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The new National Security and Investment Act regime comes into force on 4 January 2022

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The new National Security and Investment Act regime comes into force on 4 January 2022

The new National Security and Investment Act regime comes into force on 4 January 2022

The National Security and Investment Act 2021 establishes a new statutory regime for government scrutiny of, and intervention in, investments for the purposes of protecting national security. It comes into force on 4 January 2022.

The new law gives the Government extremely wide discretionary powers, although we are led to believe that it will exercise those powers sparingly.

What does it apply to?

It applies to any transaction where “control” is acquired of a “qualifying entity” or a “qualifying asset”. The law calls these “trigger events”. A qualifying entity is anything other than an individual. So companies, partnerships, limited liability partnerships and trusts are all caught.

Control of a qualifying entity is acquired if, as a result of the transaction:

  • shares or voting rights held by the acquirer (when aggregated with their existing holding) exceed 25%, 50% or more than 75% (with a separate application of the Act each time an acquirer moves out of one bracket and into another);

  • someone acquires the right to pass or block company resolutions or the ability to materially influence the policy of the qualifying entity.

A qualifying asset is land, tangible moveable property and ideas, information or techniques. Control is acquired by obtaining the right to use or direct how the qualifying asset is used, either absolutely or to a greater extent than before the acquisition.

Significantly, there is no transaction size threshold below which the rules generally will not apply.

Call-in

Subject to certain time limits, the Government can “call-in” any trigger event that takes place, or is in progress or contemplation, on or after 11 November 2020 if there is a reasonable suspicion that it could give rise to a risk to national security. Call-in means that the trigger event will be subject to a full national security assessment.

If a national security risk is found to exist, the Government then has a wide discretion to impose measures for the purpose of preventing, remedying or mitigating that risk, provided those measures are necessary and proportionate. Although expected to be a last resort, this could involve the Government blocking the acquisition or requiring it to be unwound.

Mandatory Notification

Certain trigger events have to be notified to, and cleared by, the Government before they can be entered into. The Act refers to these as “notifiable acquisitions”. Notifiable acquisitions are more likely to be called-in and subject to measures than those that are not.

A trigger event is a notifiable acquisition where the subject of the acquisition is a qualifying entity undertaking particular activities within specified sectors and as a result of the acquisition, the acquirer gains control of the qualifying entity by either:

  • increasing the percentage of shares or votes it holds to more than 25%, to more than 50% or to 75% or more; or

  • acquiring voting rights in the entity enabling it to secure or block any class of resolution governing its affairs.

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, defense, energy, military and dual use, quantum technologies, satellite and space technologies, suppliers to the emergency services, synthetic biology and transport. These sectors are exhaustively defined for the purpose of the Act in secondary legislation.

A summary of those definitions can be found here.

Completing a transaction without the requisite approval will leave it void and of no legal effect. In addition, if a person completes a notifiable acquisition without obtaining prior clearance and without reasonable excuse, they commit a criminal offence and will be liable to:

  • a fine of up to the higher of £10 million and 5% of worldwide turnover, including the turnover of any business owned or controlled by the person being penalised; and

  • for individuals, up to 5 years in prison.
Voluntary Notification

In circumstances where there is no requirement to notify a transaction as a notifiable acquisition, the NSI provides a mechanism by which the parties can voluntarily notify a trigger event to the Secretary of State in order to obtain a call-in decision one way or the other rather than just waiting for one to possibly arise.

Practical Impact

In practice, only a small proportion of deals being transacted are likely to give rise to national security concerns for the Government. 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’s 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.

Informal Advice

The government is encouraging parties to proposed transactions to contact the newly formed Investment Security Unit for informal advice regarding the implications of the new regime for their transaction. Any advice would, however, not be binding on the Government.

Get in touch

If you have any questions or concerns relating to the new NSI regime, please do not hesitate to 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 exit.