- Trainee Solicitor
A year on from the enactment of the National Security and Investment Act 2021 (“Act” / “NSIA”), we revisit the implications of the Act for both investors and those seeking investment, and reflect on how it has played out in practice across the corporate investment sphere.
In short, the NSIA is a mechanism for the Secretary of State for Business, Energy and Industrial Strategy (“BEIS”) to scrutinise, intervene in, and block the acquisition of interests in entities or assets on the grounds of UK national security. In this article we focus on the mandatory notification regime, under which “notifiable acquisitions” in relation to companies must be submitted to BEIS for review and approval before they can proceed.
A transaction will be a notifiable acquisition where a twofold test is met:
1. the target of the acquisition is a “qualifying entity” that undertakes activities in one or more of 17 specified high-risk sectors (everything from advanced robotics and AI to energy and transport); and
2. through the acquisition, the following would be acquired:
a. more than 25%, more than 50%, or 75% or more of the shares, or rights to profits or assets in the qualifying entity;
b. more than 25%, more than 50%, or 75% or more of the voting rights in the qualifying entity; or
c. voting rights that enable the securing or blocking of any resolution governing the affairs of the entity.
Essentially any entity (excluding individuals) can qualify, meaning UK companies, partnerships, trusts, and unincorporated associations are all caught, and so are entities formed outside of the UK if they engage with persons in the UK.
While there is no lower limit for existing or resultant market share, turnover, or acquisition value in some sectors, it is crucial that parties refer to the regulations and government guidance, as certain sector-specific thresholds and conditions do apply. For instance, if a solar farm business only operates a single electricity generating asset with a capacity of less than 100 megawatts, its acquisition will not be notifiable. Neither will an acquisition of an advanced robotics company if it deals only in smart speakers or lawnmowing robots.
Parties should, however, be mindful that the regime is not limited to share purchases or the issue of new shares, meaning share buybacks, redemptions, and other alterations to share capital can satisfy the second criterion.
An acquirer in a transaction caught by the NSIA must submit notifications to BEIS’ screening department, the Investment Security Unit (“ISU”), via its digital platform. A proposed transaction can then be put on hold for 21 weeks, and potentially longer:
up to 30 working days
Initial assessment: up to 30 working days
Further assessment: up to 45 working days
Further assessment extension: unlimited
While conducting its assessment, BEIS can demand information and witness attendance, and can impose interim orders to prevent national security risks materialising.
When the assessment is complete, the parties will either get the greenlight to proceed with the transaction, or BEIS will issue a final order of measures to prevent or mitigate national security risks. The manner and form of those measures are down to BEIS but have so far included the likes of controls on information; obligations to provide information to the government; prohibitions on moving certain business (such as R&D) outside the UK; and of course, the prohibition of the transaction proceeding.
A notifiable transaction that is completed without BEIS approval, or without complying to an order, is void and has no legal effect. Completing a notifiable acquisition without prior clearance is an offence, and sanctions include:
1. fines of up to the higher of £10 million, or 5% of total worldwide turnover; and
2. up to five years’ imprisonment for individuals. .
The publication of the Act in 2021 raised initial alarm in the investment and M&A community. Indeed, when the bill was presented to parliament, the government anticipated between 1,000 and 1,830 transactions to be notified under the regime. So far, and with the current climate in mind, that seems unlikely. BEIS’ first annual report on the operation of the Act, published in June 2022, recorded just 222 notifications in the first quarter of 2022, with an average turnaround of 24 working days for rejecting or calling in notifications.
While all 17 specified sectors (particularly defence, military and dual use, and critical suppliers to government) saw mandatory notifications, no final orders were issued, nor were any penalties or criminal sanctions imposed.
Since the report, there have been 16 final orders. The first was issued in July 2022 in connection with a proposed acquisition of shares in a company supplying critical communications services to the UK emergency services. The parties were allowed to proceed with the deal but were ordered to implement enhanced controls to protect the technology and allow access to premises and information by security auditors.
Flexibility has been demonstrated and BEIS has been prepared to revisit past decisions. An initial order prohibiting the acquisition of intellectual property rights in vision-sensing technology by a Chinese company from The University of Manchester was varied in January this year, with BEIS allowing the University of Manchester to share the technology in certain circumstances subject to the agreement of BEIS.
Overall, it seems investors have been pragmatic, and the Act hasn’t significantly slowed market activity in the investment sector. Data suggests that investors have resisted cautionary applications where mandatory notification criteria aren’t met, with only 25 voluntary notifications out of the 222 made in the first quarter of 2022.
Last year investors in Scotland also made use of the ISU’s general enquiries channel, seeking direct guidance as to whether contractual rights (that is, not constitutional rights) to block or pass resolutions would satisfy the criteria above. BEIS confirmed that such mechanisms would not trigger the Act, meaning investors have been able to retain almost all of their preferred controls over their portfolio companies’ corporate conduct.
However, while responsibility to submit the notification falls on the investor, those looking to make investment have been keen to ensure that the target is actively engaged in NSIA due diligence.
In some circles, investors have required their investment targets (including, where applicable, the target’s portfolio companies) to prepare and exhibit a holistic NSIA report. They have asked targets to analyse the spectrum of their activities and assess whether they consider their business to fall within the parameters. Targets can expect these reports to be closely scrutinised and should be prepared to provide extensive due diligence materials to satisfy investors.
Further to disclosure, investors have sought protection through the usual contractual mechanisms. Completions have been made conditional on satisfactory discharge of all notifications and approvals of BEIS. Targets are increasingly expected to warrant that their activities don’t fall within scope and/or that the transaction does not trigger the mandatory notification regime. It is however difficult to reconcile reliance on warranties with the power of the Secretary of State to unwind a transaction caught by the Act and declare documentation void, so investors should ensure they’re comfortable before signing on the dotted line.
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