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National Security and Investment Act set to come into force from January 2022

The National Security and Investment Act 2021 is set to come into force in January 2022.

The National Security and Investment Act 2021 (NSIA) became law on 29 April 2021. It comes into force fully on 4 January 2022 with retrospective effect, applying to any transaction completed on or after 12 November 2020 (the day after the bill was introduced into Parliament). It is the biggest piece of legislation to affect corporate transactions since the Companies Act 2006.

The Act will allow the Secretary of State for Business, Energy and Industrial Strategy to review transactions which they believe may give rise to a risk to national security. There is no definition of what national security means but some guidance is to be provided by way of a Policy Statement, to be known as the “Section 3 Statement”. A draft of this has already been published but it is subject to further review.

There is an ongoing consultation on the draft which is due to close on 30 August 2021. The draft Section 3 Statement gives some guidance on the factors that the Secretary of State will consider relevant when deciding whether a particular transaction has such an impact but there is no real detail as to what effect there might have to be or which parties might be of particular interest. Understandably, this is in order to provide some flexibility given the speed with which national security implications can change over time but it does lead to an element of uncertainty.

It is possible to obtain non-binding guidance from a new government unit that is being set up to assess transactions - the Investment Security Unit.

The Act introduces three regimes which will affect transactions. These are a mandatory notification regime for transactions in certain sectors, a voluntary notification regime for any other transactions and a “Call In” process whereby the Secretary of State can call in any transactions where they believe there might be a national security risk and make appropriate orders to deal with that risk.

The Mandatory Notification Regime

If any transaction in certain specified sectors is to take place then the parties are required to notify the Secretary of State and obtain clearance before the transaction completes. If that is not done the whole transaction will be void. This is not simply a case of a transaction subsequently being unwound, it is void from the start, and this will naturally have some confusing consequences if parties believe that they have properly completed a transaction. Whilst there are provisions which would allow a void transaction to be subsequently sanctioned by the Secretary of State that, in itself, may also have some rather strange implications.

There are 17 sectors which will be covered by the mandatory notification regime. These are:

  • Advanced Materials
  • Advanced Robotics
  • Artificial Intelligence
  • Civil Nuclear
  • Communications
  • Computing Hardware
  • Critical Suppliers to Government
  • Cryptographic Authentication
  • Data Infrastructure
  • Defence
  • Energy
  • Military and Dual-Use
  • Quantum Technologies
  • Satellite and Space Technologies
  • Suppliers to the Emergency Services
  • Synthetic Biology
  • Transport

This list means that transactions other than those that would naturally be considered to affect national security are going to be caught. There are no threshold tests, (as there are for the current regime under the Competition and Markets Authority), nor is there any requirement for the transaction itself to have reasonably foreseeable national security implications. If it is in that sector then the transaction has to be notified and cannot be completed until clearance is obtained. This means that there will be transactions which could otherwise be completed on the same day which will now probably need to be implemented by way of a split exchange and completion, conditional on clearance, which will add a number of complications which would not otherwise need to be dealt with.

This regime captures any transaction where an acquirer of an “entity”, (i.e. a company or other similar organisation), acquires shares or votes which take it above a threshold of 25%, 50% or 75% of the shares or votes. It also catches any transaction where the acquirer obtains an ability to materially influence the entity. Again this will lead to the need to consider carefully whether any proposed transaction would be caught and no doubt the parties are going to be taking a cautious approach.

Part of the caution will be because of the significant penalties for failing to make a notification, not merely that the transaction itself would be void. Fines can be levied of up to 5% of worldwide turnover or, if more, £10million. There are also criminal penalties which could catch directors of the relevant entities in their personal capacities as well. Clearly this is something that everyone needs to be aware of where they are conducting transactions.

The Voluntary Regime

Even where the transaction does not involve any of the 17 sectors, there is the ability for the parties to voluntarily notify the Secretary of State about a proposed transaction. The reason for this is because of the third element of the new regime, i.e. the ability of the Secretary of State to call in any transaction that they become aware of, (whether notified or not). This can happen at any time within 5 years of the transaction taking place, or within six months of the Secretary of State becoming aware of the transaction, (whichever is less). Again, this will introduce considerable uncertainty into transactions and therefore there will clearly be a temptation for parties to make voluntary notifications.

The call in regime, and the voluntary notification procedures cover not just transactions where an acquirer is taking a stake in an “entity” but also where they are acquiring any asset (including, in particular, intellectual property). The mandatory regime just relates to the acquisition of an entity.

The Act makes some effort to limit the consideration period in respect of any transaction notified – the Secretary of State has to determine within 30 days whether the transaction is to be properly considered or waived through and then has a further period of 30 days in which to make a final order. However, the Secretary of State has the ability to extend this time period and, in particular, if there is a lack of information then the clock can be stopped.

Where a transaction is called in and the Secretary of State is inclined to make an order then there are very wide powers as to what that order may contain. The Secretary of State can order any party to do or refrain from doing anything that the Secretary of State may think appropriate, (e.g. not to use certain information, keep matters confidential, etc). These obligations can be unlimited in time. In respect of completed transactions the Secretary of State can order that the transaction is unwound. It will be interesting to see how a transaction can be unwound possibly 5 years after it was originally completed.

The concept of the NSIA brings the UK in line with other countries in allowing the government to levy some amount of control over transactions that affect national security. A number of the provisions are similar to those found in other countries. Nevertheless, this will introduce a certain amount of uncertainty into transactions and also create further hurdles that will need to be navigated, in particular introducing the further complexity of having split exchange and completion. For some sectors, such as insurance, where transactions are often already subject to regulatory approval, this may not have too much material effect and of course it is highly unlikely that transactions would have a national security implication in any event, but the Act must still be taken into account when structuring deals.

If the NSIA may impact your corporate strategy, please do get in touch with our corporate solicitors to discuss how best you can prepare.

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