The UK National Security and Investment Act 2021 (NSI Act) received royal assent on 29 April 2021. Expected to come into force in late 2021, the NSI Act will introduce a standalone UK foreign direct investment and national security screening regime, replacing the current regime that links national security screening with UK merger control.
As described in more detail in our White Paper, The UK’s Proposed New National Security Investment Screening Regime: Standalone, Mandatory, and Broad in Scope, announcing the introduction of the National Security and Investment Bill (NSI Bill) before Parliament in November 2020, the new regime will significantly increase the UK government’s ability to review foreign direct investment (FDI) in UK businesses on national security grounds. The NSI Act introduces a mandatory notification regime for certain key sectors, stipulates for significant sanctions for failure to do so, gives the secretary of state for Business, Energy and Industrial Strategy (BEIS) the power to investigate and order remedies for other investments giving rise to national security concerns, and introduces retrospective powers pending the NSI Act coming into force. Under the NSI Act, the UK government will have the ability to impose remedies, potentially prohibit completion, and order a demerger (following completion) of certain transactions on national security grounds.
A transaction will give rise to a mandatory filing obligation where it gives rise to (1) an increase in the shareholding or voting rights of a qualifying entity to over 25%, 50%, or 75%, or (2) the acquisition of veto rights over resolutions governing its affairs. The secretary of state’s power to call in a transaction for an investigation, as well as the parties’ ability to make a voluntary notification, will also arise if the investor (1) acquires so-called “material influence” over an entity, or (2) makes certain asset acquisitions.
The mandatory filing obligation arises with regard to investments in 17 sectors considered critical for national security purposes. Following a public consultation, the scope of the 17 sectors was narrowed down in order to make the regime more targeted and proportionate. During the legislative process, the regime was also amended to remove the requirement to make a mandatory filing with regard to the acquisition of a 15% shareholding, or for certain asset acquisitions. However, parties to a transaction giving rise to a shareholding of 25% or less, or to an asset acquisition, in a target that is active in one of the 17 sectors would be able to make a voluntary notification if the relevant conditions for a voluntary notification are satisfied, since the UK government would have the power to call in such a transaction for a national security review on its own initiative.
The UK government anticipates up to approximately 1,800 notifications per year under the new regime, but estimates that under 100 of these would be called in for a detailed national security assessment and that only around 10 would result in remedies.
The high number of anticipated filings is due in part to the fact that parties to a transaction not subject to a mandatory filing requirement may nonetheless seek greater deal certainty by making a voluntary notification—given the retrospective powers of the secretary of state to call in, review, impose conditions on, and potentially unwind completed transactions.
A Mandatory Preclosing Filing Regime
Once in force, the NSI Act will require that acquirers notify certain transactions to a new Investment Security Unit (ISU) within the UK government’s Department for BEIS. There will be a prohibition on closing until clearance is received for such investments. Transactions closed in breach of the NSI Act will be void. In addition, if a transaction subject to mandatory notification closes before it is cleared, individuals may face criminal penalties including imprisonment of up to five years and/or possible director disqualification orders, while the secretary of state will also have the power to impose a financial penalty on the acquirer of up to 5% of the acquirer’s global group turnover or up to £10 million (whichever is higher). Where a transaction also meets the UK merger control filing thresholds, the UK competition agency, the Competition and Markets Authority (CMA), may also conduct a competition law assessment in parallel.
A transaction will be subject to a mandatory notification if
The mandatory filing regime will apply to transactions in 17 sectors related to UK national security. Following a public consultation, the UK government narrowed down the definitions of the relevant sectors in order to make the regime more targeted and proportionate. The UK government is continuing to develop and refine the scope of these sectors and the final definitions will be set out in regulations.
Voluntary Preclosing Filing Regime
Under the NSI Act, parties will have the ability to make a voluntary preclosing notification where the transaction does not meet the relevant mandatory notification thresholds and/or is not within one of the 17 sectors requiring mandatory notification, if the transaction is likely to have UK national security implications. Parties to a transaction will be able to make a voluntary notification in the following circumstances:
If the parties do not make a voluntary notification, the Investment Security Unit (ISU) may decide to call in the transaction for a national security review (see below). By voluntarily notifying a transaction, parties can thereby obtain greater transaction certainty.
The secretary of state will have the power to call in completed transactions for a national security review if they satisfy the requirements for a voluntary notification. The retrospective call-in power is not limited to the 17 sectors relevant to the mandatory notification obligation and it can apply to transactions in other areas of the economy giving rise to national security concerns. It can also apply to the 17 mandatory filing sectors where an acquirer obtains a shareholding below 25%, which nonetheless gives the acquirer the ability to exercise material influence over the target.
The secretary of state may call in transactions for investigation within five years after the qualifying event takes place, or within six months of the secretary of state’s becoming aware of the transaction (e.g., as a result of coverage in a national news publication).
