The UK Government has recently introduced a National Security and Investment Bill to Parliament, which will empower the Government to block M&A and investment activity that could create a national security risk. This has potentially significant implications for the energy sector, as it may limit the scope of who can invest in UK sector companies, resources and infrastructure.
Even if deals are not blocked, some investors may be discouraged by the extra time, cost and potential uncertainty around obtaining Government clearance.
The Bill has two main limbs. First, it will introduce an obligation to notify certain deals to the Government prior to completion. Second, it will empower the Government to “call-in” and scrutinise any other deal that appears to pose a national security risk, up to 5 years after it has completed.
The mandatory notification obligation applies where an investor acquires:
- 15%, 25%, 50% or 75% of the shares or voting rights (with a separate obligation arising each time one of those thresholds is crossed); or
- the ability to pass or block any class of resolution, in a business operating in one of 17 key sectors.
One of those sectors is energy, and the Government is consulting on the precise activities that will attract the obligation. Its current proposals would cover oil and gas infrastructure, energy distribution and transmission networks, energy suppliers, interconnectors, electricity generators, and firms involved in the production and supply of petroleum-based fuels.
If a notifiable deal closes without approval it will be void, and the firms involved will be liable to civil penalties of up to 5% of turnover (or GBP 10 million, if higher) or an unlimited criminal fine. Individuals responsible for closing without notifying could face imprisonment of up to 5 years and/or an unlimited fine.
The Government estimates that it will receive between 1,000 and 1,830 mandatory notifications per year, and the energy sector can expect to make up its fair share of those.
The second new power under the Bill will allow the Government to “call-in” a deal that it suspects could pose a threat to national security, and potentially block it, unwind it or impose conditions on it. This power applies to the acquisition of shares or voting rights (as per the above thresholds, other than the lowest 15% threshold) in either a company or an asset. The latter includes land, IP rights and commercial know-how. Essentially, these broad definitions will allow the Government to call in almost any type of deal where a national security risk might be identified.
The Bill does not define potential risks to national security, but it is accompanied by a statement of policy intent that refers to:
- “target risk” (i.e., concerning the nature of the target, such as a key gas pipeline or nuclear power station);
- “trigger event risk” (e.g., if a deal could give a hostile actor leverage over the UK); and
- “acquirer risk” (i.e., the identity of the acquiring business or entity itself would cause concerns).
The Government must exercise the power within 6 months of becoming aware of the transaction, whether because the parties involved have notified the Government voluntarily (before or after completion) or because it appears in the media. If the deal is not made public, the Government will be able to intervene and potentially unwind it up to 5 years post-completion. This extremely long window ensures no transactions slip through the net. Investors are likely to err on the side of caution for some time given the adverse consequences of a completed deal being unwound, in which case the Government can expect to receive a large number of voluntary notifications.
As an anti-avoidance measure, the Government’s call-in power will apply retrospectively to deals completed from 12 November 2020, with the 6-month and 5-year periods running from when the Bill takes effect (which should be at some point in 2021). Deals completing from that date will therefore have to do so at risk, as the facility to secure advance clearance from the Government is not yet in place.
This move by the UK Government will impose a strict and wide-ranging new regime that has the potential to cause significant disruption to deals and investments. It is essential that investors, sellers and advisers are aware of the risks involved, including for any deal completed after 12 November 2020, and plan their transactions accordingly.
Read Brodies’ October 2021 updated discussion of the UK Government’s National Security & Investment Act.
Damien Ryan is a senior associate at Brodies LLP, specialising in competition law.