National Security and Investment Act 2021
What is the National Security and Investment Act?
The National Security and Investment Act 2021 (the Act) is a new UK law that came into force on 4 January 2022. The Act creates a new screening regime for transactions which might raise national security concerns in the UK by giving the UK Government the ability to block or apply conditions to UK corporate transactions. The Act requires the companies to notify the UK Government of any qualifying transactions entered into on or after 12 November 2020. Non-compliance with the Act risks the transactions being void and parties facing significant criminal and civil sanctions.
The Act is administered by a new operational unit – the Investment Security Unit (ISU) in the Department for Business, Energy and Industrial Strategy (BEIS) where the ISU will be responsible for identifying, addressing and mitigating national security risks to the UK but the decision maker of any qualifying transactions is the Secretary of State of BEIS.
What does the National Security and Investment Act cover?
Qualifying transactions are defined as acquisitions of control over qualifying entities which cover a range of legal structures, including companies, limited liability partnerships and trusts. Qualifying transactions also include acquisitions of control over qualifying assets which covers both tangible assets such as land or moveable property, and intangible assets such as intellectual property. It is worth noting that qualifying acquisitions that are part of a corporate restructure or reorganisation may also be covered.
The jurisdictional criteria in the Act are extremely broad, it also applies to the non-UK based entities. In particular if the non-UK based entities:
- Carry on activities in the UK
- Supply goods or services to persons in the UK.
Further, assets outside the UK are covered if they are used in connection with the carrying on of activities in the UK or the supply of goods or services to persons in the UK.
The Act also provides examples of “trigger events” which will be deemed to give rise to a qualifying acquisition:
- Acquisitions of shares or voting rights (a) from 25% or less to more than 25%, (b) from 50% or less to more than 50%, or (c) from less than 75% to 75% or more
- Acquisitions of voting rights that enable the acquirer to pass or block the passage of any class of resolution governing the affairs of the entity
- Acquisitions enabling the acquirer materially to influence the policy of the entity
- Acquisitions of a right or interest in, or in relation to, a qualifying asset enabling the acquirer (a) to use the asset, or use it to a greater extent than prior to the acquisition, or (b) to 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.
Once parties confirm that an acquisition is a qualifying transaction, the parties should check if they are required to tell the UK Government about their qualifying transaction. The Act mainly falls into two parts:
- a mandatory regime
- a voluntary regime.
The mandatory regime will require the qualifying transaction to be notified for approval before the transaction can take place. On the other hand, the voluntary regime allows parties to submit transactions for approval. However, it is worth noting that the ISU has the power to call-in transactions retrospectively even if the ISU is not voluntarily notified.
If the parties have any qualifying transactions within the 17 sensitive sectors of the economy, the qualifying transaction will fall under the mandatory regime where the parties, as mentioned above, are required to notify the UK Government for approval before the transaction can occur. These 17 sensitive sectors are:
- Advanced Materials
- Advanced Robotics
- Artificial Intelligence
- Civil Nuclear
- Computing Hardware
- Critical Suppliers to Government
- Cryptographic Authentication
- Data Infrastructure
- Military and Dual Use
- Quantum Technologies
- Satellite and Space Technologies
- Suppliers to the Emergency Services
- Synthetic Biology
What is the timeline for complying with the National Security and Investment Act?
Notifications can be submitted via a new online portal to the ISU.
Once a notification has been accepted by the ISU, the expected timings of the ISU for processing the notification would be
- 30 working days to assess the notification; and
- 30 working days, extendable to 45 working days, to undertake the national security assessment which will only apply if an acquisition is ‘called-in.
The processes for review and, if required, assessment are the same for each type of notification, whether mandatory or voluntary.
As mentioned earlier, the ISU will have the power formally to “call in” qualifying transactions that it reasonably suspects that may give rise to a risk to national security for an in-depth review. It will be able to do so both in relation to notifications made to it and proactively regarding transactions in the UK economy.
The ISU will have five years to call in transactions, but the five-year time period will be reduced to six months if the ISU is aware of a transaction. Therefore, investors and acquirers in the UK should consider proactively disclosing qualifying transactions even though the transactions do not fall under the mandatory regime as this will reduce the call-in limitation period to six months rather than five years.
Following its assessment, when clearing a transaction, the ISU can impose conditions that it reasonably considers are necessary and proportionate to prevent, remedy or mitigate any identified national security risk. Such conditions may include, for example, restricting permitted share ownership levels or controlling access to commercial information or sensitive sites. As a last resort, the ISU may also prohibit or unwind transactions.
What are the consequences for failing to notify?
It is important to note that it will be unlawful to complete a notifiable transaction that is under mandatory regime without prior approval from the UK Government. Failure to notify will render the transaction void, civil penalties for up to 5% of total worldwide turnover or £10 million, whichever is higher, may be imposed and criminal liability for acquirers or their officers may be also imposed.
Moving forwards, according to the guidance supplied by the UK Government, it is expected to be rare that the UK Government will use its powers under the Act to block transactions. Despite this, the impact on deal timelines would be significant as the Act requires notification of qualifying transactions prior to completion. Therefore, it is vital for the parties to take the Act and the timeline for the application into consideration for future acquisitions so that the timetables are synced and consistent for all parties and most importantly to avoid any risk of the acquisition may be void.
Here to Help
If you need advice for your business, please get in touch with Michael Budd, Partner and Head of Company Commercial.
Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.