The UK’s National Security and Investment Act

The UK’s National Security and Investment Act 2021 (the “NSIA”) established the UK’s first independent regime for national security and foreign direct investment. This regime has been in full force since 4 January 2022 and empowers the UK government to review, impose conditions on, or even block deals that are considered to pose a national security risk.

We summarise the key aspects of the NSIA below.

Relevant transactions: ‘trigger events’

Acquisition of control

Transactions that may be caught by the regime involve a specific ‘trigger event’. This includes acquiring:

• shares or voting rights in a ‘qualifying entity’ where the acquirer’s share is increased from 25% or less to over 25%, from 50% or less to over 50%, or from less than 75% to 75% or more;
• voting rights that enable the acquirer to secure or prevent the passing of any class of resolution governing the affairs of the qualifying entity;
• material influence over a qualifying entity’s policy; and
• a right or interest in, or in relation to, a qualifying asset (e.g. land, other physical property and IP), enabling the acquirer to use the asset, or direct control of how the asset is used.

There are currently no exceptions to the rules around trigger events. Businesses need to be aware that even internal restructurings and share buybacks will be classed as trigger events if they meet the thresholds set out above.

Qualifying entity

A ‘qualifying entity’ is a company, partnership, unincorporated association or trust which is established in the UK or which is established outside the UK but which carries on activities in the UK or supplies goods or services in the UK. For example, a non-UK company which has a regional office in the UK, exports to the UK, or has staff who regularly work in the UK (even without a local office) would be a qualifying entity.

For the regime to apply to foreign entities, the target needs to be ‘sufficiently involved’ in UK activity. More remote connections, like having owners or investors based in the UK where the target is not, are unlikely to be sufficient.

Mandatory notification regime

Transactions must be notified to the Investment Screening Unit (the ISU) within the Cabinet Office and receive clearance prior to completion if they involve:

a) a trigger event as described above other than an acquisition of material influence in a qualifying entity or an acquisition of a qualifying asset; and

b) the qualifying entity is active in any of the 17 sectors as defined in secondary legislation (see below).

Mandatory notification sectors

The 17 key sectors are defined in secondary legislation. The government has also published more detailed guidance on these definitions. The key sectors are:

• Advanced Materials
• Advanced Robotics
• Artificial Intelligence
• Civil Nuclear
• Communications
• Computing Hardware
• Critical Suppliers to Government
• Cryptographic Authentication
• Data Infrastructure
• Defence
• Energy
• Military and Dual-Use
• Quantum Technologies
• Satellite and Space Technologies
• Suppliers to the Emergency Services
• Synthetic Biology
• Transport (including ports, harbours, airports and air traffic control)

Transactions subject to mandatory notification that are completed without the approval of the Secretary of State are void. Completion of such transactions without such approval also involves a criminal offence on the part of the acquirer and possibly also any relevant director and/or officer of the acquiring entity; this is explained further below.

If you realise a transaction should have been notified under the mandatory notification regime but was not so notified, you may submit a retrospective notification seeking retrospective approval to validate the transaction.

Voluntary regime

Transactions which do not meet the criteria for mandatory notification include:

• acquisitions of qualifying assets
• acquisitions of a qualifying entity active in any of the 17 mandatory sectors where its activities are not covered by the relevant statutory definitions
• acquisitions of entities active in any other sectors of the economy

These transactions can be voluntarily notified to the Cabinet Office if they involve a ‘trigger event’ as described above.

Qualifying assets

The acquisition of a qualifying asset (e.g. land, other physical property and IP), will fall under the voluntary regime where the asset is in the UK, is used in connection with activities carried on the UK, or is used in connection with the supply of goods and services in the UK.

This makes the potential scope of the regime very broad – for example, it could capture an acquisition of machinery located overseas but used to produce equipment for supply to the UK, or an acquisition of an offshore windfarm that generates electricity supplied to the UK.

Call-in power

Transactions which are caught by the mandatory notification regime must be notified in advance to the Secretary of State (currently the Chancellor of the Duchy of Lancaster) via the ISU’s online portal. Even if a transaction has been notified, the Cabinet Office can require further information and/or a call-in notice can be issued for a full investigation.

