The National Security and Investment Act 2021: A wolf in sheep’s clothing
The National Security and Investment Act 2021 (NSIA) represents one of the biggest changes in corporate legislation in the UK for a generation. NSIA, enacted on 29 April 2021 and in force from the 4 January 2022, has been met with alarm by UK deal-makers and City institutions. Many see this new legislation as a draconian interference on inward investment to the UK.
What’s all the fuss?
The NSIA creates a new Government authority, to be known as the Investment and Security Unit (ISU). The aim of ISU is to be the custodian of National Security interests under threat from potential share acquisitions and other deals, such as purchases of assets, including intellectual property (IP).
NSIA will catch ‘notifiable acquisitions’ with a mandatory notification being required for certain transactions and voluntary notification for others. There is no financial lower limit or threshold for a transaction in order for NSIA to take effect.
The ISU will sit within the existing Business, Energy & Industrial Strategy Department. Therefore, the Business Secretary (currently Kwasi Kwarteng) will be ultimately responsible for the exercise of the powers of the ISU. This is proposed to include a five-year retrospective call-in power on transactions that fall under the ambit of NSIA. It is very wide-ranging as NSIA is designed not only to cover foreign direct acquisitions but acquisitions and also investments by UK acquirers in UK companies and assets.
A key part of NSIA is a mandatory notification system for acquisitions of interests in shares of 25% or more in companies in defined sensitive industry sectors.
The list of sectors the Government believes are most sensitive is very expansive and covers no less than 17 defined business areas. Where such mandatory notification is required, completion of any relevant deal will need to be conditional on the ISU not calling in the transaction, and this will inevitably lead to delays. The Government itself acknowledges that the new mandatory notification regime may lead to up to 1,800 notifications arising each year.
The Government has stated that it will encourage voluntary notifications where the transaction could give rise to security concerns. Asset acquisitions are not caught by the mandatory notification requirement but can be notified voluntarily. If no voluntary notification is made, the ISU may nevertheless call in a transaction. An important reason for companies submitting a voluntary notification is to obtain transaction certainty. NSIA provides no definition of national security and ultimately it will be down to whether or not the ISU believes that a transaction presents potential national security concerns or risk.
Retrospective call-in notice
Under NSIA, the ISU shall have powers to issue call-in notices for any deal completed on or after 12 November 2020 – the day NSIA was first presented as a bill to the House of Commons. This retrospective call-in power is not limited to the 17 sectors that are relevant to the mandatory notification obligation. Therefore, in the current form of NSIA, any acquisitions that give rise to a potential threat to national security could be considered trigger events that carry an investigation risk.
What is national security?
NSIA does not define what national security means and so it is left to the ISU to interpret it. Under a statement of practice, the ISU will, however, have regard to three key factors:
(1) The target risk – that is, the nature and activities of the target business or asset;
(2) The trigger event risk – that is, the level of influence acquired;
(3) The acquirer risk – that is, the identity and affiliations of the buyer, which (as mentioned above) could include a UK buyer as well as a foreign investor.
Businesses and assets
NSIA does not apply only to share acquisitions of companies and other businesses, but to certain asset transactions as well. This includes acquisitions of land, IP and also computer programs and other information and techniques. It would therefore cover a wide range of assets transfers with a potential national security element.
NSIA use of ‘control’
NSIA has its own interpretation of what is meant by control. Over the years, company lawyers have associated control broadly with being able to vote more than half the shares of a company or indeed control the appointment of a majority of a board. NSIA, however, takes matters much further in what it sees as control. The following acquisitions in the specified sensitive sectors are notifiable by representing control:
- Voting rights over shares at set thresholds – 25%, 50% and 75%
- Material influence over a party.
If an investment falls under the above it is a ‘notifiable acquisition’ under NSIA.
Set review process
The ISU will, once it has called in a deal caught by NSIA, have up to 30 working days to screen the transaction (known a Phase 1). If so required by the ISU, there can be a call for additional time of up to 45 working days (known as Phase 2) under the new regime. The ISU review process ends with unconditional approval, conditional approval or a prohibition on the deal. Conditional approval could, for example, require that access to certain technology is restricted in some way, or certain undertakings are given about the conduct of business.
