New National Security Law to Significantly Impact Corporate Transactions
The National Security and Investment Act 2021, enacted on 29 April, establishes a new statutory regime for government scrutiny of investments for the purposes of protecting national security. It will leave an indelible stamp on how mergers and acquisitions take place.
(Updated 5 August 2021)
The impact of the new regime won’t be fully known until further regulations have been enacted. This note summarises the impact so far as currently known.
The new regime will come into force on 4 January 2022. It is, however, already having an impact - once in force, the legislation will give the government retroactive powers in relation to relevant transactions that have taken place on or after 12 November 2020.
The transactions potentially subject to the legislation are wide ranging and include:
- the acquisition of votes or shares in a UK company exceeding a threshold of 25%, 50% or 75% (with a separate application each time an acquirer proposes to move out of one bracket and into another); and
- the acquisition of an interest in a qualifying asset (land, tangible moveable property, ideas, information or techniques) giving the acquirer the right to use it, or control how it is used, to a greater extent than before the acquisition.
Significantly, there is no transaction size threshold below which the rules generally will not apply.
There are two main elements, namely:
- a mandatory notification system; and
- a government “call-in” right.
The mandatory notification system will require proposed acquirers to obtain approval from the Secretary of State for Business, Energy and Industrial Strategy before completing a relevant transaction if the target company undertakes specified activities in certain sensitive sectors. Completing a transaction without the requisite approval will leave it void and of no legal effect and could also involve criminal and civil liability.
The list of proposed sensitive sectors comprises advanced materials, advanced robotics, artificial intelligence, civil nuclear, communications, computing hardware, critical suppliers to the 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. Each of these sectors will be defined in regulations to be published later in the year. A draft of those regulations can be found here.
Government “Call-in” Right
The Secretary of State can also “call-in” any relevant transaction if there is a reasonable suspicion that it could give rise to a risk to national security, whether or not it is subject to the mandatory notification regime. It should also be noted that the mandatory notification regime will not apply to the acquisition of a qualifying asset (see “What?” above), but the “call-in” right will.
The call-in power may be used at any time the transaction is in progress or contemplation or within 6 months of the Secretary of State becoming aware the transaction has completed, provided this happens (in most cases) within 5 years of completion of the transaction. It also operates retroactively to capture relevant transactions raising national security concerns which complete between 12 November 2020 and the date the new rules comes into effect.
When considering whether to exercise the call-in power in relation to a particular transaction, the Secretary of State will be required to have regard to what is called the “Section 3 Statement”. The “Section 3 Statement” is currently in draft form and going through a consultation process, but the draft is based around “target risk” (with the mandatory notification “sensitive sectors” and areas of the economy linked to them not surprisingly at greater risk of call-in), “control risk” (the amount of control over the entity or asset being acquired) and “acquirer risk” (the extent to which the acquirer has characteristics that suggest the acquisition may be a risk to national security).
Remedies and Penalties
The Secretary of State will have wide ranging powers to address risks to national security arising from called-in and notified transactions, including the power to unwind the transaction. Furthermore, sanctions for non-compliance include fines of up to 5% of worldwide turnover or £10 million (whichever is the greater) and imprisonment for up to 5 years.
In practice, only a small proportion of deals being transacted are likely to give rise to national security concerns for the Secretary of State. To give that some context, a government impact assessment estimates that between 1,000 to 1,830 notifications will be made each year but only 70 to 95 transactions being called in for a full national security assessment.
It is also our understanding that:
- unwinding transactions is likely to be a remedy of last resort; and
- the government does not expect many pre-commencement transactions to be affected by the retroactive call-in power.
That said, a sea change is undoubtedly coming - there is an existing regime under which the government can intervene in transactions on national security grounds, and that has only been done 12 times since 2002. Furthermore, the draconian nature of the penalties are likely to lead parties to treat any ambiguity with a considerable degree of caution. Precautionary notifications and exchanging contracts for sale conditional on getting the “all-clear” from the Secretary of State could both become common. Any requirement or desire to notify will impact the transaction timetable.
"Enforcement of rights by investors and lenders may also need to be looked at, with both “swamping rights” and security enforcement capable of triggering a notification obligation at precisely when, from their perspective, time is of the essence."
There will be a process of voluntary notification which could be of use in cases of uncertainty or where the parties are concerned that, despite not falling within the mandatory notification regime, the transaction could still be “called in”. This would allow the parties to get a call-in decision before the transaction completes, rather than run the risk of a later, post-completion call-in.
Deals Happening Now
Consideration needs to be given to the new regime before committing to any transaction that:
- may complete after the regime has come into effect and require mandatory notification (a notification “condition precedent” to completion may be appropriate);
- based on current awareness, is at material risk of a “call-in”.
Get in touch
If you have any questions or concerns relating to the NSI, please do not hesitate to contact Paul Bevington.
Our corporate team advise companies, management teams, investors and debt providers from business start-ups and first round finance agreements through to mergers and acquisitions, management buy outs, development funding and then exit.