Management Corporation ’ s proposed acquisition of 60 % of the National Grid ’ s transmission business can be seen as evidence of the increased scrutiny of foreign ownership of critical energy infrastructure in the UK , notwithstanding that both Macquarie and British Columbia Investment Management Corporation already own utilities and other infrastructure in the UK .
In the upstream , such transactions may also be subject to the consent of the North Sea Transition Authority in any event , such that there is an effective block on transactions posing a threat to national security outside of the scope of the Act .
In order to mitigate the risk of a call-in notice being issued in respect of a transaction , parties should consider engaging in dialogue with the ISU in order to obtain an initial view of whether a transaction falls within the scope of the mandatory notification regime .
Finally , investors should also note that the Act is not a pure foreign investment regime and applies equally to domestic UK acquirers . The provisions of the Act , therefore , cannot be circumvented by the incorporation of a UK ‘ bidco ’ or purchaser entity .
Debt finance
Importantly , the Act can have major implications for lenders to UK projects . A loan in itself is unlikely to fall within the scope of the regime and the Government has recently issued guidance that the granting of an equitable interest over shares ‘ would not appear to grant any control over the shares … until the happening of an event that would provide control ’. On this basis , whilst the granting of security over shares is unlikely to be notifiable , the enforcement of security over shares in a qualifying entity of a specified description by a security agent or trustee on behalf of secured creditors will fall within the scope of the Act ’ s mandatory notification regime .
There is an important distinction with respect to Scots law security where title to shares is transferred to a security trustee at the point of taking the security , rather than upon enforcement as would be the case under English law . The Government has confirmed that such security would fall within the scope of the mandatory notification regime if the entity that is the subject of the share security is a qualifying entity of a specified description .
The Act should therefore be considered by lenders and borrowers not only in relation to the initial grant of the loan and security ( which are less likely to fall within the scope of the Act ), but also in the context of the enforcement of security by the security agent or trustee , and then again on any subsequent sale of the relevant shares or assets by that security agent or trustee to a third party ( which are more likely to fall within the scope of the Act ).
Project development
The Government has recently issued guidance on the applicability of the Act to the development of new build infrastructure in the downstream gas and electricity sectors . The Government considers that the scope of the Secretary of State ’ s call-in powers includes the granting of a right or licence , or the submission of a bid for a licence ( such as a generation licence from Ofgem ) or entry into a grid connection agreement with National Grid , on the basis that :
• such licences and contracts are qualifying assets ; and
• the application for the relevant qualifying asset or the award constitutes the commencement of arrangements to acquire control over a qualifying asset or the acquisition of control over the qualifying asset , respectively .
As asset acquisitions , these transactions are outside of the scope of the mandatory notification regime but may be voluntarily notified to the Secretary of State . Project developers will need to consider the risk that their bid for a licence to develop an asset or for a grid connection agreement or similar arrangement will be the subject of a call-in by the Secretary of State given the potentially significant development costs that will be incurred and would likely be unrecoverable in the event that the relevant acquisition were to be blocked by the Secretary of State . This might encourage an increase in cautious early voluntary notifications to avoid such risks . The guidance re-iterates that the Secretary of State will only call-in a transaction if it has a reasonable suspicion that the acquisition may pose a risk to national security and therefore , based on practice to date , we would anticipate that very few acquisitions of qualifying assets in this context will be subject to call-in by the Secretary of State .
5 . Conclusions
As is common following the enactment of any significant legislation , companies undertaking acquisitions in the UK energy sector are , in our experience , taking a cautious approach to the analysis of the new regime . A form of “ standard practice ” will inevitably emerge as companies , advisers and the regulators ( the ISU and the Secretary of State ) become more familiar with its operation . In the meantime , participants considering sales and acquisitions in the UK energy sector should be mindful of the Act ’ s implications , and the potentially significant applicable penalties for contravention , by ensuring that analysis and any necessary filings are built into the transaction timetable , as is customarily the case for other regulatory approvals . bracewell . com