The National Security and Investment Act (NSI Act) received Royal Assent on 29 April 2021. The new regime is not in effect yet but is expected to become live by the end of this year once important secondary legislation is published.
The new regime
As set out in our previous update, the new regime represents a significant expansion to investment regulation in the UK.
17 key sectors: 17 proposed key sectors were subject to a consultation. The proposed key sectors include communications; transport; energy; civil nuclear; data infrastructure; defence; artificial intelligence; autonomous robotics; computing hardware; cryptographic authentication; advanced materials; quantum technologies; engineering biology; critical suppliers to government; critical suppliers to the emergency services; military or dual-use technologies; and satellite and space technologies. The Government has been engaging with sector groups and has narrowed the scope of sector definitions in certain areas. This engagement continues so the scope may change again.
Mandatory notification: mandatory notification to the Investment Security Unit (ISU) will be required if there is a trigger event in one of these key sectors. Examples of “trigger events” include increasing control by crossing the 25%, 50% or 75% thresholds of shares/voting rights or veto rights. There is a standstill in place once a mandatory notification has been made so the deal cannot complete until the deal has been reviewed. An amendment was made raising the threshold from 15% to 25% which should reduce the number of transactions which need to be notified. The Government, however, will still be able to call in transactions involving acquisitions under the 25% threshold if the acquisition could result in "material influence" being exercised over the target.
Voluntary notification: if a transaction involves a "trigger event" which is outside of the 17 key sectors but could give rise to national security concerns, a voluntary notification to the ISU can be made. A key consideration will be the likelihood that the transaction may be called in for a national security assessment.
Call in procedure: the Secretary of State will have the power to call in for review any transaction (whether or not notified) where there is (or could be) a risk to national security. The Government has published a draft Statement of Policy Intent which covers how the Secretary of State expects to use the call-in power in the NSI Act. The statement sets out three risk factors which the Secretary of State expects to consider when deciding whether to exercise the call-in power. The three risk factors include:
- The target risk – the nature of the target and whether it is in an area of the economy where the Government considers risks more likely to arise
- The trigger event risk – the type and level of control being acquired and how this could be used in practice
- The acquirer risk – the extent to which the acquirer raises national security concerns.
Key elements – "at a glance"
- Although the Government has stated its powers are more likely to be used in respect of foreign investors, the regime applies to all applicable transactions and does not require an overseas entity to be involved
- There is no de minimis threshold in terms of transaction size
- There are both civil and criminal sanctions. Non-compliance could result in fines of up to 5% of worldwide turnover or £10 million (whichever is higher) and/or up to 5 years imprisonment
- The ISU will have the power to request information from the parties to the deal and to impose remedies to address national security issues
- Transactions covered by the mandatory regime which take place without notification or clearance will be legally void, unless retrospectively approved
- The NSI Act is not limited to share purchases but covers transactions involving a broad range of asset types, including real estate and intellectual property
- According to a recent BEIS press release, transactions are expected to be assessed within 30 working days and often more quickly. If a deal is called in, there will be a further 30 working days for the national security assessment which could be extended by a further 45 working days if needed.
What happens next?
We await commencement of the new regime and will monitor developments closely.
The Government has committed to working closely with investors and businesses including through a cross-sector Expert Panel to ensure they understand the new regime.
The NSI Act states that regulations on the notification process must be published including the notification forms. These regulations have not yet been published so, for now, a draft set of questions are available.
We also await secondary legislation on the 17 key sector definitions which will need to be approved by Parliament before the regime comes into effect.
Impact on current M&A deals
Certain provisions of the NSI Act apply retroactively from 12 November 2020 once the NSI Act is in force. This means the new regime could impact transactions which are in progress now.
- The call in power is exercisable for in-scope transactions which took place on or after 12 November 2020 (for up to five years or up to six months from the commencement date of the NSI Act if the Government is made aware of the transaction). The Government has stated in its Factsheets that it does not expect many transactions to be affected by this power
- BEIS is encouraging businesses to consider making an informal notification. It has reported that it is currently receiving around 10 such notifications a week.
- Although it is not possible to use the formal notification procedures until the NSI Act is in force, there might be merit in making an informal disclosure of a potential in-scope transaction so the Government is aware of it and to benefit from the shorter call in period of six months.