National Security and Investment Act 2021 – a new challenge for dealmakers?

The NSIA impacts a wide range of potential transactions, referred to in the NSIA as “trigger events”, ranging from traditional M&A transactions involving the acquisition or disposal of shares or assets to minority investments, licencing of intellectual property, intra-group reorganisations and property transactions occurring wholly outside of an M&A context. 

There is no minimum transaction or target value threshold that needs to be met in order for the NSIA to potentially apply, and the regime is broad enough to capture both domestic and overseas transactions with a sufficient connection to the UK.

The new regime is complex but has four key elements which transaction participants need to be aware of:

• A new mandatory pre-completion notification system for certain transactions involving “qualifying entities” operating in certain key sectors of the economy
• Significantly enhanced Government call-in review powers in relation to “trigger events” completed from 12 November 2020 onwards where there is a reasonable suspicion that the “trigger event” could give rise to a risk to national security
• A voluntary notification option to obtain prior Government clearance where the parties consider that there may be national security concerns at play
• Criminal and civil remedies and sanctions to address risks to national security and non-compliance with the NSIA

Mandatory notification system

In a significant departure from the existing national security intervention regime under the Enterprise Act 2002, the new mandatory notification system places an obligation on acquirers to notify the Government of certain “trigger events” in advance of completion occurring. 

The mandatory notification system will initially only capture “trigger events” involving “qualifying entities”, essentially, any legal person or entity other than an individual person, so including companies, LLPs and partnerships as well as unincorporated associations and trusts, operating in one of 17 key sectors of the economy. Relevant trigger events in this context are:

• the acquisition of more than 25%, more than 50% or 75% or more of the votes or shares (or equivalent for entities without a share capital) in a qualifying entity (whether or not the acquirer already holds an interest in the qualifying entity)
• the acquisition of voting rights in the qualifying entity enabling or preventing the passing of any resolutions governing the affairs of that entity

The 17 key sectors identified by the Government, which are the subject of detailed secondary legislation setting out the exact scope of each sector, are:

Unsurprisingly, the aspect of the mandatory notification system which has garnered the most attention to date is the penalties for completing a transaction subject to mandatory notification without obtaining prior clearance, which include:

• The transaction being automatically void and of no legal effect (though there is a mechanism to enable a transaction to be retrospectively validated)
• Civil fines of up to the higher of £10 million of 5% of total worldwide turnover
• Criminal sanctions including potential imprisonment for directors and other officers

Call in powers and voluntary notifications

In addition to the introduction of the mandatory notification system for certain higher-risk transactions, the Government will also be able to review a much broader range of “trigger events” which may present national security concerns under its expanded “call-in” powers. Transactions can be called in at any time while they are in progress, or within six months of the Government becoming aware of a completed transaction (subject to a long-stop period of five years after completion).

Examples of “trigger events” which may be subject to call-in review include:

• An acquisition of shares, voting rights or material influence over any “qualifying entity” (whether or not the entity operates in one of the 17 “key sectors”), subject to certain thresholds
• An acquisition of a controlling right or interest over a “qualifying asset” (essentially any tangible asset such as land and machinery, as well as intangible assets such as intellectual property) which can include arrangements such as IP licencing as well as a more traditional sale and purchase.

Although the Government has (deliberately) not defined “national security” in the NSIA, it has published a statutory statement setting out the factors which the Government will consider when assessing the likelihood of a risk to national security being caused by a “trigger event”, as well as various examples of transactions which are likely or unlikely to be called in for review. Transactions which are found to pose a risk to national security can be made subject to certain conditions or can be prohibited or unwound where a significant risk is identified. 

Where transaction participants believe that the transaction may raise national security concerns (and therefore could be called in for review), they can elect to make a voluntary notification at any time to obtain a call-in decision in relation to the transaction and avoid the risk of a transaction being subject to review following completion.

Impact on transaction participants

The NSIA represents a significant shift in the UK’s approach to investment screening and brings the UK into line with a number of other countries with similar regimes. Although the Government’s own impact assessment estimates that less than 2,000 transactions will be notified under the new NSIA regime every year, it is anticipated that a significantly higher number of notifications will be made in practice given the potentially severe consequences of failing to make a notification. 

For transaction participants, an initial assessment will need to be made on all transactions involving “qualifying entities” or “qualifying assets” to confirm whether a mandatory notification needs to be made or a voluntary notification is desirable in relation to the proposed transaction. This is particularly the case for those operating one of the 17 “key sectors” where mandatory pre-completion notifications are likely to be required. Once a notification has been accepted, the Government has an initial 30 working day screening period to either clear the notified transaction or refer it for a full national security assessment, so it will be essential that any NSIA notification requirements are identified as early as possible in the transaction process to mitigate the impact on the transaction timetable.