Top 10 things lenders should know about the proposed national security and investment bill

The UK government is establishing a stronger and more extensive regime to screen foreign investment. The proposals are set out in the National Security and Investment Bill, which is currently undergoing parliamentary review and is expected to become law by the end of 2021. The bill is retroactive. , so it is important that lenders are aware of its implications now for loans and other financial instruments.

  1. The bill introduces a mandatory notification regime for notifiable acquisitions in 17 key sectors. It will be illegal to enter into these transactions unless and until they are approved by the Secretary of State for Business, Energy and Industrial Strategy (BEIS). The specific sectors (which have yet to be finalized, but which have been refined by the government and reposted March 2, 2021) are: civil nuclear power; communications; data infrastructure; defense; energy; transportation; artificial intelligence; advanced robotics; hardware; cryptographic authentication; advanced materials; quantum technologies; synthetic biology; critical government suppliers; critical emergency service providers; military or dual-use technologies; and satellite and space technologies.
  2. Other transactions, which the parties consider to be likely to create a risk to national security, may be notified to BEIS on a voluntary basis for obtaining approval.
  3. The bill applies to non-UK buyers, as well as UK domestic buyers, of eligible entities and active. A qualifying entity includes a foreign entity if it conducts business or provides goods or services in the UK. (See point 8 below for more details on eligible assets.)
  4. The new regime will apply to direct or indirect acquisitions of:
      1. certain shares, voting rights and significant influence in a qualifying entity. Acquisitions as low as 15% or more of shares or voting rights (and possibly lower in case of significant influence) may be subject to revision; and
      2. a right or interest in a qualifying asset, where it enables the acquirer to use the asset, or to direct or control how the asset is used.
  5. The Secretary of State may “call“to review any transaction (whether notified or not), to assess and address any national security risk. A notice of meeting may be issued up to six months after the Secretary of State becomes aware of the transaction, provided it is within the five years of the completion of the transaction – but if the transaction is subject to mandatory notification and is not notified, No time limit apply to.
  6. The Secretary of State will have the power to “recall” transactions that take place from November 12, 2020, but will not “recall” transactions before the new regime takes effect. This means that relevant transactions currently under negotiation (or agreed but not yet completed) will be subject to the new regime, once enacted.. If a transaction falls within one of the 17 proposed key sectors, or could otherwise give rise to a national security risk, parties should consider seeking informal advice from BEIS now. It may be possible to obtain an informal comfort letter.
  7. The Secretary of State may block or impose conditions on transactions to address any identified national security risk. There are severe penalties for making a notifiable acquisition without approval and any such acquisition would be legally void. Penalties include criminal prosecution of up to five years imprisonment and fines of up to £10 million (or, if greater, 5% of worldwide turnover).
  8. Asset purchases will not be subject to mandatory notification, but may be “recalled”. This includes acquisitions of control over land, tangible personal property (such as machinery used to manufacture defense components) or ideas, information or techniques that have industrial, commercial or economic value (such as designs , source code or software). Interventions for asset transactions should be very rare, unless they are integral to an entity’s relevant business in a key sector, or the land is in a sensitive location (for example because it is close of a military base).
  9. Loans, contingent acquisitions, futures and options are not exempt from review, although rights exercisable by a director or by creditors while an entity is subject to relevant insolvency proceedings are exempt.
  10. The overwhelming majority of loans and other financial instruments should pose no national security concerns, including those of the 17 key sectors. In the rare circumstances where they are problematic, the Secretary of State expects to intervene only in the event of effective acquisition of control (for example, a lender seizing a security). More generally, lenders will need to consider the possible impact of the proposed new regime for loans used to finance the acquisition of businesses in any of the 17 key sectors, given that the financed transaction is at risk of being canceled ( and especially if it relies on the security of the target activity).

Example 1

Asset A is a site adjacent to a sensitive British defense base. Borrower B takes out a loan from lender C and pledges asset A as collateral. Borrower B defaults on the loan and Lender C enforces its security interest in Asset A. This can lead to national security risks if the entity taking control of Asset A after execution is ( or is controlled by) a hostile actor, because the proximity of Asset A could allow the acquirer (or its controller) to gather sensitive information about the operations of the defense base.

Example 2

Lender D takes security over the shares of Company E. As a result of a credit default, Lender D wishes to use this security to exercise control of Company E. This may pose national security risks by depending on Company E’s UK operations and, in particular, whether Company E is active in one of the 17 key sectors.

Example 3

Lender F holds security over the shares of company G, which operates in one of 17 key sectors. It is not uncommon for share security to include direct voting rights to the shares (usually post-default). A direct vote could trigger the mandatory notification regime, so Lender F must obtain any relevant approvals in advance.

It is therefore important for lenders to be aware that the enforcement of security over shares, land or other assets may be subject to notification and/or review, as may a sale later by the holder of the shares or assets over which security has been taken. This could apply when enforcing existing security interests granted long before the new regime came into effect (or was even proposed). While enforcement decisions are usually made following careful review/legal advice, the potential for delays due to notification/’appeals’ can be particularly acute where the ability for prompt enforcement and decisive is essential to the transaction (e.g. margin lending).

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