On 4 January 2022, the UK's National Security and Investment Act (the "NSI Act") enters into full force, heralding a step-change in the UK as regards investment screening on national security grounds.

For example, the NSI Act will enable the UK's Secretary of State for Business, Energy and Industrial Strategy (the "SoS"), acting on behalf of the UK government, to:

  • "call-in" and review certain types of completed and planned transactions, where the SoS reasonably suspects these have given rise to, or may give rise to, a risk to national security, with the SoS able to exercise information gathering powers for these purposes; and
  • make "final orders" where the SoS reasonably considers it necessary and proportionate to do so to prevent, remedy, or mitigate a risk to national security. The provisions of a "final order" could include the imposition of conditions upon a given transaction, or the prohibition of the transaction (either partially or completely).

The NSI Act is administered by the Investment Security Unit ("ISU") at the Department of Business, Energy and Industrial Strategy ("BEIS"), with the SoS acting as the decision maker.

For certain transactions where the target entity has activities in 17 defined areas of the UK economy, a mandatory notification requirement will apply. This means that specific types of transactions must be notified to - and approved by - the SoS before completion.

Failing to comply with the mandatory notification requirement will mean that:

  • the relevant transaction is void, although an application may be made online post-completion for retrospective validation;
  • the acquiring party would be exposed to the risk of a financial penalty of up to the greater of (i) £10 million; or (ii) 5% of the total value of the worldwide turnover of the acquiring party (including any businesses owned or controlled by that party); and
  • an officer of the acquiring party (e.g. a director) who consented to, or neglected to prevent, the completion of the transaction without prior notification and approval would be exposed to the risk of (i) criminal prosecution (with the possibility of imprisonment and/or a fine); or (ii) a financial penalty of up to £10 million.

In this context, it is important to note that the NSI Act may apply to corporate restructures and reorganisations, even if the transaction takes place within the same corporate group.[1]It is hoped that further guidance will be provided in due course regarding the SoS's approach in this respect.

The legal and practical implications of the NSI Act, including the timing of a review, are considered in more detail within the UK chapter contributed by partners Samuel Beighton and Bernardine Adkins to ICLG's publication, Foreign Direct Investment Regimes 2022.

Key aspects to consider when planning transactions

Where transactions are planned to complete on or after 4 January 2022, and these could fall within the ambit of the NSI Act, parties may wish to consider the following aspects when assessing risk and considering strategic options.

What is the target (e.g. a corporate entity, or assets), and does it have a connection with the UK?

  • There are different provisions under the NSI Act for transactions involving corporate entities, as compared to transactions involving only assets.
  • In terms of a connection with the UK, is the target established in the UK, or located in the UK, or carrying on activities in the UK, or supplying goods or services in the UK, or used in connection with activities carried on in the UK, or goods or services supplied in the UK?

If the transaction has a connection with the UK, what level of control would be acquired in relation to the target, and could this potentially enable the SoS to review the transaction?

  • Where the target is a corporate entity, the SoS could potentially review the transaction if:
    • the acquiring party's shareholding (or equivalent),[2] or its voting rights, in the target would increase from:
      • 25% or less - to more than 25%; or
      • 50% or less - to more than 50%; or
      • from less than 75% - to 75% or more (the "Shareholding Criterion"); or
    • the acquiring party's voting rights in the target would allow it to block or pass resolutions governing the affairs of the target (the "Resolutions Criterion"); or
    • the acquiring party would be able to exercise "material influence" over the policy of the target (the "Material Influence Criterion"). An assessment of material influence will be conducted having regard to the approach taken by the UK's Competition and Markets Authority (the "CMA") in the context of the UK merger control regime.[3] The CMA will generally consider whether a shareholding of 15% or more (and exceptionally, less than 15%) may confer material influence.[4]
  • Where the target constitutes assets, the SoS could potentially review the transaction if this would result in the acquisition of a level of control, which enabled the acquiring party to either:
    • use the assets, or to use the assets to a greater extent than pre-transaction; or
    • direct or control the use of the assets, or do so to a greater extent than pre-transaction,
    with the "use" of assets including their exploitation, alteration, manipulation, disposal or destruction.

If the SoS could potentially review the transaction, what are the target's activities in relation to the UK, and do these activities trigger the mandatory notification requirement, or present a greater risk of the transaction being "called-in"?

