November 11, 2020
National Security and Investment Bill – Anarchy in the UK (for M&A)?
The answer is almost certainly no – but the Bill does look set to inject material new risk into UK M&A. The UK is constructing a dedicated, stand-alone regime for assessing national security risk on transactions, some 45 years after President Ford established the Committee on Foreign Investment in the United States (CFIUS). While the UK regime takes a different form and structure than CFIUS, it is set to become an integral part of M&A involving UK targets, with a process some fear could be as opaque and open to political influence as CFIUS.
Over four years since then Prime Minister Theresa May announced a review of the national security public interest provisions in the Enterprise Act 2002 following her unenthusiastic approval of Chinese investment in the Hinkley Point C nuclear power station, a green paper and then a white paper has finally delivered the draft legislation. The message throughout has remained consistent – the breadth and depth of national security risks to the UK have increased beyond the ability of the creaking regime in the Enterprise Act to manage effectively.
That this proposal lasted two General Elections, two Prime Ministers and three Secretaries of State for Business, Energy and Industrial Strategy, demonstrates this was as much bureaucratic (or more accurately, securocratic) driven, as it was political. With the US and particularly the Trump administration privately and publicly urging the UK to toughen their defences against alleged nefarious state actors (for this, read China) accessing or acquiring sensitive UK assets and technology, with the backdoor this might provide to US economic and defence interests, the momentum was unstoppable towards the National Security and Investment Bill.
Collision with political reality in the UK arrived with the challenge of credibly selling ‘Global Britain’ at the same time as ushering in among the most far-reaching national security review powers in the democratic world. This is why the Prime Minister first announced plans for a new Office for Investment to lay down a neatly prepared red carpet for desired global investment into the UK, the ‘good cop’ to the ‘bad cop’ of the new investment review regime. While the Bill has yet to complete parliamentary scrutiny, five challenges are evident for M&A:
- Volume. The new regime is predicted to deliver a massive increase in the number of cases subject to review, originally estimated at around 200 each year, with 100 going to advanced review and 50 then being subject either to remedy or prohibition, but upwards of 1000 cases are now expected to come under review. In the 18 years since the Enterprise Act 2002, there have been only a dozen or so such national security interventions, all being cleared at the first stage and with zero prohibitions. So, from less than one review a year on average under the current regime, we are moving to potentially a thousand or more such reviews annually .
- Opacity. A definition of national security risk is not within the legislation, neither will there be any hierarchy of the security risk of countries. Indeed, theoretically even UK-UK deals will come under scrutiny. Although there is expected to be opportunity to seek Judicial Review, there are fears that the process itself will, like CFIUS and the Enterprise Act regime, struggle to offer the clarity and visibility important in deal-making.
- Politicisation. The buck will stop with a politician – specifically, the Secretary of State for Business, Energy and Industrial Strategy, currently Alok Sharma. While operating in a quasi-judicial role in making these determinations, he will be delivering what is although not a political decision as such, is still a decision by a politician. The fear will be that national security (as not defined) could over time merge into industrial policy or even electoral policy, depending on the target and the ability of interest groups to exert political pressure.
- Retroactivity. The legislation suggests transactions if not notified can then be subject to subsequent call-in by the Secretary of State for up to five years, in doing so providing a level of retroactive risk that will for some make what is meant to be a voluntary regime outside certain specific sectors, effectively mandatory.
- Specificity. There will be a higher bar set for specific sensitive sectors, with understandable candidates like AI and Quantum Technologies requiring mandatory filings. That this list will be determined by Ministers and approved by MPs, leaves open in time other sectors being brought in as a result of political factors, not risk.
There is a genuine and sincere desire within the Government to modernise the current regime and bring the UK into line with our allies and peers, providing order and structure to a previous national security review regime that was designed for an entirely different geopolitical age. However, the fear will linger that once Ministers are in possession of a hammer, many transactions might look like a nail. The current Government may indeed not wish to wield that hammer without very real need, but the sheer volume of transactions it is expected to review will mean at least some will attract interest groups within and without parliament who will exert pressure that Ministers might find difficult to resist. Ensuring that transactions involving UK targets include comprehensive political due diligence at the earliest possible stage in deal selection and preparation is no longer an option, it is a necessity.