National Security and Investment Act 2021

The National Security and Investment Act 2021 (NSI) came into force on 4 January 2022, establishing a new regime for government scrutiny of, and intervention in, transactions to protect the UK’s national security (the NSI Regime) – the most severe remedies being the blocking of a transaction or worse unwinding a transaction which has already completed.

The ability of the government to intervene in transactions with national security implications is not new. The Enterprise Act 2002 (EA02) allows the government to intervene in mergers and acquisitions on public interest grounds, however the NSI replaces the national security considerations of the EA02 with a more extensive, standalone regime.

What are the key aspects of the new NSI Regime?

• Mandatory notification: notification is mandatory for acquisitions of stakes or influence (see Trigger Events below) in entities in 17 “sensitive” sectors. In-scope transactions must obtain prior approval from BEIS before completing (and, if not, the transaction will be void as a matter of law, backed by significant financial and criminal penalties).
• Voluntary notification: voluntary notification allows parties to submit transactions for approval which are within the scope of the NSI Regime (but where notification is not mandatory) and enables the newly created Investment Security Unit within BEIS to “call-in” transactions for review on national security grounds.
• Retrospective application: The call-in power applies retrospectively in respect of transactions which completed on or after 12 November 2020. It also applies whether or not a transaction has been notified to the ISU.
• Trigger Events: The types of transactions captured have been significantly expanded. The Trigger Events expand beyond typical M&A deals and could include:
  • business acquisitions
  • acquisition of, or obtaining control over, certain assets (including land, equipment and IP)
  • intra-group transactions
  • minority investments (including as a result of minority protection/”veto” rights).
• Thresholds: There are no general financial (for example, turnover) or share of supply thresholds as there are in competition cases and under the EA02.

What is “national security”? Is the NSI Regime only interested in acquisitions and investments by overseas entities?

Perhaps surprisingly, “national security” is not defined in the NSI. Each transaction will be reviewed on a case-by-case basis and the government has been clear that the NSI Regime does not presume that transactions involving any foreign state or state-owned entities are inherently more likely to pose a national security threat. Transactions that have no direct foreign involvement may also still be caught by the NSI Regime.

However, in considering whether or not to exercise its call-in power, the government has provided guidance that it will (broadly) have regard to:

• Target risk: whether the relevant entity or asset is being used, or could be used, to raise a risk to national security. Transactions are more likely to be called-in if the relevant entity or asset is in one of the 17 “sensitive” sectors or closely linked to such sectors
• Control risk: the practical influence or ability of a party to control, use or direct the use of the underlying acquisition to undermine national security (for example, inappropriate leverage, ability to influence strategy/policy or stymie R&D or otherwise influence UK market behaviour (in a way which may give rise to a national security concern)).
• Acquirer risk: whether the acquirer possesses characteristics that suggests there is, or may be, a risk to national security (for example, any track record of prior acquisitions, relevant sectors of activity or known affiliations).

What are the Trigger Events?

Each Trigger Event involves the acquisition of rights or interests conferring control over a Qualifying Entity or a Qualifying Asset.

The Trigger Events are the acquisition of:

1. shares or voting rights in a Qualifying Entity to more than 25%, 50% or 75%;
2. voting rights sufficient to secure or prevent the passage of any class of resolution governing a Qualifying Entity’s affairs;
3. the ability to materially influence policy of a Qualifying Entity;
4. a Qualifying Asset which results in greater usage rights or a new or greater ability to direct or control how the asset is used.

• Qualifying Entity: an entity (other than an individual), whether or not a legal person and therefore includes, for example, companies, LLPs, partnerships and trusts.
• Qualifying Asset: includes (i) land, (ii) tangible moveable property and (iii) ideas, information or techniques which have industrial, commercial or other economic value. Some of the examples provided in respect of this third category include trade secrets, designs, plans and drawings, software and source code. The inclusion of the acquisition of such assets (separately from the acquisition of the underlying business) marks a significant extension to the previous regime.

In both cases, to be within the scope of the NSI Regime there need only be a UK nexus: (i) it carries out or is part of activities in the UK or (ii) it supplies or is part of supplying goods or services to persons in the UK.

The transaction we are considering is a Trigger Event, is it therefore caught by mandatory notification?

No. Whether a transaction is a Notifiable Acquisition depends on the type of Trigger Event and whether it is in a Sensitive Sector.

The 17 Sensitive Sectors are a mixture of national infrastructure (e.g. defence and energy) and advanced technology (e.g. artificial intelligence, quantum technologies and advanced materials), which are set out in a statutory instrument. However, the definitions are complex and many are likely to demand technical expertise, therefore BEIS has also published separate guidance to help parties in assessing their scope.

These sectors are not set in stone. In fact, it has been made clear that the sectors will be regularly assessed and revised to reflect the changing landscape and technologies.

If the transaction is in one of these sectors, the acquirer will be required to submit a mandatory notification to the ISU if it involves any of the following Trigger Events:

1. the acquisition of shares or voting rights in a Qualifying Entity to more than 25%, 50% or 75%;
2. the acquisition of voting rights sufficient to secure or prevent the passage of any class of resolution governing a Qualifying Entity’s affairs.

My transaction is not a Notifiable Acquisition, can I proceed without needing to consider the NSI Regime?

This would not be advisable. Although it is not caught by mandatory notification, the government are encouraging parties to make a voluntary notification where it may nevertheless raise national security concerns.

The key advantage of this approach is certainty and to counteract the call-in risk – as if the transaction is a Trigger Event that has or may have a national security element, and the parties have opted not to voluntarily notify, the transaction could be “called-in” at any time within six months of the ISU becoming aware of the Trigger Event (up to five years following the date of the Trigger Event).

In deciding whether or not to make a voluntary notification, it should be noted that if the government calls in a completed transaction which had not been voluntarily notified, its assessment of the national security risk will be made at the time of the assessment (not when the relevant transaction took place). This rather “future-looking” consideration, will need to be weighed up as part of the decision-making around the NSI Regime, including whether to submit a voluntary notification or otherwise seek informal guidance from the ISU (thereby triggering the six-month call-in period).

As mentioned above, transactions are more likely to be called-in if the relevant entity or asset is in one of the 17 Sensitive Sectors or closely linked to such sectors, however the NSI Regime provides the government with flexibility to intervene where, notwithstanding that a transaction falls outside these areas, it may raise national security concerns. The table below provides an overview:

What will this mean in practice?

It is anticipated that government intervention in transactions with national security elements will be more likely under the NSI Regime than under the previous regime, although given there were only c.17 interventions on national security grounds under the EA02 this is arguably no surprise. However, notwithstanding the far-reaching scope of the NSI Regime and the more extensive powers granted under it, the government has stated that it expects that less than 10% of notified transactions will be called-in for assessment (with the vast majority being cleared in the initial 30 day review period). It has also stated that the blocking or unwinding of transactions is expected to happen rarely – the hope being that alternative solutions can be found to address national security concerns through the imposition of proportionate and risk-based remedies. Of course, only time will tell whether this will be achieved and what the practical implications will be for parties and their advisers as they engage with the NSI Regime.