24 May 2021

The National Security and Investment Bill 2020 is now UK Law

With little fanfare, on 29 April 2021, the National Security and Investment Act (the “NSI Act”) was granted Royal Assent following the approval of the National Security and Investment Bill 2020 (the “Bill”) by the UK Parliament. However, the adoption of a number of statutory instruments remains outstanding before the new regime can become fully operational, expected to be later in 2021.

In the interim, below are the key points that one should be aware of as of now before transacting in the UK, either as or with, foreign investors.

  • It is important to note that the NSI Act will have retrospective effect, applying to all transactions taking place since the Bill was first announced.  This anti-circumvention mechanism gives the UK government powers to call in for review from the commencement date of the NSI Act any qualifying transaction with national security concerns completed on or after 12 November 2020 for up to 5 years after the deal (or even longer in certain circumstances as described further below).

  • Under the NSI Act, the Secretary of State of Department for Business, Energy & Industrial Strategy (“BEIS”) will be able to intervene in transactions involving specific “trigger events”, being the acquisition of:

  1. more than 25%, 50% or 75% of shares or voting rights in a qualifying entity (which includes a company, partnership, unincorporated entity or trust);

  2. voting rights that enable or prevent the passage of any class of resolution governing the affairs of the qualifying entity;

  3. material influence over a qualifying entity’s policy; or

  4. a right or interest in, or in relation to, a qualifying asset (e.g. land, other physical property and IP) providing the ability to use the asset or direct control of how the asset is used.

  • The main amendment to the Bill made in the NSI Act is the removal of the 15% threshold for a “notifiable transaction”.  As a result, minority investing below 25% should not be caught by the NSI Act, provided there is not the passing of material influence to a new party acquirer to BEIS. Any transaction which is subject to mandatory notification and which is completed without clearance will be deemed void.

  • The addition of a trigger event for dealing in assets shows a focus on intellectual property and know-how, such as trade secrets, databases, source code, algorithms, designs, plans and software. Transactions to acquire these outright or by licence or other commercial arrangement will now be caught as was not previously the case under the past national security regime.

  • Not all transactions involving a trigger event will be caught by the NSI Act as the focus of BEIS is only on acquisitions of UK targets in 17 key sectors which are stated by the UK Government to be most likely to give rise to national security concerns (the “Key Sectors”). Only such transactions will be subject to a mandatory notification by the acquirer to BEIS and any transaction which is subject to mandatory notification and which is completed without clearance will be deemed void.

  • Although to be finally confirmed in the secondary legislation, the Key Sectors are currently: (a) Advanced Materials, (b) Advanced Robotics, (c) Artificial Intelligence, (d) Civil Nuclear, (e) Communications, (f) Computing Hardware, (g) Critical Suppliers to Government, (h) Critical Suppliers to the Emergency Services, (i) Cryptographic Authentication, (j) Data Infrastructure, (k) Defence, (l) Energy, (m) Synthetic Biology, (n) Military and Dual Use, (o) Quantum Technologies, (p) Satellite and Space Technologies and (q) Transport. Since the publication of the Bill, BEIS has consulted with the market as to the final scope of the Key Sectors and has since published some important revisions as summarised here.

  • For transactions with trigger events where there is uncertainty as to whether they are operating in any of the Key Sectors or whether there are any other national security concerns, a voluntary notification by the potential acquirer may be required.

  • It is important to note that just because a transaction may be caught by the NSI Act does not mean that the transaction will never be permitted to proceed.  The Government expects that most transactions will receive consent orders to proceed as it seeks to balance its powers of review with the desire to promote the UK for foreign investment in a post-Brexit and post-COVID world.

  • To consent to a transaction BEIS will make an assessment of the potential to increase the risk of disruptive or destructive actions, espionage activities such as the ability to have unauthorised access to sensitive information or the use of inappropriate leverage to exploit an investment to influence the UK.  It is expected to be rare for genuine commercial parties, even if abroad, to trigger such risks but the assessment remains subjective in the hands of the Government.

  • Assessing acquirer risk currently carries the most uncertainty. BEIS states that it expects parties to do their due diligence on acquirers and notify BEIS if they have concerns. Acquirers should be forthcoming with information and able to pre-empt enquiries by having detailed information packs as the nature and extent of their business around the world as well as their ownership and control, including links to any State entity.

  • BEIS states that it will consider if national security risk is increased with the introduction of any hostile state actors. No individual states have been named and there are no express criteria to determine what makes a state hostile. Clearly the Government is giving itself maximum discretion to make an appropriate assessment at any given time.

  • There is an initial 30 working day assessment period for BEIS to review a transaction (the CMA previously had up to 4 months). Parties will typically sign conditional acquisition agreements and wait for the outcome of a review. However, the initial period may be followed by an additional period of 45 working days if there are concerns or a lengthier voluntary period if agreed with the acquirer.   

  • If BEIS finds that national security is indeed at risk following its review of the transaction, it is expected to impose necessary and proportionate remedies or potentially void the deal if it has already occurred. It may also limit access to certain information to persons with the requisite security clearances and enter into deeds of undertaking with key parties as we have seen in the past.  BEIS could ultimately block any deal and this is subject to a right of appeal.

  • Where there is a failure by an acquirer to comply with the NSI Act, necessary sanctions (criminal and civil) will be imposed, such as:

  1. fines up to 5% of the global turnover of the business in question or £10 million (whichever is higher);

  2. imprisonment for up to five years and/or dis for specified directors and officers; and

  3. certain corporate criminal penalties.  

What should you do as of now?

  • The Government has indicated that it intends to continue developing and refining the new NSI regime, particularly the relevant guidance as to the application of the legislation, the form of mandatory notification and secondary legislation needed. If you have a transaction expected to sign or close in the next six months you should pay close attention to these developments.

  • There is possibility for early consultation with BEIS as regards your transaction by writing to a designated email address. You may also discuss your transaction with BEIS in order to obtain some additional confidence regarding the possibility of clearance of transactions. This is being actively encouraged by BEIS as per published policy statements and market advice although any advice from BEIS will not comprise formal clearance until the secondary legislation is finalised.  We are happy to assist market participants with their informal consultation processes with BEIS and any other preparations needed to comply with the NSI Act. 

  • If the risk of the application of the NSI Act to your transaction is low then parties may complete their transactions prior to final commencement with low risk of the transaction being called in for review.

  • If there is more risk or uncertainty in the deal parties may still complete the transaction with the risk of being called in, the transaction being blocked and parties being subject to sanctions.

  • Ultimately it is for the parties to consider the risks before proceeding and we are well placed to advise on these complex areas as may be required. 

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We explore the key issues being considered by clients looking to unlock investment opportunities in the People’s Republic of China.

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