The National Security and Investment Act 2021 – Buyer (and Seller) beware!

29th July 2022

If you are acquiring an interest, or increasing your interest, in any entity (including for example, any company, limited liability partnership, partnership, unincorporated association or trust) (qualifying entities) or any asset (for example, land or other property, fixed assets, moveable property, databases, designs, software, lab equipment or intellectual property), then you need to be aware of the government’s mandatory and voluntary notification regimes under the National Security and Investment Act 2021 (NSIA) (the Act).

Failure to comply with the Act can lead to draconian penalties (including imprisonment and penalties of up to 5% of your organisation’s global turnover or £10 million, whichever is greater) and/or run the risk of the transaction being null and void.

The Act gives the government power to clear, block or impose restrictions in respect of notified transactions as well as a discretionary power to “call in” a transaction for review on the grounds of national security (following which it can exercise those powers). To seek to avoid “call in” you can make a voluntary notification to the government to seek advance clearance.

The Act applied from 4 January 2022 and has retrospective effect, giving the government the power to “call in” suspect transactions which completed as early as 12 November 2020.

What triggers a mandatory notification?

Any transaction involving the acquisition of an interest in shares or voting rights in a qualifying entity of or above certain thresholds or, of an interest in voting rights that allow you to pass or block resolutions governing the affairs of the entity, in instances where the qualifying entity operates in one of 17 prescribed sectors of the UK economy, will require the acquirer to file a mandatory notification to the Department for Business, Energy and Industrial Strategy (BEIS). This notification must be made irrespective of whether there is or could be any national security concern.

This is a suspensory regime which means that the transaction cannot be closed without BEIS’ advance approval and if it completed without such approval then the transaction is void and the acquirer is at risk of the severe penalties referred to above.

The 17 areas of the economy are:

  • Advanced Materials
  • Advanced Robotics
  • Artificial Intelligence
  • Civil Nuclear
  • Communications
  • Computing Hardware
  • Critical Suppliers to Government
  • Cryptographic Authentication
  • Data Infrastructure
  • Defence
  • Energy
  • Military and Dual-Use
  • Quantum Technologies
  • Satellite and Space Technologies
  • Suppliers to the Emergency Services
  • Synthetic Biology
  • Transport

What triggers a voluntary notification?

This is a sweep-up regime, applying to transactions which fall outside of the mandatory regime but where the transaction could give rise to a national security concern and therefore could be at risk of being “called in”. Whilst the mandatory regime applies to the acquisition of interests in shares and voting rights only, the voluntary regime also applies to the acquisition of assets or acquiring ‘material influence’ over a qualifying entity’s policy.

What is a “national security” risk?

“National security” risks are not defined in the Act, instead BEIS has confirmed that any assessment of the same will focus on:

  • Target risk: whether the qualifying entity or asset being acquired is being used, or could be used, in a way that raises a risk to national security.
  •  Acquirer risk: whether the acquirer has characteristics that suggest there is, or may be, a risk to national security from it having control of the qualifying entity or asset.
  • Control risk: the amount of control that the acquirer gains of a qualifying entity’s activities or strategy through the qualifying acquisition.

For example, a national security risk might arise in scenarios where a business or assets can be re-purposed for nefarious means. This is perhaps particularly applicable to the sectors of defence and technology.

The acquirer will need to consider these risks when arriving at its decision on whether there could be a national security concern making it preferable to get advance approval for the transaction from the government on a voluntary basis.

There are pitfalls to avoid

There is scope for the parties to overlook circumstances in which advance approval must or should be obtained from the government for a transaction either via the mandatory or voluntary notification procedures.

The 17 Sectors: The parties may not realise that the qualifying entity concerned operates in one of the 17 sectors. It is important to carefully consider the specific applicable regulations and government guidance setting out what falls within the 17 sectors. Some are very technical in nature (such as advanced materials) and others are broader than you may assume and/or require you to carry out due diligence on supply chains and operations to establish whether or not the sector applies (for example to determine whether or not the operations of the qualifying entity fall somewhere within the supply chain in the defence sector). A lack of awareness is not a defence.

The nature of the transaction: It is not always obvious that government clearance for the transaction may be required for example approval may be needed in relation to:

  • Lending: where a lender gains control over any shares, voting rights and/or assets particularly upon enforcement of security following an event of default;
  • Internal restructuring: even if such an arrangement does not involve any outside investors or any change in ultimate beneficial control; or
  • Simple matters: such as share transfers, appointments of assets or shares into trusts, the issue of shares, share buy backs or share for share exchanges.

The thresholds: there are various rules about what has to be included when calculating whether the thresholds are met and so in circumstances where the aggregated interests already held or of relatives or associated companies or where interests that are held indirectly or via nominees or on trust meet the thresholds it might not be obvious that the relevant thresholds are met.

Deal certainty

To achieve deal certainty and avoid criminal and financial penalties an acquirer must consider carefully whether the Act applies to a transaction and, if it does, obtain the necessary government approval. It is also important for sellers to ensure the appropriate government approval has been obtained as generally speaking it is in no parties’ interests for the transaction to be void or to be later set aside (or to have controls / restrictions imposed in respect of it after the event which could be unacceptable to them commercially or financially). Early consideration of the Act in a transaction process should help reduce delays in a transaction that can be caused as a result of a mandatory or voluntary notification being required.

If you are contemplating any kind of transaction or arrangement relating to entities or assets in any way connected to the UK or would otherwise like to know more about the NSIA and how it might affect you please contact our Corporate Department on 0161 832 3434.

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