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Mandatory, CFIUS-style screening system in place for transactions in 17 industry sectors
On 11 November 2020, the UK Government introduced the long-anticipated National Security & Investment Bill before Parliament. The new law will significantly expand the Government’s existing powers to review the national security implications of transactions and has been timed to coincide with the end of the Brexit Transition Period. The reforms follow concerns globally about foreign control of national businesses active in sensitive sectors, which have further intensified due to the COVID-19 crisis.
Starting in early 2021, a mandatory national security notification system will apply to acquisitions of as little as a 15% shareholding in businesses in one of 17 strategically important industry sectors (such as defence, energy, transport, communications, data infrastructure, a range of specialised technology industries as well as critical suppliers to the Government and emergency services). Outside of the 17 focus industries, notification will be voluntary.
Businesses will need to self-assess whether they must submit a mandatory filing. The Government is publicly consulting until 6 January 2021 on how the 17 in-scope industry sectors should be defined.
The mandatory regime will be suspensory, meaning that transactions cannot complete until clearance is given by the Government. If a transaction that is subject to mandatory notification completes prior to obtaining clearance, it will be legally void.
If the acquirer fails to submit a mandatory filing, it risks significant financial penalties (up to 5% of total worldwide turnover or £10 million, whichever is higher) and criminal liability for directors.
The Government will have the ability to “call in” both mandatory transactions (that should have been notified) and transactions meeting the voluntary criteria (but where the purchaser decided not to notify). Although the Government cannot use the call-in power before the new regime has commenced, after the Bill is enacted the Government will be able to call in deals that are in progress or in contemplation as of today, 12 November 2020. Any investor engaged in a live deal affecting the UK should therefore be acting now, to consider whether the transaction raises national security issues under the new regime and whether to proactively engage with the Government in the coming weeks.
Given the stiff penalties for failure to notify under the mandatory regime and the risk of the deal being declared void after the event, businesses will likely err on the side of caution and file voluntarily where there is a possibility that their transaction may be caught by the mandatory regime or otherwise give rise to a national security issue. Overall, investors into the UK should be prepared for additional regulatory burdens, more complex risk assessments and allocation as well as delays to anticipated deal timelines.