A complete guide for investors and companies
On 4 January 2022, the National Security and Investment Act 2021 (“NSIA”) came into force. The NSIA replaces the existing provisions of the Enterprise Act 2002, provisions that previously dealt with possible public interest issues arising from mergers. The rules of the NSIA apply to any qualifying acquisition (detailed below) of an entity (e.g., a company) or any qualifying acquisition of assets (e.g., intellectual property or land). The NSIA may also capture transactions beyond that of standard mergers and acquisitions such as minority investments, where qualifying interests or rights are acquired.
The objective of the NSIA is to enable Government scrutinisation and potential intervention in transactions that may harm the UK’s national security. A new Investment and Security Unit (“ISU”) at the Department for Business, Energy and Industrial Strategy (“BEIS”) has been created as a result of the NSIA. The ISU will be tasked with “identifying, addressing and mitigating national security risks to the UK arising when a person gains control of a qualifying asset or qualifying entity”. ‘National security’ is not defined in the NSIA, presumably to ensure that the NSIA’s application enjoys the widest possible scope. It is hoped that the NSIA will deter hostile actors from threatening the UK’s national security and inevitably make it much harder for them to do so.
This article highlights the rules relating to the NSIA and the new obligations imposed on companies or investors (“Acquirers”), i.e., to notify the Government of an acquisition, if that acquisition poses risks to the UK’s national security. Acquirers from the UK and abroad will be required to notify the Government, when a qualifying entity or asset is concerned. The Government has published its own comprehensive guidance on the new NSIA regime on its website.
The Government has made it clear that it is not their intention to inhibit friendly foreign direct investment. Although, it is arguable that a legitimate risk exists, in that some potential Acquirers may be disinclined from investing with the red tape attached to potential qualifying acquisitions.
The Government deem seventeen areas of the economy to be sensitive, these are:
- Advanced Materials
- Advanced Robotics
- Artificial Intelligence
- Civil Nuclear
- Computing Hardware
- Critical Suppliers to Government
- Cryptographic Authentication
- Data Infrastructure
- Military and Dual-Use
- Quantum Technologies
- Satellite and Space Technologies
- Suppliers to the Emergency Services
- Synthetic Biology
There is scope for other areas or sectors of the economy to be caught by the NSIA, should national security risks emerge in a new unforeseen sector or area.
Acquirers are legally required to submit a ‘mandatory notification’, to inform the Government when they intend to acquire an entity falling within the one of the above areas. A feature of the NSIA is that it operates retrospectively and captures acquisitions that were completed on or after 12 November 2020, although those completed before this date are exempt. Potential Acquirers must therefore be aware that for acquisitions after this date and before 4 January 2022, the Government has the authority to potentially call-in the transaction if it is deemed that it could raise national security concerns.
Where acquisitions are subject to a mandatory notification, a ‘standstill’ obligation applies; this prohibits completion until permission from the Government has been obtained.
The Government will consider three risk factors when they assess a potential transaction. Although it need not be established that all three risk factors are present i.e., where there are less than three factors present, a transaction could still be called-in. These risk factors include:
(1) The target risk – Is the entity or asset that is being acquired important to the national security of the UK?
(2) The Acquirer risk – Could the Acquirer seek to use or control the entity or asset to the detriment of the UK’s national security
(3) Control risk – What is the level of control that the Acquirer will obtain as a result of the acquisition? If more control is acquired, the risk to national security is obviously heightened.
The Government expects that for “most qualifying acquisitions, the overall consideration of these risks is expected to indicate a low risk to national security”.
The NSIA stipulates a number of ‘trigger events’, the occurrence of which may result in a transaction being deemed a ‘qualifying acquisition’, these events are detailed below:
(1) The acquisition is a right or interest in, or in relation to a qualifying entity, potentially including:
(ii) limited liability partnerships;
(iii) a partnership;
(iv) any other body corporate;
(v) a trust; or
(vi) an unincorporated association.
