From 4 January 2022 the government has been able to intervene in transactions on the grounds of national security under the National Security and Investment Act 2021 (NSI).
In scope transactions must be notified to the Investment Security Unit (ISU) and cannot complete until they have been cleared.
So what are the 10 key lessons that we've learned so far?
1. Consider NSI on all transactions: the new NSI rules should be considered on every transaction, regardless of its size, to confirm either that:
- the transaction is outside scope and so can proceed as normal;
- the transaction is caught by the mandatory notification requirements and must be cleared before it can complete; or
- the transaction gives rise to other national security concerns meaning a pre-cautionary voluntary notification should be made.
2. Screen early in the transaction process:
The target's activities must be carefully reviewed against the 17 NSI sectors and other national security concerns. This should take place early in the transaction process preferably before, and separate from, the usual due diligence process, so that any additional requirements can be accommodated where necessary.
3. Not all sectors are equal:
The titles of the 17 NSI sectors caught by the mandatory notification can be misleading. Whilst some are narrowly drafted, others are extremely wide ranging. For example, the "Transport" sector only catches airports and ports which handle more than certain volumes of passengers or freight each year. But the "Defence" sector catches any supplier to or contractor with the Ministry of Defence or a national security establishment, including anyone in a chain of sub-contractors even if they are unaware that the final contractor is contracting with a defence establishment.
4. It's not just acquisitions:
For an entity operating in one of the 17 NSI sectors, any transaction which causes a person's holding of shares or voting rights in that entity to pass through the 25%, 50% or 75% thresholds is caught. This means that a share buyback, a group reorganisation, a transfer under pre-emption rights, the compulsory transfer of a leaver's shares or the exercise of swamping rights could all potentially trigger a requirement for a mandatory notification.
5. It's not just foreign buyers:
Although the new NSI regime brings the UK into line with the foreign investment screening requirements of other jurisdictions such as the EU, the regime applies equally to both foreign and UK buyers or investors. But, as the acquirer risk is one of the factors taken into account by the ISU when screening transactions, a blue-chip UK investor may find its deals are cleared more quickly post-notification.
6. It's not just UK targets:
Investments in or acquisitions of entities incorporated or resident outside the UK can still be caught by the regime where those entities either carry out activities in the UK or sell products or services into the UK. But only the target's UK activities are considered when assessing whether or not it is caught by the NSI regime.
7. Impact on timetable:
Where a notification is required, the process is likely to add around eight weeks to the deal timetable, allowing time for the ISU submission to be prepared, submitted, reviewed and cleared. As noted above, if the transaction is low risk based on the factors considered by the ISU (the acquirer, target and control risk) the transaction may be approved sooner. But if, instead of being cleared, the transaction is referred for a second phase investigation, the timetable will extend by at least a further six weeks.
8. Responsiveness of ISU:
Generally, the ISU is accepting a submission within a few days but then taking up to the full period of 30 working days to clear a transaction. Whether the acceptance period is extended as more transactions are notified remains to be seen. Early indications are that the ISU is not receptive to shortening the 30 working day period in urgent cases, which reinforces the need for early notification.
9. Advance notifications:
There is no need for a trigger event to be certain before notification, so notifications can be made in advance of heads of terms or exchange of contracts. No pattern of how far in advance the ISU will accept a notification has emerged as yet, so for now there are no limits. But the ISU's position is less clear when it comes to trigger events such as options or swamping rights which may become exercisable in the future but cannot be exercised at the time of notification. It may be that these cannot be notified and cleared in advance, although we are aware of one instance where ISU appear to have cleared an option 10 months in advance of when it could become exercisable.
10. No choice retrospective notifications:
Where a trigger event occurs under the mandatory notification regime which is outside the parties' control (such as an event based option), then retrospective notification is the only course of action if, as noted above, advance notification was not possible. Whilst it would be harsh these circumstances, the ISU's approach to civil fines, disqualification risks and criminal penalties has yet to emerge where an event covered by the mandatory notification regime is dealt with retrospectively.