The New National Security and Investment Regime
Last updated, 13:00, 26 April 2022
The UK’s wide new powers to capture both UK and foreign investors planning to acquire interests in businesses, land and assets connected to the UK under the National Security and Investment Act 2021 (the “NSI Act”) came into force on 4 January 2022. The NSI Act creates a standalone regime for Government scrutiny of investments which present a possible risk to national security in the UK.
The retroactive nature – and potential breadth – of the NSI Act, the type of transactions potentially within its ambit (including acquisitions of non-UK companies and assets if they carry on activities in the UK), as well as the potential remedies and sanctions for non-compliance, have caused huge consternation for businesses and their advisers.
The regime that sits behind the NSI Act formally commenced on 4 January 2022 and companies will now need to consider very carefully whether any proposed transaction will require mandatory notification before completion (see below).
In addition, transactions that completed on or after 12 November 2020 may now be subject to ‘call-in’ by the Secretary of State (“SoS”). The call-in powers will apply to any such transactions for a period of five years from formal commencement of the new regime. This period can be shortened to six months if the SoS is made aware of the transaction.
Contact the Competition team at Freeths for specific advice or if you would like to inform Government of any completed transaction. Freeths already has significant experience in this regard and any informal advice application to Government will serve both to make the SoS aware and to receive some comfort that the transactions are unlikely to be called in now that the Act is in force.
Key features of the NSI Act
The key features of the NSI Act include:
- a mandatory notification requirement for transactions involving acquisitions of ownership or control over entities active in one or more key sectors in the UK. In contrast to the separate (voluntary) UK merger control regime, there are no turnover or share of supply thresholds;
- a voluntary notification system for non-notifiable transactions in any sector of the UK that may raise national security concerns;
- the introduction of a power to ‘call in’ transactions, enabling the Government to assess deals which may give rise to national security risks (whether or not they have been notified); and
- the power to impose remedies to address risks to national security (including potentially requiring unwinding of transactions) and sanctions for non-compliance with the mandatory notification requirement (including the transaction being deemed void).
Parts of the NSI Act have ‘retroactive’ effect. Accordingly, transactions entered into on or after 12 November 2020 now have the potential to be called in for review by the Government on national security grounds.
The new regime applies to both UK and foreign investors and investments provided the latter entities – or assets – have some connection with the UK (e.g. carry on UK activities or service UK customers). It sits alongside, but is completely separate from, the existing (voluntary) merger control regime under the Enterprise Act 2002 (“EA”). Guidance on how the regime works alongside other regulatory requirements, including the EA and the Takeover Code, has now been published by the Government. In practice, transactions will now need to be assessed for both competition and national security investment issues. This is likely to lead to longer deal timetables, reduce deal certainty and add an extra expense on parties to transactions with an impact in the UK.
The NSI Act introduces a mandatory pre-notification requirement for transactions in 17 key sectors (see Key sectors subject to mandatory notification). Parties must notify the SoS of notifiable transactions in order to obtain clearance to close the deal. Notifications should be submitted online through the Government’s digital portal.
Scope of the mandatory notification requirement
The NSI Act introduces mandatory notification within key sectors for the following ‘trigger events’:
- the acquisition of more than 25%, more than 50%, or 75% or more of the shares or voting rights in a ‘qualifying entity’; or
- the acquisition of voting rights that enable or prevent the passage of any class of resolution governing the affairs of a ‘qualifying entity’.
A ‘qualifying entity’ is any entity that is not an individual (e.g. companies and partnerships). An entity which is formed or recognised under the law of a country or territory outside the UK is also a ‘qualifying entity’ if it carries on activities in, or supplies goods or services to, the UK.
Notably, acquisitions that are part of a corporate restructure or reorganisation can be covered by the rules. This is the case even if the acquisition takes place within the same corporate group, meaning that even within corporate restructures, it may be mandatory to notify. In addition, bear in mind that the regime’s reach extends beyond M&A transactions and could capture investments by way of share subscription or secured lending arrangements.
Asset acquisitions do not require mandatory notification (although this may be provided for in secondary legislation). In such cases, transacting parties should assess the risk of the transaction being called in (see Call-in power) and consider making a voluntary notification (see Voluntary notification).
Guidance on how the NSI Act applies to people or acquisitions outside the UK was published in July 2021.
