Background
The National Security and Investment Act 2021 (‘the NSI Act’) came into force on 4 January 2022 and gives the UK Government powers to assess, intervene and if necessary block investments and other acquisitions of control of UK businesses that may give rise to national security risks. It imposes a legal requirement to inform the Government about certain qualifying acquisitions of entities in one of 17 sensitive areas of the UK economy, with notification being made via an online form. For further information on the provisions of the Act, please refer to our guide here.
The Government has published a number of guidance documents to assist businesses participating in acquisitions which may potentially fall within the scope of the Act. Such guidance documents provide details on the operation of the Act and the process for submitting notifications and include: "Check if you need to tell the Government about an acquisition that could harm the UK's national security", "Details of the 17 types of notifiable acquisitions" and "Guidance on completing and registering a notification form".
Market Guidance
The Government is committed to providing periodic updates to its guidance on the application and interpretation of the Act, with its first Market Guidance Notes being published in July 2022 with the intention of addressing questions that commonly arose over the course of the first six months of the Act's operation. This July 2022 Market Guidance included a set of tips to avoid common errors made when filling in the online notification forms, explaining when a single notification may be made for multiple connected acquisitions, and guidance on the application of the Act to certain acquisitions such as indirect acquisitions of control and internal corporate reorganisations.
In April 2023, a second Market Guidance Note was published, bringing about further updates to the Government's NSI Act guidance, and should provide useful clarity on topics which were previously unclear or insufficiently dealt with in the guidance.
The April 2023 update
This second edition of the Market Guidance sets out updates and practical advice including:
- Advice on what evidence parties should provide to the Government if they are facing some form of material financial distress.
- Advice on when in the lifecycle of a deal it might be appropriate to notify a qualifying acquisition: this will generally be when there is good faith intention to proceed, which might be evidenced by, for example, the existence of heads of terms. Notifying too soon risks that subsequent post-notification changes may mean the updated acquisition counts as a separate trigger event requiring another notification.
- Further guidance on the stages of the assessment process, including explaining the effect of interim and information orders the Government may impose during the assessment period.
- Information on Government’s power under the NSI Act to provide financial assistance to businesses and other parties affected by a final order.
- Information on how to engage with the Government if there is significant uncertainty about whether an acquisition is notifiable.
- Top tips when completing a notification form. This section also identifies some additional information which may be helpful to include in your notification, assisting the Government in its review.
- Advice on useful additional details to provide in notification forms if the qualifying entity or acquirer is incorporated outside the UK.
- How to submit information to the Government that is classified above OFFICIAL under the Government Security Classification system – the Investment Security Unit (ISU) must be emailed for advice on how to securely submit such information.
Significance
This second edition of Market Guidance provides some welcome further clarification for businesses making notifications via the online form, and will help to ensure greater predictability and transparency of the NSI Act regime.
Of particular note, is the guidance on seeking a view from the Government when there is uncertainty about whether an acquisition is notifiable. This update sets out information which should be provided in emails to the ISU (sharing as much detail as possible about the acquisition, including names of parties and their activities; explaining clearly why there is uncertainty in the application of the ct) and providing examples of queries the Government would and would not be able to advise on. The note also states that the Government is unlikely to comment on hypothetical scenarios as they may be misapplied to similar but substantially different real scenarios – this is useful confirmation to have.
Given the fact that the Act is still relatively new and that there is often a grey area where it is difficult to assess whether certain activities fall within one of the 17 sensitive areas, seeking guidance from the ISU is often necessary. Knowing what to include in requests for advice will help businesses ensure that they are best placed to receive a helpful response from the ISU, which will in assist them in deciding whether a notification is required under the Act.
Similarly, the updated guidance setting out examples of situations where it would be appropriate to proceed with notification will be valuable for businesses unsure at what stage of an acquisition they need to submit the notification. This in turn avoids the risk of businesses wasting their time by submitting a notification too soon and it being rejected or requiring a further notification to be submit following a material change to the planned arrangements.
The top tips setting out some potentially useful information to include in the "Additional Information" section of the form is also worth businesses being aware of. By ensuring that all information is included that may assist the Government in its assessment – such as setting out the rationale for the acquisition, any relevant financial or economic information, and details of any related acquisitions – it may help to speed up the process of the notification being accepted, and to reduce the risk of an information notice being issued. Information notices are served by the Government where it needs further information to complete its assessment.
Final Orders and Blocked Acquisitions
The further guidance on the stages of the NSI assessment process is especially pertinent, as one of the topics it covers is how the Government may inform parties that a final order is being considered, and the process of then communicating that decision to parties. In cases where the Government is considering issuing a final order, the Government may write to inform relevant parties of this and invite them to make representations to inform the Government’s decision making.
If the Government does determine that there are national security risks arising from the acquisition, the parties may be informed at any stage of the assessment period of the conditions that Government may put in place through a final order. A final order will then be issued if the Government imposes conditions on an acquisition to mitigate national security risk, or if the acquisition is completely blocked.
The Government has made final orders in relation to a number of acquisitions since the Act came into force, the first of which being in relation to the licensing of intellectual property developed by the University of Manchester to a Chinese company, Beijing Infinite Vision Technology Company Ltd. To read our insight into this order, please click here. Whilst a significant proportion of the final orders made do relate to acquisitions in which the acquirer has ties to China, others feature acquirers in the UK and the US: businesses should be aware of the potential for acquisitions to be called in regardless of the country of incorporation of the acquirer (even though ties to certain states do present a higher "acquirer risk"). A full list of the notices of final orders made by the Government can be found here.
The ability of UK regulators to block acquisitions should not be underestimated, as illustrated by the CMA blocking the $68.7 billion proposed acquisition of Activision by Microsoft earlier this year. Whilst there has not yet been such a high profile intervention in relation to national security under the NSI Act, and which is dealt with under a completely different framework anyway, businesses should be aware that the UK Government should be expected to be similarly unlikely to hold back from making a final order if a high profile acquisition is deemed to threaten UK national security.
With the ability to call in acquisitions which have not been notified and to unwind completed transactions, along with potentially harsh penalties for failure to notify, not notifying an acquisition which falls within the scope of the regime will also not be tolerated. Good understanding of the scope of the Act and the guideline's provisions can help ensure that notifiable acquisitions are identified and notified as required.
Conclusion
The updates to the NSI Act guidance brought about by the April 2023 Market Guidance Note should prove a useful change. The additional transparency and clarity will assist businesses in determining if a notification is required, and if so, help them fill out the online notification form in a way that ensures the process is as smooth as possible. This avoids the risk of delays holding up the receipt of clearance (and therefore, the ability to proceed with completing the acquisition).
Looking ahead, the NSI Act Annual Report is due to be published in June 2023, and it is anticipated that it will provide further insight into the functioning of the NSI regime one year on from the Act's commencement, setting out data on notifications made. Further Market Guidance Notes may draw on the findings of this report.
If you think you will be involved in a transaction which may require mandatory or voluntary notification to the Government under the Act, or would like to discuss any points raised in this article, please contact one of the authors below.
Authors: Jonathan Branton, Dimitris Sinaniotis and Katie Hurst
