In November, the UK government unveiled plans to introduce screening of M&A transactions on national security grounds, heralding wide-ranging legislative powers to intervene on deals and compulsory deal clearance for key sectors. Lawyers say the new National Security and Investment Bill’s biggest impact will be another layer of due diligence and slower deal timetables.
“The key concern is the scope of the mandatory regime,” says Simon Lyell, private equity partner at Weil, Gotshal & Manges, referring to the requirement for proposed acquirers of assets in certain key sectors to seek authorisation before closing deals. “That is very wide and could catch a lot of businesses. We don’t yet know the final form of the regulations, which may narrow, but at the moment, for example, a data storage business that stores data for certain sectors, such as major airports or defence, would be caught.”
That means an added layer of diligence of targets and their customers. “The processes people like are the ones that move quickly and efficiently – this is going to hamper that,” says Lyell.
The secretary of state will also be able to call in acquisitions of a much wider range of sensitive assets to do a national security assessment. “There is the potential for long delays to deal timetables,” says Lyell. “The simultaneous filing and closing of deals is going to become a thing of the past; it is already falling out of vogue.”
Many are already familiar with the principles thanks to the Committee on Foreign Investment in the US. Ivan Schlager, a partner at Kirkland & Ellis, says: “The useful thing about the UK process is that people have been anticipating this for some time and have begun to factor it into transactions. So, from that perspective, I don’t think there is going to be a tremendous dislocation in the deal environment.
“Non-problematic buyers, including well-known funds with well-established GP/LP relationships, will be able to leverage off of the work they have done with CFIUS over the years, and with the French process and others. The parameters of how to look at a deal and structure a deal are pretty well known.”
Some of the key issues for private equity are around fund structuring to account for LPs that come from sensitive locations. They need to be insulated from access to sensitive data or technologies, in line with the US process.
Precisely how the UK regime will differ from CFIUS and other regimes remains to be seen, but Schlager says that is not all that matters: “The details matter because they give you a
road-map and some bright lines for identifying certain sensitivities. But the fine art of this is understanding how the rules are going to be interpreted and getting to know the personalities of the people interpreting the rules.
“The real issue is understanding the policy objectives of the administration and how this fits in with the broader national economic policy objectives. In my experience, there isn’t a legal precedent that you can pull down, but deal by deal the regulatory issues become clear.”
When it comes to national security, every transaction is unique. Dealmakers are likely to avoid taking unnecessary risks. Lyell says: “Any new regime is always viewed with suspicion at the start but, because of the rule of law here, people will assume it will be run properly. Nevertheless, until there’s some precedent under the authority’s belt so people can look to that for guidance, there will be initial caution that will result in additional filings given the serious consequences of getting it wrong.”