  • The mandatory notification requirement will be triggered where:
    • the target is a corporate entity;
    • the level of control satisfies either the Shareholding Criterion, or the Resolutions Criterion (see, above); and
    • the target has specific activities in any of the following 17 areas of the UK economy ("Mandatory Notification Activities"), as defined within The National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021[5] (the "Notifiable Acquisition Regulations"), and considered within the accompanying guidance:[6]
      • advanced materials;
      • advanced robotics;
      • artificial intelligence;
      • civil nuclear;
      • communications;
      • computing hardware;
      • critical suppliers to the UK government;
      • cryptographic authentication;
      • data infrastructure;
      • defence;
      • energy;
      • military and dual-use;
      • quantum technologies;
      • satellite and space technologies;
      • suppliers to the emergency services;
      • synthetic biology; and
      • transport.
    • Perhaps unsurprisingly, the Notifiable Acquisition Regulations require careful review and consideration, as the definitions of Mandatory Notification Activities may be broader than the parties would otherwise expect.
    • Outside of the mandatory notification requirement, a transaction is more likely to be "called-in" for review where:
      • the target is a corporate entity, and the level of control satisfies the Material Influence Criterion, and the target undertakes any of the Mandatory Notification Activities;
      • the target is a corporate entity, and the target undertakes activities that are closely linked to the Mandatory Notification Activities;
      • the target constitutes assets, and the assets are, or could be, used in connection with either the Mandatory Notification Activities, or closely linked activities; and
      • the target constitutes assets - specifically land - and the land is, or is proximate to, a sensitive site (e.g. critical national infrastructure sites, or government buildings).[6]

If the transaction would trigger the mandatory notification requirement, or present a greater risk of being "called-in", is there a risk that the transaction would be adversely affected at the end of the SoS's review (e.g. as a consequence of conditions being imposed upon the transaction, or the transaction being prohibited, under a "final order")? If so, is this risk commercially acceptable to the parties?

  • In seeking to assess this risk, it would be prudent for the parties to have in mind the relevant risk factors that the SoS will consider when determining whether to "call-in" a transaction,[7] as summarised below:
    • target risk: in essence, what the target does, is used for, or could be used for, and whether this gives rise to, or may give rise to, a risk to national security;
    • acquirer risk: whether the acquiring party presents a risk to national security, having regard to aspects including: (i) its activities; (ii) its technological capabilities; and (iii) its links to entities which may seek to undermine or threaten the interests of the UK; and
    • control risk: whether the level of control gives rise to, or may give rise to, a risk to national security.
  • Where the target constitutes assets, BEIS guidance notes that the SoS rarely expects to "call-in" transactions which are not, and could not be, used in connection with either the Mandatory Notification Activities, or closely linked activities, and - where the assets are land - this land is not, nor is it proximate to, a sensitive site (e.g. critical national infrastructure sites, or government buildings).[8]

Where the level of risk is commercially acceptable, and the parties proceed with the transaction:

  • If the transaction triggers the mandatory notification requirement, how will this be addressed within the transaction documentation (e.g. in relation to transaction conditionality), and factored into the transaction timetable (including in the context of any other regulatory or reporting requirements)?
  • If the transaction does not trigger the mandatory notification requirement, what is the strategy as regards notification? If notification is to be made, again, how will this be addressed within the transaction documentation, and factored into the transaction timetable?
  • If the transaction could also fall within the ambit of the UK merger control regime:
    • What is the strategy for engaging with each of the CMA, and the ISU, in order to seek to enable the efficient management of the review under the NSI Act, and avoid a subsequent assessment by the CMA under the UK merger control regime?
    • How will the possible additional role of the CMA be addressed within the transaction documentation (e.g. in relation to transaction conditionality), and factored into the transaction timetable (including in the context of any other regulatory or reporting requirements?)
  • In addition, what is the strategy for positioning and managing any stakeholder messaging in relation to the transaction, and any expected review process?
    • While not determinative of any review undertaken, appropriately explaining to external stakeholders the rationale for a given transaction may enable a number of interested parties to express their support for the transaction, rather than to oppose this.

If it would be helpful to receive any further information in relation to the NSI Act, or the UK merger control regime, and how we can support your business, please contact Samuel Beighton or Bernardine Adkins.

Footnotes

[1] See, BEIS guidance "National Security and Investment Act: prepare for new rules about acquisitions", updated 15 November 2021
[2] Where the target entity does not have share capital, consideration will be given to holding the right to a percentage share of the capital or profits of the entity. In relation to a limited liability partnership, consideration will be given to holding the right to a percentage share of any surplus assets of the partnership on a winding up. See, section 8(3), NSI Act.
[3] See, "Mergers: Guidance on the CMA's jurisdiction and procedure", CMA2, 23 December 2021
[4] The National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021
[5] See, BEIS guidance, "National Security and Investment Act: guidance on notifiable acquisitions", 15 November 2021
[6] See, BEIS notice, "National Security and Investment Act 2021: Statement for the purposes of section 3", 2 November 2021
[7] ibid.
[8] ibid.