The UK government announced on 20 July that the National Security and Investment Act will enter into force on 4 January 2022. This act introduces mandatory filings for certain investments raising national security concerns, grants the UK government extensive call-in powers for up to five years for completed transactions, and has retrospective application for transactions closing between 12 November 2020 and 3 January 2022. Businesses operating in the 17 sectors affected should consider whether their current or pending transactions fall within the act’s scope—and take appropriate action.
As explained in our previous publications,[1] the National Security and Investment Act (NSI Act) creates a new, standalone regime for the screening of investments, including foreign direct investments (FDI), in the United Kingdom. The NSI Act significantly expands the UK government’s ability to review transactions on national security grounds and stipulates for mandatory, suspensory filings with respect to certain transactions within 17 key sectors. The NSI Act will also apply retrospectively to certain transactions that have closed between 12 November 2020 and 3 January 2022. The UK government has also published related guidance and other publications to assist businesses in preparing for the new regime.[2]
KEY FEATURES OF THE NSI ACT
- From 4 January 2022, a mandatory notification regime will be in force for acquisitions—including minority non-controlling investments—in 17 key sensitive sectors.[3] Businesses will also be able to submit voluntary notifications for transactions falling outside of these sectors. Submissions will be made via a new online portal.
- The Investment Security Unit (ISU), a specially dedicated team within the UK Department for Business, Energy and Industrial Strategy (BEIS), will review submissions made under the NSI Act.
- The NSI Act does not have any turnover, asset value, or share of supply jurisdictional thresholds below which a transaction would not be subject to the regime. The following “trigger events” are capable of being reviewed under the NSI Act:
- Acquisitions of shares or voting rights (1) from 25% or less to more than 25%; (2) from 50% or less to more than 50%; or (3) from less than 75% to 75% or more;
- Acquisitions of voting rights that enable the acquirer to secure or prevent the passage of any class of resolution governing the affairs of the target;
- Acquisitions enabling the acquirer to exercise material influence over the policy of the target; or
- Acquisitions of a right or interest in, or in relation to, a qualifying asset enabling the acquirer to (1) use the asset, or use it to a greater extent than prior to the acquisition; or (2) direct or control how the asset is used, or direct or control how it is used to a greater extent than prior to the acquisition.
- Asset acquisitions will not be subject to mandatory notification, but may be called in for a national security review if they could give rise to a national security risk. In addition, internal reorganisations may also be subject to the NSI Act.
- From 4 January 2022, the UK government will also be able to call in a transaction for an in-depth review where it does not satisfy the requirements for mandatory pre-notification, in circumstances in which it reasonably suspects that the transaction in question gives rise to national security risks. The UK government will have five years from completion to call in transactions, reduced to six months where the UK government is aware of a transaction. The UK government will also be able to retrospectively call in transactions that have closed between 12 November 2020 and commencement of the regime on 4 January 2022.
- The initial review period following mandatory notification will be 30 working days from the point the ISU accepts a notification. The UK government has stated that it expects to clear a large majority of notified transactions within this initial period. If a transaction requires an in-depth review, then there will be an additional review period of 30 working days, with the possibility of an additional 45 working days (and further extensions beyond this, subject to agreement with the acquirer).
- The UK government sets out the following factors in determining the call-in risk of a transaction for an in-depth investigation:
- Target risk – i.e., the nature of the target and whether it is active in an area of the economy where the UK government considers national security risks are more likely to arise;
- Acquirer risk – i.e., the extent to which the acquirer raises national security concerns;
- Control risk – i.e., the type and level of control being acquired and how this could be used in practice.
- Following a national security review under the NSI Act, the UK government may (1) clear a relevant transaction; (2) impose conditions, such as restricting permitted share ownership levels or controlling access to commercial information or sensitive sites; (3) unwind a closed transaction; or (4) block a proposed transaction.
- Non-compliance with the NSI Act risks significant criminal and civil sanctions, including financial penalties of up to 5% of total worldwide turnover or 10 million British pounds (ca. $13.9 million)—whichever is higher—for acquirers that fail to submit a mandatory notification, as well as criminal liability for directors. Transactions subject to the mandatory filing regime that close prior to receiving clearance under the NSI Act will be void.
KEY TAKEAWAYS AND NEXT STEPS
Since 12 November 2020, the UK government has been accepting informal briefing papers on the national security implications of transactions before the NSI Act comes into force.
Given the broad scope of the NSI Act and its retrospective application, parties have generally taken a cautious approach on the need to notify a transaction during this interim period. This is likely to continue after the NSI Act comes into force—with parties making voluntary filings and taking a cautious view on the scope of the mandatory regime.
Thus far, the authors of this LawFlash have found the dedicated BEIS team to be pragmatic, responsive to queries, and receptive to the parties’ evidence—a positive sign for the NSI Act’s application when it comes into force.
Parties have also been including risk mitigation clauses and conditions precedent with respect to the NSI Act in their transaction documentation. It is likely that NSI Act compliance will become an important aspect of negotiations for relevant transactions, as is already the case for other investment screening regimes such as the Committee on Foreign Investment in the United States (CFIUS) or global merger control compliance. For transactions subject to the NSI Act, it will be important for parties to coordinate the NSI Act clearance process with other relevant investment screening reviews and merger control reviews to ensure that the parties’ representations are consistent, filings are prepared efficiently, and the review timetables are synchronised.
Further guidance is expected ahead of the regime’s commencement, including for the 17 mandatory notification sectors, which is anticipated in the fall of 2021. Other aspects of the new regime, including the content of the notification form, will also need to be determined prior to the regime coming into effect. This guidance will further assist parties in preparing for the NSI Act coming into force on 4 January 2022. We will update our readers on the expected guidance and other key developments as information becomes available.
[1] Foreign Direct Investments In The United Kingdom: UK National Security And Investment Act Receives Royal Assent; The UK’s Proposed New National Security Investment Screening Regime: Standalone, Mandatory, and Broad in Scope
[2] These include (1) the Draft notifiable acquisition statutory instrument (expected to be introduced later in 2021), which defines the 17 sectors subject to mandatory notification requirements; (2) the Statement on the use of the call-in power, which sets out how the UK government expects to exercise its call-in power; (3) Guidance on how the NSI Act could affect people or acquisitions outside the UK; (4) General guidance regarding the new regime, which describes (a) the types acquisitions covered by the NSI Act, (b) the mandatory regime, and (c) how the UK government will scrutinise acquisitions; (5) Guidance on the NSI Act alongside other regulatory requirements, which covers how the NSI Act will interact with (a) the Enterprise Act, (b) the Competition and Markets Authority, (c) the Export Control Joint Unit, (d) the Takeover Code, (e) the Financial Conduct Authority and (f) Prudential Regulation Authority; and (6) Guidance for the higher education and research-intensive sectors.
[3] These will include (1) Advanced Materials; (2) Advanced Robotics; (3) Artificial Intelligence; (4) Civil Nuclear; (5) Communications; (6) Computing Hardware; (7) Critical Suppliers to Government; (8) Critical Suppliers to the Emergency Services; (9) Cryptographic Authentication; (10) Data infrastructure; (11) Defence; (12) Energy; (13) Military and Dual-Use; (14) Quantum Technologies; (15) Satellite and Space Technologies; (16) Synthetic Biology; and (17) Transport.
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