This article was last updated on 4 January 2022
The National Security and Investment Act 2021 introduces new powers to scrutinise and intervene in investment transactions in the UK. The legislation is part of a global trend towards introducing foreign investment laws which has seen a number of other countries introduce similar protections. While the Act came into force fully on 4 January 2022, the ability to "call in" transactions for review extends to transactions that have occurred after the introduction of the legislation to Parliament on 11 November 2020.
The Act provides the Government with "call-in" powers to reverse, block and impose remedies (including conditions) and sanctions in relation to investments that it considers a potential threat to national security. It also introduces new mandatory and voluntary notification and clearance regimes. The mandatory regime applies to acquisitions of control or threshold interests in entities in specified sectors; the voluntary regime applies to other types of transactions. If not notified and cleared, transactions subject to themandatory regime will be void. Sanctions for non-compliance with the regime will also include fines of up to 5% of worldwide turnover or £10 million – whichever is greater – and imprisonment of up to five years.
Commenting on the Act, Partner and Chair of Mishcon de Reya's Corporate department, Kevin McCarthy, said:
Given the Act's potential to unwind transactions or render them void, the implications of this legislation are potentially very important for those considering investment in the UK. The regime could affect many types of investments through a wide range of entities (including trusts and partnerships) and assets and across many different sectors. For example, investments in entities supplying goods and services to, or carrying on activities in, the UK could be caught, even where the investment is through a vehicle incorporated outside the UK. Acquisitions of certain IP or land assets will also be in scope. In short, taking early advice is very important.
Historically, the Government has had only limited powers within the merger control regime under the Enterprise Act to intervene in transactions on public interest grounds (including national security). In the Government's view, these powers were no longer sufficient to tackle the types of threats that the UK faces today. The Act has been introduced to modernise the UK regime and to bring the Government's powers into line with those of its closest allies. It replaces the national security aspects of the Government's current powers under the Enterprise Act.
Overview of the new regime
Under the Act, a dedicated Investment Security Unit in the Department for Business, Energy and Industrial Strategy (ISU) is responsible for assessing certain investments in the UK. The analysis carried out by this body is separate from any merger control analysis undertaken by the Competition and Markets Authority (CMA) to assess the impact on competition. Previously the CMA had been involved in assisting the Secretary of State for Business, Energy and Industrial Strategy to undertake its assessment of public interest concerns.
The Act provides for a hybrid notification system: mandatory notification obligations that will attach to certain transactions in specified sectors; and voluntary notifications available for other transactions that otherwise might be capable of being "called in" by the Secretary of State where the Government reasonably suspects that the transaction is a qualifying acquisition that has given rise to, or may give rise to, a risk to national security.
The "call-in" mechanism enables the Government via the Secretary of State to review non-notified transactions for up to five years post-completion, provided it does so within six months of it becoming aware of the transaction. Investors may therefore wish to notify voluntarily in order to secure deal certainty if their transaction may be of interest from a national security perspective.
A key role for the ISU will be market monitoring to ensure that deals that should have been notified are identified and called in. In addition, information-sharing provisions between UK public authorities (including the CMA) and other allied foreign agencies have been relaxed to allow exchanges of relevant information and intelligence to be shared.
Qualifying acquisitions and "trigger events"
For transactions to come within either the Act's mandatory or voluntary notification regimes, a "trigger event" must take place. Each trigger event involves a person acquiring control over either a qualifying entity or a qualifying asset. "Qualifying entity" is broadly defined and the Act therefore applies to a wide range of entities (whether or not having legal personality), including trusts and partnerships.
A person will acquire control over a qualifying entity where the person acquires a right or interest which:
- reaches or crosses certain thresholds (25%; 50%; and 75% of votes or shares) in an entity;
- is a voting right that enables the person to secure or prevent the passage of any class of resolution governing the affairs of the entity; or
- enables the person to materially influence the policy of the entity.
In an earlier iteration of the Bill, before it became an Act, the acquisition of a right or interest crossing a threshold of 15% was included within the trigger events, but this has been omitted from the Act. Care will need to be taken, however, as even a shareholding of less than 15%, when accompanied by other factors indicating the ability to exercise material influence over policy, may be considered to result in the ability to exercise material influence.
The Act treats reorganisations in the same way as other transactions and the Government's guidance released on 20 July 2021 confirms that this is the intention: "Qualifying acquisitions that are part of a corporate restructure or reorganisation may be covered by the new rules. This is the case even if the acquisition takes place within the same corporate group. This means that even within corporate restructures, it may be mandatory to notify."
"Qualifying assets" include land, tangible movable property and with respect to intellectual property, ideas, information or techniques that have industrial, commercial or other economic value. A trigger event will occur where there is an acquisition of a right or interest in (or in relation to) an asset which gives the acquirer the ability to use the asset (or use it to a greater extent) or to direct or control how the asset is used (or direct or control how the asset is used to a greater extent than prior to the acquisition).
The mandatory notification requirement obliges proposed acquirers of rights or interests (falling within one of the trigger events relating to shareholdings or voting rights described above) in entities operating in sensitive sectors to seek approval from the Government before completing their acquisition. If such a transaction were to be closed prior to approval, it would be legally void.
