On 4 January 2022, the National Security and Investment Act (NSI Act) will officially come into force, implementing a new screening regime which, even by conservative estimates, will impact a significant number of corporate transactions with a UK nexus (1,000-1,800 transactions per annum).
The new regime is the culmination of much discussion at government level as to the UK’s approach to national security matters and reflects a global trend towards greater intervention in and scrutiny of national security issues.
Up until now, transactions raising any national security issues in the UK could only be reviewed by UK government under its (relatively) limited powers under the Enterprise Act 2002. The NSI Act, which has retrospective effect, strengthens government’s intervention powers considerably given in particular that the Act:
- applies to a broad range of transactions, including minority investments, acquisitions of voting rights and acquisitions of assets including land and IP;
- applies irrespective of the size of the parties involved (i.e. there are no turnover or share or supply based tests as under merger control legislation);
- imposes a mandatory obligation to get pre-completion clearance for any transaction which involve a target entity active in one of the (17) qualifying sectors – see Appendix for the full list;
- also enables UK government to review (call-in) deals entered into or that complete on or after November 12, 2020, although the full regime will only be in place once the NSI Act enters into force on January 4, 2022; and
- includes significant sanctions for failure to comply as well as the risk of transactions subject to mandatory notification being void.
Each of these points are further explained below.
Qualifying Transactions: a deliberately wide scope
The NSIA captures not just the acquisition of control but also "trigger events" including:
- any acquisition of more than 25%, 50% and 75% of the votes or shares in an entity;
- any acquisition of voting rights that enables or prevents the passage of any class of resolution governing the affairs of the entity being acquired; or
- (in relation to voluntary notifications only – see further below) the acquisition of material influence: the ability of the acquirer to influence policy relevant to the behaviour of the target entity in the marketplace.
In addition, the target entity or asset must be from, in or have a sufficient connection with the UK.
The target corporate entity must therefore carry on activities in the UK or supply goods or services to people in the UK, whereas a qualifying asset must be used in connection with activities carried on in the UK or the supply of goods or services to people in the UK. However, the Department for Business, Energy and Industrial Strategy (BEIS)’ guidance on this issue indicates that UK government will take a broad approach to the UK nexus requirement.
The mandatory notification regime
Irrespective of whether a qualifying transaction raises national security issues or not, notification will be mandatory if the target entity or assets are active in one of the 17 qualifying sectors.
The qualifying sectors are set out and defined in a Statutory Instrument – listed in the Appendix of this note. As well as obvious sectors of national importance such as defence, energy and transport, there is a significant focus on technology and innovation – e.g. advanced robotics and quantum technologies.
BEIS has also published guidance to help explain what the definitions are intended to capture and how to apply them. In many cases the sectors are widely drawn – for example any supplier to the MOD will be regarded as being within the ‘Defence’ sector whatever the scope of their activities.
Voluntary notifications also possible
For deals in all other sectors of the economy or for companies providing products / services that do not fall into the definition of one of the 17 mandatory sectors, it is still possible that the UK government will decide that national security issues necessitate an investigation. To mitigate against this risk, parties to such transactions can seek clearance by making a “voluntary” notification.
An overview of the investigatory process
A specific unit, the Investment Security Unit, within BEIS has been set up to deal with notifications. The Unit will conduct an initial review within 30 working days of notification, after which the transaction will either be cleared or called-in for a full national security assessment. A full assessment will take a further 30 working days, subject to an initial extension of 45 working days, and further potential voluntary extension if agreed with the parties. The clock can be stopped on the review if further information is required.
Transactions subject to mandatory notification requirements must be suspended pending clearance.
For voluntary notifications, the parties will have the option to notify at any time, but the Secretary of State will be able to call-in a deal for up to six months after they become aware of it, any time up to five years after the deal takes place. Further, a transaction under the voluntary regime but not voluntarily notified will proceed straight to a full assessment if called-in for review.
Stiff penalties for failure to comply
Completing an acquisition subject to mandatory notification, or not notifying a transaction where notification is mandatory, gives rise to the risk of heavy fines (5% of total worldwide turnover or £10 million, whichever is greater) and potential imprisonment of up to five years.
Equally importantly, transactions that are subject to mandatory notification will be void without clearance being received.
The UK has traditionally set itself up being “open for business” and its legal regime for the oversight of corporate transactions set up accordingly. However, the UK has decided that it needs to follow the international trend for governments to strengthen their national security rules.
In so doing it has created a regime which has a particularly broad scope and, by including the possibility of significant sanctions for non-compliance, effectively makes the NSI Act a crucial part of any transactional diligence process.
It will be critical to ask the right questions of your advisors from the outset.
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