On the 4th of January 2022, the National Security and Investment Act came into force, and with it, an increased level of scrutiny bestowed to the government. This regime casts a new light on key investments and acquisitions with the potential to harm UK national security, with the act intended to further protect national security within the UK.
Spanning across seventeen areas of the UK economy, this act has left many wondering what it might mean for their business. Who does this act apply to? What are these new government powers? And does this act have retroactive powers? (Spoiler alert, it does!)
Fortunately, we’ve reviewed the new regime and have set out what you need to know regards the National Security and Investment Act 2021. Let’s get into it!
What is the National Security and Investment Act?
The National Security and Investment Act (or NS&I) establishes a new regime for UK Government scrutiny of investments and acquisitions for the purposes of the protection of national security. Importantly, this act applies retrospectively to transactions entered into since 12 November 2020.
The NS&I Act introduces:
- A mandatory notification system – this requires certain acquirers of shares or voting rights in companies in the UK (in certain specific sectors) to obtain clearance from the Government before the completion of the transaction.
- Voluntary notification (for transactions not subject to a mandatory notification requirement) if parties consider that the transaction may be subject to the national security regime.
- Retroactive Government powers – for transactions completing between 12 November 2020 and 3 January 2022 the Government has the power to “call in” transactions for review (and has five years from the 4 January 2022, to do so).
Which sectors does this apply to?
There are 17 sectors that are subject to the mandatory notification regime:
- 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
The Government has issued extensive guidance about each these sectors, which you can view in more detail on the Gov.UK site.
Does this apply to my company’s investment or acquisition?
Potentially. If it operates in one of the stated seventeen sectors and the “target” company being invested in or bought, was formed in the UK then this is a “qualifying entity” and therefore could be caught by the regime. The “target” company may also be caught if it carries out activities in the UK or if it supplies goods or services to the UK.
The NS&I Act differs from the Enterprise Act 2002 in that there is not a minimum turnover or supply threshold in order for the regime to apply. But, the NS&I Act does contain certain “trigger” events for mandatory notification, if, as a result of the transaction:
- each acquirer’s shareholding increases to (i) more than 25%; or (ii) more than 50%; or (iii) at least 75% of the entity’s share capital or'
- they are able to exercise “material influence” over the entity’s policy.
What are the Government’s powers?
In the event that the transaction or investment requires a mandatory notification, and this is not made, the Government then has a number of powers. These include:
- The power to impose conditions, prohibit or unwind the transaction.
- Civil and criminal sanctions, including paying up to 5% of the acquisition organisation’s turnover (global) or £10 million (whichever is greater).
This “call-in” power can be exercised from the 4 January 2022 and for up to five years after a transaction completes. In other words, this is big, big news.
What do you need to do?
- The Government has issued guidance at gov.uk and has also produced a handy flowchart to investigate whether you are affected.
- Beyond this, there are a few key things you should be aware of:For mandatory notifications, the transaction must not complete until you have the full clearance from the Government.
- If there is any uncertainty, there is a National Security and Investment notification service (Investment Security Unit (ISU) who can be contacted by emailing firstname.lastname@example.org. However, this is described as being an advisory service only and any advice is “non-binding”.
- For these voluntary notifications, you can technically decide to continue with the transaction (unless you have been prohibited by way of an interim order from the Government). However, this carries the risk of the transaction being unwound if it is caught by the regime and the Government considers that there are national security risks.
- There is also a retrospective validation application form (for transactions subject to mandatory notification including those that completed before the NS&I Act came into force).
- Identify, at the outset, whether the regime applies to the transaction and to address this with the other parties – to ensure compliance with the regime and to avoid any delays to completion or issues between the parties.
- What will constitute a threat to national security? – the Government’s guidance states that they expect most notifications to be “cleared” rather than “called in”. However, it remains to be seen how the notification works in practice and the types of transactions that are “called in”.
- Initial 30 working day review period (and further assessment period of 30 working days, if “called in”) - it will be interesting to see how the Government deals with this practically in terms of its capacity to turn around these notifications, and how this may affect/cause delays in deal making timelines (e.g. investors’ risk acceptance in relation to this regime vs. delays).
- Voluntary notifications – if “non-binding” advice is received will investors or buyers want to rely on this in terms of risk? Could this cause further delays and costs for the parties?
- Threat to foreign investment in the UK – how will this affect the appetite of foreign investment into the UK alongside Brexit?
Given the infancy of this act, much remains to be seen. If you find yourself impacted by this new regime and are need of a helping hand, you can contact our corporate team here. If you’d like to receive business updates like this straight to your inbox, you can sign up to our newsletter here.
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