The National Security and Investment Act 2021 (NSIA2021) introduces sweeping new powers allowing the government to intervene in UK transactions where it believes there is a risk to national security.
The new regime is likely to have a significant effect on UK transactions, leading to precautionary notifications, extended deal timetables and increased costs.
Although the powers are aimed at controlling foreign investment in sensitive UK businesses, they will apply equally to both UK and foreign investors across a wide range of industries.
When must a mandatory notification be made?
A “qualifying entity” is any entity, whether or not a legal person, that is not an individual. It includes a company, a limited liability partnership, any other body corporate, a partnership, an unincorporated association and a trust. It includes foreign entities which carry on activities in the UK or which supply goods or services to persons in the UK.
Note that asset acquisitions aren’t caught by the mandatory notification regime – it only applies to the acquisition of shares or voting rights. However, there is no deal size or other monetary threshold: regardless of its size, an acquisition in the specified sensitive sectors will need to be notified.
When considering whether shares or voting rights have been acquired, the existing rules that apply to the PSC (‘persons with significant control’) regime will apply here in relation to things such as joint interests, nominee holdings and joint arrangements.
What are the specified sectors?
The government has been consulting on the 17 specified sectors (listed below) that fall within the mandatory notification regime. These include industries with a clear national security angle, such as civil nuclear and defence, but also those of a more general nature, such as energy, transport and communications.
The final sector definitions will be set out in regulations which have yet to be published. Of the current definitions some, such as artificial intelligence and communications, have pretty broad scope; but others, for example energy and transport, have sector specific materiality thresholds within the definition.
What happens when a mandatory notification is required?
The relevant transaction must be notified to the new Investment Security Unit (ISU) within the Department for Business, Energy and Industrial Strategy. A transaction requiring a mandatory notification cannot complete until clearance has been given.
There are significant sanctions for an investor or buyer (and its directors) that fails to make a mandatory notification when required, including:
- a fine of up to 5% of global turnover or £10m (whichever is the higher);
- disqualification for directors and, potentially, imprisonment for up to five years; and
- crucially, any transaction that should have been notified under the mandatory notification regime but which completes without such a notification being made is void.
The severity of these sanctions suggests that, once the regime is fully in force (expected to be towards the end of 2021), transactions within the 17 specified sectors may routinely become conditional on clearance being given.
When can a voluntary notification be made?
Buyers or investors will be able to make a voluntary filing where they are investing in a business outside the 17 specified sectors, but where the transaction could give rise to national security concerns.
A voluntary notification can be made in relation to a qualifying transaction (that is one which gives rise to national security concerns) where a person:
- acquires 25% of the shares or votes in an entity, or passes through the 25%, 50% or 75% voting or shareholding thresholds;
- acquires ‘material influence’ over an entity’s policy; or
- gains certain rights, interest or control of a qualifying asset, including land, tangible moveable property and intellectual property. Examples of transactions that could be caught here are acquiring land opposite a military barracks or nuclear reactor, or the transfer of trade secrets or technology with a national security element.
As with the mandatory notification regime, there is no deal size or monetary threshold and transactions of any size could be caught.
Call in powers
When can a transaction be called in for review?
The government will be able to call in for review a transaction that should, or could, have been notified under the mandatory or voluntary filing regimes if it believes that the transaction may present a risk to national security.
There is no definition of ‘national security’ or what is a risk to it. However, the government has said it will consider the following factors when deciding whether to exercise these powers:
- the target risk – the nature and activities of the target business;
- the trigger event risk – the level of influence acquired; and
- the acquirer risk – the identity and affiliations of the buyer, with affiliations to other countries being of particular importance.
When can a transaction be called in for review?
Where a transaction was subject to the mandatory notification regime but was not notified, the government can call in the transaction for review at any time.
Other transactions which are not voluntarily notified can be called in for review up to five years after completion of that transaction, but only up to six months after completion if the government has been put on notice of that particular transaction. That can be done either by emailing the ISU or by making sure that the transaction receives publicity in a national newspaper. The government has said that it will only do this in very limited circumstances, where there is actually a national security concern. But it is expected that the risk of a transaction being called in for investigation will drive voluntary notifications under the new regime.
Are pre-implementation transactions affected?
A controversial aspect of the new legislation is the retrospective nature of the call-in powers. Although the NSIA2021 received Royal Assent in April 2021, the new powers are not expected to come into force until the end of 2021. However, any transaction completed between 12 November 2020 (the date the legislation was first introduced into parliament) and the date the legislation comes into force may be called in for review following the implementation date. This is not limited to transactions in the 17 specified sectors and any transaction completed after 12 November 2020 which gives rise to national security concerns is at risk of investigation.
In addition, until the regime comes into force it is not possible to make a mandatory or voluntary notification in order to avoid this risk of retrospective call-in. It is possible to approach the ISU for informal guidance but this will not be binding and the ISU could still change its mind and call in a transaction once the regime is fully in force.
The risk of investigation under these retrospective powers will apply for five years after the new regime comes into force, reduced to six months where the ISU was put on notice of the transaction.
The review process
What happens when a notification is made?
Once the regime is in force, a mandatory or voluntary notification will be made to the ISU via a secure digital portal.
The ISU then has an initial period of 30 working days to consider the transaction and either give clearance for it to go ahead or refer the transaction for a phase 2 investigation. That investigation will take another 30 working days, which could be extended by a further 45 working days. Transactions which are called in for review directly by the ISU will effectively move straight into a phase 2 investigation.
What happens at the end of the review process?
The review process ends with either:
- unconditional approval
- conditional approval, with conditions designed to minimise the risk to national security – for example requiring a disposal, placing a limit on the level of interest that can be acquired or imposing restrictions on access to national security sensitive information; or
- a prohibition on the transaction taking place.
The new powers in practice
Whilst the introduction of the new regime will perhaps mark an end to the UK’s lighter touch approach to foreign investment screening, it will bring the UK into line with other jurisdictions. The NSIA2021 is largely consistent with current international legislation, including the EU Foreign Investment Screening Regulation, under which jurisdictions are strengthening controls over foreign investment in certain areas of political concern.
Buyers and investors will need to conduct careful due diligence to understand whether the target’s activities have national security implications and whether a mandatory notification is required or a voluntary notification would be wise.
Once the regime is in force, qualifying transactions in the 17 specified sectors will need to be conditional on clearance being given. The approval process will need to be factored into the transaction timetable and the deal’s feasibility. Where there is genuine doubt about whether the transaction is caught by the notification regime, the draconian penalties may drive buyers to make precautionary notifications.
Similarly, the threat of the call in powers for any transaction which presents a risk to national security may also prompt an increase in filings outside the 17 specified sectors as buyers adopt a more cautious approach.
The government estimates that the new regime will result in between 1,000 and 1,800 notifications per year although some commentators believe that there will actually be many more notifications. Given that there have only been 13 interventions by the UK government on national security grounds since general merger control legislation came into force in 2003, this clearly marks a significant step change in the UK’s approach.