imposed – which could be particularly disruptive given the lapse of time.
BEIS has stated that it believes that there will be around 1,000 to 1,830 transactions notified each year, with 70 to 95 transactions called-in for a full national security assessment. However, we think the number of transactions notified and reviewed could be significantly higher, given the broad scope of the new regime and the risks related to transactions being called-in after completion.
The types of orders and remedies available are not specified in the Bill in its current form and, if imposed, are therefore likely to broad ranging. The Government’s response to the 2018 White Paper indicates that likely remedies are those contemplated in the White Paper, i.e. remedies such as imposing restrictions on access to confidential information, intellectual property transfer, compliance and monitoring, staff and (as a last resort) unwinding of the relevant transaction. Clearly any of these remedies could have significant adverse commercial and legal implications for the parties involved, as well as on others in any supply chain dependent on them.
It remains to be seen how the enactment of the Bill will play out in respect of intangible asset transactions. It is anticipated that the Government will be more likely to intervene in a broad range of transactions under the new regime than has been the case under the existing national security provisions in the Enterprise Act 2002.
The Government is clearly attuned to the role that intangible assets could play in national security risks in the future. That is apparent from recent reports of enforcement notices being sent to UK academics for breaches of separate legislation (the Export Control Order 2008 (as amended)) for alleged unlicensed export of security sensitive intellectual property rights to China.
What does this mean for businesses? Parties entering into applicable transactions in respect of intangible property should consider whether their transaction is at risk of a call-in. Given the new regime will apply to transactions on or after 12 November 2020, parties should already be considering this. This assessment may not be clear-cut, and will require legal advice based on the particular scenario.
If there is such a risk of call-in, the affected parties may need to take a number of steps. Depending on the facts, and subject to appropriate legal advice, these may include:
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