The National Security and Investment Act 2021 (the UK Act) grants the UK government authority to review, add conditions to, and potentially ‘block’ any transaction involving national security interests. We are yet to see how this plays out in practice, but for now we can use the example of Australia, which has had a system in place for quite some time that operates in much the same way as the UK Act intends to.
Law firms Forsters and Arnold Bloch Leibler have taken a keen interest in how the Australian Foreign Acquisitions and Takeovers Act 1975 (the Australian Act) might help to put the new UK Act into perspective.
The UK Act is likely to cover a very broad range of transactions. Those within its scope will be subjected to an extra layer of regulatory oversight. Any deal that may trigger a ‘risk to national security’ (undefined in the UK Act) could be caught, whether the reason for that risk is the underlying business, specific property, the identity of the purchaser or its affiliates, or potentially even the rationale behind a given transaction.
Possible impacts of the UK Act
How are deals affected?
- The timing of the deal will need to be flexible to accommodate time for regulatory reviews.
- Given that the UK government may impose certain conditions on a deal for it to proceed, parties will need to consider two threshold issues. First, should parties seek government approval before entering into an agreement, or should it simply be a condition for completion? Second, what will happen if (unknown) conditions are imposed: will the parties wear that risk, or will any imposed conditions entitle a party to rescind or renegotiate the contract?
- For smaller parties that primarily use professional advisers, costs may increase in case the government requests further information from all or some parties to a transaction as part of the review process.
- Parties will need to undertake their own analysis of whether any conditions being imposed on a transaction would alter the commercial efficacy or rationale of entering into it.
- Where transactions are not sanctioned at the time of completion, the UK government retains the power to investigate it post-completion for up to five years, and could require the parties to unwind the transaction.
- Neither the UK Act nor supporting documentation suggests that any fees will be imposed on notifications, but the UK government has retained powers to make amendments to the regime in the future as it deems fit. In Australia, the level of fees for applications is generally commensurate with the value of the consideration for the transaction and the type of acquisition that is taking place.
How will the UK Act potentially alter?
It will be interesting to see how the new UK regime develops over time, especially once the necessary secondary legislation has been enacted. In particular:
- What are the specific types and values of transactions that should trigger the need for approval? At present, for example, the acquisition of non-voting shares requires approval – but should it? What about a single preference share that amounts to all of the economic interest in a company (only)? Under what circumstances (if any) should foreign investors taking up pro-rata entitlements in publicly listed companies require approval? Should amending a put/call option arrangement trigger the need for reapproval?
- The regime should set appropriate monetary thresholds for transactions and introduce an exemption certificate-type system for certain classes of investors.
- In considering the need for approval, the Australian Act looks both to ultimate ownership and control, but somewhat inconsistently and sometimes with perverse outcomes. The UK Act does not specifically contemplate beneficiaries, for example, and this may be a quirk to be ironed out in practice.
It will take time to fully understand how the secretary of state implements the review system, but the majority of transactions should remain largely unaffected. This is particularly true of the deals that have minimal or borderline connections with national security. Such deals ought to be reviewed and consented to in short order, which, in turn, will minimise any increase in transaction costs and deal timeframes. Fortunately, the example of the Australian framework shows that the UK government’s new review function does not necessarily mean that transactions and investment, both local and foreign, should be hindered or deterred.