HM Insights

New rules that every foreign investor needs to know before investing in the UK

The UK Government’s National Security and Investment Bill introduces a new screening process for foreign investment in the UK. The new rules don’t come into force fully until 4 January 2022 but, as some of the provisions are retrospective, the changes are immediately relevant to businesses in certain sectors.

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National security concerns

Government powers to scrutinise investment transactions on national security grounds are currently contained in the Enterprise Act 2002. Although there have been some tweaks to the rules since then, the rapid advancement of technological, economic and geopolitical change mean that wider reform of these powers is considered necessary to future-proof the screening process and protect the UK from potential threats.

The National Security and Investment (NSI) Bill will introduce new powers for government to examine potential national security issues relating to foreign investment and will establish a range of remedies to help prevent disruption, unfair leverage, and espionage.

Principles of the Bill

The NSI Bill will establish a statutory requirement for businesses operating in sensitive sectors of the economy – such as communications, defence, energy, transport, computing hardware, satellite and space technologies and others - to seek authorisation for specific types of transactions, subject to certain threshold levels.

Alongside this there will be a voluntary notification system. Parties who consider that their transaction may raise national security concerns will be expected to notify through the voluntary system (which has yet to be described in any detail), even if their business is not of the type automatically required to notify.

A further safeguard under the Bill will enable the Secretary of State to ‘call-in’ statutorily defined transactions to undertake their own national security assessment, whether or not the transaction has been notified by the parties involved. The Secretary of State will have the power to call in a transaction up to six months after they became aware of it (for example, by coverage of the deal in the national news). The latest a transaction can be called-in for additional scrutiny is five years from the date of acquisition. A Statement of policy intent has been published, outlining how the Secretary of State expects to use this call-in power.

The government will then have powers to apply remedies to address risks to national security, or to impose sanctions for non-compliance with the notification regime. The Bill also sets out the mechanism for making a legal challenge to call-in decisions, or for objecting to any penalties or restrictions that are imposed.

Retrospective effect

The power to call-in a transaction for assessment is to be retrospective, applying to any relevant transaction since the NSI Bill was introduced to parliament in November 2020. This is to ensure that parties cannot accelerate acquisitions to avoid scrutiny. It is therefore critical for businesses to begin thinking about the effect of the Bill on current transactions, not just those which will complete after the Bill is passed.

There is no mandatory reporting duty until the Bill has been passed and there is no formal process for voluntary notifications in place at the moment. Businesses who consider that their acquisition may be caught by the NSI Bill scheme are nevertheless being encouraged to be proactive in contacting the newly established Investment Security Unit (ISU) for an informal and non-binding initial view of whether a transaction is likely to be within the scope of the new regime.

Operation and implications of the NSI Bill

Draft regulations have been produced which specify the description of qualifying entities together with a list of activities of a qualifying entity that will be subject to the new rules. Further guidance has been released to help businesses prepare for the forthcoming changes and there is also a series of factsheets and a flowchart which provide more information on how the regime will operate.

Despite this new level of detail, it still remains to be seen how quick the Secretary of State will be to exercise the power to call-in investment transactions for further scrutiny. The policy statement accompanying the NSI Bill includes an assurance that the power to address national security risks will be governed by the principles of necessity and proportionality, and will not be used arbitrarily to interfere with investment. We hope to see this policy borne out in practice.

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To discuss any of the issues raised in this article please contact a member of the team:

Stephen Chan

Jamie Watt

Caroline Summers

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