(2) The acquisition is a right or interest in, or in relation to a qualifying asset, potentially including:
(i) intellectual property (“IP”);
(ii) tangible, moveable property; or
(3) The acquisition is an entity or asset that is from, in, or has a ‘connection’ to the UK (it can be qualifying if it):
(i) supplies goods or services to people in the UK; or
(ii) carries on activities in the UK.
(4) If the asset (e.g., land, tangible and moveable property, or any intellectual property) is located outside the UK and outside the limits of its territorial sea, the asset will be ‘qualifying’ if it:
(i) is used to supply goods or services to people in the UK; or
(ii) is used in connection with activities carried on in the UK.
Example: A Spanish company is acquiring a German company which carries out business in the UK, or supplies goods / services to persons within the UK, the Government could exercise their call-in power and examine the acquisition for possible risks to the UK’s national security.
(5) The Acquirer meets or passes a specific threshold relating to the amount of control they acquire over the qualifying entity or asset, including:
(i) shareholder stake or voting rights in a qualifying entity meets or exceeds relevant percentage thresholds including:
(ii) from 25% or less to more than 25%;
(iii) from 50% or less to more than 50%;
(iv) from less than 75% to 75% more; or
(v) the Acquirer’s voting rights allows the Acquirer to pass or block resolutions governing the affairs of an entity;
(vi) the Acquirer enjoys the ability to materially influence the entity’s policy and goals, and / or the Acquirer is able to influence the strategic direction of the entity, or the Acquirer is able to enjoy the use of a qualifying asset, direct or control its use and are able to do this more than they could prior to the acquisition.
Potential civil and criminal sanctions for non-compliance
Where a mandatory notification is required and the Acquirer fails to submit a relevant notification and yet still then proceeds with the notifiable acquisition, then that Acquirer may incur civil and / or criminal sanctions. These sanctions include a fine of up to 5% of the Acquirer’s worldwide turnover or a fine of up to £10 million (whichever is greater) and in respect of individuals, imprisonment for up to five years and / or up to fifteen years disqualification from acting as a director. These significant penalties demonstrate the necessity for potential Acquirers (and their directors) to fully comprehend and adhere to the procedures of the NSIA.
It may be possible, where the Acquirer has failed to submit a mandatory notification, to submit a retrospective notification. A retrospective notification can be submitted where the acquisition has been completed without the approval of the Secretary of State for BEIS. If approved, this can provide the Acquirer with the comfort that the acquisition will not be voided nor incur any related penalties post completion.
Whilst the acquisition is under Government review following a notification, the reviewers have a wide range of tools at their disposal. They may take any of the following actions:
(1) clear the acquisition to proceed;
(2) impose certain conditions (such as altering the amount of shares an investor is permitted to acquire, restrict the dissemination of commercial information, and limit access to certain operational sites or works; or
(3) block or unwind the transaction (although such action would be rare and is likely to be made in a personal capacity by the Secretary of State for BEIS).
If the Government believes that the acquisition will be a national security risk, it will call the transaction in. The Government will then carry out a thorough assessment of the potential national security risks and decide what action, if necessary, it considers proportionate to address any of these risks.
The Acquirer is responsible for filling out a notification form. Information that may be included can be found on the Government’s website.
Please see a breakdown of the requirements below:
- contact details of the notifying party and any Acquirers;
- acquisition details, including relevant sectors, trigger events and key dates;
- qualifying entity details (of the entity that is being acquired), including its name, registration details and a description of the activities the entity undertakes – details must also be provided about the entity’s pre-acquisition and post-acquisition ownership structure;
- Acquirer details, including information about the Acquirer, any foreign government share ownership or voting rights in the Acquirer, any direct or indirect involvement by a foreign government in respect of the operation or decision-making of the Acquirer, and any contractual arrangements regarding share ownership or voting rights between the Acquirer and any other party after the acquisition completes;
- ownership structure of the Acquirer including the ultimate parent company when the Acquirer is an entity, and board of directors or equivalent within the Acquirer;
- additional information including other relevant documentation and information on the acquisition, and any additional comments that are considered relevant to the acquisition;
- qualifying asset details must be provided, including information about the qualifying assets, UK Government Security Classification, UK licences, dual-use items and UK citizens’ data;
- ownership and structure of qualifying assets, including a pre-acquisition ownership structure chart of the qualifying asset, expected post-acquisition ownership of the asset and potential foreign government control over how the qualifying asset is used; and
- a signed declaration when submitting a notification (regardless of it being mandatory or voluntary), the Acquirer must also upload a signed declaration which acknowledges the act of submitting a notification.
