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Foreign Investments – UK National Security and Investment Act

10 January 2022

A comprehensive guide to the UK National Security and Investment Act 2021. 

The National Security and Investment Act 2021 (NSI Act) came into effect on 4 January 2022, establishing a new regulatory regime for the UK government's investigation and intervention in mergers, acquisitions, and investments for the purposes of protecting UK national security. This replaces current powers under the Enterprise Act 2002.

What is happening?

The NSI Act is bringing about a number of changes, including the introduction of mandatory and voluntary notification system, and the UK Government's power to call in for review transactions that pose a risk to national security.

The UK Government's stated intention its to modernise its powers in responding to national security threats, with greater transparency and more efficient clearance processes. Whilst it is hoped that investors will as a result enjoy greater certainty and clarity, in the immediate future companies will have to work to adapt to these changes and ensure that they comply with notification requirements if their transactions or investments do fall within the scope of the regime, or face sanctions.

What is the new NSI Act regime?

The new regime will apply to "trigger events": transactions or investments where a person gains control of qualifying entities or qualifying assets.

The scope of "qualifying entity" is broad - it includes any entity (foreign or UK based), whether or not a legal person, that is not an individual. A qualifying entity only needs to have revenues generated in the UK. 

"Qualifying assets" include land; tangible moveable property; and ideas, information or techniques which have industrial, commercial or economic value.

The trigger events are:

  • The acquisition of votes or shares in a qualifying entity exceeding a threshold of 25%, 50% or 75%.
  • 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.
  • The acquisition of a right in a qualifying asset providing the ability to use the asset, or direct or control how the asset is used.

The mandatory notification system will require the person gaining control of a qualifying entity to notify the Investment and Security Unit (ISU) of the Secretary of State (SoS) for BEIS for approval. Notifiable acquisitions must meet the above trigger event requirement, whilst also fulfilling a sector requirement. This provides that the qualifying entity is active in a high-risk sector of the economy.

These 17 sensitive areas of the economy 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. The Government has published a draft statutory instrument of sector definitions for the mandatory notification regime and an explanatory note.

A voluntary notification system is also being introduced in order to encourage notifications from parties whose transactions fall outside the scope of the mandatory notification system but consider that it may raise national security concerns. The seller, acquirer or the qualifying entity concerned may give a notice under the voluntary notification system. The acquisition of a qualifying asset will only fall under the voluntary notification system.

The SoS has the power to call in for review any trigger event, whether or not it is notified, if they reasonably suspect that a trigger event- whether in progress, contemplation, or already taken place- could give rise to national security risk. National security is not defined in the Act, giving the Government a potentially broad remit for intervention.

However, the SoS will weigh up the target risk (whether the nature of the entity or asset is more likely to give rise to national security risk), the trigger event risk (the potential of the underlying acquisition of control to undermine national security), and the acquirer risk (national security concerns relating to the specific acquirer).

The power is likely to be exercised where there may be a potential for immediate or future harm to UK national security. Examples include a risk of harm to the UK's critical infrastructure or government and defence assets, or where a hostile actor may develop capabilities posing a security threat to the UK.

Please refer to the Government's Statement of Policy Intent for further information.

Deals completed before January 2022

The SoS has the power to call-in for review any transaction that was completed from November 2020 until January 2022. If a transaction that closed during this period would have fallen within the mandatory regime had the NSI Act been in force at the time, it could be a candidate for a call-in by the SoS once the NSI Act comes in to effect. The SoS can call-in a deal up until 5 years from completion. This is reduced to six months, if the parties inform the SoS of the transaction.

How does this affect businesses?

There have been very few public interest interventions on national security grounds since the Enterprise Act was enacted. However, it is expected that the more expansive scope of NSI Act means that there will be a significantly increased number of notifications to the ISU each year. The Impact Assessment accompanying the National Security and Investment Bill suggests that there will be approximately 1,000-1,830 notifications per year and 70-95 call ins/national security assessments. This will affect equally UK and foreign investors.

Sanctions for failure to comply with the regime are potentially severe, including fines of up to 5% of worldwide turnover or £10 million (whichever is the greater) and imprisonment of up to five years.

Additionally, failure to obtain approval for a mandatorily notifiable transaction will result in it being treated as void.

It is therefore important for businesses to firstly be certain as to whether their transaction falls within the scope of the notification requirements, and secondly to ensure that the notification procedure is then complied with.

Complying with notification requirements may affect the timing of the deal: the Secretary of State has a 30 working day screening period to decide whether to clear the notified transaction or to initiate a full national security assessment of the transaction.

If the SoS issues a call in notice, either following the notification or unilaterally, the SoS then has a 30 working day initial period to review. This may be extended by a further 45 working days. If further time beyond that is required, the SoS and acquirer can agree a further voluntary period to determine the national security risk of the transaction. This means that the total timeline for reviewing a transaction could exceed 100 working days and therefore significant contingencies may need to be factored into planning of transactions.

Following this review of the transaction, the SoS can: issue a final notification stating that no further action is required, or a final order either imposing conditions of approval or blocking the deal.

The SoS may also impose interim orders during the assessment phase in order to protect against national security threats during this time.

How can we help

We are particularly known for our commitment to applying regulatory rules practically and efficiently to support our clients' commercial strategy. Our regulatory advice is grounded in deep understanding, sector experience and judgment, but communicated in realistic, understandable language. Our approach is to give clear, partner-led guidance, delivered in a characteristically approachable way.

We can advise parties (based in or outside the UK) on the possible impact of the NSI Act regime on any proposed divestments or acquisitions which are in the 17 sensitive sectors of the UK economy or other sectors which may nonetheless raise national security risks post January 2022. We can also assist parties in contacting the ISU to discuss possible acquisitions and how the new regime could impact their transaction and timeline.

Further Reading