NSI Act: Key points
The NSI Act introduces a hybrid regime, consisting of a mandatory regime for 17 most sensitive sectors of the economy and a voluntary regime for all other sectors.
Under the mandatory regime, parties must submit a notification to the newly established Investment Security Unit at the Department for Business, Energy & Industrial Strategy (BEIS) if they acquire more than 25%, 50% or 75% of votes or shares (or the ability to block or pass resolutions) in a target entity active within a specified sector in the UK. Due to the suspensory nature of the mandatory regime, a transaction cannot close until it receives clearance. The 17 sectors caught by the mandatory regime are as follows: 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, defense, energy, military and dual-use, quantum technologies, satellite and space technologies, synthetic biology and transport. The definitions of what specific activities fall within each mandatory sector are very technical and can be difficult to apply in practice, so often require in-depth consideration and confirmation from the target as part of the due diligence process.
The voluntary regime applies to all sectors of the economy, and parties are encouraged to voluntarily notify any “trigger events” which they consider may be of interest from a national security perspective. In addition to the thresholds under the mandatory regime, trigger events for the voluntary regime include the acquisition of “material influence” over a company (which may be deemed to exist in shareholdings as low as 10% or 15%) and acquisitions of a “right or interest” in a qualifying asset (such as land or intellectual property). The UK Government also has extensive “call-in” powers to review qualifying transactions that have not been notified up to five years post-completion. If the Government has been made aware of the transaction, however, the call-in period is reduced to six months. This power is retroactive, enabling the Government to review transactions that closed as far back as 12 November 2020.
There are significant criminal and civil sanctions for non-compliance with a mandatory notification obligation, impacting both buyers and sellers. A fine of up to 5% of worldwide turnover or £10 million (whichever is higher) can be imposed and buyer-side directors can face up to five years’ imprisonment. A completed transaction will also be void. It is important to note, the NSI Act applies unilaterally: there are no turnover, transaction value or market share safe harbors.
Practical implications for investors
Investors should consider the potential application of the NSI Act to any transactions completed from 12 November 2020 onwards. On future transactions, they should conduct a thorough self-assessment of the application of the NSI Act and consider any national security concerns at an early stage in the transaction process. If the target has any activities which may be relevant to national security, the buyer should undertake more extensive due diligence to check whether the activities fall within a mandatory sector definition.
The NSI Act may capture acquisitions or investments by US investors where the target carries on activities in, or supplies goods or services to, the UK, whether or not the target has a UK-incorporated subsidiary.
For example, a US-based investor (with no UK operations) is contemplating acquiring a 100% stake in Company A which is incorporated in the US and does not have a UK subsidiary. The majority of Company A’s operations are in the US, but it does conduct some business from a regional office in the UK relating to its cryptographic authentication products. In this scenario, a mandatory notification would be required because Company A is “carrying on activities in the UK” through its UK branch and the activities fall within one of the mandatory sectors.
While the identity of the acquirer will be a relevant factor as part of the substantive review of the transaction once it has been notified or called in, there are currently no safe harbors based on the nationality of the investor; the NSI Act applies equally to all investors if the jurisdictional tests are met (including UK investors). Based on the UK Government’s approach to national security scrutiny under the previous national security framework (the PIIN process under the Enterprise Act 2002), in which many of the cases reviewed in recent years involved US acquirers, US investors should expect similar levels of scrutiny, albeit through a more formalized notification process.
Due to the extremely broad scope of the NSI Act, including the low shareholding thresholds for “trigger events”, investors should be aware that some seemingly passive investments, that may not be caught by other foreign investment regimes, may nonetheless trigger a mandatory NSI Act notification. The NSI Act also applies to internal re-organizations if the thresholds are met.
Parties will need to ensure that adequate NSI Act protections are included in the transaction documents. For transactions that fall within the mandatory regime, parties should include a condition precedent for mandatory notification and approval. Even where the transaction is outside of the mandatory regime, parties may consider including a voluntary notification condition or a catch all condition to address the residual risk of the Secretary of State issuing a “call-in notice” to review the transaction prior to completion.
The NSI Act review process may also impact the deal timeline. In the initial stage, parties will need to build in enough time to perform due diligence, prepare the notification and answer any initial questions from BEIS. Once a notification (whether mandatory or voluntary) is made to BEIS, the Secretary of State has 30 working days to issue a “call-in notice” if it has any national security concerns. While most transactions are expected to be approved within this initial 30-day period, where a “call-in notice” is issued, the Secretary of State has a 30 working day preliminary screening period (which can be extended by a further 45 working days) in which to determine whether to impose remedies or take no further action. The outcome of the assessment will either be unconditional clearance, clearance with conditions or prohibition of the transaction.
Further, investors should be aware that the notification form requires extensive disclosure of information about the buyer (including, inter alia, any non-UK government ownership interests, details of any shareholder with shares or voting rights of 5% or more in the buyer and details of any previous foreign investment notifications made within the last 12 months), as well as details about the target.
Despite the UK Government issuing substantial guidance, important aspects of the regime remain uncertain, and a broad swathe of stakeholders are engaging with the Investment Security Unit to seek clarity on these issues. How the Government will use its broad powers and discretion is yet to be seen. While it is still too soon to assess the impact of the NSI Act on investment in and into the UK, the impact of the regime already has been significant for dealmakers and investors, as another necessary consideration to factor into the transaction process.
The Government intends to publish an annual report on the regime in March 2022, as well as further guidance notes once the regime has been in operation for six months.
