UK NSI: a reminder of why it’s so important for investors
The UK National Security and Investment (NSI) regime came into full force on 4 January 2022 and is in its most simple form is designed to safeguard national security interests in the UK.
Although it’s not a new piece of legislation, the launch of our latest FDI report provides an opportunity to remind companies that are engaging in transactions and investments in the UK about why it’s important to be well-informed about the regime.
In the following Q&A, I will explore the specifics of the NSI regime, its impact on different types of transactions, the sectors it covers, the potential consequences of non-compliance, and how Irwin Mitchell can assist businesses in navigating through this complex regulatory landscape.
What is the UK National Security and Investment (NSI) regime?
It is a relatively new UK legislation that requires certain corporate transactions to be cleared by UK Government before they can complete, and also allows Government to investigate transactions (whether corporate or asset based) with retrospective effect.
How does UK NSI work?
For a transaction to be caught by the mandatory UK NSI regime, two elements are required. First, a change in direct or indirect control, and control essentially means acquiring more than 25%, more than 50% or reaching 75% of voting or share ownership rights or being able to block or pass any class of resolution in any corporate entity. This trigger event is far wider than the normal meaning of “control”. These changes can be direct or indirect, so changes higher up in a group structure can be caught and be a trigger event. Second, any part of the group below the change needs to be involved in activities falling within one or more of 17 NSI Sectors. If these two requirements are met then the transaction must be cleared by UK Government before the transaction completes.
So if the mandatory UK NSI regime applies only to corporate transactions, how does the regime affect asset based transactions?
Transactions falling outside of the mandatory UK NSI regime can still be subject to the voluntary UK NSI regime, where the transaction can be voluntarily notified to UK Government. This is usually only done where the transaction may present a risk to UK National Security and doing so avoids the risk of UK Government later deciding to investigate a transaction (whether corporate or asset based) after completion. All assets sale transactions are only covered by the voluntary NSI regime rather than the mandatory NSI regime.
So do I only need to be worried about corporate sale and purchase transactions?
No, the reach of the mandatory UK NSI regime is far wider than just sale and purchase transactions. Any event which changes the position on share ownership or voting rights can be a trigger event, even if ultimate control does not actually change. For example, if part of a group of companies carries out activities falling within one or more of the 17 NSI Sectors and as part of a group reorganisation, a new company is inserted into the chain of ownership (either by a newly formed company being inserted or by moving companies around the group), that will amount to a change in direct or indirect “control” as there is a new entity in the chain of share ownership or voting rights, even if the ultimate owners and controllers at the top of the group have not changed. In a similar way pre-emption rights, share options, swamping rights, share buy backs, etc can all change the position on direct or indirect share ownership or voting rights and lead to that event being caught by the mandatory UK NSI regime.
Is the mandatory UK NSI regime the only aspect to be worried about?
No, there is also a voluntary regime under which a transaction which will or may have an impact on UK national security can be notified to obtain clearance. The main benefit of doing so is, assuming the transaction is cleared, that it prevents the UK Government from calling that transaction in for retrospective review. Otherwise any transaction can be subject to a retrospective review with the risk of remedies being imposed by the UK Government for the shorter of 6 months after the UK Government was aware of the transaction or 5 years after completion. This voluntary regime is also far wider in its scope in that it can cover a third party acquiring material influence over a corporate entity or transactions which involve land, assets, intellectual property rights, etc. Some of the transactions in relation to which remedies have been imposed by UK Government were covered by the voluntary regime rather than the mandatory regime. This means generally the voluntary regime should be utilised where a transaction has the potential for material impact on UK national security and particularly where transactions involve other parties from countries which are regarded as “unfriendly” by the UK, for example Russia, Iran, North Korea and China.
So when did the UK NSI regime come into force?
The UK NSI regime came into full force on 4th January 2022, but as noted above can apply with retrospective effect back to 12th November 2020.
Why is UK NSI relevant for non-UK transactions?
