The UK government has just announced that it is ordering a national security review of a proposed acquisition by a Chinese purchaser of a small UK company that manufactures graphene. Given that the UK prides itself on its attractiveness for inward investment and its light regulatory regime in M&A, we look at the rights of the UK government to intervene in M&A transactions.
On what basis can the UK government intervene in a private corporate transaction?
The first point to emphasise is that the UK government does not regularly intervene in private M&A transactions. In fact, it is very unusual and generally speaking there is no need to obtain clearance to a corporate merger.
However, the government does have the power to intervene in certain merger cases. These are cases that involve a “public interest consideration”, “special public interest cases” and intervention to protect “legitimate interests”. The government has commented that its intervention in the graphene case is based on the fact that “at least one-quarter of all graphene plasma goods and/or services which are supplied in the United Kingdom are supplied by Perpetuus (the target company)”.
Under the current regime, there is a turnover test (generally £70m) and a share of supply test (25% or more of the supply or purchase in the UK), with the graphene case falling into the share of supply test.
Who decides if the government has a case?
A separate entity called the Competition and Markets Authority (CMA), which is the competition regulator in the UK, will review the referral. Depending on the nature of the referral, it may do anything from clearing the merger to publish its opinion on why the merger should be refused and refer this back to the government. Where the intervention relates to national security, the government is ultimately responsible for the decision to block the merger, although it must consider the CMA’s conclusions in reaching its decision.
Are there any proposed changes to the regime?
Yes, the UK government has passed legislation called the National Security and Investment Act 2021 (NSI Act). This will establish a new, standalone regime for government scrutiny of, and intervention in, acquisitions and investments for the purposes of protecting national security. The new regime will replace the national security aspects of the government’s current powers of intervention referred to above.
What are the key points of the NSI Act?
The NSI Regime applies to specified categories of transaction or investment that involve the acquisition of control over certain qualifying entities or qualifying assets. The in-scope transactions (referred to in the NSI Act as trigger events) include:
• The acquisition of votes or shares in a qualifying entity exceeding a threshold of 25%, 50% or 75%.
• The acquisition of voting rights that enable or prevent the passage of any class of resolution governing the affairs of the qualifying entity.
• The acquisition of material influence over a qualifying entity’s policy.
• The acquisition of a right or interest in, or in relation to, a qualifying asset providing the ability to: (i) use the asset, or use it to a greater extent than before the acquisition; or (ii) direct or control how the asset is used, or direct or control how the asset is used to a greater extent than before the acquisition.
The key features of the NSI Regime include:
• Mandatory notification. A mandatory notification system applicable to certain sensitive sectors of the economy requiring advance authorisation and approval from the UK government before completing their acquisition. Failure to obtain such approval will result in the acquisition being void and of no legal effect and may also result in criminal or civil penalties.
• Voluntary notification. A voluntary notification system (for transactions that are not subject to a mandatory notification requirement) to encourage notifications from parties who consider that their transaction may raise national security concerns.
• Government call-in powers. The power for the UK government to “call in” for review any in-scope transaction (whether or not notified) where there is a reasonable suspicion that it could give rise to a risk to national security. This can apply even after the transaction has been completed.
• Remedies and sanctions. Powers for the UK government to impose remedies to address risks to national security (including the imposition of conditions, or prohibiting or unwinding the transaction) and sanctions for non-compliance with the NSI Regime, including fines of up to 5% of worldwide turnover or £10 million (whichever is the greater) and imprisonment of up to five years.
What are “sensitive sectors”?
This has not been finalised but is likely to include the following:
Critical suppliers to the government
Military and dual-use
Critical suppliers to emergency services
Satellite and space technologies
Synthetic biology (formerly known as Engineering biology and renamed following the consultation)
When does it come into force?
The current indication is that the NSI Act will come into full force in January 2022.
If you are considering an acquisition in the UK and would like further guidance on any issues raised above, please contact any member of the Corporate team.