Does the National Security and Investment Act 2021 affect your transaction?

What is the NSI?

The NSI is a new piece of legislation that came into force on 4 January 2022. It gives the government the power to review acquisitions and intervene in transactions that could harm the UK’s national security. The government can impose certain conditions on an acquisition and in rare cases may unwind or block an acquisition completely.

What types of acquisitions are affected?

The NSI applies to ‘qualifying acquisitions’. An acquisition is a qualifying acquisition only if all of the following apply:¹

the acquisition is of a right or interest in, or in relation to:
o a qualifying asset (being (i) land (ii) tangible moveable property and (iii) intellectual property); or
o a qualifying entity (that is, an entity other than an individual e.g. a company, a partnership, a trust, etc.)
the entity or asset you are acquiring is from, in, or has a connection to the UK, which means:
o to be a qualifying asset, that it is used in connection with activities carried on in the UK or used in connection with the supply of goods or services to people in the UK
o to be a qualifying entity, that it carries on activities in the UK or supplies goods or services to people in the UK
the level of control you acquire over the qualifying entity or qualifying asset meets or passes a certain threshold

Whilst the NSI primarily relates to the acquisition of entities that play an important role in national infrastructure, it has broad applicability and therefore should be borne in mind by most parties when considering an acquisition. The NSI can also include the acquisition of land by virtue of the acquisition of control over assets.²

The transaction is a qualifying acquisition, what now?

You will need to consider whether the government needs to be notified about the transaction. There are two types of notification regime under the NSI, a mandatory notification regime and a voluntary notification regime. Where a transaction is reviewed, it may be cleared without needing remedies, be blocked (very rare) or have conditions imposed on it to address national security concerns.

What is the mandatory regime?

A transaction requires a mandatory filing when it involves one or more of 17 sensitive sectors of the UK economy (set out below). These are areas deemed more likely to give rise to national security risks.³ Such transactions must be notified to the government before they can be completed otherwise the acquisition will be void.

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 Technology
Suppliers to the Emergency Services
Synthetic Biology
Transport

What is the voluntary regime?

Where a transaction is a qualifying acquisition, it is open to review (known as being “called in”) by the government. In such a scenario the parties may choose to make a voluntary notification. The voluntary regime allows parties to pre-emptively submit transactions for approval by the government.

Where certain risk factors are present, the government has the power to review qualifying acquisitions that have taken place or which are in progress or contemplation even if not voluntarily notified. So if parties are concerned that a transaction may be called in, it may be safer to make a notification at an early stage to avoid derailing a transaction at a later stage.

However, generally-speaking a voluntary notification would only be made if there is a significant likelihood of the government calling in the transaction and transactions are more likely to be called in if they involve one of the 17 mandatory filing sectors or fit the primary risk factors below.

What are the primary risk factors?

The primary risk factors per government guidance⁴ are set out below, it is worth noting that the expectation is that all three risk factors will be present when calling in an acquisition, which means that a transaction is unlikely to be ‘called in’ by the government for review if there are low levels of target, acquirer or control risk (described below).

“Target risk
This concerns whether the target of the qualifying acquisition (the entity or asset being acquired) is being used, or could be used, in a way that raises a risk to national security.
Acquirer risk
This concerns whether the acquirer has characteristics that suggest there is, or may be, a risk to national security from the acquirer having control of the target.
Control risk
This concerns the amount of control that has been, or will be, acquired through the qualifying acquisition. A higher level of control may increase the level of national security risk.”

What are the timeframes involved in a notification and what orders might be made?

There are statutory time limits to each stage of the process. The time limits and the types of order available are set out in the NSI Annual Report published by the government in 2022:

“Once the Secretary of State has accepted a notification, they have 30 working days to decide whether to call in the acquisition for a more detailed assessment or to clear it.If an acquisition is called in, the Secretary of State has 30 working days to assess whether any remedies are needed to address national security risks. If necessary, the Secretary of State can extend this period by 45 working days, and the Secretary of State and acquirer can mutually agree to further voluntary extensions.

During an assessment, the Secretary of State can impose interim orders, such as requiring the acquisition to halt until the assessment is complete. Once a decision is reached, the Secretary of State will clear the acquisition or, if necessary and proportionate, impose remedies through a final order.” ⁵

When can the government review a transaction?

Once a transaction has taken place, the government has six months to call it in for review from the time that the Secretary of State became aware of it, at any time up to five years after a deal has taken place.

What are the risks of non-compliance?

Failure to comply with the NSI may result in sanctions including worldwide turnover-based fines and criminal liability, as well as the risk of a transaction being void (this means that it is treated in law as if it had not taken place).

Comment

Given the broad requirements required for a ‘qualifying acquisition’, most transactions will require some consideration of the NSI. Parties will need to consider whether a mandatory or voluntary filing may be required. Should parties wish to err on the side of caution and notify a transaction (because they are aware of facts or circumstances that mean a transaction may raise national security concerns), deal documentation would need to be amended to contain suitable wording to ensure that completion does not take place until cleared.