National security in the UK: Key takeaways for investors
By Bryan Bletso and Gavin Maddison.
The National Security and Investment Act 2021 (NSIA) came into full effect on Tuesday 4 January 2022.
It overhauls the current national security regime in the UK, expanding the government’s powers to scrutinise qualifying acquisitions and investments on national security grounds.
While the new regime will apply to domestic and foreign investors without distinction, many believe that it will impact on foreign investment into the UK in particular. Some describe it as “draconian,” given there are no financial thresholds to meet or de minimis exemptions.
As with the introduction of any new statutory regime, there’s some uncertainty about how the new legislation will be interpreted and applied once it’s in force. How will it impact investors? We summarise the key takeaways from the NSIA as it comes into force.
Under the NSIA, the Department of Business, Energy & Industrial Strategy (BEIS) will have the power to review and intervene in transactions where control of a qualifying entity or qualifying asset is acquired and there’s a risk to national security.
The Secretary of State for BEIS will have to be notified of and approve certain transactions in specified sectors before completion. Other transactions may be voluntarily notified if the parties consider that there’s a risk of call-in by the Secretary of State.
The Secretary of State’s call-in power
The Secretary of State may call-in a transaction if there’s a reasonable suspicion that a trigger event is taking or has taken place in relation to a qualifying entity or qualifying asset. These call-in powers may be exercised on the Secretary of State’s own initiative or as a result of a mandatory or voluntary notification.
The Secretary of State also has the power to call-in qualifying transactions that completed between Friday 12 November 2020 and Monday 3 January 2022 (the day before commencement of the NSIA).
There are various time limits that apply to these call-in powers depending on the circumstances.
Qualifying acquisitions – is there a trigger event?
The NSIA only applies to qualifying acquisitions. An acquisition will be a qualifying acquisition if:
- It relates to a qualifying asset or qualifying entity
- The entity or asset being acquired is from, in or has a connection to the UK
- The level of control being acquired meets or passes a certain threshold.
A qualifying entity is widely defined as any entity other than an individual. This covers:
- Any other body corporate
- Unincorporated associations
Foreign entities will be qualifying entities under the NSIA if they carry on activities in the UK, or supply goods or services to the UK.
A qualifying asset includes:
- Tangible or moveable property
- Ideas, information or techniques which have industrial, commercial or other economic value.
This would include information such as trade secrets, databases and software. If the land or tangible moveable property are situated outside of the UK or its territorial seas, or for any intellectual property, they will be classed as qualifying assets if used in connection with activities carried on in the UK or used in connection with the supply of goods or services to people in the UK.
The requirement relating to control of an entity envisages one of four scenarios:
- An increase in the percentage of shares held;
- An increase in the percentage of voting rights held;
- The acquisition of votes which enable passing or stopping a resolution; or
- The acquisition of votes which enable material influencing of policy.
A person will gain control of a qualifying asset if the person is able to use the asset to a greater extent or is able to direct or control how the asset is used to a greater extent. The government has published guidance to clarify what it means for an asset to be used in connection with activities carried on in or with the supply of goods or services to people in the UK.
Is there a national security risk?
The term “national security” has been deliberately left undefined in NSIA. This was to preserve flexibility for the future as risks may change over time. The government has published a statement of factors that the Secretary of State expects to take into account when exercising the call-in power, although it’s been emphasised that the statement isn’t a definition of national security.
The NSIA provides for a mandatory notification regime for certain transactions. A notifiable acquisition takes place when a person gains control (by increasing the percentage of shares held, increasing the percentage of voting rights held, or acquiring votes that enable the passing or stopping of a resolution) of a qualifying entity operating within one of 17 sensitive sectors. Notification on a mandatory basis isn’t required in relation to qualifying assets.
The Secretary of State’s approval must be obtained before a notifiable acquisition may complete. Any notifiable acquisition that is completed without approval is void and completion will constitute a criminal offence.
Transactions that are outside of the mandatory notification regime may be voluntarily notified if the parties believe that there may be implications for national security. This will be particularly relevant if the parties are concerned that there’s a risk of the transaction being called-in by the Secretary of State.
From Tuesday 4 January 2022, the Secretary of State will have six months after becoming aware of the transaction to call it in subject to a longstop date of five years after completion. There is, however, no five year longstop date for mandatory notifications.
What happens after a mandatory or voluntary notification is made?
Once a notice is accepted, the review period of 30 working days will begin. Before the end of the review period, the Secretary of State must either give a call-in notice or notify each relevant person that no further action will be taken.
If a call-in notice is given, an assessment period will be triggered, during which a more detailed review will take place. This period could be up to 75 working days, resulting in either a final order or a final notification that no further action is needed.
Due to the retroactive elements of the NSIA, the regime is already being widely considered in respect of investments and acquisitions although the full implications aren’t yet clear. With the commencement of the NSIA, we’ll be keeping a close eye on how the regime is interpreted and implemented.
Further updates will follow.