If the Government requires more information than that contained within the notification form, it may issue an information notice, setting out the information required, the reason for requiring the information, how it should be provided, any time limit the Government feels necessary and the potential consequences for non-compliance.
If there are concerns that NSIA may apply to a transaction, the parties should ensure that the deal timetable contemplates such Government intervention. The Government initially has 30 working days to screen a transaction that has been called-in. If the Government deem further investigation necessary, a more in-depth review will be triggered. The Government must make a final decision no more than 30 working days later (although this timescale is extendable to 45 working days if needed). If there are certain delays (such as further information requests), the clock will stop and the timescale may be extended further.
For up to five years after a trigger event, the Government can assess acquisitions retrospectively by calling in the transaction. If the Government has not been made aware of the transaction, the fiveyear time limit does not apply and the Government can investigate them up to 6 months after becoming aware of them.
Informal Advice Service
There is an informal advice service provided by the Investment Security Unit who are contactable via this email address: email@example.com.
See the relevant ISU advice page here.
Decision appeals process and duties of relevant bodies
There is no formal appeals process if an Acquirer is unsatisfied with the Secretary of State’s decision in relation to any transaction within the remit of the NSIA. the decision can be challenged only in relation to its lawfulness. However, in relation to the sanctions, criminal and civil penalties could be challenged through their normal appeals processes.
The UK Competition and Markets Authority (“CMA”), and UK sectoral regulators must inform the Secretary State of any transactions that may be subject to the NSIA, although the NSIA and UK merger control regime remain separate. The CMA must also assist the Secretary of State, accepting their directions if the said directions are necessary and proportionate to the interests of the UK’s national security. In light of the NSIA, the CMA has also provided updated merger control guidance, relating to the procedures used by the CMA in operating the merger control regime as set out in the Enterprise Act 2002. In particular, the updated guidance addresses the criteria the CMA applies when determining whether it has jurisdiction under the Act and the policies and procedures used by the CMA to discharge its functions under the Act.
Parties to a proposed transaction should determine:
(1) whether a trigger event is likely to occur;
(2) whether there will be an impact on the transaction timetable (factoring in the potential need for Government review); and
(3) whether any necessary interim funding is needed.
When determining whether a trigger event exists, it may be necessary to determine whether the control thresholds are satisfied. If there are complex holdings by different group members or such holdings arise from different business or capacities, they may need to be aggregated in accordance with the provisions of the NSIA.
Where parties are unsure as to whether the mandatory notification applies, parties may agree to opt for a voluntary notification which would eliminate any uncertainty relating to the Government’s ‘call-in’ power. It is important to understand that the onus of complying with the provisions of NSIA is on the Acquirer, not the seller.
Regard should also be had for other merger control rules; early consultation with the ISU may facilitate this and ensure extensive delays are mitigated.
The NSIA has created an added layer of complexity to the landscape of mergers and acquisitions. It remains to be seen how convoluted it will be for Acquirers and how many transactions will be caught by the NSIA. The Government is confident that the NSIA will keep the UK ‘open for business’ and will not inhibit foreign direct investment. Nonetheless investors, companies and their directors will need to ensure they are fully aware of their obligations and responsibilities arising from the NSIA.
If you are looking to raise investment, invest in a company, purchase or sell a company then our corporate team would be happy to assist. Our commercially focused approach provides us with the ability to build great relationships with all parties involved and allows us to drive deals or rounds to successful completions.