National Security and Investment Act comes into force from January 2022
The National Security and Investment Act 2021 is in force from January 2022
The National Security and Investment Act 2021 (NSIA), in force from 4 January 2022, also impacts with retrospective effect on certain transactions. It is the biggest piece of legislation to affect corporate transactions since the Companies Act 2006.
The Act allows the Secretary of State for Business, Energy and Industrial Strategy to review transactions that they believe may give rise to a risk to national security. There is no definition in the NSIA of what national security means, but guidance issued by the government identifies the following factors as being relevant in assessing risk to national security:
- target risk — what does the target do?
- acquirer risk — what are the characteristics of the acquirer and what are its relationships?
- control risk — what level of control will the acquirer obtain over the target?
The NSIA introduces three regimes that 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
The mandatory notification regime applies to transactions occurring in certain specified sectors. Transactions falling within the mandatory regime must be notified by the parties to the Secretary of State for 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 that 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 that will be covered by the mandatory notification regime. These are:
- Advanced materials
- Advanced robotics
- Artificial intelligence
- Civil nuclear
- Computing hardware
- Critical suppliers to the government
- Cryptographic authentication
- Data infrastructure
- Military and Dual-use
- Quantum technologies
- Satellite and space technologies
- Suppliers to the Emergency services
- Synthetic biology
This list means that transactions other than those that would naturally be considered to affect national security are nevertheless caught.
The mandatory regime captures any transaction whereby an acquirer acquires shares or voting rights which results in it owning above 25%, or above 50% or 75% or more of the shares or voting rights in an entity (i.e. a company, LLP, partnership trust or other similar organisation) which carries on particular activities within one of these 17 sectors. The mandatory regime also catches any transaction whereby the acquirer acquires voting rights which enable it to affect or block the passage of any class of resolution governing the affairs of such an entity.
The entity does not need to be UK-based. The regime also applies to non-UK entities which carry on activities in the UK or which supply goods or services to persons in the UK.
There are no minimum financial threshold tests nor is there any requirement for the transaction itself to have reasonably foreseeable national security implications. If the entity is carrying on the specified activities 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 that could otherwise be completed by way of simultaneous exchange and completion, which will now likely need to be implemented by way of a split exchange and completion, with completion conditional on clearance. This split, itself, will likely add a number of complications (for example, conduct of the business by the seller between exchange and completion) that would otherwise not need to be dealt with.
A cautious approach to the mandatory notification regime is likely, not least because of the significant penalties for failing to make a mandatory notification, as well as the fact that the transaction itself would be void for non-notification. Fines can be levied of up to 5% of worldwide turnover or, if more, £10million. There are also criminal penalties that could catch directors of the relevant entities in their personal capacities as well. Clearly, this is something that everyone needs to be aware of when they are conducting transactions.
The Voluntary Regime and the Government Call-In power
Even where the transaction does not involve any of the 17 sectors, there is the ability for the parties to notify the Secretary of State voluntarily about a proposed transaction. The reason why the parties may consider doing so is because of the third element of the new regime, known as the government call-in power, i.e. the ability of the Secretary of State to call-in any transaction that they become aware of (whether notified or not) where there is a reasonable suspicion that it could give rise to a risk to national security, whether or not it falls within one of the 17 sensitive sectors. 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 occurs first). Again, this will introduce considerable uncertainty into transactions and therefore there will clearly be a temptation for parties to make voluntary notifications on a fail-safe basis.
The call-in regime and the voluntary notification procedures cover not just transactions where an acquirer is taking a stake in an “entity”, as in the mandatory notification regime, but also where they are obtaining “material influence” over the entity or are acquiring certain assets (including, in particular, land, trade secrets and intellectual property).
Where a transaction is called-in, whether as a result of a mandatory notification, a voluntary notification or the government’s own volition, and the Secretary of State is satisfied that there is a risk to national security, then the government has very wide powers as to what orders it can make to prevent, remedy or mitigate that risk. 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 timetable for assessment of transactions under the NSIA is:
- The government has 30 working days from notification of a transaction (whether a mandatory or voluntary notification) to determine whether to issue a call-in notice.
- If a call-in notice is issued, the government has a further 30 working days, extendable by a further 45 working days, to carry out an initial assessment.
The overall review period is likely to be longer than this, particularly if the government seeks further information from the parties.
The NSIA brings the UK in line with other countries in allowing the government to exert 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, in most cases, it will be 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.