The National Security and Investment Act 2021 came into force fully on 4 January this year. The first annual report on the operation of the Act was published in June, and more recently in July the Department for Business, Energy and Industrial Strategy (BEIS) published a set of market guidance notes, based on an analysis of notifications received under the Act and feedback from stakeholders.
In our June briefing we discussed the publication of the Government's first annual report on the operation of the Act and the establishment of a framework for cooperation and information sharing in the operation of the NSI Act between BEIS and the CMA, and reflected on how the new regime had bedded in so far and our own experience of making notifications under the Act. In this briefing, we look at some of the areas in which BEIS's market guidance notes provide helpful clarification. Since our last update, the first final order has also been published under the Act.
Market guidance notes
BEIS's market guidance notes provide practical guidance on making notifications, including avoiding common errors, but perhaps the most helpful aspect is commentary on certain types of events that may constitute acquisitions of control. The topics addressed by the notes include the treatment of temporary acquisitions of control, such as the appointment of liquidators or other insolvency measures, the granting of security over shares, indirect acquisitions of control, how different types of voting rights are treated and internal corporate reorganisations.
The appointment of a liquidator or other insolvency measures
The guidance confirms that the appointment of a liquidator or receiver may constitute a qualifying acquisition under the Act and could therefore, in certain scenarios, require mandatory notification.
Granting of security over shares
The guidance confirms our existing understanding that granting security over shares will not typically be a notifiable acquisition, at least where the granting of security does not involve the transfer of title to the shares to the secured lender (or its nominee). The guidance notes the distinction between the granting of share security and the enforcement of that security, which may or may not occur at a further point in time.
Different types of voting rights and mandatory notification
The Act applies where there are acquisitions of voting rights that enable a person to secure or prevent the passage of any resolution governing the affairs of the target entity. The guidance discusses circumstances where parties have contractual rights that may have the effect of securing or preventing the passage of a class of resolution. These are frequently taken by minority investors when providing early-stage investment. The Government considers that contractual rights of this nature are not covered by the Act on the basis that the contractual rights are not themselves voting rights, provided that such contractual rights do not amount to "control" of the voting rights (as described in the interpretation provisions of the Act). Care needs to be taken however: even though contractual rights of this nature might not amount to "control" for the purposes of the mandatory notification regime, they could, depending on the facts, amount to "material influence". While an acquisition of material influence is not subject to mandatory notification, it may be appropriate for a voluntary notification to be submitted.
The Government also makes clear in the guidance that internal reorganisations can be qualifying acquisitions where they result in an acquisition of control over a qualifying entity, even if the ultimate beneficial owner of the entity remains the same. This had been our understanding of the legislation, but it is helpful that the guidance explains the rationale. While the Government recognises that most acquisitions of this kind will simply be a product of internal corporate restructuring and efficiency,
"there may be rare cases where the acquisition of control over an entity by a person in the same business group raises national security risks. That may be true even if the ultimate beneficial owner is the same before and after the qualifying acquisition."
The guidance goes on to say that,
"this is because an acquisition of control by another 'link' in the corporate structure – particularly one where the ultimate beneficial owner is passive – could enable a hostile actor to pursue malign actions over the entity."
First final order published
On 20 July, the Secretary of State for BEIS made the first final order under the Act. The parties subject to the order were the University of Manchester and Beijing Infinite Vision Technology Company Ltd (the acquirer), who had entered into a licence agreement for the acquisition of intellectual property relating to vision sensing technology. The order stated that it had "the effect of preventing the acquisition of the intellectual property from proceeding." This was on the basis that the technology in the licence agreement had dual-use applications, there was potential that the technology could be used to build defence or technological capabilities which may present a national security risk to the UK and those risks would arise on the transfer of the intellectual property to the acquirer.
Next steps and other resources
We understand that the Government intends to update and supplement its market guidance notes in the future. The introduction to the guidance says that BEIS welcomes suggestions for topics to include in future market guidance publications.
Our longform report, The National Security and Investment Act: protecting UK assets and infrastructure, provides an overview of the UK's new national security regime and puts it in context with the global trend towards greater scrutiny of foreign investments. This includes an examination of the NSI Act's mandatory and voluntary notification regimes and takes a closer look at some of the high-risk sectors within the mandatory regime which are likely to be relevant to tech businesses.
Our NSI checker, created in collaboration with Taylor Vinters, offers a series of simple questions to help you understand whether notification under the NSI Act is likely to be required or at least considered for your transaction.