Criminal and financial sanctions
NSIA will not only have powers to adjudicate that an acquisition over which it has jurisdiction is void, it also sets out potential criminal liability for a failure to notify. This applies to companies but can also extend to their directors as well. In addition, the ISU will have powers to impose a financial penalty on a relevant acquirer who breaches NSIA of up to 5% of the acquirer’s global group turnover or £10 million, whichever is higher.
Biggest change in a generation
NSIA represents one of the biggest changes in corporate legislation in the UK for a generation. Although the concepts set out in NSIA were consulted on in 2017–2018, the Government has chosen to ignore many aspects that were drawn to their attention by interested parties. In particular, how exactly NSIA will work within the timetable of a Takeover Code regulated bid is, at this stage, an unknown. How can a takeover involving scores of individual shareholders, many from different countries, be unwound? On the implementation of NSIA with its current wide selection of sensitive sectors and with no financial minimum threshold, all stakeholders in mergers, acquisitions and investments in the UK should factor in the possibility that their transactions will be called in for investigation.
The Government says that NSIA is designed to protect the UK and its national security in order to make it safer to invest in. However, the uncertainty it creates by its wide-ranging nature, and the lack of clarity around national security assessment, surely leads to a potential dilution of deal value going forward. A wolf in sheep’s clothing indeed.
Specified Description List – (sensitive industry sectors) for Notifiable Acquisitions
- Advanced Materials
- Advanced Robotics
- Artificial Intelligence (AI)
- Civil Nuclear
- Computing Hardware
- Critical Suppliers to Government
- Critical Suppliers to the Emergency Services
- Cryptographic Authentication
- Data Infrastructure
- Engineering Biology
- Military and Dual Use
- Quantum Technologies
- Satellite and Space Technologies
The National Security and Investment Act FAQs
What is The National Security and Investment Act 2021?
The National Security and Investment Act 2021 is part of a new regime by the UK government which gives them greater powers to intervene in UK company takeovers if there is considered to be a threat to national security.
Some sectors will be subject to a mandatory notification regime and others will be encouraged to undertake a voluntary notification. The full scope of the sectors involved, or what constitutes a national security assessment or threat is yet to be fully clarified.
The previous legislation that gave the Government powers to review transactions on the grounds of public interest is contained in the Enterprise Act 2002. The NSIA goes much further than this.
Why is the NSIA important?
The NSIA is important because it will potentially affect a large number of business transactions. Businesses will need to understand whether deals, mergers or acquisitions they make require them to make a mandatory notification. Alternatively, whether they should make a voluntary notification because of the trigger events involved.
Although similarities may be found with the existing UK merger control context this new legislation goes further than many expected. Businesses and investors must familiarise themselves with the potential sanctions and enforcement involved if they breach the legislation. A failure to comply with their new obligations could result in fines of up to £10 million and up to five years imprisonment.
When will the new law become effective?
The commencement date for NSIA was 4 January 2022.
What does NSIA try to stop?
The Act creates new stand- alone powers for UK Government to block ‘notifiable acquisitions’ of shares or key assets of business operating in the UK which may affect national security. The law will impose a mandatory reporting obligation on buyers proposing to make acquisitions.
What types of business fall under its jurisdiction?
There is a list of 17 business sectors, each broad in scope, ranging from obviously sensitive areas such as Defence and military through to not so obvious areas such as Transport, data Infrastructure and suppliers to Government.
What is the value threshold for a transaction to fall foul of the proposed new law?
There is no minimum financial threshold or market share percentage minimum. There simply must be a risk to national security in a relevant business area.
What levels of acquisition is caught?
The new law will catch acquisitions of shares of 25% or over in a relevant business with other trigger levels such as 50% and 75% of shares.
What other assets can be caught?
Acquisitions of land and material Intellectual property is also caught.
Once a buyer notifies the UK Government, how long does it have to wait?
The new law has a set timetable for the new Government department to review the transaction. The first period of designated time is 30 days, but it may be extended. It is intended that online notifications will be made by a buyer, but Government have the power to call for more information.
What if a buyer fails to notify an acquisition under the new law?
The acquisition can be declared void and criminal sanctions can apply to the buyer and (if a corporate) its directors.