National Security and Investment Act: Now is the time to act

The National Security and Investment (NSI) regime has become operational in the UK – now is the time to ensure you are aware of its impact on your acquisitions and investments. Transactions in a wide range of sectors, from high-tech to sectors more traditionally associated with national security considerations (such as defense and key infrastructure), may be subject to scrutiny and possible intervention. .

The government has said it wants the UK to be the best place in the world to work and do business, but the introduction of this new regime creates another layer of complexity for those investing in the UK. These new rules should be read with caution. Further details on the diet can be found in our previous articles, Strengthening defences: Britain’s new national security investment screening regime and UK national security and investment – now is the time to act.

Transactions closed between November 12, 2020 and January 4, 2022 may be called for government review, under the retrospective provisions of the legislation. However, the mandatory notification provisions, for 17 designated sectors, only apply to operations that closed from January 4. As we are already in February 2022, you need to proactively determine what impact the regime has or will have, and understand if notification is necessary or desirable.

We set out below six key aspects of the regime of which potential acquirers and investors should be aware.

The scheme came into effect on January 4, 2022, but can revert to November 12, 2020

Until January 4, 2022, the regime was still not fully operational and it was not possible to make a notification – mandatory or voluntary – to the Investment Security Unit (“ISU”) of the Department for Business, Energy and Industrial Strategy (“BEIS”). ). However, the regime has retroactive application in that the government now has the power to request a review of transactions closed on or after November 12, 2020. BEIS said transactions closed before January 4, 2022, which would have been subject to the mandatory notification regime had they closed on or after that date, are more likely to be called for national security review. than other transactions. The government has not been specific about what tests it will apply, but there is evidence that the UK is concerned about a loss of control of national infrastructure to hostile foreign states.

Failure to comply with a mandatory notification requirement has criminal ramifications

From January 4, 2022, mandatory notifications will have to be made to the ISU within the BEIS for “eligible transactions” in the 17 most sensitive sectors of the economy (see our previous article, Strengthening defences: Britain’s new national security investment screening regime). Failure to provide mandatory notification can result in substantial civil and criminal penalties (at worst, up to 12 months in prison), in addition to the legal nullity of the agreement from the outset.

The 17 mandatory sectors are: Advanced Materials, Advanced Robotics, Artificial Intelligence, Civil Nuclear, Communications, Computer Hardware, Critical Government Suppliers, Cryptographic Authentication, Data Infrastructure, Defense, energy, military and dual use, quantum technologies, satellites and space. Technologies, Providers of Emergency Services, Synthetic Biology and Transport. The interests of investors, acquirers and targets are unlikely to be aligned in sharing any risk, so it is crucial to understand the implications the regime may have for you and your transaction.

Mandatory scheme requires non-UK targets to ‘carry on business’ in UK

Apparently, the NSI regime applies to both UK-domiciled and non-UK targets, the latter being taken on the basis of either: (i) carrying on business in the UK; or (ii) the supply of goods or services falling within certain of the UK mandatory sector definitions. However, in the context of the mandatory notification regime, the government has now stressed that it is essential that a non-UK target ‘carry on business’ in the UK before a mandatory filing is required. Therefore, where a target only supplies goods or services to customers in the UK, this is not sufficient to fall within the mandatory regime. This is an important point to assess on the limits of the mandatory system which did not immediately emerge from the legislation itself. This clarification should help reduce unwarranted mandatory notifications and remove unnecessary conditionality from the agreement.

A point of nuance to the above is that some of the 17 key sectors, as defined in the regulations, involve a “supply” element in the description, such as government critical suppliers and utility service providers. emergency. Transactions in these sectors can therefore still be captured, even in cases where the target does not do business in the UK.

Regime is agnostic as to the nationality of investors

The application of the NSI regime is deliberately not limited to investments from abroad; it applies equally to domestic and non-UK acquirers. What is relevant to trigger a notification is the target company, not the company making the acquisition. Additionally, while it may be considered that investors from some jurisdictions may be more attractive to BEIS than others (e.g. the Center for the Protection of National Infrastructure (“CPNI”) cites Russia and China as being countries where national laws on information gathering may be problematic from a UK national security perspective: https://www.cpni.gov.uk/informed-investment), General assumptions about particular countries (positive or negative) should resist. Indeed, under existing national security screening rules, the government has intervened on several occasions over the past 20 years where the acquirer was other countries, including the United States – most recently in the CONTINUOUS reviews of defense acquisitions and the security group, a security company Ultra and aerospace and defense Meggitt, which involve the two American buyers.

Low intervention threshold

An acquisition of 25% or more in a target active in the 17 key sectors will be subject to the mandatory notification regime. However, it should also be kept in mind that transactions in these key sectors or closely related to these key sectors involving the acquisition of “material influence” in the target may still be subject to government review. ‘it has national security concerns – as may be the case given the sensitive nature of these sectors.

Material influence is a relatively low bar and can occur well below this 25% threshold, allowing the government to establish jurisdiction over a potentially wide range of transactions. This is particularly relevant given that there are no turnover or other materiality thresholds in the NSI regime.

A recent example of material influence was the review of a merger of Amazon’s investment in Deliveroo in 2020, where the UK Competition and Markets Authority determined that Amazon had acquired material influence over Deliveroo with a 16% stake and one director on the Deliveroo board. . Thus, even in the context of a minority investment, where the target is active in a potentially sensitive sector, it is prudent to assess whether significant influence is being acquired, so that there is a risk of state appeal.

Lenders may also fall within the scope of the scheme

The regime can also catch lenders and funders, even in circumstances where they themselves do not immediately gain control of a target. In the event that, for example, it is possible to assert acquired securities on shares in the event of default, this formal notice may itself trigger a notification obligation. Problems can then arise if such enforcement action requires mandatory notification (at least from a timing perspective) or if the lender executing the security itself raises national security concerns.

There may be further difficulties for lenders if, at the outset, mandatory notifications to be made by borrowers have been missed. In these circumstances, security may have been taken against an underlying transaction which is itself legally void. A meticulous check should therefore be ready before ensuring that any mandatory notification obligations have been complied with so that any collateral taken is not compromised.

Although the regime does not apply in the context of insolvency proceedings, the decision to take security over shares should therefore be subject to careful consideration.

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