I wrote an article last year on the new legal framework for screening investments for national security considerations in the UK. This article is the update following the coming into force of the National Security and Investment Act 2021 (NSI Act) on 4 January 2022. According to the UK government ‘this is the biggest shake-up in 20 years of the UK’s system of screening investments’ although it has tried to reassure investors that the regime aims to block ‘only a small minority of acquisitions’ that pose a potential risk to UK national security. This update gives an overview of the new regime, the notification requirements, guidance on whether your investment or acquisition could be caught by this regime, and links to UK government guidance.
Key points about this regime
The NSI Act covers acquisitions or investments that impact ‘national security’ although the scope of national security concerns is an undefined concept in the Act. This means that there is a lot of discretion for the government to intervene in transactions and consequently lots of potential uncertainty for investors.
The Act puts into place a mandatory notification regime for 17 ‘sensitive’ sectors of the economy requiring mandatory prenotification of transactions. In addition, the Government has extensive power to review (‘call-in’) and block a wide range of transactions, even those outside these sensitive sectors. This power applies even if the company is small, or the investor is British. Companies selling overseas assets used in connection with activities in the UK and companies that are not based in the UK but sell into the UK are covered by the regime.
What has changed?
From 4 January the Security of State can issue a ‘call-in notice’ for arrangements leading to a trigger event where there is a reasonable suspicion of risk to UK national security. A “trigger event” is the acquisition of material influence or certain shareholding or voting rights or even acquisition of an asset and this includes land, tangible property and IP (including trade secrets, databases, code, algorithms). The UK government can issue this notice within 6 months after becoming aware of the trigger event or up to 5 years after the event except for acquisitions subject to mandatory notification where there is no 5-year limit. This power applies to UK and non-UK companies and assets covered if the target has its activities in the UK.
There is a mandatory notification obligation for 17 sensitive sectors of the economy.
Where the mandatory notification obligation applies, there is a corresponding prohibition on completion prior to obtaining clearance. If the companies go ahead and complete despite this, then the transaction is treated as automatically void!
The 17 sensitive sectors of the economy are predictably those that are government sensitive (Civil Nuclear, Defence, Military and Dual-Use, Suppliers to the Emergency Services and Critical Suppliers to Government) and high technology IT and engineering (Artificial Intelligence, Advanced Robotics, Cryptographic Authentication). However, the list includes significant economic sectors relating to infrastructure: Energy, Transport, and Communications. This means that a wide range of industries could be caught by this.
Voluntary and mandatory notifications
Notifications should be made on a voluntary basis to the new Investment Security Unit (ISU) (part of the Department of Business, Energy and Industrial Strategy (BEIS)) from 4 January 2022. The Prescribed Form and Content of Notices Regulations 2021 specify the form and content of the different notices. The information required is mainly about details of ownership and structure of entities and any regulatory approvals obtained from government or regulatory bodies. In this context, it is more straightforward than notification forms for merger control, for example, because is not concerned with the market share nor competitive position of the parties. The NSI Act gives the government extensive information-gathering powers and power to issue attendance notices in order to gather information on a transaction both before and after notification.
The UK Government has predicted that it will have 1,000-1,800 notifications annually, but it is expecting only a small proportion of those deals (approximately 10 annually) to require remedies. However, in practice, all parties to transactions that fall within the NSI Act will need to factor the NSI review process into the deal timeline and may need to undertake more extensive due diligence on any target activities to uncover any national security issues. The Government has promised to issue further guidance 6 months after the Act commences in light of experience once the Act is in operation, which will give more clarity for all parties on how this new regime is working in practice.
General Update by Niamh Gleeson, Partner at Aria Grace Law