We continue to have significant concerns regarding the inclusion of intragroup transactions within the current scope of the NSIB. We consider that standalone internal restructurings which do not involve a change of control, i.e., which are not connected to a separate third party transaction, should be removed from the ambit of the Bill altogether as they do not raise a national security risk.
Having reviewed the transcripts from the Committee stage reading of the Bill, we understand that the Government is concerned that an intragroup transaction that is connected to a separate third party transaction could raise a national security issue. The example given is when a parent company in a group makes an acquisition of a third party company through a low level subsidiary and then internally transfers ownership of the third party company to the parent. The proposed solution is to design the notification process and forms so that a single notification providing all the details of the entities in the same corporate structure can be reviewed together, i.e., that the third party acquisition and connected internal reorganisation can be notified together for review.
We respectfully disagree that this proposal will reduce the burden of notification of transactions that do not pose a national security risk, as illustrated below.
Trigger Event 1: Company A domiciled in a foreign country establishes a UK subsidiary, Company B. Company B acquires an unconnected UK company involved in synthetic biology (one of the 17 sectors which will require mandatory notification), Company T.
Trigger Event 2: Company B transfers all the shares in Company T to Company A.
We consider that any national security risk occurs at Trigger Event 1 in Example A. Company T has become controlled indirectly by Company A at that point. If the idea behind making Trigger Event 2 a separate trigger event is to prevent the transfer of Company T’s synthetic biology business out of the UK, mandatory notification of that transfer can be avoided by Company T transferring its assets to Company A, an event that would not be mandatorily notifiable under the current scope of the NSIB. The key to controlling the transfer of Company T’s business out of the UK is to ask questions to detect it in the notification of Trigger Event 1 and then to call in Trigger Event 2, whether it is an asset or a share transfer, for review if necessary.
The unintended but hugely problematic consequence of the current position is illustrated by this further example:
Trigger Event 1: Company A domiciled in a foreign country transfers all the shares in its 100% directly held subsidiary, Company T, which operates a UK synthetic biology business, to Company B, a newly established UK subsidiary which it owns 100%. This is necessary to effect Trigger Event 2 below. Other assets and shareholdings within Company A’s group are also transferred to Company B. The aim is for all the various assets and shareholdings which Company A wishes to sell by way of Trigger Event 2 to be brought together under Company B. This is a “carve out”.
Trigger Event 2: Company A transfers the shares in Company B to Company P. Company P thereby acquires indirect control of Company T.
In Example B, both Trigger Event 1 and Trigger Event 2 are mandatorily notifiable under the current version of the Bill. However, it is no solution to suggest that they can be notified together. Trigger Event 1, the internal reorganisation, has zero national security implications but cannot go ahead until it has been notified and cleared (as it is subject to mandatory notification). The Parties (Company A and Company P) will want this done as quickly as possible and will not want to complicate the 30 day review by the UK Government of Trigger Event 1 by notifying Trigger Event 2, which may have national security implications, at the same time. Only once Trigger Event 1, the carve out, has happened after receiving clearance, is Trigger Event 2 allowed to take place. That will require a separate notification and review which may well involve Trigger Event 2 being called in for a full national security assessment. Trigger Event 2 cannot take place until it is cleared by the UK Government.
This means that the parties must either notify Trigger Event 1 and 2 together, in which case they cannot complete the carve out until the UK Government has finished an in-depth national security review of Trigger Event 2, if this is to take place; or they would have to make two separate notifications. This seems unnecessarily burdensome particularly given that internal reorganisations do not raise a national security risk.
We therefore continue to urge the Government to remove intragroup transactions from the mandatory notification regime.