How will the new National Security and Investment Bill affect overseas and domestic investors?
Watch out for the National Security and Investment Bill, which will significantly increase the government’s ability to scrutinise investments on national security grounds. The bill introduces a mandatory and voluntary notification regime depending on the type of transaction but it is drafted so that it has very broad scope and no de minimis thresholds. The bill is already “live” and will capture deals from 12 November 2020 onwards, although no notifications can be made until the bill is enacted, which we expect to be next year.
How does the new regime work and which sectors are affected?
The secretary of state will be given powers to call in acquisitions of control over entities or assets (called trigger events), where the secretary of state reasonably suspects that there is or could be a risk to national security as a result of the acquisition of control. The secretary of state must then carry out an assessment of the risk and, if necessary, impose remedies. For acquisitions that have to be notified on a mandatory basis, a failure to notify a transaction may result in it being legally null and void from the outset. Ouch.
Whether an acquisition will be caught by the new legislation depends on the level of control being acquired over an entity, which is measured against certain thresholds of share ownership and voting rights. Control of an asset arises on the acquisition or increase of a right to use the asset or to direct or control how it is used.
Mandatory regime
The entity over which control is being acquired must be within a key sector. There are 17 sectors which will be set out in secondary legislation and the government is currently carrying out a consultation – open until 6 January – on the definition of these. The target entity must also be either a UK entity (including company, partnership, trust etc) or a foreign entity which carries on activities in the UK/supplies goods or services to persons in the UK. Whether it is a notifiable acquisition depends on the level of shares/voting rights being acquired. Acquisitions of assets rather than corporate entities are not subject to mandatory notification – so pure land deals do not currently fall within the mandatory regime.
There are significant penalties for non-compliance. As well as remaining exposed to call-in by the secretary of state for possible intervention on national security grounds, transactions that were not duly notified will be automatically void and the acquirer will be exposed to significant financial sanctions and/or a prison sentence.
Voluntary notification
There is a voluntary notification process for trigger event transactions (for qualifying assets as well as qualifying entities) which are not in one of the 17 key sectors but where there may still be a national security issue to consider. As to what constitutes qualifying entities or assets, the new regime includes land and tangible property and also ideas, information or techniques such as databases, algorithms, formulae and software.
As this is a voluntary regime, transacting parties can choose not to make a notification but they risk a subsequent call-in for review where the secretary of state reasonably suspects that there is or could be a risk to national security as a result of the transaction. This power lasts for five years which can be shortened to six months after the secretary of state becomes aware of the trigger event.
The draft Statement of Policy Intent shows that the secretary of state will take three factors into consideration when deciding whether to exercise its call-in power: the target risk, the trigger event risk and the acquirer risk. At the time of writing one amendment to the bill that is being mooted is that the call-in power would only be used where the three risks (acquirer, trigger event and target) were all present. If this were included, it may give transacting parties some comfort that assuming that at least the acquirer and trigger event were non-problematic, the location of land would not be an issue.
Key issues for real estate
Although pure land deals do not currently fall within the mandatory regime, the new regime could have serious implications for real estate.
Proximity to a sensitive site
This is the most important flag for real estate deals as a real estate transaction can fall within the voluntary notification regime if the property is “in proximity to a sensitive site”. In the government’s draft Statement of Policy Intent, published alongside the bill, it flags that: “The Secretary of State expects to intervene very rarely in asset transactions. However, where assets are integral to a ‘core area’ entity’s activities or, in the case of land, the asset is in a sensitive location, their acquisition is more likely to be called in than other asset transactions… Land is generally only expected to be an asset of national security interest where it is, or is proximate to, a sensitive site, examples of which include critical national infrastructure sites or government buildings. However, the Secretary of State may also take into account the intended use of the land.” By “core area”, the draft statement appears to be referring to the (currently 17) key sectors to be designated for mandatory notification, in which national security risks are more likely to arise.
The draft bill does not define what is meant by “proximate to a sensitive site”. How transacting parties and their advisers would check and rule out the intended use of land is even more challenging. There is currently no register of sensitive land or any other conclusive means of checking whether land is sensitive. Legal advisers would need to do extensive due diligence on neighbouring sites to establish the owner and even then it would not necessarily be obvious if the site was sensitive.
One suggestion would be to have a register of sensitive land, identifying the location of sensitive sites or, if that is too much of a security risk, a database which a purchaser could search to see whether an acquisition site is affected. Without a list of critical sites or a search tool, it will be very difficult for purchasers, lenders or lessees to establish conclusively whether there is proximity to a sensitive site.
Thresholds
At the time of writing, the bill has no de minimis thresholds that would allow smaller real estate transactions to escape scrutiny, even though it is highly unlikely that they would have national security implications.
Telecoms, data infrastructure and energy
The 17 key sectors that have been identified by the new regime as potentially raising national security concerns include telecoms, data infrastructure and energy. It is not clear from the bill as currently drafted whether a real estate deal involving, for example, a purchase or lease of a property with telecommunications equipment or an electricity substation on site would potentially be caught by the regime and could lead to a voluntary notification.
Impact on the real estate industry
Although the bill will bring the UK more into line with regimes seen in many other countries, certain aspects of the bill are anticipated to be contentious and may create concerns for business – particularly given the UK’s historically open stance towards foreign investment. Some of the proposed measures may be seen as deterring inbound investment at a time when the UK is keen to be seen as open for business following Brexit.
Also, while in practice the new regime will be more focused on foreign investors, legally it actually applies to all acquirers regardless of nationality so domestic investors will also need to bear in mind the notification obligation for deals in the key sectors and the risks of a call-in more generally.
The new regime will increase the regulatory burden for business and will create legal uncertainty for trigger event transactions that proceed without a prior review by the secretary of state. For deals subject to voluntary notification, there will be pros and cons to consider on filing the transaction with the secretary of state and so closing off the five-year intervention risk. Trigger event deals that take place in the period between 12 November 2020 and the commencement date of the new legislation will present a similar conundrum.
The consultation closes on 6 January 2021.
Jane Dockeray is a knowledge counsel and Ingrid Stables is a senior knowledge lawyer at Hogan Lovells International LLP
