The UK's National Security and Investment Act 2021: what you need to know

The UK Government has created an extensive new standalone regime, strengthening its powers to scrutinise transactions on grounds of national security.  The NSI Act received royal assent on 29 April 2021, and the new regime will come into force on 4 January 2022. Certain aspects of the NSI Act will however apply retrospectively, between 12 November 2020 and the commencement of the new regime.

The NSI Act introduces a hybrid mandatory and voluntary notification regime.

Mandatory notification, and an associated stand-still obligation, applies to notifiable acquisitions (i.e. acquisitions of qualifying entities – see section 4 below) in 17 key sectors of the economy. Those 17 mandatory sectors are defined in the National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021 (see textbox below for the full list). The requirement to notify and obtain approval from the Government in respect of notifiable acquisitions will come into force on 4 January 2022. It will be unlawful to complete a notifiable transaction in any of these sectors without prior approval from the Secretary of State. Failure to notify will render the transaction void, and civil and criminal penalties may be imposed. Further guidance will be published by the Government on its approach to compliance measures and enforcement before the regime comes into force. This means that transactions which may fall within the mandatory regime will have to be structured so that completion cannot take place until clearance has been obtained. 

The regime also allows parties to notify transactions to the Secretary of State on a voluntary basis. Parties to transactions falling outside the mandatory regime will therefore need to weigh up the risks of not notifying i.e. that the transaction could be "called-in" for more detailed scrutiny (and ultimately, if found to raise national security concerns, ordered to be unwound). It will be possible to complete a transaction ahead of clearance in circumstances where parties have submitted a voluntary filing, unless the Government requires the parties not to do so by imposing an interim order.

There are no financial thresholds for notification or de minimis exemptions. The concept of a "Trigger Event" is relatively widely defined; although mandatory notification only applies to acquisitions of businesses and not asset acquisitions (see "voluntary notification" at section 5 below).  

Given the wide range of transactions that could be caught, the focus for jurisdictional purposes will primarily be on the nature of the underlying business or asset in which the interest is being acquired (and whether it falls within or is closely linked to the list of activities the Government is concerned about – see above).

Mandatory notification will apply to direct or indirect acquisitions of more than 25%, more than 50% or 75% or more (i.e. including increases in existing shareholdings) of the shares or voting rights in qualifying entities or voting rights that enable or prevent the passing of a company resolution, if they fall within one or more of the 17 mandatory sectors (see above).

A qualifying entity is widely defined as any entity (including a company, LLP, any other body corporate, partnership, unincorporated association or trust) other than an individual. A foreign entity will be a qualifying entity if (whether alone or with others) it carries on activities in (or partly in) the UK, or supplies goods or services to the UK.

It will be possible to apply to the Government for retrospective validation where parties have completed a notifiable acquisition without notifying and obtaining approval from the Government.

Acquisitions of entities active in any other sectors or acquisitions of qualifying assets, which give rise to national security concerns, may be called-in for review by the Government or voluntarily notified by the parties.

Even acquisitions of bare assets (e.g. a transfer of IP) could be caught. A qualifying asset can be any of: (i) land; (ii) tangible moveable property; and (iii) ideas, information or techniques with value, e.g. trade secrets, databases, source code, algorithms, formulae, designs, plans/drawings/specifications and software. A foreign based asset will be a qualifying asset if it is used in connection with activities carried on in the UK, or the supply of goods or services to persons in the UK.

However, the Government's guidance indicates that it expects to call-in rarely acquisitions of qualifying assets as compared to acquisitions of qualifying entities. It also expects to call-in rarely acquisitions of qualifying assets which are not either used (or could be used) in connection with activities set out in the 17 mandatory sectors (see above) or land which is, or is proximate to, sensitive sites.

Acquisitions of "material influence" (commonly 15% or more of the shares/votes, and in some circumstances even less) in qualifying entities are also within the scope of the voluntary notification regime.

The Secretary of State can call-in any transaction that falls within the scope of the regime, regardless of whether it has been notified, but only to assess its risk to national security. The Secretary of State must reasonably suspect that the transaction gives rise or may give rise to a risk to national security.

The call-in power can be exercised up to six months after the Secretary of State becomes aware of the transaction, provided that is within a long-stop of five years after completion. For mandatory notifications, however, the five year long-stop does not apply.

The Secretary of State will consider primarily three risk factors when deciding whether to call-in a transaction: (i) target risk – what the target does, is used for, or could be used for (acquisitions of qualifying entities that undertake activities closely linked to the 17 mandatory sectors are more likely to be called in than those that are not closely linked), (ii) acquirer risk – characteristics of the acquirer, including sector/s of activity, technological capabilities and links to entities which may seek to undermine or threaten national security, and (iii) control risk - the amount of control acquired.

The Government is anticipating 1,000-1,830 notifications to be made each year. It is expecting to call in a further 75-90 non-notified deals per year. Of this total, the Government expects only around 10 deals per year to require remedies.  

The expected timings for processing notifications remain the same as under earlier proposals, i.e.: (i) 30 working days to assess the notification (the 'review period'); and (ii) 30 working days, extendable to 45 working days, to undertake the national security assessment (the 'assessment period').

By the end of the review period, the Government will either (i) clear the acquisition and inform the acquiror that it can go ahead with the transaction, or (ii) call-in the acquisition for a full national security assessment. Notices requiring further information, or attendance of individuals at meeting/s, that are issued during the review period will not impact the 30 working day deadline. However information or attendance notices issued during the assessment period will have the legal effect of 'stopping the clock'.

Within 30 working days of a transaction being called in for a national security assessment, the Government will either inform the acquiror that (i) the acquisition is cleared and can go ahead; (ii) the acquisition can go ahead subject to certain conditions; (iii) the acquisition is blocked and cannot go ahead, or (iv) the assessment period needs to be extended for another 45 working days, on the basis that it is reasonably believed that the acquisition raises or would raise a national security risk, and an additional period is required to further assess the acquisition.

The Secretary of State has powers to impose hold separate orders, both interim and final, if necessary and proportionate.

It is worth bearing in mind the following points, particularly as regards current or upcoming transactions:

• The Government has caused consternation in some quarters by reserving the right to apply the provisions of the NSI Act retrospectively to some transactions when the regime comes into force (which is admittedly unusual).  For transactions completing between 12 November 2020 and 3 January 2022 (inclusive), the six month and five year periods (for "call-in") will apply from 4 January 2022. However, it has done this to deter parties from rushing transactions through with the intention of avoiding scrutiny.  Our view is that this retrospective power is likely to be exercised cautiously and only in relation to a minority of transactions raising more serious national security concerns. That said, if you have concerns about whether a transaction could be subject to retrospective call-in, it is possible to raise that informally with the ISU (as noted above). 
  
  
• Transactions with lengthy gap periods, which sign before the regime comes into force but only complete once it is in force (i.e. from 4 January 2022 onwards), will potentially be caught by the new regime, and consideration should therefore be given to whether a mandatory notification (and therefore suspensory condition to the transaction agreement) will be required. Parties should also assess the level of any risk of call-in of such transactions under the voluntary regime.
  
  
• Our experience to date is that very few transactions raising national security concerns are prohibited, and the Government's guidance indicates that it expects to completely block transactions rarely. In practice, remedies are likely to involve the imposition of conditions such as limiting the extent of shareholding acquired, limiting access to sensitive information or sites or to certain staff (e.g. personnel with security clearances), restricting the sale or transfer of IP rights (e.g. by requiring the Government's prior consent), requiring reporting to and/or compliance checks by the Government or requiring Government approval of key personnel.