Taking stock of the UK's new national security and investment regime
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Although commonly spoken of as a form of foreign direct investment or FDI regulation, the NSI regime will cover not only foreign acquisitions of UK businesses or assets but also UK-UK acquisitions.
The NSIA represents a major change in the regulatory and investment landscape for transactions with a UK 'nexus' when it comes into full effect from 4 January 2022. This is a good time for UK businesses and those looking to invest in UK business to familiarise themselves with key points of the NSI regime ahead of its commencement.
Mandatory notification
From 4 January 2022, buyers of shares or voting rights (exceeding certain thresholds) in target entities active in one or more sensitive sectors of the economy will need to seek prior authorisation from the Secretary of State for Business, Energy and Industrial Strategy (BEIS), via the newly created Investment Security Unit (ISU), before completing their transaction.
Businesses and investors that are party to a transaction which is subject to the mandatory notification requirement will need to consider whether, for example, their share purchase agreement should provide for an NSI regime-related condition (i.e. where completion will take place only if the transaction has been approved by the Secretary of State).
Businesses and investors will also need to consider the knock-on effect of notification on the transaction timetable. At a minimum, in cases that do not give rise to any national security concerns, parties will have to wait up to 30 working days post-notification for the ISU to confirm that no further action will be taken. If the ISU believes that there may be national security concerns and calls the deal in for review, the period for review could extend to as long as 21 weeks from notification (or longer if agreed by the parties).
Which transactions are caught by mandatory notification?
The mandatory notification requirement will apply to acquisitions of more than 25%, more than 50% or 75% or more of the shares or voting rights in 'qualifying entities' (or voting rights that enable or prevent the passing of a company resolution) active in one or more of the 17 sensitive sectors (see below).
A 'qualifying entity' is widely defined as any entity other than an individual, including a company, a limited liability partnership, any other body corporate, a partnership, an unincorporated association or a trust. A non-UK entity will also be a qualifying entity for mandatory notification purposes if it carries on relevant activities in the UK.
Importantly, and unlike the position under the (voluntary) UK merger control regime, a transaction that is subject to the mandatory notification requirement will need to be notified irrespective of the parties' combined share of supply or the target entity's turnover.
Sensitive sectors
The National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021 (legislation.gov.uk) set out the descriptions of entities within the 17 sensitive sectors of the economy that will be subject to the mandatory notification requirement. The sectors are at headline level:
| Advanced Materials | Computing Hardware | Defence | Satellite and Space Technologies |
| Advanced Robotics | Critical Suppliers to Government | Energy | Suppliers to the Emergency Services |
| Artificial Intelligence | Cryptographic Authentication | Military and Dual-Use | Synthetic Biology |
| Civil Nuclear | Data Infrastructure | Quantum Technologies | Transport |
| Communications |
The Notifiable Acquisition Regulations contain detailed definitions of the businesses and activities that fall within the scope of mandatory notification within these broad sector headings. For example, within the Transport sector, mandatory notification will only apply where the target owns or operates ports or airports of a certain size in the UK or provides air traffic control services in the UK. Further detail on the scope of the 17 sensitive sectors can be found in our Summary of Mandatory Sectors under the NSIA.
Sanctions
Transactions subject to the mandatory notification requirement, which are completed without approval, will be legally void (although the NSIA allows for retrospective validation of non-approved transactions in certain limited circumstances). Buyers may also be subject to criminal or civil penalties, including fines of up to five per cent of worldwide turnover or £10 million (whichever is the greater) and/or imprisonment of up to five years for individuals.
Voluntary notification
For transactions that are not subject to the mandatory notification requirement (e.g. acquisitions of entities active in non-sensitive sectors of the economy), the NSIA provides a mechanism by which parties can make a voluntary notification where there is a perceived risk that their transaction will be 'called in' for review (see below). The range of transactions that are eligible for voluntary notification is much wider than those caught by the mandatory notification requirement and includes:
- acquisitions of 'qualifying assets'. This is broadly defined and includes land, tangible moveable property and intellectual property. A non-UK based asset will also be a qualifying asset if it is used in connection with activities carried on in the UK, or the supply of goods or services to persons in the UK; and
- acquisitions of 'material influence' over a qualifying entity's policy. Material influence is a flexible concept which will allow all relevant aspects of an acquirer's influence over the target, going beyond shareholdings or voting rights, to be taken into account.
In the light of the Government's 'Section 3 statement' (see below), voluntary notification is most likely to be advisable (or need consideration) in the case of:
- transactions in one of the 17 sensitive sectors which do not require mandatory notification; and
- transactions in sectors that are closely linked to one of the 17 sensitive sectors.
