The National Security and Investment Act 2021 – An overview
The National Security and Investment Act 2021 (the NSI Act) allows the UK Government to assess the national security impact of transactions that may threaten UK national security.
The NSI Act covers any transaction which has a national security interest. Therefore, it applies to domestic transactions and not just those involving foreign investment.
The term ‘national security interest’ is not defined. However, the government has provided guidance in the form of a ‘Statement of policy intent’ which describes how the Secretary of State expects to use its power and the risk factors that will be considered when deciding whether to use such powers.
The NSI Act received Royal Assent in April and is expected to come into force later this year.
The NSI Act introduces a mandatory and voluntary notification regime.
When is mandatory notification required?
A mandatory notification is required if:
- the subject of the acquisition is a qualifying entity that undertakes its activities in the UK within a sensitive ‘core’ sector; and
- there is a ‘trigger event’ meaning the acquirer gains ‘control’ of the qualifying entity by either:
- increasing the percentage of shares (or votes) that it holds in the entity to more than 25%, 50% or 75%; or
- acquiring voting rights in the entity that enables it to secure or prevent the passage of any class of resolution governing the entity’s affairs.
There are 17 sensitive ‘core’ sectors including: civil nuclear; communications; transport; energy; cryptographic authentication, data infrastructure; defence; artificial intelligence; computing hardware; satellite and space technologies.
A qualifying entity includes companies, limited liability partnerships, any other corporate bodies, partnerships, unincorporated associations and trusts. A foreign entity will be a qualifying entity if it carries on activities in the UK, or supplies goods or services to the UK.
Any transaction which is obliged to make a mandatory notification and yet does not will be legally void and ordered to be unwound. There are also penalties for breach of the mandatory regime (ranging from fines to imprisonment).
When should you consider voluntary notification?
If a transaction does not meet the criteria for the mandatory notification regime, the parties to a transaction may still submit a voluntary notification to the Secretary of State if the transaction may constitute a ‘trigger event’ that could give rise to national security concerns (notwithstanding the sector).
Here a ‘trigger event’ is defined more widely and includes:
- the acquirer gaining ‘control’ or ‘material influence’ (usually 15% or more of shares/votes but can in some cases be less) over a qualifying entity;
- the acquirer gaining ‘control’ of a qualifying asset (which gives the acquirer the ability to either (i) use the asset, or use it to a greater extent than prior to the acquisition or (ii) direct or control how the asset is used, or direct or control how the asset is used to a greater extent than prior to the acquisition).
A qualifying asset is defined quite widely and incudes land, tangible moveable property, ideas, information or techniques with value eg data bases, source code and software. To the extent that such acquisition gives rise to national security concerns, the parties may elect to submit precautionary notifications to avoid the risk of the Secretary of State later ‘calling in’ the transaction.
Screening of notifications
After receiving a notice in respect of a trigger event, the Secretary of State must decide whether to accept or reject it. The notice may be rejected, for example, because of insufficient information. If the notice is accepted, then the Secretary of State must decide within 30 working days whether to clear the notified transaction or exercise its call-in power to undertake a full national security assessment of the transaction. Once the review has been completed, the Secretary of State can:
(i) approve the transaction
(ii) approve the transaction subject to conditions or
(iii) prohibit the transaction (or render it void if it has already completed).
The Secretary of State also has the power to ‘call-in’ for review transactions that are not subject to mandatory notification, up to five years post-closing, for a national security assessment. Although if the Secretary of State is made aware of a transaction, this reduces the call-in period to six months from the date of awareness (or six months from the date the law is passed if the government is made aware before the law is passed).
The right to call-in has retrospective effect so any relevant transactions entered into from 12 November 2020 could, potentially, be called-in.
Key points to remember
Consider the application of the NSI Act at the beginning of a potential transaction in case clearance is required and this impacts on the transaction timetable.
The NSI Act has a broad application, it will not just affect share acquisitions by foreign investors, it can also affect a wide number of transactions for example those involving LLPs or the transfer of intellectual property rights or land.
One area of market practice which we expect to evolve is the allocation of risk under transaction documentation that the transaction may be called-in for assessment by the Secretary of State and / or rendered void. There could be an impact on negotiations and transaction structures as deals may be conditional on clearance being obtained. In respect of transactions which are not obviously notifiable there may still be a need to allocate the five-year post-closing call-in risk. We shall see how the market reacts to the new risk.