The reach of the UK NSI regime is far wider than most national security regimes in other countries. First, it applies to all buyers, regardless of the country they are based in (even UK based buyers). This means the trigger event which amounts to a change of “control” can happen in any jurisdiction in the world and still be caught because it catches indirect as well as direct changes. Second, the mandatory UK NSI regime catches entities where there is a connection between the part of the target group in relation to one or more of the 17 NSI Sectors and the UK. That connection does not require the corporate entity to be based in the UK, it could be merely supplying goods or services into the UK from outside the UK or carrying out research in the UK. Also, the UK can catch foreign UK military bases and the equivalent.
Can you give me an illustration of just how wide the reach of the UK NSI regime is?
As an example, if a buyer in the USA is acquiring a 26% interest in a target group based entirely in Canada, but part of that target group supplies components as a sub-contractor to a main contractor (and that main contractor is also based in Canada) and that main contractor is using those parts to provide products or services to the UK Ministry of Defence (essentially the UK armed forces) then that transaction is caught by the mandatory UK NSI regime and must be cleared by UK Government before it completes. This is despite not one of the parties or parts of the groups of companies involved being based in the UK.
You mentioned there being 17 NSI Sectors which define the activities caught by the mandatory UK NSI regime. What are they?
The titles of the 17 NSI Sectors are: (a) Advanced Materials; (b) Advanced Robotics; (c) Artificial Intelligence; (d) Civil Nuclear; (e) Communications; (f) Computing Hardware; (g) Critical Suppliers to Government; (h) Critical Suppliers to the Emergency Services; (i) Cryptographic Authentication; (j) Data Infrastructure; (k) Defence; (l) Energy; (m) Military and Dual-Use; (n) Quantum Technologies; (o) Satellite and Space Technologies; (p) Synthetic Biology; and (q) Transport. However many of them are far wider than their title suggests. For example Advanced Materials catches any rare earth magnets used in any components or products, Computing Hardware catches software written in low level code, Data Infrastructure catches any supply to most parts of UK Government even if the supply is not related to IT services or products, Defence catches any supply as a contractor or sub-contractor to the UK armed forces or any part of the UK’s security bodies whether or not the supply is obviously defence or security related and Military and Dual use catches items which are export controlled in the UK. However some of the sectors are much narrower than their title would suggest, so for example Transport only catches ports, airports and air traffic control.
What happens if a transaction subject to the mandatory UK NSI regime is not notified to UK Government and cleared before it completes?
First the transaction is void, i.e. it has no effect. For foreign transactions that raises interesting questions about the impact of it being void in the UK, but this is likely to affect UK assets, UK companies, contracts for supply into the UK etc. even if it does not affect the main part of the transaction outside of the UK. Second, the buyer (i.e. the person acquiring direct or indirect “control”), their higher group, the directors of the buyer and the directors of their higher group all commit criminal offences in the UK and are also at risk of having civil fines imposed on them by UK Government. For companies, the maximum fine is linked to turnover at the higher of 5% of group worldwide turnover, for individuals the maximum fine is linked to income and for the criminal offence they can face up to 5 years in prison. The effect of the criminal offence can also taint any consideration paid which then becomes the proceeds of crime which may have adverse consequences even in jurisdictions outside of the UK. Finally, the professional advisors involved in the transaction may, by virtue of aiding and abetting the commission of a criminal offence in the UK by the buyer, its group and their directors, also commit a criminal offence in the UK.
If a transaction is missed, can the position be corrected retrospectively?
Yes in part, in that a transaction caught by the mandatory UK NSI regime can be notified and cleared retrospectively, which then means it is no longer void and from that perspective it is as if it was cleared prior to completion. However even if the transaction is cleared retrospectively, that is not a “get out of jail” card in relation to the criminal offences and civil fine risks, and whilst it is likely to form part of mitigation, UK government still has the option to pursue civil or criminal sanctions. UK Government is only likely to do this in the more serious cases rather than in cases of inadvertent oversight.
What should I do if I am involved in a foreign corporate transaction?
