Chris Brierley
Partner
Article
23
Key legislation entered into full force on 4 January 2022, with the potential to affect finance transactions.
The National Security and Investment Act 2021 (NSI Act) introduces to the UK a new investment screening regime, which requires that certain types of transaction are notified to, and cleared by the Secretary of State for Business, Energy and Industrial Strategy (the SoS) prior to completion.
Transactions subject to this mandatory notification requirement involve the acquisition of "control" in a business undertaking defined activities in seventeen specific areas of the UK economy that are deemed "high risk" from a national security perspective.
The SoS also has the power to call-in relevant transactions for review on the grounds that they have or could give rise to a risk to national security. With this in mind, parties may opt to notify transactions voluntarily to the SoS, in order to seek prior clearance before completing a given transaction.
Where the SoS reviews a transaction, it can proceed to make such orders as it considers necessary and proportionate in order to prevent, remedy or mitigate a risk to national security. These powers are extensive, and could include the imposition of conditions upon a given transaction, or a transaction ultimately being prohibited in its entirety.
In addition, if the mandatory notification requirement applies and is breached (e.g. the acquirer completes without clearance), this results in:
Given the potential impact of any such measures on a borrower's business and ability to repay its debt funding, as well as the lender's security (e.g. if the transaction is legally void), it will be important for all parties to be aware of the risks arising under the NSI Act from the outset.
While the number of finance transactions impacted by the NSI Act is expected to be low, the broad application of the regime, and the extent of the available powers, means that it has the potential to impact finance transactions in a number of ways.
We consider these in our article below, exploring:
Finance transactions could be affected by either the mandatory notification requirement or the SoS's call-in powers.
The mandatory notification requirement, and the need to obtain clearance prior to completion, applies to transactions where:
The call-in power enables the SoS to call-in and review qualifying transactions (before or after completion) where there is an acquisition of "control" in relation to a Qualifying Entity, or certain assets, and this acquisition has, or could give rise to, risks to national security.
Notably, in addition to the levels of "control" outlined above in connection with the mandatory notification requirement, "control" in the context of the call-in power also includes:
For acquisitions falling outside of the mandatory notification requirement that complete on or after 4 January 2022, the SoS has a period of five years from completion to call-in the transaction.
If parties consider a transaction to be at risk of a call-in, they may wish to make a voluntary notification to the SoS pre-completion, so as to seek to obtain unconditional clearance, or otherwise confirm the basis of any conditions that the SoS would wish to impose (i.e. to enable the transaction to complete).
The SoS has issued a Statement[2] setting out how it intends to exercise the call-in power (the "Call-In Statement"). The combination of the Call-In Statement, and current Government guidance indicates that:
For more background on the NSI Act , please see the following resources which have been created by partners from our EU, Trade & Competition team who are also contributors to the UK Chapter of ICLG's publication, Foreign Direct Investment Regimes 2022:
Acquisition finance: If a loan will or may be used to fund an acquisition of shares or assets then due diligence should be conducted to ascertain whether the relevant acquisition either triggers the mandatory notification requirement, or would be an appropriate candidate for voluntary notification (having regard to those factors outlined above). Depending upon the outcome of this exercise, changes may need to be made to the timeline and documentation; for example, to make completion of the transaction conditional upon obtaining clearance from the SoS, and to include representations and undertakings to directly address risks in the context of the NSI Act.
For completeness, parties should be aware that the NSI Act is applicable to intra-group reorganisations, and may also have extra-territorial effect (e.g. where Qualifying Entities or assets are outside of the UK, and either: (i) carry on activities and/or supply goods or services in the UK; or (ii) are used in connection with activities carried on in - and/or goods or services supplied in - the UK).
It will therefore be important to consider the entirety of a transaction plan with this broad application of the NSI Act in mind.
Granting loans or taking security: The grant of a loan or taking of security is not generally expected to trigger the application of the NSI Act, unless one of the following applies:
Exercising material influence over an entity: The extent of a lender's involvement with a borrower sometimes changes during the life of a loan, and there are potential call-in risks associated with circumstances where a lender increases their input, and begins to influence a borrower's strategic and operational decisions (for example, if a borrower's business is failing, and the lender starts to attend and influence decisions taken in board meetings). A call-in right may arise in these circumstances, if the acquisition of material influence gives rise to national security concerns. It is therefore recommended that lenders familiarise themselves with the call-in risk factors (outlined in the section above) and build ongoing monitoring of NSI Act risks into their relationship management processes.
Enforcement of security: The realisation of security will potentially constitute an acquisition of control for the purposes of either the mandatory notification requirement (in respect of shares), or the exercise of the call-in power (where the transfer of shares or assets does not trigger the mandatory notification requirement, but may give rise to a risk to national security).
There is a carve-out in Schedule 1 of the NSI Act at paragraph 6(2) for rights that are "exercisable" by an administrator or by creditors while the entity is in "relevant insolvency proceedings". However, parties should be aware that:
While the Call-In Statement offers guidance, there remain a number of areas where it is unclear how the call-in power will be exercised. Although additional guidance is expected to follow later this year, and this is to be welcomed, in the absence of certainty at this time parties may wish to consider the possibility of notifying voluntarily, if they consider that planned arrangements would be capable of being called-in by the SoS (even if the risk of call-in appears to be low).
The notification process is likely to create some challenges for insolvent disposals, which typically do not have the luxury of time on their side. It will therefore be necessary to consider whether a notification is required, or desirable, at the earliest possible stage. For example, while the administrator can only make an application once appointed, it might be beneficial for the company to make a voluntary notification (in a form agreed with the proposed administrator) prior to appointment, if the relevant terms are settled.
Changes during the life of a loan: Parties should take care if changes are made to the finance parties, or documentation, during the life of a loan and the terms of a loan or security contain rights that could trigger a mandatory notification requirement, or enable the SoS to exercise the call-in power (if national security concerns arise). Risks should also be re-assessed if either: (i) the borrower's business becomes involved in, or becomes closely linked to, any of the Notifiable Activities; or (ii) relevant assets (including not only land forming part of the security but also 'proximate sites') are subject to a change of use in connection with Notifiable Activities (or closely linked to such activities) in order to seek confirmation that the changes would neither trigger a mandatory notification requirement, nor face a material risk of the SoS exercising the call-in power, (e.g. on a disposal as part of an enforcement process). We recommend that lenders address these points as part of their ongoing monitoring of the lending relationship.
The legal obligation to make a mandatory notification ultimately rests with the acquirer. However, the potential impact of either:
means that all parties are advised to consider the potential application of the NSI Act throughout any transaction.
This could include for example:
The vast majority of finance transactions are expected to be low risk for the purposes of the NSI Act , but please contact us if you would like any further information in relation to the NSI Act , or would like advice from our experts on identifying and managing notifications.
Footnotes
[1] These seventeen areas of the UK economy are currently: 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. See the Notifiable Acquisition Regulations.
[2] National Security and Investment Act 2021: Statement for the purposes of section 3 published 2 November 2021
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