National security reviews are having a growing impact on international M&A deals. Such reviews have the potential to drastically change the nature of an M&A transaction or, worse, derail it completely.
The impact of a national security review can range widely, from an actual or de facto prohibition of the transaction to application of conditions or mitigation measures on the target and/or the acquirer.
These conditions and mitigation measures can include divestiture of assets, ring-fencing of certain data/information, or governance restrictions, among others.
This article addresses the specific steps an investor should consider taking in structuring and planning its transactions to incorporate protections regarding applicable national security reviews.
Regarding timing, parties should consider the review period under the national security review process once the submission for such review has been formally accepted by the relevant authority. The significance of these timing considerations may vary depending on whether clearance by the relevant authority is mandatory or voluntary.
Acquirers would typically want to specify in the transaction agreement the circumstances relating to the regulatory review process under which it would not be required to consummate the proposed transaction.
Depending on the market practice in the relevant jurisdiction, the contract provisions intended to protect the acquirer from these risks may take the form of regulatory material adverse change clauses and/or covenants that specify the level of effort that the acquirer must expend in order to obtain the necessary regulatory approval.
Material adverse change clauses and/or covenants are often accompanied by reverse break-up fee arrangements. These provisions are designed to allocate certain financial risk to the acquirer if the transaction is not consummated due to regulatory reasons.
While most investors are accustomed to the concept of reverse break-up fee arrangements, the risk that such arrangements will be triggered increases as thresholds for national security reviews and intervention become lower worldwide.
A recent trend in dealing with anticipated national security reviews is the use of "ring-fencing" provisions in the transaction agreement. These ring-fencing provisions limit the acquirer's ability to either control or gain access to certain specified aspects of the target's business, assets or operations.
These provisions preemptively address and alleviate the likely national security concerns of the relevant authority regarding the particular transaction. Ring-fencing measures are often aimed at protecting the target's intellectual property and know-how by increasing or establishing management's oversight duties.