The UK’s new National Security and Investment Act (“NSIA”) entered into force on January 4, 2022. The NSIA marks a considerable change in the UK’s investment screening powers and adds to an increasingly complex European and global landscape of investment regulation (or FDI) filings necessary for the execution of M&A and other transactions.
The Act is accompanied by new machinery of Government – the Investment Security Unit (“ISU”), which also became fully operational on January 4. Sitting within the Department of Business, Energy and Industrial Strategy (“BEIS”), the ISU is the single point of contact for businesses wishing to understand the Act and/or to notify the government about acquisitions. It will receive NSIA filings and function as the central organising hub for the investment screening process. The ISU reports directly to the Business Secretary, who is now empowered by the Act as the final decision-maker in respect of investment screening and intervention.
Covington and the Act
Given the importance of the NSIA and the penalties for non-compliance, Covington has been working closely with the ISU for the last 15 months to help shape how the Act will function in practice. This relationship means that Covington is well-placed to assist clients understand and comply with the UK’s new investment regime.
Throughout the passage of the legislation we have maintained a watching brief on the legal and political aspects of this important update to the powers of the UK Government to scrutinise corporate and other transactions. Most recently, we considered the implications of the NSIA for the life sciences, technology and energy sectors.
This alert highlights some of the key elements of the UK’s new national security and investment regime and includes some useful web-links.
Mandatory and Voluntary Filing
The Act introduces – for the first time in the UK – mandatory filing obligations and pre-clearance requirements for transactions occurring in ‘core’ sectors that the UK Government views as most sensitive to national security. These obligations apply to all investors, including those from the UK.
There are currently 17 “core” sectors (which may be amended over time):
- Advanced Materials
- Advanced Robotics
- Artificial Intelligence
- Civil Nuclear
- Computing Hardware
- Critical Suppliers to government
- Cryptographic Authentication
- Data Infrastructure
- Military and Dual-Use
- Quantum Technologies
- Satellite and Space Technologies
- Suppliers to the Emergency Services
- Synthetic Biology
Mandatory filing obligations will be triggered on acquisitions in these core sectors if, as a result of the transaction:
(i) an interest of 25% or greater is being acquired;
(ii) an investor’s interest in shares or voting rights exceeds either a 25%, 50% or 75% threshold ; and/or
(iii) an investor gains the ability to secure or block any resolution of a target company active in a core sector.
There is no monetary threshold for the filing obligation, so if the equity threshold is met, a compulsory filing will be required, even for low-value transactions such as early-stage VC and development investments.
Investors can elect to notify transactions voluntarily, if concerned about potential national security implications of a transaction. Voluntary filing is also possible for all transactions not at an entity level, e.g., business/asset transfers and licensing arrangements. The primary benefit to investors of filing voluntarily is to obtain certainty that a transaction will not be subject, at a later date, to the exercise of NSIA call-in powers (see below).
The Act sets out detailed timescales within which the Government must respond to a filing – whether submitted on a voluntarily or mandatory basis. Review periods can extend up to around 5 months (or longer in exceptional cases) but a significant majority of cases – 80-90% according to UK Government estimates – are expected to be cleared within an initial 30 working day review period. These timelines are designed to create certainty for investors, whilst the scope of the notification requirements is designed to enable quick identification of those transactions which present a national security risk. The 80-90% figure reflects the fact that filing requirements are fixed more broadly than the area of actual national security concern and represent an initial filter through which those transactions presenting greatest national security interest/risk can be identified.
Although the UK Government has made it clear that UK companies and UK based assets are its priority, the Act will also apply to any cross-border transaction (e.g. through the acquisition of a US parent company or group) that involves indirect acquisition of a UK subsidiary entity.
In addition, other transactions that occur substantially outside the country but have a connection to the UK can be covered by the Act. In many instances, only call-in powers in the Act will be relevant (see below) but occasionally mandatory filing obligations may also apply. Depending on the circumstances, the provisions of the Act may extend to:
- entities that carry on activities in the UK (for example from an R&D facility or those doing business from a regional office in the UK);
- producers and distributors which supply goods or services to people in the UK;
- assets used in connection with activities carried on in the UK (for example machinery physically located overseas that produces equipment used in the UK) or those in connection with the supply of goods or services to people in the UK.
Powers to Intervene in Transactions
If the UK Government has a reasonable concern that a national security risk might arise, the Act bestows broad call-in powers. These powers are available in respect of any transaction (not just those in the core sectors) in which “material influence” is acquired. As a rule of thumb (notably borrowed from the application of merger control rules), material influence is not usually expected to arise in acquisitions of less than a 15% interest in shares or voting rights. However, it is a flexible and potentially evolving concept to be assessed based on specific circumstances – for example, other rights acquired by an investor, such as board seats, influence over important strategic decisions, or wider commercial relationships among those involved in the transaction may form part of an overall picture of influence.
The UK Government may exercise this call-in power for up to five years post-closing (by which time national security considerations may have evolved) – although this period is reduced to six months if the UK Government becomes aware of the acquisition (for example, from press reporting or informal (email) notification). The Act enables the UK Government to call in transactions which completed after 12 November 2020.
Finally, the Act gives the UK Government the power to impose conditions on an acquisition falling under the jurisdiction of the NSIA, including the power to unwind completed acquisitions or block anticipated deals. While these powers are expected to be exercised rarely and most remedies will be behavioural, the more immediate concern for M&A transactions is that any acquisition requiring mandatory notification and completed without approval will be regarded as void.
Understanding the NSIA Regime
We have set out below some of the most useful links to the UK government’s published guidance as well as to the online notification portal:
- The NSI online notification service is now live.
- The UK Government has developed guidance in consultation with an expert panel (of which Covington is a member). This guidance outlines:
- The types of acquisition covered by the new rules and how the UK Government will scrutinise notified acquisitions;
- The activities that are in scope of mandatory notification in the 17 core sectors;
- How the Act could affect people or acquisitions outside the UK;
- How to complete and submit a notification form;
- How the Act works alongside regulatory requirements; and
- Guidance for the higher-education and research sectors.
- A link to the collection of guidance is here.
- The UK Government’s November 2021 Statement to Parliament (referred to as the Section 3 Statement) is intended to describe circumstances in which an acquisition is likely to be called-in for detailed national security review. It explains how the UK Secretary of State expects to exercise this power and sets out the factors the UK Government will consider when assessing an acquisition – “target risk”, “acquirer risk”, and “control risk”.
While many transactions will be able to proceed without the need to submit an NSIA filing, investors (including those in and from the UK) should diligence their filing obligations pursuant to the Act early in the transaction process, alongside any assessment of required antitrust and other regulatory filings.
We look forward to working with you as the investment community becomes accustomed to the UK’s new NSIA.