Following a Government consultation on the proposed definitions of the key sectors that are subject to mandatory notification, the National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021 were introduced and came into force on 4 January 2022. These Regulations and associated guidance specify the 17 sensitive sectors that are subject to mandatory notification, namely:
Sanctions for non-compliance
Transactions that are subject to mandatory notification will not be permitted to complete until clearance has been provided. There are serious consequences for non-compliance with this requirement. Notifiable transactions that are closed without clearance will be legally void, although the NSI Act does provide for the possibility of retroactive validation. If granted, the transaction would be treated as having been completed with the approval of the SoS.
The NSI Act also confers powers on the SoS to impose financial and criminal penalties for various offences under the Act. These can include fines of up to 5% of global turnover or £10 million – whichever is the greater – and/ or imprisonment of up to five years. The National Security and Investment Act 2021 (Monetary Penalties) (Turnover of a Business) Regulations 2021 came into force 4 January 2022 and explain how turnover will be calculated for these purposes.
There is a parallel voluntary notification process for otherwise non-notifiable transactions (e.g. in non-key sectors or for certain minority acquisitions in key sectors) if a trigger event that has taken place, or is in progress or contemplation, gives rise to national security concerns. The following acquisitions constitute trigger events for the purposes of the voluntary regime:
- the acquisition of an increase in a holding of shares or voting rights in a ‘qualifying entity’ to more than 25%, more than 50% or to 75% or above;
- the acquisition of voting rights that enable or prevent the passage of any class of resolution governing the affairs of the ‘qualifying entity’;
- the acquisition of material influence over a qualifying entity’s policy; and
- the acquisition of a right or interest in, or in relation to, a ‘qualifying asset’ (see Call-in power) providing the ability to:
- use the asset, or use it to a greater extent than prior to the acquisition; or
- 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.
While this process is voluntary, transacting parties may wish to submit a voluntary notification to avoid the prospect of a call-in at a later date under the Government’s retrospective review powers (see Call-in power).
The National Security and Investment Act 2021 (Prescribed Form and Content of Notices and Validation Applications) Regulations 2021 (as amended by the National Security and Investment Act 2021 (Prescribed Form and Content of Notices and Validation Applications) (Amendment) Regulations 2022) detail the prescribed form and content of a mandatory or voluntary notice, or a validation application to the SoS. Information on the procedure for serving (or giving) documents required under the NSI Act is also detailed within the National Security and Investment Act 2021 (Procedure for Service) Regulations 2021 which also came into force on 4 January 2022 and cover:
- Documents served (or given) by the SoS
- Documents served (or given) to the SoS
- Address for service by email
- Address for service by post
Where either a mandatory or voluntary notification is given, a 30-working day ‘review period’ applies during which the SoS must either call in the transaction for a more detailed assessment or give notice that no further action will be taken under the NSI Act.
Be aware that the SoS now has the power, of its own volition, to ‘call in’ transactions that:
- have not been notified (either under the voluntary or mandatory regime);
- have given rise to or may give rise to one of the trigger events described in Voluntary notification above; and
- have given rise to or may give rise to a risk to national security.
Notably, the call-in power extends to asset acquisitions, including acquisitions of land, tangible moveable property and, with respect to intellectual property, “ideas, information or techniques which have industrial, commercial or other economic value” such as trade secrets, databases, source code, algorithms, formulae, plans, drawings and specifications and software. Land or moveable property situated outside of the UK can also be caught if it is used in connection with activities taking place in the UK or the supply of goods or services to persons in the UK.
The Government could call in a non-notifiable transaction (i.e. a transaction subject to voluntary notification) up to five years after it completes. However, the Government’s call-in power is limited to six months after it becomes aware of a non-notifiable transaction (subject to an overall deadline of five years).
Where the transaction was subject to mandatory notification, the five-year time limit does not apply. If parties fail to notify a notifiable transaction, the Government can call it in whenever it is discovered (unless it completed on or between 12 November 2020 and 3 January 2022, in which case the call-in deadline is five years from commencement, or six months from the Government becoming aware).
Exercise of the SoS’s call-in power
On 2 November 2021, the Government published a Statement for the Purpose of Section 3 of the NSI Act, which sets out how the SoS expects to exercise the call-in power and which must be considered by the SoS before it can exercise its power. This publication will be reviewed at least every five years and will aid parties in understanding whether their acquisition is likely to be called in.
The Section 3 Statement explains that the call-in power will not be used as a means of interfering arbitrarily with investment but will be used solely to safeguard the UK’s national security. The SoS will therefore only exercise this power in the event of there being reasonable suspicion of potential immediate or future risk to UK national security.
