Buying an asset that is considered a risk to UK national security now needs to follow an approval process which investors are taking notice of as they understand the impact this can have to their transactions.

Purchasers and investors are rightly adapting their transaction processes to manage the requirements of and emerging risks presented by the National Security Act 2021 (the “NSIA”).

The NSIA, came into force on 29 April 2021, but many provisions will not take effect until 04 January 2022. The NSIA seeks to strengthen national security and allow the Secretary of State (“SoS”) the ability to scrutinise and even reverse transactions which are subject to its reach. This will also include a power to “call in” past transactions that completed on or after 12 November 2020.

What is the NSIA?

The NSIA will strengthen the Government’s regulatory powers to unwind completed acquisitions or block anticipated deals, should they pose a threat to national security by being a qualified entity in the 17 designated sensitive areas. Broadly, the areas 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 and transport. Consequentially many sectors and industries are going to be impacted.

The Government’s current description of these sectors is set out in a draft notifiable acquisition statutory instrument.

The qualifying entity categories are drafted to capture a wide range of businesses and transactions in those sensitive areas and so careful consideration and expert advice is required.

What deals will be subject to the NSIA?

The NSIA applies to various types of transactions and does not require these to include 100% acquisition due to the broad definition of “control” which is In the case of:

1. the general call-in power, “control” means:

I. a holding of shares or voting rights increasing through 25%, 50% or 75%

II. being able to pass or block shareholder resolutions

III. being able to influence materially the policy of the target

IV. to use or control how the assets are used, or to do so at a greater extent

2. the mandatory notification regime (see below), all of the above apply apart from (III) and (IV).

It must be noted that there is no jurisdictional threshold in reference to UK turnover or value. This definition of “control” means that the NSIA could apply to the following examples; a fundraising round where new shares are issued, a partial disposal, the formation of a joint venture, and a share buyback if the buyback increases shareholding/voting rights of another member.

“Call in” power: the Government will have the power to screen and “call in” transactions that threaten national security in the wider economy. This condition will apply to both share purchases and asset purchases. It will catch acquisitions completed on or after 12 November 2020, those currently in progress and those currently in contemplation. These “call-in” powers can look back at acquisitions up to five years. But the period is reduced to 6 months if the Government becomes aware of the acquisition through notification. Within the Government’s draft “Section 3 Statement”, they have explained how this power is likely to work. They have confirmed that every acquisition will be treated on a case-by-case basis, that the level of control acquired over an entity will be in relation to the assessed risk to national security and investigations of asset acquisitions are expected to be rare.

Investors are advised to review previous transactions which completed on or after 12 November 2020 to ascertain if within the NSIA’s remit and, if so, seek expert advice to manage any risk which follows. Should a past transaction be subject to the NSIA, there is a notification process which can be utilised to pre-empt the call in power. The call in power takes effect on 4 January 2022 and so, if within the NSIA’s scope, the investor will need to consider the benefits of notifying prior to 4 January 2022.

Mandatory Notification vs Voluntary Notification: which one relates to our transaction?

Mandatory Notification

The burden of notifying the Government lies with the acquirer and not the sellers. In relation to the 17 designated sensitive areas set out by the Government, investors must notify the Government if a transaction falls within one of these definitions, irrespective to the size of the target or its UK business.

Voluntary Notification

Investors are free to make a voluntary notification if they consider that their transaction is related to the 17 sensitive sectors or they believe that there may be implications for national security. Given the Government’s “call in” power, this will ensure that you are legally certain in how to move ahead within your transaction.

It should be noted that asset acquisitions are not subject to mandatory notification and will only be subject to the voluntary notification regime. This also includes commercial activities i.e. the granting of intellectual property licenses or rights of land. However, the call in power will still apply to asset acquisitions.

Whether your transaction requires voluntary or mandatory notification, the Government will have to provide a decision as soon as reasonably practicable as to whether its notification is accepted or rejected. (It is worth noting that the notice may be rejected, but on the basis that insufficient evidence has been provided to the SoS and they have therefore been unable to decide if they need to exercise their “call-in” power.)

If the notice is accepted, then the SoS must notify the person who gave the notice and, within 30 working days, issue a “call-in” notice in relation to the relevant transaction or confirm no further action is to be taken.

If you you receive such a notice, this will initiate an assessment period of 30 working days. The SoS is within its rights to extend this to 45 working days if necessary. Therefore, it may take up to 105 working days to approve your transaction. The SoS can also stop the clock by requesting to see more information from the parties.

The Government has detailed three main factors that it looks into when deciding to call in a transaction. These are:

A. The target’s operations

B. The level of control which the buyer/investor will acquire

C. The identity of the buyer/investor.

As a result, investors should adapt their transaction process to factor in the NSIA notification requirements and the effect those requirements have on the deal timeline. Our investors are already raising NSIA at the beginning of transactions in order to evaluate its applicability at the outset and understand its impact on potential exit strategies.

In terms of added due diligence, sellers and investors will need to look more closely at the target’s customers, technology and suppliers to assess if there is a potential threat to national security.

Consequences of Non-Compliance

Transactions which complete before receiving Government approval are void and an investor acting in contravention of the NSIA faces significant civil and criminal penalties. These include up to five years’ imprisonment or alternatively, the SoS may impose a monetary penalty up to 5% of the total worldwide turnover of the investing/acquiring business or £10 million; whichever is higher.

It remains to be seen how a void transaction is to be unpicked equitably, but it is safe to assume that it would make for a poor investment and ROI.

Summary

The wide scope of the NSIA coupled with the penalties for breaching the legislation within creates a significant risk for investors.

The legislation should be considered prior to any transaction to understand and mitigate its impact from the outset. The key recommendations for investors are:

• Review past transactions to ascertain the NSIA’s applicability to them and seek expert advice if necessary
• Update transaction processes to factor in the NSIA’s notification requirements in order to change the transaction timetable
• Include NSIA analysis prior to any future transactions to evaluate its impact on both the acquisition, and future exit strategies in order to mitigate the risks and consequences of the NSIA applying.

For further information or to discuss the issues raised, please contact our corporate regulatory team on 01276 686222 or via matthew.lea@herrington-carmichael.com. or mark.chapman@herrington-carmichael.com.

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to your own particular matter before action is taken.