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. It also serves as a timely reminder to businesses and investors as to why consideration of the Act needs to be built in at the opening (diligence) stages of a transaction.
A reminder of how the NSIA works
As explained in our original note “The UK’s new National Security Screening Regime: why you need to know about it now”, 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 – the process generally takes 1-2 months in total (NSU has 30 working days to make a ‘decision’ on a notification that has been accepted). There are no turnover, transaction value or market share safe harbours, and the UK nexus requirement is effectively very easy to make out.
Full list of 17 sectors can be found in 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.
Experience so far under the NSIA
Several themes have started to emerge under the NSIA:
Parties have adapted well
The vast majority of transactions covered by the NSIA tend to be unproblematic and parties have adapted well to the new regime, of the notifications made, a very small number have been rejected: 7 out of 178 mandatory notifications, and for 1 out of 22 voluntary notifications.
All sectors covered
Although most mandatory notifications have related to five key sectors – defence, military and dual use, critical suppliers to government, artificial intelligence and data infrastructure, the Report notes that mandatory notifications have now been received for acquisitions taking place in each of the 17 mandatory sectors.
Call-in notices are already being used
In the period covered by the Report, 17 transaction were called-in by the government for further assessment. Two call-ins are currently in the public domain: China-backed Nexperia’s acquisition of a stake in Newport Wafer Fab and the increased stake in BT by French billionaire Patrick Drahi, Once finalised, these investigations will give a useful indicator of how far UK government is prepare to go in reviewing competed transactions for national security purposes.
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