Energy sector braced for UK Government’s new review powers for M&A deals

By Charles Livingstone and Damien Ryan, Brodies LLP

The new National Security and Investment Bill will 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 (illustration: Brodies LLP)
The new National Security and Investment Bill will 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 (illustration: Brodies LLP)

The UK’s new National Security & Investment Act will come into full force from 4 January 2022. It has significant implications for the energy and infrastructure sector, in which many deals could become subject to a mandatory UK Government approval process before the transaction can complete. This date also marks the commencement of the Government’s power to “call in” other deals for review, including deals completed on or after 12 November 2020, where the Secretary of State reasonably suspects an acquisition may create a risk to national security.

Last year, we summarised the key elements of the regime. Since then, the Government has removed the obligation to notify a deal where a person acquires just 15% of the shares or voting rights in an entity that comes within the scope of the regime. The obligation will now kick in at a higher threshold of 25% (and again at 50% and 75%). This amendment is designed to reduce the number of notifications, removing the serious risks of failing to notify (i.e. the deal being void, as well as civil and criminal penalties) from less significant levels of investment.

However, it remains the case that a deal of any value will trigger the obligation, as long as the target acquisition company is carrying on the activities set out in the regulation – attempts to introduce a de minimis threshold were unsuccessful.

Mandatory notification regime
The Government has also now published draft regulations defining the entities, across 17 key sectors, that will be caught by the mandatory notification regime. The information originally published with the legislation confirmed that the energy sector would be within scope but did not provide much detail on what exactly would be caught.

The draft definitions for the energy sector set out certain volume thresholds. A target active in the upstream petroleum market (i.e., an owner, operator, licensor or developer of terminals, pipelines and infrastructure) will trigger the mandatory obligation to notify if the relevant facility has a throughput of 3 million tonnes of oil equivalent over the preceding 12 calendar months (or, in the case of a new facility, is expected to reach that level within its first 12 months of operation). The draft regulation also extends the territorial reach of the regime: it is sufficient that a facility is either “…situated in whole or in part in the United Kingdom; or used in connection with the supply of petroleum to persons in the United Kingdom.”

LNG added
The draft regulations also add LNG import and export facilities to the scope of the regime, alongside gas processing facilities. An entity that owns or operates a gas processing facility in Great Britain, or any LNG import or export facility, will be caught by the mandatory notification obligation if the facility has the capacity to handle more than six million cubic metres of gas per day. Entities licensed to transport gas or operate gas interconnectors will also be caught.

Renewables
Acquisitions of entities active in renewables and other generating assets will trigger a notification where the target entity owns or operates an individual generating asset with a total installed capacity of 100 megawatts or more; or if the total installed capacity of the assets owned or operated by the target will, when combined with those already owned by the acquirer (plus the amount of customer load and generated electricity available to them), exceed at least one gigawatt. Acquisition targets holding transmission, distribution or interconnector licences will also trigger notification.

Supply chain
Finally, the regime will also apply to firms involved in the supply chain for petroleum-based road, aviation or heating fuels (including liquefied petroleum gas), as long as the entity has handled more than 500,000 tonnes per year within the previous 3 years or owns a facility that has handled more than 50,000 tonnes per year.

The Government has also published guidance in respect of its use of the call-in power, which can be used for, essentially, any deal (including asset deals) up to 5 years after the deal completes – or 6 months from the point of the Government becoming aware of the deal. The guidance says that the Government will assess the characteristics of the acquirer; consider whether the target asset or entity could be used to undermine national security; and evaluate the level of control that will be acquired over the asset. In short, the Government is retaining a considerable discretion in the exercise of this expansive power, though it does say it is most likely to use it in relation to deals most closely connected with the sectors and targets to which mandatory notification applies.

Given these risks, parties are already taking the precautionary measure of informally engaging with the Government’s new Investment Security Unit (ISU) where they suspect that their deal might attract attention once the Act comes into force.

Competition and Markets Authority
Many energy sector deals will still also require an assessment by the Competition and Markets Authority. The guidance on the new NSI regime reaffirms the CMA’s function as “the independent and expert authority responsible for competition assessments” and says that where an acquisition is reviewed on both competition and national security grounds “the ISU will work closely with the CMA to manage the case”.

The new screening regime will extend to M&A activity beyond UK shores, as long as the target entity or asset has a sufficient nexus with the UK. The Act empowers the UK Government to impose requirements on, or even block, deals relating to non-UK businesses that supply goods or services to UK customers, or to assets that are situated outside the UK but used in connection with the supply of goods or services to UK customers. It is not clear how the Government could enforce measures in respect of such non-UK deals, but it appears that it would seek to use the presence of a UK subsidiary or staff who travel to the UK as opportunities to exert pressure.

The new Act raises many questions for anyone in the process of, or currently contemplating, acquiring companies or assets active in the UK energy sector. Anyone looking to navigate this new, complex regulatory regime should seek specialist assistance.

Charles Livingstone and Damien Ryan, Brodies LLPCharles Livingstone (at left) is a partner and Damien Ryan is a senior associate at Brodies LLP, specialising in competition law.