The National Security and Investment Act 2021 (Act) marks the latest development in the UK government’s steps to scrutinise business transactions on national security grounds, and reflects the growing trend where governments globally have sought to tighten regulatory controls on FDI.
In this article we briefly cover some of the key provisions of the Act and how it might affect your business.
What is the National Security and Investment Act?
The Act came into force on 4 January 2022, and allows the government to scrutinise, impose conditions on, and block any qualifying transactions it believes could pose a risk to national security (including retrospectively to transactions which completed on and from 12 November 2020).
There are two parts to the Act:
- the mandatory notification scheme which requires ‘qualifying entities’ to notify the new Department of Business, Energy and Industrial Strategy (BEIS) of any ‘qualifying acquisitions’; and
- the voluntary notification scheme which allows parties to voluntarily submit transactions for approval.
The nature of the business/assets involved in the transaction will determine whether a business is required to notify. The government can assess acquisitions up to 5 years after they have taken place and up to 6 months after it becomes aware of them if they have not been notified.
Proceeding without such notification/approval could result in various penalties including the applicable transaction being rendered legally void, financial penalties or criminal sanctions.
Mandatory Notification
A mandatory notification must be made where there is: (A) the transaction involves a qualifying entity in one of the 17 high risk sectors identified (see below); and (B) a trigger event takes place.
A qualifying entity must carry on activities in the UK or supply goods or services to people in the UK, or be an entity which holds qualifying assets (i.e. assets used in connection with activities carried on in the UK or the supply of goods or services to people in the UK). It need not necessarily be a UK company.
Entity in a High Risk Sector
The mandatory notification regime applies to qualifying entities involved in at least one of the seventeen sensitive, or “high risk”, sectors identified by the Government. These are:
· 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 · Military and Dual-Use · Quantum Technologies · Satellite and Space Technologies · Synthetic Biology · Transport |
Trigger Event
If the above criteria are satisfied, one of the following transactions would then be considered a trigger event:
- The acquisition of more than 25%, more than 50% or at least 75% of the shares or votes in a qualifying entity; or
- The acquisition of the voting rights in the qualifying entity which would allow the acquirer to block resolutions governing the qualifying entity’s affairs.
Significantly, internal restructuring is not excluded from the scope of the Act, nor is there any requirement for shares to be acquired by a person or entity outside the UK or Europe.
Voluntary Notification
In addition to this mandatory notification, parties may also voluntarily notify transactions where their business does not operate in a “high-risk” sector, but the nature of the transaction or the business is such that there is risk that the transaction may be ‘called in’ for review by BEIS.
Whilst we consider this is unlikely to apply to most business and transactions in Northern Ireland, the kinds of criteria that determine whether or not a transaction might be “called in” for review focus on the potential national security implications of the transaction, bearing in mind the way the target entity or asset is being used, or could be used, whether the acquirer has any characteristics that suggest there is, or may be, a risk to national security, and the degree of control the acquirer might have over the target following the acquisition.
What Next/What Should I do?
Although the Government has published guidance on the application of the new regime, this is a new body of law and interpretation of the Act continues to develop. Given the limited exemptions within the Act, lack of financial thresholds, and significant penalties for non-compliance both target companies and acquirers should act diligently in considering the Act.
In considering the above, you may wish to consider:
- whether your business is likely to be deemed as operating within any of the key “high-risk” sectors. BEIS has published guidance on applying the definitions, but if you are in any doubt you should seek legal advice;
- whether any currently negotiated, or potential future, transactions your business is involved in might be subject to the Act, either given the deemed “high risk” nature of the business, or any particular national security considerations that Government might deem to be relevant, and how the notification requirements might impact transaction timelines going forward; and
- as the Act applies retrospectively, whether you need to alert the government of any historic transactions which could fall within the scope of the Act (the advantage of doing so being that the Government’s ability to retrospectively call-in a deal for review once the Act comes into force will be limited to six months, instead of five years if the deal is not brought to its attention).
If you are unsure whether your business or any transaction it has been involved in might fall within the scope of the Act, or you are otherwise concerned about the implications the Act may have on your businesses’ current or future plans, please feel free to contact Andrew Kirke, Partner – Contracts and Technology Department by email Andrew.Kirke@tughans.com.
While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.
