NSIA can only affect acquisitions
Where an acquisition is being funded, NSIA can impact the transaction in two ways. Both the acquisition by the borrower of the assets being funded, and the taking or enforcement of security by the lender, could be susceptible to challenge under NSIA and could fall foul of the mandatory or call-in regimes.
Where there is no acquisition, NSIA remains relevant because the taking or enforcement of security by the lender could be deemed to be “gaining control” for the purposes of NSIA.
It is also important to bear in mind that the call-in power can operate retrospectively. This means that even if entities or assets are not being acquired as part of the current transaction, if they have been acquired at any time since 12 November 2020 then that acquisition could be the subject of a call-in notice under NSIA. There may even have been multiple acquisitions during that period.
NSIA is only relevant to share security
The mandatory regime, which carries with it the most draconian consequence under NSIA, whereby failure to comply renders the transaction automatically void, would only apply to share security and not to asset security. This is because the mandatory regime only applies to the acquisition of control of entities and not assets.
However, taking or enforcing security over other assets, including real estate or intellectual property, could be the subject of a call-in notice. Whilst this would not result in the transaction being void, the call-in power is wide, allowing the Secretary of State to impose “proportionate remedies”. In principle this could be used to unwind the security or any enforcement action.
A call-in notice would only be issued where such taking or enforcement of security gave rise, or could give rise, to a risk to national security. This may not always be immediately obvious to lenders or their lawyers, however. For example, on a real estate finance transaction, the site over which security is being taken may be adjacent to a sensitive location, but this would not necessarily be revealed by the bank’s due diligence.
NSIA is only a concern for businesses operating in the “17 sectors”
As stated above, the mandatory regime, which can render a transaction void, only applies to acquisitions of control over entities within the 17 sectors. However, the call-in regime could apply to an acquisition of control over any entity (whether or not within the 17 sectors) if it could result in a risk to national security.
It is also important to stress that determining whether a business is operating in one of the 17 sectors is a complicated exercise, and it may not be immediately apparent that a borrower is caught. For example, the list of sectors includes “critical suppliers to government”. Determining whether a business falls within this category could entail a review of its key contracts to determine whether it has contracted with any public bodies. Likewise, on a real estate transaction, even a property-holding SPV might fall within the 17 sectors, for example if its tenant was a government body dealing with sensitive information.
NSIA will only be relevant if a bank takes possession of shares or an asset on enforcement
Taking security: in terms of the taking of security, it seems fairly clear that the taking of legal (as opposed to equitable) share security could trigger a risk of challenge under NSIA. This has been confirmed by the Government’s market guidance notes issued in July 2022. English law security over shares is typically taken by way of an equitable share charge and therefore should not be caught (although see further below in relation to voting rights). However, in the case of a legal charge over real estate or other legal security over assets, the taking of the security itself could potentially be caught by NSIA. It is important to note though that the mandatory regime only applies to shares. Where we are talking about real estate or other assets other than shares, the risk would be the issue of a call-in notice, which would only happen if the taking of that security was or could give rise to a risk to national security.
Taking possession or selling on enforcement: it also seems fairly settled that a lender taking possession of or selling shares or assets on enforcement would be deemed to be an acquisition of “control” for the purposes of NSIA, and could be the subject of the mandatory notification requirement (in the case of shares) or a call-in notice (in the case of shares or assets). Lenders therefore need to consider NSIA when taking any action to enforce their security.
Voting rights: one issue that has caused some confusion is whether the exercise, or ability to exercise, voting rights by a lender under share security could constitute an acquisition of control for the purposes of NSIA thus triggering the mandatory or call-in regimes. Schedule 1 paragraph 5 of NSIA states that rights are to be treated as held by the person who controls them, and section 10 NSIA states that a person will be treated as acquiring an interest or right where they control it.
This means that the acquisition of control required to trigger the mandatory or call-in regimes could occur when a lender gains control of voting rights. Therefore the exercise by a lender of voting rights following an event of default, or even the ability for a lender to exercise voting rights following such an event, could result in a requirement for a mandatory notification (if the secured shares were in a company active in one of the 17 sectors), or a call-in notice (whether or not the secured shares were in a company active in one of the 17 sectors, if such action resulted in a risk to national security). Lenders may therefore need to take advice on NSIA before calling an event of default, even if they do not intend to exercise voting rights.
Schedule 1 paragraph 7 of NSIA may provide some help to lenders. This deals specifically with rights attached to shares held by way of security and provides that such rights are to be treated as held by the chargor where: (i) apart from the right to exercise them for the purpose of preserving the value of the security, or of realising it, the rights are exercisable only in accordance with the chargor's instructions, and (ii) where the shares are held in connection with the granting of loans as part of normal business activities and apart from the right to exercise them for the purpose of preserving the value of the security, or of realising it, the rights are exercisable only in the chargor's interests. This suggests that provided the security document only allows for voting rights to be exercised in this way (which will normally be the case), holding such security will not be caught by NSIA even after a default, however the position if such voting rights were in fact exercised is still not clear.