For transactions not caught by the mandatory notification regime:

• the Secretary of State has the power to call in transactions for review if he/she considers that the transaction may give rise to a national security risk;
• the call-in power can be exercised for up to five years from the trigger event taking place, but this can be reduced to six months where the Secretary of State is made aware of the transaction, for example by a voluntary notification.

Statement on exercise of call in power

There are no defined criteria as to which types of transactions are most at risk of being subject to a call-in notice. The statement on use of the call-in power issued by the Cabinet Office provides further guidance on when the call-in power might be used, but notes that each case will be assessed individually to see if it presents a national security risk. The risk factors considered are as follows:

1. Target risk – the target’s business activities, or the application of the target assets being transferred, and whether any of those activities pose a national security risk. Activities linked to the 17 mandatory notification sectors are more likely to raise a target risk.
2. Acquirer risk – whether the acquirer poses a risk to national security, by considering the sector(s) in which the acquirer is active, the acquirer’s capabilities and any links of the acquirer to entities or states that could undermine the UK’s national security. The Cabinet Office has confirmed that, in some cases, an acquirer’s activities may be so sensitive that a transaction needs to be investigated regardless of target risk. The Cabinet Office has also confirmed that they will not make judgements based solely on the acquirer’s country of origin, but a tie or allegiance to a state or organisation that is hostile to the UK will certainly be examined.
3. Control risk – the level of control the acquirer gains over an entity or asset.

To protect your business from being subject to a call-in notice, we recommend assessing the risk level of transactions early on, based on the factors outlined above. This will help you to determine whether a transaction is likely to be cleared and, if it does not fall within the mandatory regime, whether it would be beneficial to make a voluntary notification.

What types of information need to be provided?

Mandatory, voluntary and retrospective notifications need to be submitted via the ISU’s online portal. The information required for each type of notification is broadly similar, including information about the acquiring parties, the target entity/assets, the activities of each party (including identifying whether the target entity is active in any of the mandatory notification sectors) and structure charts of both the acquirer and target pre- and post- acquisition. Acquiring parties are also required to provide details of their shareholders and directors.

There is also no filing fee charged by the Cabinet Office for submission of a notification.

How long will reviews take and what are the possible outcomes?

It is worth noting that whilst mandatory notifications are suspensory, i.e. completion is prohibited until clearance is received, notifications can be submitted (and even cleared) in advance of a signed transaction agreement.

Once a notification has been made

If a transaction is notified and accepted under the mandatory or voluntary regime, the government then has 30 working days from the day the notification is accepted (the ‘review period’) to decide whether it will:

• take no further action; or
• call in the acquisition for a national security risk assessment (at which point a further 30 working day assessment period would be triggered, as outlined below).

Following a mandatory notification, the transaction cannot be completed until the Cabinet Office has completed its review and cleared the transaction. In our experience, even straightforward transactions are rarely cleared much earlier than the 30-working day limit, so it is essential to factor this timeline into your planning when structuring a deal.

If the transaction is called in

If the transaction has been called in (either following a notification, or simply because the government considers it necessary), the government can take up to 30 working days to assess the national security risk (known as the ‘assessment’ period), which can be extended by a further 45 working days if needed.

By the end of the assessment period (whether or not extended by a further 45 working days), the government will decide that:

• the transaction is cleared and can go ahead; or
• the transaction can go ahead subject to specified conditions; or
• the transaction is prohibited.

Sanctions

There are serious penalties for non-compliance with the NSIA regime:

• Civil penalties can be imposed of up to 5% of worldwide turnover or £10 million, whichever is the greater.
• Directors can also be disqualified for up to 15 years.
• Criminal penalties for completing a transaction without clearance. If this is done with the consent or connivance of, or due to neglect on the part of, a director or officer of a company or entity, such an individual is also guilty of the offence. Fines can be imposed and individuals found guilty can be imprisoned for up to five years.
• Voiding automatically those transactions that should have been notified under the mandatory regime, but were not.

How can we help?

Burges Salmon has significant experience advising domestic and international investors, acquirers and sellers on the NSIA. If you have any questions in relation to the issues raised in this article, please contact Chris Worrall, Shachi Nathdwarawala or your usual Burges Salmon contact.