The National Security and Investment Act 2021 (the Act) comes into force on 4 January 2022 but has retrospective effect and already applies to transactions completed on or after 12 November 2020. It replaces and expands on the government’s current powers under the Enterprise Act 2002 which were limited and little used.
It must be considered in all M&A and investment activity involving the following sectors:
Critical suppliers to government
Satellite and space technology
Suppliers to emergency services
Military and dual-use technology
There is an obligation imposed by the Act to obtain advance clearance from the Secretary of State (SoS) prior to acquisitions of and investments in entities in the sectors listed above for reasons of national security. If the SoS forms the view that a transaction raises national security concerns, it can block the transaction or make it subject to specified remedies or conditions. The SoS can also order a completed transaction to be unwound.
Advance clearance of transactions is required in certain circumstances
This requirement to obtain clearance applies to all UK and non-UK buyers or investors where the target entity carries on certain activities in the UK. There are no minimum thresholds or safe harbours (with one or two limited exceptions) so even small deals can be caught by the regime. Targets located offshore are also potentially subject to the requirements.
Clearance is also needed for intra-group transactions including group restructuring, reorganisations and integration activity where that involves moving assets between entities.
What are the consequences of breaching the Act?
Transactions that are notifiable under the Act will be automatically void unless prior clearance is received from the SoS before the transaction completes.
As well as that, other penalties may be imposed ranging from up to 5 years’ imprisonment of the buyer’s directors and fines equal to the greater of £10m or 5% of the company’s global group turnover.
This means it is essential to undertake an analysis of any transaction to see if it falls within the notification regime and, if so, to apply for clearance at an early stage and certainly before completion.
Which transactions need an application for advance clearance?
A transaction is a “notifiable acquisition” if it requires mandatory notification under the Act. Mandatory notification is triggered if the buyer proposes to acquire a specified level of control over an entity or assets that are within the scope of the regime.
Notifiable acquisitions are determined using 3 measures:
- Extent of control to be acquired
The buyer will be acquiring shares (including non-voting shares) or voting rights in the target entity of more than 25% or 50% or at least 75%. This includes moving from one threshold to another for example, acquiring one share over a 50% shareholding already held. This means that significant investments will be subject to mandatory notification as well as outright acquisitions.
Also caught will be transactions where the buyer acquires voting rights sufficient to block any shareholder resolution of the target entity or materially influence the entity’s policy. In this context, material influence of policy relevant to the behaviour of the target in the relevant marketplace will also qualify as control. This might include a shareholder agreement with substantial veto rights, even if the buyer does not acquire the requisite number of shares. It might also include the right to appoint board members enabling the buyer to influence strategic decisions.
If the entity does not have shares, the percentage reference is used against rights to percentages of capital or profits instead. Shares held as security are unlikely to fall within the scope of the Act unless the holder of the security acquires material influence over the target.
- The target must be a qualifying entity or a qualifying asset
A qualifying entity is any entity other than an individual person. It includes companies, partnerships, trusts, unincorporated associations.
Qualifying assets are: land, tangible property, ideas / information / techniques that have industrial commercial or other economic value such as trade secrets, intellectual property, source code, algorithms, designs and software.
- Specified description applies to the target
If the qualifying entity operates in any of the sectors referred to above and carries on activity in the UK the transaction will be notifiable if the other elements are also satisfied. These sectors and relevant activities are set out in the schedules of The National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021 which are still going through parliamentary scrutiny. These schedules provide set out much detail of which activities are relevant within each sector and it will be necessary to scrutinise these to see if the target and its activities falls within them and is therefore subject to the requirements of the Act.
Overseas targets will be carrying on activity in the UK (and therefore within the Act’s scope) in a broad range of cases including supply of goods or services to the UK or having a UK office. Out of scope activity includes remote workers, purchase of goods or services from UK suppliers and having UK based investors.
Assets located overseas will be in the scope of the Act if they are used in connection with activities in the UK or the supply of goods or services to the UK.
As well as mandatory notifications, voluntary notifications can also be made in respect of acquisition of control over assets in any sector or acquisitions of material influence over entities that are not active in the sectors listed above.
A voluntary notification can be made by the buyer, seller or target and can be used to seek a ruling on whether national security concerns are raised by the transaction.
What are the powers of the SoS?
The SoS may call in completed and proposed acquisitions that fall within the notification thresholds for up to 6 months following the SoS becoming aware of the acquisition (subject to a maximum of 5 years following completion of the acquisition).
This call in power can be used in relation to any transaction completed on or after 12 November 2020 (i.e. before the Act comes into force) where there is an acquisition of control that gives rise to a national security risk.
The call in powers of the SoS are wider than those for mandatory notification and the SoS needs to only reasonably suspect that there may be a national security risk posed by the transaction. Voluntary notifications might be advisable, depending on the circumstances of the transaction and whether a risk of call in is perceived.
This also applies to acquisitions of assets, such as intellectual property or acquiring a right to use real property in a sensitive area.
How is a notification made?
All notifications will need to be submitted through a digital portal of the Investment and Security Unit (ISU) which is a part of the Department for Business, Energy & Industrial Strategy (BEIS). Informal enquiries may also be made to the ISU although informal views of the ISU will not be binding on the SoS. There is no filing fee payable.
Information to be supplied in a notification has yet to be finally decided by the government but is likely to include details of the buyer’s representatives, the transaction (target, parties, key terms and details of the trigger event), the target and its activities and the buyer’s controlling ownership structure, including beneficial owners and their nationalities.
How long does the SoS take to make a decision?
Once a notification is accepted by the SoS it has 30 working days to complete a Phase 1 investigation and confirm whether the transaction is cleared or issue a call-in notice. This time period starts on the date that the SoS notifies the buyer that its notification has been accepted.
If a call-in notice is issued a Phase 2 investigation will start which lasts up to 30 working days, extendable by another 45 working days if necessary. Further extensions are also possible if agreed by the SoS and the buyer.
Note, there may be various discussions before the notification is accepted by the SoS and there is no guidance as yet how long the initial waiting period can last for. It is also possible for an original notification to be rejected by the SoS if the information provided is insufficient. So this initial pre-acceptance waiting period needs to be factored into any timing considerations.
Following a Phase 2 investigation, the SoS will either approve the transaction (a final notification) or impose restrictions/remedies or even block the transaction (a final order). The decision of the SoS can be challenged by way of a judicial review.
What does this mean for the deal?
The only way of getting certainty is to make a notification to the SoS. This is because the SoS’s call-in powers can last up to 5 years and informal conversations with the ISU are not binding.
If clearance is not obtained before signing, deals can be signed on a conditional basis with completion only taking place once specified conditions are satisfied. This assumes the parties intend to make a notification to the SoS even if not mandatory. Those conditions will be satisfied if the SoS either approves the transaction (subject to remedies that are satisfactory), approves the transaction after a call-in or does not call in the transaction.
Sellers are advised to make an advance assessment of the risk of call-in as part of preparations for sale since, if notification is required, the identity of the buyer will make no difference to any decision of the SoS.
The government is continuing to release further guidance and secondary legislation related to the Act.
If you have any questions on this topic or would like to discuss any corporate transaction, please contact Brigitta Naunton.
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