The UK National Security and Investment Act 2021 (the Act) received Royal Assent on 29th April and is anticipated to become law later this year. The Act introduces a new standalone regime in the UK for the review of transactions and investments on national security grounds (NSI Regime).
Key Aspects
The NSI Regime will replace the national security aspects of the government's current powers of intervention under the Enterprise Act 2002. Its key provisions are summarised below:
Trigger Events
The Act applies to 5 categories of transaction that involve the acquisition of control over certain qualifying entities or qualifying assets (referred to in the Act as “trigger events”).
The first 4 of these events relate to the ways in which an acquirer may obtain control over a qualifying entity. These events comprise the acquisition of a right or interest in a qualifying entity which results in any one or more of the following:
The percentage of shares held increasing to more than 25%, 50% or 75%.
The percentage of voting rights held increasing to more than 25%, 50% or 75%.
The acquisition of voting rights enabling the blocking/ passing of corporate resolutions.
The acquisition of “material influence” over a qualifying entity’s policy. Relevant government guidance indicates this may include the acquisition of a shareholding of less than 15% when accompanied by other factors e.g. board representation.
The fifth category of trigger event concerns an acquirer gaining control of a qualifying asset and occurs where there is an acquisition of a right or interest in (or in relation to) an asset which gives the acquirer the ability to:
use the asset, or use it to a greater extent than prior to the acquisition (“use” includes references to its exploitation, alteration, manipulation, disposal or destruction); or
direct or control how the asset is used (or to a greater extent than prior to the acquisition)
Qualifying entity
This concept includes companies, limited liability partnerships and any other bodies corporate, partnerships, unincorporated associations and trusts. It is important to note that an entity formed or recognised outside the UK is capable of constituting a qualifying entity for the purposes of the Act if it:
carries on activities in the UK or
supplies goods or services to persons in the UK
So e.g. an acquisition of a French target by a German acquirer will be caught if the French entity supplies customers in the UK.
Qualifying assets
These comprise:
land (real estate)
tangible moveable property
ideas, information or techniques which have industrial, commercial or other economic value (e.g. trade secrets, databases, source code, algorithms, designs and software)
Again, land or moveable property located outside the UK is a qualifying asset for the purposes of the new regime if it is used in connection with:
activities carried on in the UK or
the supply of goods or services to persons in the UK
The extension of the NSI Regime to include assets is designed to prevent parties from circumventing the regime by purchasing assets rather than shares in the company that owns them.
Notification
The NSI Regime establishes 2 routes for acquirers to notify acquisitions to the Government for the purposes of obtaining a decision on whether the transaction gives rise to national security issues:
A mandatory notification procedure will apply to certain types of acquisition (“notifiable acquisitions”) of qualifying entities that operate in specified sectors (to be specified in secondary legislation) where it is considered that national security risks are most likely to arise. A notifiable acquisition must be notified and cleared before the acquisition occurs. A “standstill” obligation prohibits the parties from completing the transaction prior to obtaining clearance breach of which will result in the transaction being treated as automatically void and of no legal effect.
A notifiable acquisition occurs where both of the following criteria are met:
The subject of the acquisition is a qualifying entity that undertakes particular activities in the UK within a specified sector
As a result of the acquisition, the acquirer gains control of a qualifying entity by either:
increasing the percentage of shares (or votes) that it holds in the entity to more than 25%, 50% or 75%; or
acquiring voting rights in the entity that enable it to block or pass resolutions.
Acquisitions of qualifying assets are not caught by the mandatory notification regime.
A voluntary notification system where parties are encouraged to notify trigger events that, whilst falling outside the mandatory regime, may nevertheless raise national security concerns. This process applies to share and asset deals and will help parties gain deal certainty.
Notification Process
Notifications must be made by the acquirer and will be made via an online portal to a new Investment Security Unit (ISU) housed within the Department for Business, Energy and Industrial Strategy (BEIS). The decision-maker will be the Secretary of State for BEIS.
BEIS is required to decide as soon as reasonably practicable after receiving a notification of a trigger event whether to accept or reject (e.g. insufficient information provided) the notification. Once BEIS gives notice of acceptance it has an initial 30-working day period to:
clear the notified transaction; or
exercise its call-in power to initiate a full national security assessment of the transaction
Pre-Notification Discussions
The government has indicated that it will establish a process where parties can take informal non-binding guidance from BEIS as to whether their proposed transaction falls within the scope of the NSI Regime. In advance of the implementation of the Act BEIS encourages parties to contact the ISU (email investment.screening@beis.gov.uk) for such guidance on the likelihood of their transaction being called in for a national security assessment.
Retrospective clearance
Where a notifiable transaction has been completed without the requisite clearance (and so is void) the parties may apply for the transaction to be retrospectively validated subject to an application being made in accordance with the applicable procedure.
Call-in powers
The government is given power to call in a trigger event for a full national security assessment irrespective of whether it has been formally notified.
To exercise the power the Secretary of State must reasonably suspect that:
A trigger event has occurred or is in progress or contemplation; and
That trigger event has given rise to or may give rise to a national security risk.
The power extends to any trigger event that takes place between 12 November 2020 and the day before the Act comes into force - it cannot be exercised in relation to a transaction that completed on or before 11 November 2020.
The call-in power must be exercised in accordance within strict time limits. In essence, BEIS has up to 5 years after completion to call-in the deal reduced to 6 months if it has become aware of the transaction.
The retrospective call-in power may be exercised at any time up to 6 months after the commencement of the Act or 6 months after the date on which BEIS becomes aware of the transaction whichever is later (subject to a longstop of five years after completion of the transaction).
The Secretary of State has an initial assessment period of 30 working days (beginning on the day the call-in notice is given) to determine whether to issue:
a final order imposing remedies (for the purpose of preventing, etc. the national security risk) or
a final notification clearing the trigger event.
That initial assessment period can be extended by an additional 45 working days if the government believes that there is a national security risk.
The call-in power can be used in relation to transactions involving non-UK companies or assets. It is sufficient if:
the target entity supplies goods or services to persons in the UK; or
the target’s assets are used in connection with activities carried on in the UK or the supply of goods or services to persons in the UK.
National Security
Given the concept’s central significance, rather unhelpfully the Act does not define “national security” for the purposes of the NSI Regime. Factors expected to be taken into account will be set out in a statutory statement in due course. In mitigation, the flexibility which the government has created recognises the complex and dynamic nature of the threats to national security that the UK could face.
Sanctions
Sanctions for non-compliance with the NSI Regime will be severe:
where the mandatory notification obligation applies, the transaction is void if completed prior to clearance
fines of up to 5% of worldwide turnover or £10 million (whichever is the greater)
imprisonment of up to 5 years and/or
director disqualification for up to 15 years
Key points for investors
There are a number of key take-aways for investors including:
Closing thoughts
The Act represents a radical overhaul of the UK’s approach to scrutiny of transactions on national security grounds and has material significance for foreign investment in the UK. Despite assurances from government as to the likely number of transactions to be called-in and those that are being cleared quickly, the impact of the NSI Regime on investor sentiment is uncertain.
The mandatory notification and standstill obligations may impact M&A auction processes involving the relevant sectors.
The extra territorial aspects are significant and should be considered carefully by overseas counterparts where the target group carries on any part of its business in the UK.
The NSI Regime represents a significant new transaction execution risk which parties will need to incorporate into their processes and timetables. Sanctions are severe –civil and criminal – meaning the regime poses a buyer and seller risk.
If you are contemplating an investment or acquisition which may fall within the NSI Regime we would be pleased to help with any questions you may have.
