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.
The new regime doesn’t go live until further regulations have been enacted, the content of which will play a significant role in defining the full extent of the impact of this new law. This note summarises the impact so far as currently known.
The expectation is that the new regime will come into force towards the end of the year. It is, however, already having an impact - once it goes live, 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 current list of proposed sensitive sectors comprises advanced materials, advanced robotics, artificial intelligence, civil nuclear, communications, computing hardware, critical suppliers to government, critical suppliers to the emergency services, cryptographic authentication, data infrastructure, defence, energy, military and dual-use, quantum technologies, satellite and space technologies, synthetic biology and transport. In response to a consultation process, the Government produced revised draft definitions for each of these sectors in March 2021, which can be found here.
These definitions will, however, continue to be developed and refined and will not be finalised until further regulations have been enacted in the lead up to taking the regime “live”.
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. 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. As alluded to above, 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.
Factors the Secretary of State will be required to have regard to when deciding whether to exercise the call-in power are yet to be finalised, but are expected to include matters such as the sector in which the target company carries on business, the type and level of control being acquired and the extent to which the identity of the acquirer raises national security concerns.
The Secretary of State will have wide ranging powers to impose remedies 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 this new regime before exchanging contracts on any transaction that may require mandatory notification and which could complete after it has gone live. A notification “condition precedent” to completion may be appropriate.
The government is encouraging parties to proposed transactions to contact the newly formed Investment Security Unit by e-mailing email@example.com for informal advice regarding the implications of the new regime for their transaction. Although not binding on the Secretary of State, an indication that a particular transaction isn’t likely to be one of concern to the Investment Security Unit may provide sufficient comfort to proceed. There is, however, currently no way of circumventing the “call-in” risk, other than by delaying the transaction and then going through the appropriate notification process when it becomes available.
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.