The sectors and activities within them that are subject to the mandatory notification regime are:
- advanced materials;
- advanced robotics;
- artificial intelligence;
- civil nuclear;
- computing hardware;
- critical suppliers to the government;
- cryptographic authentication;
- data infrastructure;
- military and dual-use;
- quantum technologies;
- satellite and space technologies;
- suppliers to the emergency services;
- synthetic biology (formerly known as engineering biology); and
On 15 November, the Government published guidance to help businesses and investors determine whether an entity being acquired falls within one of the mandatory notification sectors.
Where the proposed transaction does not fall within the mandatory notification regime, parties are encouraged to notify a "trigger event" voluntarily where they consider that it may raise national security concerns. When assessing whether a voluntary notification should be made, the parties to a transaction will need to refer to the "Section 3 Statement" (discussed further below), which sets out how the Secretary of State expects to exercise the call-in power under the Act.
"National security" and when transactions are likely to be "called in"
There is no definition in the Act of "national security" for the purpose of the notification and call in regimes. Instead, the factors that the Secretary of State expects to take into account when deciding whether to exercise the call-in power are set out in a "Section 3 Statement" (formerly known as the "Statutory Statement of Policy Intent" when an earlier iteration was published in November 2020). Following consultation, the final text of the Section 3 Statement was published on 2 November 2021. While the Section 3 Statement does not define "national security", it does confirm that the call-in power is likely to be used where there may be a potential for immediate or future harm to UK national security. This includes risks to governmental and defence assets, such as "disruption or erosion of military advantage; the potential impact of a qualifying acquisition on the security of the UK’s critical infrastructure; and the need to prevent actors with hostile intentions towards the UK building defence or technological capabilities which may present a national security threat to the UK."
The Section 3 Statement identifies three primary risk factors that the Secretary of State will consider when assessing the likelihood of a risk to national security being caused by a trigger event. There are the target risk (i.e. whether the entity or asset could be used in a way that raises a national security risk); the control risk (i.e. the amount of control being acquired) and the acquirer risk (i.e. the extent to which the acquirer possesses characteristics that suggest that there may be a risk to national security from the acquirer having control). The statement confirms that the Secretary of State expects that, when calling in an acquisition, all three risk factors will be present, but does not rule out calling in an acquisition on the basis of fewer risk factors.
Trigger events will be assessed on a case-by-case basis, having regard to the three risk factors. The Section 3 Statement makes clear that acquisitions within the 17 areas of the economy that are subject to mandatory notification (or which are closely linked to one of those sectors) are more likely to be called in for scrutiny. The Statement also indicates that the Secretary of State expects to call in asset acquisitions rarely compared to acquisitions of entities.
What steps can the Government take following a national security review?
Following a national security assessment, the Government could decide to approve the transaction, approve the transaction subject to conditions, or prohibit the transaction (or order the transaction to be unwound if already implemented). Possible conditions include altering the number of shares an investor is allowed to acquire, restricting access to commercial information, or controlling access to certain operational sites or works.
Timing and sanctions
The Act provides that where a proactive notification is made (either mandatory or voluntary), the Government has 30 working days to issue a "call-in" notice. Where a "call-in" notice is issued (including for non-notified transactions), the Government will have 30 working days to assess the transaction, which is extendable by an additional 45 working days if the Government reasonably believes that the investment poses a risk to national security. Beyond 75 working days, an additional period may be agreed upon between the Government and the acquirer. This contrasts with the existing public interest regime, under which the relevant minister sets individual timelines on a case-by-case basis.
As noted above, there are sanctions for non-compliance with the regime, which includes fines of up to 5% of worldwide turnover or £10 million – whichever is greater – and imprisonment of up to five years.
The Act has the potential to capture a large number of transactions and investments, particularly as it does not include minimum turnover and share of supply thresholds and so transactions of any size can be caught.
In addition, acquisitions of entities located outside of the UK can also fall within the scope of the Act if they carry on activities in the UK or supply goods or services to persons in the UK.
The Government's Impact Assessment estimated that between 1,000 and 1,830 transactions would be notified under the new regime each year. This is significant considering that there have only been 12 public interest interventions on national security grounds since 2002.
Importantly, the Government has made clear that these new powers will be used exclusively on national security grounds – and not for broader economic reasons. While this is welcome news for investors, it remains to be seen how robustly the new regime will be able to insulate itself from the political pressure (relating to British jobs or headquarters for example) that can often be associated with such transactions.
The Government has made available various pieces of guidance to help businesses and investors get to grips with the new regime. The Government published on 20 July guidance on how the rules work in relation to acquisitions, how the Act could affect people or acquisitions outside the UK and how the new regime will work alongside other regulatory requirements, as well as sector-specific guidance for the higher education and research-intensive sectors. On 15 November 2021, new and updated guidance was published to help businesses to understand their obligations under the Act, including new sections on the process of submitting a notification form. Finally, on 17 December 2021 the Government published guidance to assist acquirers in completing and registering a notification form: this covers, among other matters, how to register for an account with the National Security and Investment notification service through which notifications must be submitted, complete the notification forms and withdraw notifications.