The UK National Security and Investment Act 2021 took full effect on 4 January 2022, giving the UK Government unprecedented new powers to intervene in deals it suspects could threaten UK security. Early experience is that there can still be surprise at the extent of the Act’s scope and application, and that it will take some time for assessments to standardise and become routine. This piece summarises the key questions and issues for deal-makers both in the UK and beyond.
The Act’s mandatory notification obligation became ‘live’ on 4 January. Within-scope acquisitions are void if they complete without approval, with the acquirer vulnerable to significant civil and criminal penalties.
What entities are covered?
The obligation to notify arises where an investor acquires “control” (see below) over an entity (any non-natural person or body) active in any of the 17 high-risk sectors identified by the Government:
- Advanced Materials
- Advanced Robotics
- Artificial Intelligence
- Civil Nuclear
- Computing Hardware
- Critical Suppliers to Government
- Cryptographic Authentication
- Data Infrastructure
What level of control triggers notification?
A person gains control over a within-scope entity where they acquire:
- Shares or voting rights that take them above thresholds of 25%, 50% or 75% (with a new notifiable acquisition each time); or
- Voting rights that can ensure or prevent the passage of any class of resolution governing the entity’s affairs.
The ‘resolution’ threshold creates a grey area if investors only have the ability to veto resolutions over particular matters. This should be resolved in time, but given the stark consequences of completing without approval investors may want to be cautious when considering their veto rights.
The acquirer’s identity does not matter: the obligation applies equally to UK and non-UK buyers, and indeed even if there is no change in ultimate ownership – i.e. intra-group reorganisations will be caught. This creates scope for a very large number of deals to be notified.
What are the consequences of a deal being notifiable?
A notifiable acquisition that completes without approval is void. Such a deal can be retrospectively validated by the Government, but even an interim ‘void’ status would be very messy and best avoided.
Completing without approval can also have significant consequences for the acquirer (including any director, manager etc. of a body corporate), including up to 5 years imprisonment and/or an unlimited criminal fine, or a civil penalty of up to the higher of 5% of turnover or £10 million. A reasonable excuse will provide a defence, so buyers can hedge this penalty risk through warranties confirming the target is outside scope.
A notification requires substantial detail about the target and acquirer. The Government’s Investment Security Unit (“ISU”) has an initial 30 working day screening process to decide whether to initiate a detailed review by issuing a ‘call-in notice’. If so, it then has 30 to 75 working days (further extendible by agreement) for that full review. These timings could add weeks or even months to completion timetables.
The ‘call-in’ regime
What deals can the Government review?
While notifiable acquisitions come with the most risk, the Act also empowers the Government to review other deals if it has national security concerns. This power can be used where a “trigger event” takes place in relation to a qualifying entity (defined above) or a “qualifying asset”.
In relation to entities, a trigger event occurs where a person gains either control (defined above) or “material influence” over the target’s “policy”. The latter will generally catch vetoes over key matters such as budgets, business plans and/or board appointments. Such a deal would not have to be notified, but could be called in by the Government.
That power can be used for assets where a person acquires a right or interest in, or in relation to, a “qualifying asset” that means they can use the asset or direct or control how it is used (or do so to a greater extent). There is, again, no minimum turnover or deal value threshold.
“Qualifying asset” is very broad, covering land, corporeal moveable property and “ideas, information or techniques which have industrial, commercial or other economic value” (e.g. trade secrets; databases; source code; algorithms; formulae; designs; plans, drawings and specifications; and software). The asset must be either within the UK or its territorial sea, or otherwise used in connection with activities carried on in the UK or the supply of goods and services to persons in the UK.