The UK government recently published its first “annual” report into the workings of the National Security and Investment Act (NSIA) covering the first few months of the Act’s operation. The report demonstrates how ingrained the NSIA has already become in the UK M&A/Investment landscape with 222 deal notifications alone made to the BEIS’ Investment Security Unit (ISU) between January and March 2022.
The report also serves as a timely reminder to businesses and investors as to the reach of the new Act and its importance as an item to be taken into consideration in the early stages of all transactions.
A reminder of how the NSIA works
Establishing whether a transaction qualifies
THE NSIA introduced a two-track investment screening regime, consisting of a mandatory regime for 17 of the most sensitive sectors of the economy and a voluntary regime for all other sectors.
Under the mandatory regime, parties must submit a notification to the newly established ISU if they acquire more than 25%, 50% or 75% of the votes or shares (or the ability to block or pass resolutions) in a target entity active within a specified sector in the UK. A transaction covered by the mandatory regime cannot close until it receives security clearance.
Crucially, there are no turnover, transaction value or market share safe harbours, and the UK nexus requirement is effectively very easy to make out.
The 17 sectors caught by the mandatory regime are listed in an appendix at the end of this article. Each qualifying sector has to be considered carefully as the government has published detailed guidance on what activities are caught - National Security and Investment Act: guidance on notifiable acquisitions - GOV.UK (www.gov.uk).
The voluntary regime applies to all sectors of the economy which may be of interest from a national security perspective. In addition to the thresholds under the mandatory regime, trigger events for the voluntary regime include the acquisition of “material influence” over a company (a well-established concept under UK merger control rules, which may be deemed to exist in shareholdings as low as 10% or 15%), and acquisitions of a “right or interest” in a qualifying asset (such as land or intellectual property).
The UK Government also has extensive “call-in” powers to review qualifying transactions that have not been notified up to five years post-completion. If the Government has been made aware of the transaction, however, the call-in period is reduced to six months.
Penalties for failing to comply
As noted above, if a qualifying investment or acquisition involves a mandatory sector, but does not receive NSIA clearance following notification to the ISU prior to closing, the deal is void. In addition, investors can be subjected to severe penalties, including:
• fines of up to £10 million or up to 5% of global turnover, whichever higher; and
• up to 5 years imprisonment for directors of the investor firms.
Should investors/acquirers fail to notify under the voluntary regime in circumstances where national security may be threatened, the Secretary of State can (retrospectively) intervene and impose remedies to protect national interests. These might include conditions that would threaten deal values, such as the restriction of access to confidential information and the prevention of transfers of valuable assets.
Other deal impacts
Given the consequences alluded to above, in transactions which fall within the voluntary part of the regime, a decision has to be taken whether to alert the Government of a potential qualifying acquisition. If the parties adopt this approach, or if notification is mandatory, the Government has 30 working days from a fully accepted notification to determine whether to investigate further or take no further action with respect to the investment. If it takes the former course, the investigation will take at least a further 30 working days.
Parties will therefore have to take into account the costs of compliance and impacts on deal timetables whilst they await a decision from the ISU.
More importantly still, however, the NSIA and its significant reach mean it now needs to be an integral part of the due diligence stage of VC and PE deals.
Appendix – list of mandatory sectors
• Advanced Materials
• Advanced Robotics
• Artificial Intelligence
• Civil Nuclear
• Computing Hardware
• Critical Suppliers to Government
• Cryptographic Authentication
• Data Infrastructure
• Military and Dual-Use
• Quantum Technologies
• Satellite and Space Technologies
• Suppliers to the Emergency Services
• Synthetic Biology