The critical sectors consist of those that one might naturally consider should be there: e.g. energy, transport, communications and defence. Over and above these, however, there is a strong technology undercurrent: artificial intelligence, data infrastructure and other tech-related sectors are also included.

The threshold for significant influence is not very high.  It can be met by a transaction involving:

• as little as a 25% shareholding or voting rights in the UK business; and/or
• the acquisition of control over certain assets owned by the UK business.

It thus represents a considerable expansion of the powers that the Government had to consider mergers and acquisitions under the Enterprise Act 2002, including under those provisions of that Act relating to national security.

Following notification of the transaction, the Government’s clearance, now acting through the new Investment Security Unit (“ISU”), must be obtained before the transaction can proceed.  

Failure to comply with the Act leads to the potential for a heavy penalty: 5 years’ imprisonment for anyone responsible for the non-notified transaction and/or significant fines based on a percentage of turnover.  The transaction will also be automatically void.

Voluntary notification/calling in

Coupled with the mandatory notification regime, there is also a voluntary notification scheme.  Essentially, this applies to transactions:

• where an entity will obtain material influence over a UK business as a result of the intended transaction; and
• the UK business does not operate in the critical sectors described above.

In practice this means that if an acquisition is not subject to a mandatory notification, but may involve matters of national security, a party can check whether it may be subject to scrutiny from the Government in due course.

The Government also has the power to “call in” (i.e. review) transactions from 12 November 2020 onwards, whether or not they have been notified.  If they are found to be inappropriate (e.g. if untrue or deceptive information has been given as part of the notification process), the Government can unravel the deal.

Commentary

It is likely that the Government will be more willing to intervene in transactions following the passing of the Act than it was under the provisions of the Enterprise Act.  As such, any of our clients involved in acquisitions of or significant investments in UK businesses, particularly those operating in the 17 sectors highlighted above, will need to take particular care.

One particular issue that we have identified is that the definitions of several of the sensitive sectors are imprecise, such that there is no “bright line” as to whether or not the operations of a UK Business fall inside or out of it.  The definitions of “data infrastructure” and “communications” are particularly broad (albeit that the “communications” definition is slightly mitigated by the need for the relevant business to have a turnover of at least £50,000,000).

There may, therefore, be doubt as to whether or not a notification is required.  Our view, at present, is that of safety first: that if there is any suggestion that a mandatory notification might be required, (and in the absence of compelling commercial reasons), at the very least a voluntary notification ought to be made.

We do note that there is provision within the Act for retrospective notification (and approval).  We hope that, certainly in the first months following its coming into force, the ISU will be relatively sympathetic to errors made on the basis of misconstruction of, at least, the scope of the sensitive sectors, and will allow retrospective correction of errors.  However, time will tell.

If you have doubts as to whether an acquisition or investment is required to be notified or may voluntarily be notified, please get in touch with us and we would be happy to discuss further.  

Tim Herbert, Director (LinkedIn: Tim Herbert)

27 January 2022

For further information, or if you have any questions about this briefing, please speak to your usual London Law Collective contact or contact us at hello@londonlawcollective.com

[1] The 17 sectors are: (1) Advanced Materials; (2) Advanced Robotics; (3) Artificial Intelligence; (4) Civil Nuclear; (5) Communications; (6) Computing Hardware; (7) Critical Suppliers to Government; (8) Cryptographic Authentication; (9) Data Infrastructure; (10) Defence; (11) Energy; (12) Military and Dual-Use; (13) Quantum Technologies; (14) Satellite and Space Technologies; (15) Suppliers to the Emergency Services; (16) Synthetic Biology; and (17) Transport