This video is in mandarin
In the previous article on these pages, the author enumerated the industries in which mandatory filing is required under the National Security and Investment Bill, the UK’s version of a foreign investment vetting legislation bill. This column will look at the types of transactions that could be caught, the decision maker of the review and the review period and outcome.
Triggers for notification
Investments in shares. The regime will apply to direct or indirect acquisitions of:
(1) Shares or voting rights of the target legal entity that exceed 15%, 25%, 50% or 75%;
(2) Voting rights that enable or prevent the passage of any class of resolution governing the affairs of the target legal entity (e.g., shareholding with veto power attached); and
(3) Material influence over the target’s policy.
Investments in assets. When the assets over which a foreign investor can gain control by way of an investment falls into any of the following categories, the regulator may include such investment within the scope of a national security review:
(2) Tangible movable property; and
(3) Intellectual property, or any commercially valuable idea, information or technology, more specifically including trade secrets, databases, source code, algorithms, formulas, designs, plans, drawings and their specific parameters, and software.
The regulator will consider whether the investor will secure use of the assets to a greater extent than before the acquisition, or the right to decide to use, develop, improve, discard or destroy such assets.
Of particular concern is that the review powers of the UK regulatory authority will not be limited to investments in UK companies and assets only, but may extend to investments in non-UK companies that carry on business activities in the UK or that provide goods or services to UK customers, as well as to non-UK assets or intellectual property that are used in UK-related business activities, or to provide goods or services to UK customers.
With respect to foreign transactions falling within the 17 sensitive industries, compliance with the mandatory filing obligation will only be required if they pass a stringent test of connection to the UK. However, the specific definition of such a test still requires the further issuance of secondary legislation by the UK regulator for clarification.
Unlike the previous reform proposals announced in a government white paper, this bill will fully separate the review authority from the UK Competition and Markets Authority (CMA) under the existing system, and hand the authority responsibility to the Department for Business, Energy and Industrial Strategy (BEIS).
Within the BEIS, a new 100-person investment security unit has been created. In future, this unit will become the point of contact directly responsible for accepting filings from, and providing guidance to, transaction parties.
Of course, antitrust filings under the current UK merger control regime, and the expanded and revised public interest-based reviews, have not been abolished and will continue to be overseen and reviewed by the CMA.
Review period, outcome
After a filing is made, the regulator will have 30 working days to decide whether to issue a “call-in” notice and, if so, a further 30-75 working-day review period to decide whether to clear the transaction, approve it but with remedies imposed, or prohibit the transaction. If the transaction is complex, the review period may be extended.
With respect to a review decision made by the BEIS (more precisely, the secretary of state for the BEIS), it may be appealed to the High Court on the judicial review standard. Such a judicial review by the court will be limited to the question of the legality of the decision, without a second substantive review of the policy considerations on the basis of which the review decision was made.
Without a doubt, the National Security and Investment Bill will have a substantial and probably far-reaching impact on Chinese investment transactions involving the UK, with the prudent assessment of the feasibility of a transaction, the setting of the conditions precedent to closing, the realistic expectations on the progress of the transaction, and the reasonable arrangement of the timetable all being crucial.
According to the impact assessment published by the UK government, it is expected that the new regime will result in 1,000-1,830 notifiable transactions per year. This is a staggering figure, as, after all, since the implementation of the foreign investment review system by the UK in 2003, there has to date been only a little more than 10 transactions that have been reviewed for their national security implications. The review capacity, actual review time, and efficiency of the BEIS, have all yet to be tested in practice.
The UK government has stated that the reviews will be based on national security considerations, not economic nationalism, and that the reviews should be quick and appropriate so as to minimise disruption to transaction efficiency and investors’ concerns about a deteriorating UK investment environment.