You should first of all identity if there is a trigger event, i.e. a change in direct or indirect control meaning acquiring more than 25%, more than 50% or reaching 75% of voting or share ownership rights or being able to block or pass any class of resolution. If the answer to this is yes, then all parts of the group below that change in control should be screened to see if any of that part of the group’s activities fall within one or more of the 17 NSI Sectors.
Are there any minimum size, value or turnover thresholds below which the mandatory UK NSI regime does not apply?
Whilst there are some size/volume thresholds for some of the specific sectors, e.g. in the Energy Sector the amount of electricity generated, there are no general size, value or turnover thresholds. Many of the 17 NSI Sectors can be satisfied by just one contract or trading relationship which might be immaterial in value or size.
How can Irwin Mitchell help?
Our lead partner on NSI, Andrew Evans, has a wide range of experience in assessing whether a transaction is caught by UK NSI and has made over 45 mandatory NSI notifications on behalf of clients since UK NSI came into force on 4th January 2022. These have covered both UK and foreign based transactions. Typically, once we have confirmed that there is a change in control for UK NSI purposes, we will provide a screening questionnaire tailored to the business(es) of the target group and then assess whether or not the mandatory UK NSI regime applies. Sometimes further information is required to reach a definitive view. If a mandatory NSI notification is required, then we can assist in compiling the information needed for the notification and submit the notification on your behalf. There are no UK Government fees charged for making a notification.
Irwin Mitchell can also help with reaching a view on whether a voluntary notification is advisable, though in most cases unless the transaction has an obvious impact for UK National Security a voluntary notification will not be necessary if the mandatory NSI regime does not apply.
How long does the screening process take?
The screening process is usually quite quick, and that largely depends on how quickly the answers to the tailored NSI questionnaire come back. It can be just a few days and sometimes it is obvious that a transaction is caught by the mandatory UK NSI regime right from the start.
If my transaction is caught by mandatory UK NSI regime, what impact will it have on timescales?
We always advise that the UK NSI regime and screening should be assessed right at the start to minimise the impact of any delays. Typically, from identifying that a transaction is caught to clearance at the end of Phase 1 of the UK NSI assessment process (and most transactions are cleared at the end of Phase 1) is about 2 months. Typically, that is made of up to 2 weeks to compile the information for the notification, a day to submit it, 3 working days for the notification to be confirmed as complete, which then starts a 30 working day clock by which a decision at the end of Phase 1 must be reached. If the transaction does raise UK National Security issues, then it will be examined in more detail in Phase 2 which adds at least another 30 working days to the timetable.
How likely is it that my transaction will be caught by the mandatory UK NSI regime?
Currently our assessment is that above 40% of all UK based corporate transactions are being caught by the mandatory UK NSI regime, though many of these are being missed due to inexperienced advisors being involved. Our lead partner on NSI regularly has to explain to other advisors why a transaction is caught contrary to their definite view that it is not caught. So far his success rate is 100%.
The percentage of entirely non-UK transactions caught by the mandatory UK NSI regime would be expected to be far lower than the percentage for UK based transactions, but we would still estimate that above 10% would be caught. This is especially where the non-UK transaction involves entities in countries or fields of operation that historically have supplied the UK or the entities are involved in areas which have obvious national security or defence links.
Is there anything else I should know?
As a corporate advisor it is worth forming an understanding of whether your clients are likely to be engaged in any activities which fall within one or more the 17 NSI Sectors or may do so in the future, though the future is hard to predict as just one new supply relationship or a new area of product research could change completely whether a group of companies is engaged in one or more of the 17 NSI Sectors. This knowledge will allow a better assessment of risk, and also inform on the likelihood that account needs to be taken of the mandatory UK NSI regime in minor corporate documents and events, such as options, share buy backs, per-emption rights, etc.
The same applies if you are an owner or director of a corporate, it is worth having a sense of whether you may be caught by the mandatory UK NSI regime in advance, though again bear in mind the position can change with just one new supply relationship or area of product research.
How do I get in touch to find out more about the UK NSI regime?
You can reach Andrew Evans by email at andrew.evans@irwinmitchell.com or you can reach our Director of Strategic Growth (International), Bryan Bletso at bryan.bletso@IrwinMitchell.com.
