On 15 November 2021, the government published new National Security and Investment Act 2021 (NSIA 2021) guidance on notifiable acquisitions and updated guidance on what to expect when an acquisition is being reviewed and assessed.
The NSIA 2021 received Royal Assent on 29 April 2021 and is due to come into force fully on 4 January 2022. The new regime introduces replaces the government's existing powers to intervene in mergers and acquisitions on the grounds of national security, and includes a mandatory notification regime while also enabling investors in sectors not covered by the mandatory regime to notify any transaction voluntarily if they believe it has implications for national security.
The NSIA 2021 is the product of concerns that the government’s powers to scrutinise acquisitions on national security grounds (contained in the existing public interest merger regime provisions of the Enterprise Act 2002) had become inadequate to protect UK national security interests.
A reminder of some of the principal features of the NSIA 2021:
Call-in powers
This is central to the new regime. The UK Government is empowered to call in for review any qualifying transaction for national security assessment. “National security” is not defined in NSIA 2021 - a deliberate decision on the part of the government to preserve flexibility as risks change over time.
In short, the government can give a “call-in notice” if it reasonably suspects that:
a trigger event has taken place in relation to a qualifying entity or a qualifying asset, and the event has given rise to or may give rise to a risk to national security
arrangements are in progress or contemplation which, if carried into effect, will result in a trigger event taking place in relation to a qualifying entity or qualifying asset, and the event may give rise to a risk to national security
In this way a call-in notice may be given when a qualifying acquisition prompting national security concerns has completed or is merely in prospect (see our earlier briefing for an explanation of these concepts).
In terms of territorial reach, the NSIA 2021 is not limited to trigger events in relation to entities incorporated or assets situated in the UK. Nevertheless, a trigger event in relation to an overseas entity or asset (where, for example, it is the target of an M&A deal) will not come within NSIA 2021 unless that entity or asset has the required nexus to the UK.
The call-in power is exercisable at any time up to 6 months after the Secretary of State becomes aware of the transaction, provided this is also within 5 years of the “trigger event” occurring. This call-in power extends to any sector and is not subject to any materiality thresholds. This means that the acquisitions which qualify for review may include transactions involving start-ups.
Call-in powers may be exercised on the government’s own initiative or following a mandatory or voluntary notification.
The government has wide powers to impose remedies if national security concerns are established including, potentially, blocking or unwinding transactions. Contravention may lead to significant civil and criminal sanctions.
Mandatory notification
NSIA 2021 requires mandatory notice to be given of certain prospective acquisitions of shares/voting rights in target entities carrying on specified activities in the UK in 17 sectors. The rationale is to ensure that particularly sensitive acquisitions can be assessed before they take place – so avoiding any risk that intervention would be too late in terms of unwinding transactions or investments which raise national security issues.
The mandatory notification obligation only applies to “notifiable acquisitions” i.e. acquisitions which result in:
the percentage of shares or voting rights that the acquirer holds in the entity increasing and crossing the 25%, 50% or 75% thresholds; or
the acquisition of voting rights in the target entity that (whether alone or together with other voting rights held by the acquirer) enable the acquirer to secure or prevent the passage of any class of resolution governing the affairs of the entity
Qualifying acquisitions that are part of a corporate restructure or reorganisation may be covered by the new rules. This is the case even if the acquisition takes place within the same corporate group - meaning intra-group reorganisations may be caught.
Where the mandatory notification obligation applies, there will be a corresponding “standstill” obligation prohibiting completion prior to obtaining clearance. Breach of this obligation will result in the transaction being automatically void (in the absence of retrospective validation)
Voluntary notification
Acquirers will have the option to notify a qualifying transaction voluntarily to obtain clearance, which may be advisable where parties have concerns that a qualifying acquisition may give rise to a risk to national security
Retroactive powers
Whilst the substantive provisions of the NSIA 2021 will come into force on 4 January 2022, the Government will have retroactive powers to call in for review on that date (or potentially up to 5 years later) any qualifying transaction completed between 12 November 2020 and the commencement date.
Government Guidance
On 15 November 2021 the Government published further guidance on:
on the types of acquisitions that can be classed as ‘notifiable’
what parties should expect when they submit a notification form and go through the NSIA notification and assessment process.
The precise definitions of the specified activities in the 17 specified sectors are not included in the NSIA 2021 but are set out separately in the Notifiable Acquisition Regulations. The Government has also published separate Notifiable Acquisitions Guidance with additional guidance on the specified activities. The final sector definitions adopted in the Notifiable Acquisition Regulations will also be kept under review but at the time of writing the 17 sectors are as follows:
The guidance issued by the government also explains what investors can expect once a notification has been made. The guidance explains the review process and how this is divided into 2 parts: a review period applicable to all notifications and an assessment period applicable only to an acquisition which is “called-in”. These processes will be the same for each type of notification, whether mandatory, voluntary or retrospective. The review period and the assessment period each last up to 30 working days. The government may extend the assessment period by an additional period of 45 working days, subject to certain tests being met. Any further extension beyond those 45 working days must be with the written agreement of the acquirer. Within 30 working days of acceptance of the notification form the government will either:
clear the acquisition and confirm that it can proceed
call in the acquisition for a full national security assessment
require further information require the parties to attend a meeting
The government has indicated that it expects most notifications will be cleared rather than called in and that parties will be informed of the outcome of the government’s decision during the first 30 working day review period.
High level guidance has been issued by the government on the intended exercise of the call-in power. It states that it gives as much detail as is possible on how the government expects to use the call-in power, given the sensitivity of national security. The statement must be reviewed every 5 years and may be reviewed more frequently.
Conclusions
The new regime represents an important new deal execution risk factor.
The retroactive call-in powers mean that it is critical for investors to consider the potential application of the new regime for all transactions completed from 12 November 2020 onwards which could potentially raise national security concerns. Key take ways for Investors:
Deal not yet signed
consider whether an NSI regime condition precedent should be included in the transaction documents
factor the NSI review process into the deal timeline and long stop date
investors should consider more extensive due diligence on any target activities that could be relevant to national security
Deal signed but not yet completed
Consider obtaining informal guidance from the ISU if there is any risk of a potential national security issue
In the context of a cross-border acquisition that may give rise to national security concerns, it will therefore be necessary to consider whether any target entity or asset might fall within the scope of NSIA 2021. Factors that the government will take into account in assessing national security risk in that context are set out in the Section 3 Statement and examples are contained in government guidance.
The impact of the new regime on foreign investment into the UK remains to be seen. The Government has repeatedly stressed that it does not wish to deter friendly foreign investment acknowledging the importance of such investment for the UK economy.
All this being said whilst the focus of the new regime is clearly on foreign investment it should be borne in mind that the new regime applies equally to UK investors - who will be subject to the same notification obligations and potential sanctions