The SoS will consider the following three risk factors when deciding whether to call in a transaction for review:
- the target risk – the nature of the target and whether it is in an area of the economy where the Government considers risks are more likely to arise;
- the control risk – the type and level of control being acquired and how this could be used in practice; and
- the acquirer risk – the extent to which the acquirer raises national security concerns.
The Government’s Section 3 Statement also describes how the SoS will consider these risk factors when deciding whether to use the call-in power and lists a number of helpful examples. For example, for asset acquisitions relating to land, transactions are more likely to be called in where the asset is in, or is proximate to, a sensitive location (examples of which include critical national infrastructure sites or government buildings).
Each decision will be made on a case-by-case basis and will be made in relation to risk existing at the time the decision is made, rather than at the time the qualifying acquisition occurred. While the SoS would usually expect all three risk factors to be present prior to calling in a qualifying acquisition, the Section 3 Statement explains that this is not a prerequisite.
Information gathering powers
The NSI Act grants the SoS wide-ranging information gathering powers to request any information, from any person, to help inform its assessment of the national security risks of a transaction. These powers also extend to requiring information from acquirers outside the UK.
Information may be requested by way of an information notice or an attendance notice requiring the attendance of witnesses to give evidence.
An information notice may be issued by the SoS at any stage during the contemplation or progression of an acquisition, prior to or after a call-in, during review or assessment and after final orders. The notice will detail the reason for additional information being requested, as well as the time limit and method for submitting the additional information.
An attendance notice will be issued in the event that the government needs to hear from those involved in the acquisition. Attendance can be requested from representatives of the parties involved in the acquisition or those in a specific position within the companies involved.
Failure to comply with the requests set out in either an information or attendance notice, without reasonable excuse, could result in fines and/or imprisonment.
A significant feature of the NSI Act is the ‘retroactive power’ to review transactions (including those outside the 17 key sectors identified in Sectors subject to mandatory notification) that closed on or after 12 November 2020 but before the regime commenced on 4 January 2022. Any transaction constituting a trigger event (either under the voluntary or mandatory regime) will be open to review at any point in the five years running from the regime’s commencement date, or six months if the Government becomes aware of the transaction.
The retroactive powers of the Government are likely to create significant uncertainty for parties that have recently completed transactions without first seeking informal advice. Parties should therefore be acting now to consider whether these transactions raise potential national security issues under the new regime and whether to proactively engage with the Government.
The SoS has the ability to impose remedies on transactions both during the assessment period (‘interim orders’) and following the completion of a full national security assessment (‘final orders’).
Interim orders are intended to prevent the parties to the acquisition from taking any steps which might undermine any conditions the SoS may seek to put in place at the end of the assessment period through a final order. They can be issued at any point during the assessment period and examples include a prohibition on exchanging confidential information and/or accessing sensitive sites or assets.
A final order will be issued if the government decides to block, unwind, or impose conditions on an acquisition. Final orders may include structural and behavioural conditions and will remain in place until they are either revoked or varied, or until they expire. Both interim and final orders will specify requirements to demonstrate compliance with the conditions of the order. Examples of such requirements include providing regular statements of compliance, attending meetings with the Investment Security Unit, and allowing site visits.
Non-compliance with interim or final orders is an offence under the Act and can result in enforcement action.
The new regime commenced on 4 January 2022. Mandatory notification and its impact on deal timetable and structure will now need to be considered very carefully before a transaction in any of the 17 key sectors completes.
Informal advice to assist businesses and investors is available from the Investment Security Unit within the Department for Business, Energy and Industrial Strategy (BEIS) and Freeths have made successful use of this process to assist clients involved in a number of proposed transactions in diverse sectors.
The NSI Act provides the Government with unprecedented jurisdiction over acquisitions of businesses, land and assets with some connection to the UK. As such, UK ‘foreign’ investment rules will invariably become a significant issue for businesses and investors when assessing investment strategy, deal feasibility and transaction timings on any deal with a potential national security impact in the UK.
Head to our Brexit Exchange where you will find all the latest updates and developments from our experts, regarding Brexit and how that affects businesses and individuals in a range of areas.
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
‘Doing the right thing’ is at the heart of Freeths. Find out more about our excellent client service and the strong set of values that guide the way we work.
Talk to us
Freeths are a leading national law firm with 13 offices across the UK. If you have a query about our services or just want to find out more, why not give us a call?
Contact: 03301 001 014