'Call-in' power
The Secretary of State will have the power to call in any in-scope transaction (whether or not notified) if they reasonably suspect that the transaction gives rise to, or will give rise to, a national security risk.
A transaction may be called in at any time while it is still in progress or contemplation, or within six months of the Government becoming aware of its completion. The Government may call in a deal within five years of completion (except that this time limit will not apply where a buyer has failed to notify a transaction that is subject to the mandatory notification requirement).
Where a transaction has been notified, the Secretary of State must exercise their call-in power within 30 working days of the notification being accepted.
Retroactive call-in power
The Secretary of State's call-in power will also apply retroactively to any in-scope transaction closed between 12 November 2020 and 4 January 2022. Buyers whose transactions are closing before 4 January 2022 will therefore need to consider now whether there is a substantive risk of their transaction being called in once the NSIA is fully in force. The ISU is open to consultation in this respect, and has been willing to provide a non-binding view, based on any information received from a buyer, of whether a transaction is likely to be called in.
The call-in power will be exercisable in relation to such transactions for up to five years from 4 January 2022 (or six months from 4 January 2022 if the buyer informed the Government of the transaction prior to the NSI regime's commencement).
Exercising the call-in power – the Section 3 statement
The NSIA requires the Secretary of State to have regard to the 'Section 3 statement' when considering whether to exercise the call-in power.
The Section 3 statement indicates that transactions in the 17 sensitive sectors of the economy are more likely to give rise to national security risks. Therefore, where such transactions do not require mandatory notification (e.g. in relation to asset transactions), they are more likely to be called in than transactions outside of the 17 sensitive sectors. Equally, transactions in areas of the economy that are closely linked to the activities in the 17 sensitive sectors, but do not fall under the relevant definitions in the Notifiable Acquisition Regulations, are also more likely to be called-in.
In addition, the Section 3 statement identifies three primary risk factors that the Secretary of State will consider when assessing the likelihood of a risk to national security (and therefore whether to call in a transaction for review):
- Target risk – this concerns whether the target entity or asset being acquired could be used in a way that poses a risk to national security.
- Acquirer risk – this concerns whether the acquirer has characteristics (e.g. the sector(s) of activity, technological capabilities and links to entities which may seek to undermine or threaten the UK's national security) that suggest that there is, or may be, a risk to national security from the acquirer having control of the target entity or asset.
- Control risk – this concerns the amount of control being acquired, and whether this is being used, or could be used, in a way that may give rise to a risk to national security.
The Section 3 statement does not, however, give any indication of the substantive factors that the Government would take into account in assessing whether the target, acquirer or transaction would give rise to national security concerns, nor does the statement or the NSIA define what is meant by 'national security'. This is intentionally designed to give the Government maximum flexibility to protect the UK from security risks.
Remedies and powers of investigation
Where the Secretary of State calls a transaction in for review, they have broad powers to require the provision of information and the attendance of witnesses, as well as a power to make interim orders to prevent pre-emptive action by the parties pending the outcome of the review.
In cases that give rise to national security concerns, the Secretary of State will have the power to impose conditions on the transaction or the parties or to block the transaction altogether.
Guidance and information
BEIS has published a range of guidance and information about the NSIA as part of a process of preparing businesses and investors for the commencement of the NSI regime, including:
- National Security and Investment Act: prepare for new rules about acquisitions
- Guidance overview: How the National Security and Investment Act could affect people or acquisitions outside the UK
- Guidance overview: The National Security and Investment Act alongside regulatory requirements
- Guidance overview: National Security and Investment Act: guidance for the higher education and research-intensive sectors
- National Security and Investment Act:guidance on notifiable acquisitions
How we can help
UK businesses and foreign investors in the UK will need to consider the possible impact of the NSIA on their transactions. Of particular importance will be to assess whether the target falls into or close to one or more of the 17 mandatory sectors and then consider the impact of any mandatory or voluntary notification on the deal timeline. While it can be expected that the number of transactions that give rise to national security concerns will be relatively low, the NSIA amounts to a significant increase in the Government's power to intervene on national security grounds. It can be expected that compared to the position prior to the NSIA coming into force there will be an uptick in the number of cases that are called in for national security review.
Our expert team of lawyers advises on both UK merger control and NSIA issues. We have significant experience in advising both UK and foreign business and investor clients on navigating the new NSI regime.
The team will help you to understand the implications of the NSIA for your transactions (both current and future). We will work with you to understand whether mandatory notification is required or whether a voluntary notification is recommended and support you through the notification process.