The National Security and Investment Act 2021 (NSI Act) came into force on Tuesday 4 January 2022, establishing a new, stand-alone statutory regime for government scrutiny of, and intervention in, acquisitions and investments for the purposes of protecting national security (NSI Regime). The new regime will replace the national security review regime under the Enterprise Act 2002.
Unlike the regime under the Enterprise Act, the government’s powers to intervene in transactions under the NSI Regime do not depend on the target of the acquisition meeting minimum turnover or share of supply thresholds.
Application of the NSI Regime
The NSI Regime applies to not only certain categories of transaction or investment that involve the acquisition of control over qualifying entities (i.e. any entity other than an individual) or qualifying assets, including land and movable property, but also ideas, information or techniques which have industrial, commercial or other economic value.
Relevant transactions (or “trigger events”) include:
- The acquisition of votes or shares in a qualifying entity exceeding a threshold of 25% or 50%, or 75%.
- The acquisition of voting rights that enable or prevent the passage of any class of resolution governing the affairs of the qualifying entity.
- The acquisition of material influence over a qualifying entity’s policy.
The acquisition of a right or interest in, or in relation to, a qualifying asset providing the ability to:
- Use the asset, or use it to a greater extent than prior to the acquisition; or
- 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 proposed acquirers of shares or voting rights (exceeding defined thresholds) in companies and other entities which undertake specified activities in the UK in certain sensitive sectors of the economy will need to seek authorisation and obtain approval from the Secretary of State before completing their acquisition. A transaction which falls into the criteria for a mandatory notification and where the acquirer does not seek approval from the Secretary of State before completion will be void and of no legal effect. In addition, the acquirer may be subject to criminal or civil penalties for completing the transaction without obtaining clearance.
Remedies and sanctions
The Secretary of State will have powers to impose remedies to address risks to national security, including the imposition of conditions, or prohibiting or unwinding the transaction. Sanctions for non-compliance with the NSI Regime will also be given, including fines of up to 5% of worldwide turnover or £10 million (whichever is the greater) and imprisonment of up to five years.
There are two routes for acquirers to notify acquisitions to the Secretary of State for the purposes of obtaining a decision on whether the transaction gives rise to national security issues:
This applies to acquisitions of certain types of control over of qualifying entities that operate in specified high-risk sectors of the economy in the UK (section 14 of the NSI Act).
Parties are encouraged to notify trigger events that, whilst falling outside the mandatory regime, may nevertheless raise national security concerns (section 18 of the NSI Act).
Transaction notifications (whether mandatory or voluntary) must be submitted to the Investment Security Unit (ISU) via a digital platform.
Transactions caught by the mandatory notification regime
The mandatory notification regime applies to transactions that meet the definition of a notifiable acquisition, as set out in section 6 of the NSI Act. This provides that a notifiable acquisition occurs where the following criteria are cumulatively met:
- The subject of the acquisition is a qualifying entity that undertakes activities in the UK within a specified high-risk sector of the economy.
- As a result of the acquisition, the acquirer gains control of a qualifying entity by either:
- Increasing the percentage of shares (or votes) in the entity from: (i) 25% or less to more than 25%; (ii) 50% or less to more than 50%; or (iii) less than 75% to 75% or more; or
- Acquiring voting rights in the entity that enable it to secure or prevent the passage of any class of resolution governing the entity’s affairs.
However, it should be noted that the NSI Act currently does not provide for acquisitions of qualifying assets to be caught by the mandatory notification regime. This may change in the future.
Sectors within the mandatory notification regime
A qualifying entity is within the scope of the mandatory notification regime if it undertakes any of the activities, in any of the sectors in the UK that are specified in Schedules 1 to 17 to the Notifiable Acquisition Regulations. These include:
- Advanced materials
- Cryptographic authentication
- Suppliers to emergency services
- Advanced robotics
- Data infrastructure
- Artificial intelligence
- Civil nuclear
- Synthetic biology (formerly known as engineering biology and renamed following the consultation)
- Military and dual use
- Computing hardware
- Quantum technologies
- Critical suppliers to the government
- Satellite and space technology
For further information on the NSI regime, the government has published guidance which can be found here.
Despite detailed guidance, many aspects of the NSI Regime remain unclear, such as whether it remains possible to ask the government for guidance when in doubt about the qualification of a deal as mandatory notification event. What is clear, though, in light of the severe consequences when getting it wrong, is that the new NSI Regime will lead to a host of new notifications, whether on a mandatory or voluntary basis.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.