Posted Thursday 7th April 2022
The UK National Security and Investment Act 2021 (“NSIA”) came into force on 4 January 2022. From this date, there has been a substantial expansion of the UK government’s ability to scrutinize investments. NSIA will be a standalone UK foreign direct investment and national security screening regime. It will replace the previous regime that links national security screening with UK merger control. It is fair to say that the UK government will be more likely to intervene in transactions under NSIA than it did under the Enterprise Act 2002.
The new regime will now significantly increase the UK government’s ability to review foreign direct investment (“FDI”) in UK businesses on the grounds of national security.
NSIA brings in a mandatory notification regime for certain key sectors, and gives the Secretary of State for Business, Energy and Industrial Strategy (“BEIS”) the power to investigate and order remedies for other investments giving rise to national security concerns and includes retrospective powers. As from 4 January 2022, the UK government can impose remedies, potentially prohibit completion, and order a demerger (following completion) of certain transactions on national security grounds.
Companies are required to notify the Secretary of State of deals and obtain approval before completing their acquisitions if they fall within one of the sensitive sectors. Failure to do so could give rise to financial and criminal penalties.
NSIA is divided into two parts, a hybrid mandatory regime and a voluntary regime. The mandatory regime requires qualifying transactions within any of the 17 specified “high risk” sectors to be notified for approval before they can proceed. The voluntary regime will enable parties to submit transactions for approval and will also allow the new BEIS Investment Security Unit (“ISU”) to call in deals retrospectively.
A transaction will give rise to a mandatory filing obligation where it gives rise to (1) an increase in the shareholding or voting rights of a qualifying entity to over 25%, 50% or 75% or (2) the acquisition of veto rights over resolutions governing its affairs. The Secretary of State’s powers to call in a transaction for an investigation, as well as the parties’ ability to make a voluntary notification, will also arise if the investor (1) acquires so-called “material influence” over an entity, or (2) makes certain asset acquisitions.
The mandatory filing obligation arises with regards to investments in 17 sectors considered critical for national security purposes:
It should be noted that acquisitions in areas of the economy closely linked to these 17 areas could be of interest to the Secretary of State and acquisitions in these areas could be more likely to be called in than other areas of the economy and will be treated on a case-by-case basis.
The Secretary of State may call in transactions for investigation within five years after the qualifying event takes place, or within six months of the Secretary of State’s becoming aware of the transaction (e.g., as a result of coverage in a national news publication).
The Secretary of State may, within a period of five years of the NSIA coming into force, call in for review transactions that closed on or after 12 November 2020 but before the NSIA comes into force, or within six months of the NSIA coming into force if the Secretary of State had been made aware of the transaction. As regards transactions with potential UK national security implications that have closed or will close between 12 November 2020 and 4 January 2022.
The UK government presently anticipates between 1000 and 1830 notifications per year under the new regime, but estimates that less than 100 of these would be called in for a detailed national security assessment and that only around 10 would result in remedies.
Regarding the timetable, the ISU will conduct an initial review within 30 working days of being notified; after the review they will either clear the transaction or call it in for a full national security assessment. The full assessment will itself take up to 30 working days and can be extended, initially, for a further 45 working days – and there is potential further voluntary extension if agreed with the parties. It should be noted also that the clock can be stopped on the review if further information is required by the ISU.
Main features of the NSIA
Acquirers will need to notify certain tractions to the ISU. There will be a prohibition on closing until clearance is received for such investments. Transactions closed in breach of the NSIA will be void. In addition, if a transaction subject to mandatory notification closes before it is cleared, individuals may face criminal penalties including imprisonment of up to five years and/or possible director disqualification orders. The Secretary of State will also have the power to impose a financial penalty on the acquirer of up to 5% of the acquirer’s global group turnover or up to £10 million (whichever is higher). Where a transaction also meets the UK merger control filing thresholds, the UK competition agency, the Competition and Markets Authority, may also conduct a competition law assessment in parallel.
A transaction will be automatically subject to a mandatory notification if:
The mandatory filing regime will apply to transactions in 17 sectors related to UK national security listed above.
As set out above, parties will have the ability to make a voluntary preclosing notification, if the transaction is likely to have UK national security implications. However, where the transaction does not meet the relevant mandatory notification thresholds and/or is not within one of the 17 sectors requiring mandatory notification, parties to a transaction will be able to make a voluntary notification in the following circumstances:
If the parties do not make a voluntary notification, the ISU may decide to call in the transaction for a national security review.
The NSIA will apply to FDI and also to both UK and non-UK investors. However, the affiliations of the investor will be relevant for the purposes of the substantive national security review as well as in deciding whether to exercise the call-in power with regards to transactions not giving rise to the mandatory filing obligation.
The mandatory and voluntary filing regime under the NSIA does not include generally applicable minimum turnover, asset value, or share of supply thresholds.
Risk Factors
The statement made under section 3 of the NSIA sets out how the Secretary of State expects to exercise the power to give a call-in notice: the target risk (is the target of the acquisition being used, or could it be used, in a way that poses a risk to national security?); the acquirer risk (does the acquirer have characteristics suggesting a potential risk to national security by controlling the target?); and the control risk (does the degree of control that will be acquired pose a risk to national security?). The Secretary of State has confirmed that the UK government will not make assumptions based on an acquirer’s country of origin. Authorities will nevertheless take into account ties or allegiance to a state or organisation that is hostile to the UK. Conversely, acquirers with a history of passive or long-term investments that have not raised any national security concerns are likely to be viewed as low-risk. Furthermore, the government expects to call in for review acquisitions of assets significantly less frequently than acquisitions of entities.
Extraterritorial scope
The U.K. government also published helpful guidance on various aspects of the new regime, including how the Act could affect people or acquisitions outside the UK. The guidance confirms what type of acquisitions outside the UK are covered by the rules, common circumstances that would put an acquisition in scope of the rules and provides useful examples. The extraterritorial scope of the Act applies to transactions affecting entities formed under the laws of territories outside the UK that carry on activities in the UK or supply goods or services to people in the UK. It also applies to assets (including land) situated outside of the UK that are used in connection with activities carried on in the UK or with the supply of goods or services to people in the UK – which has been of particular concern to a number of stakeholders, so the clarifications provided by this guidance will be welcome. The guidance specifies that an overseas entity that carries out research and development in the UK or has an office in the UK from which it carries on activities would likely be within the scope of the new rules. Conversely, an entity whose sole connection with the UK is that it has owners or investors who are based in the UK, buys goods or services from the UK-based suppliers, or has a parent company that has other subsidiaries that carry on activities in the UK would likely not be within the Act’s scope.
Final remarks
The new national security regime means that many companies, including lenders to UK companies will have to consider carefully its potential application to a wide range of M&A and debt transactions. With NSIA applying to investments by domestic and foreign acquirers, certain public and private M&A transaction documents will henceforth need to include a condition for closing.
This article is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action.
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