The National Security and Investment Act 2021 (NSIA) came into force on 4 January 2022 and established a stand-alone statutory regime for government scrutiny of, and intervention in, acquisitions and investments for the purposes of protecting national security in the UK. This has substantial implications for the UK M&A landscape and has a wide-ranging impact for proposed transactions in a number of different sectors.
In effect, the NSIA establishes two separate regimes for both mandatory and voluntary notification.
Transactions that involve the acquisition of a specified level of control over certain qualifying entitles or assets require mandatory notification and authorisation/clearance from the Investment Security Unit (ISU). Unlike previous regimes, the government’s power to intervene in a transaction is not determined by the target of the acquisition meeting minimum thresholds of turnover or market share of supply thresholds.
The level of control requiring notification is generally defined as more than 25% of the issued shares or voting rights in the relevant qualifying entity, and the effected target entity must be operating within one of the following 17 specific sectors;
- Advanced materials – specifically those offering significant benefits to military capability.
- Advanced robotics.
- Artificial Intelligence.
- Civil nuclear.
- Communications – including telecommunications, broadcasting, support infrastructure and information systems.
- Computing hardware.
- Critical suppliers to the government – those contracted to access very sensitive data, assets, or estates.
- Cryptographic authentication.
- Data infrastructure – physical or virtualised infrastructure for storing, process or transmitting data in digital form.
- Military and dual use.
- Quantum Technologies.
- Satellite and space technology.
- Suppliers to emergency services – goods and services which are used for the operational delivery of those services.
- Synthetic biology.
- Transport – this includes ports and harbours, airports, and air traffic control.
The UK Government has issued ‘notifiable acquisition guidance’ which aims to assist businesses and investors in assessing whether an entity falls within one of sectors noted above. The ISU also encourages parties to contact it at an early stage to obtain its view as to whether a transaction falls within the mandatory notification regime.
An acquisition will be automatically deemed void if approval ought to have been sought from the ISU (but was not) prior to completion of the transaction. Further, the ISU also has the jurisdiction to impose criminal liability on the directors of the relevant companies that have been in office at the entity immediately prior to completion. A financial penalty linked to turnover of the affected entity may also be imposed on an acquirer who fails to notify under the mandatory scheme.
Notwithstanding the above thresholds, the UK Government retains the power to ‘call in’ for review any transaction (whether it has been notified), in any sector, where there is a reasonable suspicion that it has given, or could give rise to, a risk to national security.
This notice to review may be issued at any time while the transaction is in progress or contemplation, or within 6 months of the Secretary of State becoming aware of the transaction completing, provided this occurs within 5 years of completion. Perhaps unusually, the power to ‘call in’ transactions also may be applied retroactively to transactions which were completed between 12 November 2020 and 3 January 2022.
Acquisitions deemed at risk and completed without clearance from the ISU may be unwound and considered void. The voluntary notification regime therefore operates to mitigate this risk and notification should always be carefully considered.
Both mandatory and voluntary notifications must be submitted to the ISU via a digital platform. Mandatory notifications must be made by the person acquiring the specified level of control in the qualifying entity, whilst a voluntary notification can be made by either the seller, acquirer or any qualifying entity concerned.
The NSIA provides a set timetable for the ISU to review a notified transaction. The first period of designated time is 30 working days, but this can be extended. It is sensible therefore that parties involved in a relevant transaction should consider in good time whether a transaction is notifiable under the mandatory or voluntary regime and factor the ISU’s period of review into their deal projections.
The NSIA contains a mechanism which enables retrospective validation of a notifiable transaction in certain circumstances. The procedure for making an application for validation is similar to the transaction notification process. Again, this must be submitted digitally to the ISU.
In these circumstances, once the ISU has confirmed their acceptance of a validation application, they have a period of 30 working days in which to issue a ‘call in’ notice to review or issue a validation notice.
The ISU has advised that it will not routinely make public that it has been notified under the mandatory regime or has ‘called in’ a transaction for review but will inform the acquirer if it intends to do so. In guidance to be read in conjunction with the NSIA, it has signalled its intent to work collaboratively with parties where there are doubts or concerns about other disclosure obligations conflicting with aspects of the NSIA regime.
This piece of legislation can impact a transaction at an early stage, and therefore ought to be one of the initial considerations of the parties to a proposed transaction. Ideally, no later than the parties have agreed the heads of terms of a transaction, in such that they do not incur costs unnecessarily, should the ISU not provide the requisite clearance for the transaction to proceed.
If you are unsure whether a proposed transaction is caught by the mandatory regime or whether a voluntarily notification should be made, please contact Elborne Mitchell’s corporate and regulatory teams for further advice.
Callum Asten, Assistant Solicitor/ October 2023