National Security & Investment Act 2021: What you need to know

Introduction

The UK’s National Security & Investment Act 2021 (“the Act”) provides a mechanism for the UK government to scrutinise the acquisition of control over a UK business or asset, and to intervene on national security grounds, including potentially preventing the acquisition. While the regime is similar in some respects to other countries’ ‘foreign direct investment’ (FDI) regimes, the UK regime applies equally to all domestic and international transactions.

So, for anyone acquiring any control over UK businesses and assets, the regime is an important factor to consider and potentially to take account of in deal structures and timetables.

There are no minimum turnover thresholds and very limited exceptions. Indeed, the regime even captures intra-group corporate restructurings and reorganisations.

Mandatory pre-notification

The Act imposes a mandatory suspensory notification regime in relation to acquisitions in 17 different industry sectors.  The 17 sectors are:

It is the acquirer’s responsibility to make a notification to the Cabinet Office. Failing to pre-notify and obtain clearance from the government in relation to a relevant acquisition in any of these 17 sectors is an offence (leading to potentially significant fines and imprisonment) and the transaction will be void.

In terms of control thresholds, notifiable acquisitions are those where:

• the acquirer’s shareholding goes from: (i) 25% or less to greater than 25%; (ii) 50% or less to more than 50%; or (iii) less than 75% to 75% or more;
• the acquirer’s percentage of voting rights goes from: (i) 25% or less to greater than 25%; (ii) 50% or less to more than 50%; or (iii) less than 75% to 75% or more; or
• the acquisition gives voting rights which enable the acquirer to secure or prevent the passage of any class of resolution.

There is no limitation period for the government to take action in relation to an acquisition that qualified for mandatory notification.

It is possible to make a retrospective notification in relation to a transaction that should have been notified. Subject to government approval, this can have the effect of making a transaction not void.

Voluntary notification

To obtain comfort in relation to transactions which do not fall within the mandatory notification requirements, an acquirer can make a voluntary notification.

This process is typically used by those involved in transactions:

• falling just outside the 17 sector definitions;
• involving lower degrees of control (e.g. material influence);
• asset acquisitions (particularly within the 17 sectors); and
• any other situations where national security issues may be a risk.

Non-notified transactions

The government has up to five years post transaction to investigate non-notified transactions concerning acquisitions outside the mandatory regime and to take action in relation to them.

This is reduced to six months where the Cabinet Office is ‘made aware’ of an acquisition. It is not entirely clear what is required, short of a voluntary notification, for the Cabinet Office to be ‘made aware’ of a transaction. It has been suggested that it might be sufficient for the transaction to be publicised, e.g. on a company website or the trade press. However, this is yet to be clarified.

Call-in notice

The government may issue a ‘call-in notice’ if it reasonably suspects that an acquisition may give rise to a national security risk.

The government is required to publish a statement about its intended exercise of the call-in power. This emphasises the flexibility of the power, but also that the government’s intention is that it should only be used for the purpose of dealing with risks to national security and not to interfere arbitrarily with investment.

The government statement says that it will consider the following risk factors:

Target risk: whether the target could be used in a way that raises a risk to national security;

Acquirer risk: whether the acquirer has characteristics that suggest there is or may be a risk to national security from the acquirer having control of the target; and

Control risk: the level of control the acquirer obtains through the transaction.

Investigation timetable

The investigation timetable can be suspended if the government issues an information notice or an attendance notice, requiring further information or to interview someone.

During the assessment period, the government has wide powers to prevent ‘pre-emptive’ action by means of an interim order.

Notifications can be made at a relatively early stage in a deal process (e.g., based on heads of terms).  However, should the deal change in any substantial detail, a new notification would have to be made and the process starts again. Therefore, parties intending to notify should generally wait until the key acquisition details, particularly relating to ownership and control rights, are unlikely to change before making notification to government.

Transparency

Notifications and clearance decisions are not made public.

Similarly, while the government does publish final orders (where it has concerns about a transaction and is taking action), these decisions do not contain detailed reasoning. The decisions simply state the parties and include a high level summary of the action taken to protect the UK’s national security interests.

The government is however required to publish an annual report, which contains various statistics which provide some insight into the operation of the regime.

Risk management

Finally, the government states (and experience confirms this) that for most transactions the risk to national security is low. For example, the government believed that there could be between 1,000 and 1,830 notifications per year with 70 to 95 call-ins per year.  However, to date (covering the year and a half or so of full operation of the Act) there have only been 17 final orders where issues were found and action taken, and only five of these have so far resulted in transactions being prohibited (although this does not include transactions which were withdrawn before this stage was reached).

Consistent with the government expectations, the transactional risks might therefore be said to be low for most transactions caught by the regime.

However, given the potentially very serious sanctions for failing to notify and non-compliance with the process, the process risks are high, particularly for transactions involving one or more of the 17 defined sectors.

Therefore, it is essential that acquirers factor in managing these risks when planning and executing transactions involving UK targets.

Challenging a final decision

While the government’s decisions under the Act can be challenged in the courts, this is only on a judicial review basis (and in some respects a limited judicial review at that). Therefore, such challenges can be expected to be an uphill battle.

This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek specific legal advice.

Author

Noel Beale