Retrospective ‘Call-in’ Powers Once the NSI Act Comes into Force
The secretary of state may, within a period of five years of the NSI Act’s coming into force, call in for review transactions that closed on or after 12 November 2020 but before the NSI Act comes into force, or within six months of the NSI Act’s coming into force if the secretary of state had been made aware of the transaction. With respect to transactions with potential UK national security implications that have closed or will close between 12 November 2020 and the date on which the NSI Act comes into legal effect, the UK government encourages parties to liaise informally with BEIS for business planning purposes and in order to obtain informal guidance on whether the transaction would likely be subject to a call-in notice once the NSI Act comes into force.
Application to Both UK and Non-UK Investors
The NSI Act will not only apply to FDI, but will apply to both UK and non-UK investors. However, the affiliations of the investor will be relevant for the purposes of the substantive national security review as well as in deciding whether to exercise the call-in power with regard to transactions not giving rise to the mandatory filing obligation.
No Minimum UK Turnover, Asset Value, or Share of Supply Thresholds
The mandatory and voluntary filing regime under the NSI Act does not include generally applicable minimum turnover, asset value, or share of supply thresholds. As currently proposed, however, the mandatory filing regime stipulates for certain sector-specific thresholds (e.g., public electronic communications networks or public electronic communications services must have at least £50 million in annual turnover in order to fall within the scope of the mandatory regime).
Substantive UK National Security Assessment
The UK government statement of policy intent states that the secretary of state’s national security assessment under the NSI Act will take into account the following three key factors: (1) the target risk, i.e., the nature and activities of the target business or asset; (2) the trigger event risk, i.e., the level of influence acquired by the investor; and (3) the acquirer risk, i.e., the identity and affiliations of the buyer, which (as described above) could include UK as well as non-UK investors.
Statutory Review Timeframe
The NSI Act introduces a statutory review timetable under which the secretary of state will have up to 105 working days to review a transaction (or even longer in certain circumstances). The secretary of state will have up to 30 working days following a mandatory or voluntary filing in which to decide whether to call in a transaction to review on national security grounds. If the secretary of state decides to call in a transaction, then the secretary of state will have a further 30 working days to conduct a detailed “phase 1” national security assessment, which may be extended by an additional “phase 2” 45 working days (or more).
Secretary of State’s Decision
The national security review may result in unconditional approval, conditional approval, or prohibition of a transaction. Conditional approval could, for example, require divestment remedies or behavioural remedies including, for example, restricting access to sensitive technology. In addition to this, the secretary of state will also have the power to order the demerger of completed transactions.
The UK government will now introduce a series of statutory instruments required for the commencement of the NSI Act and will provide accompanying guidance. These regulations will define those sectors subject to the mandatory regime, the form and content of mandatory and voluntary notifications, and various procedural elements.
Parties planning transactions before the NSI Act comes into effect would be advised to consider in advance (1) whether any potential UK national security issues may arise under the new regime; (2) how best to address any such issues—including liaising with the UK government and other stakeholders; and (3) any impact on deal structure and timetable.
Parties contemplating completing a transaction with UK national security implications before the NSI Act comes into force may also wish to seek legal advice and consider engaging informally with the UK government as their transaction may be called in for a national security review once the NSI Act is in force (especially if it falls within one of the 17 sectors being considered for the mandatory notification regime). Doing so would ensure that the secretary of state must exercise his/her call-in powers within six months from the date that the NSI Act comes into force, thereby providing greater deal certainty.
The first decisions made under the NSI Act and any associated government guidance will likely significantly influence how the new regime is implemented in the future. Parties (including acquisition finance lenders) should therefore pay close attention to these early developments and would be well advised to take into account the implications of the NSI Act on current and future transactions.
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 This is provided the shareholding of 25% or less in the target would not enable the acquirer to pass or block resolutions governing the affairs of the target, since that would give rise to a mandatory filing in any event.
 These 17 sectors are likely to include the following: Advanced Materials; Advanced Robotics; Artificial Intelligence; Civil Nuclear; Communications; Computing Hardware; Critical Suppliers to Government; Critical Suppliers to the Emergency Services; Cryptographic Authentication; Data Infrastructure; Defence; Energy; Synthetic Biology; Military and Dual-Use; Quantum Technologies; Satellite and Space Technologies; and Transport.
 The concept of “material influence” is already used in UK merger control. When assessing whether there is material influence, the CMA will focus on the acquirer’s ability to materially influence policy relevant to the behaviour of the target entity in the marketplace (including the target’s management, its strategic direction, and its ability to define and achieve its commercial objectives). The assessment of material influence for the purposes of UK merger control requires a case-by-case analysis of the overall relationship between the acquirer and the target. In making its assessment, the CMA will have regard to all the circumstances of the case, including the acquirer’s shareholding, influence over the target’s board, and other sources of influence (e.g., via consultancy services or certain financial arrangements).