The NSI Act – Preparing for the New Rules

The National Security and Investment Act 2021 (the “NSI Act”) fully came into force on 4 January 2022, introducing a standalone regime that affords the U.K. Government wider powers to scrutinise and intervene in “qualifying acquisitions”. As has been covered in more detail by our previous NSI Act updates here, the new “call-in” powers granted to the Secretary of State have retrospective applicability, covering any qualifying acquisition completed after 12 November 2020, and the Government can scrutinise acquisitions up to six months after becoming aware of them, provided this is within five years of the transaction (although this five-year time limit will not apply if the acquirer failed to notify a transaction falling within the ‘mandatory notification’ regime). The retrospective nature of the NSI Act puts numerous past transactions at risk.  As a result, over the past year enquiries were being made and conversations had with the Investment Security Unit in the Department for Business, Energy and Industrial Strategy and in some cases, parties opted for voluntary applications in advance.

An acquisition is considered “qualifying” if it is in relation to a qualifying asset or qualifying entity, that has a connection to the U.K., and the level of control acquired meets or passes a certain threshold - i.e., a shareholding crossing set thresholds, acquiring voting rights to pass or block resolutions, acquiring the ability to materially influence policy of a qualifying entity or to control the use of a qualifying asset. As such, it is important to remember that an ‘acquisition’ can apply not only to the transfer of shares from buyer to seller in traditional M&A, but also venture capital equity investments, share buybacks (if the buyback results in shareholdings and/or voting rights of a shareholder to excess the thresholds for a trigger event) and joint venture arrangements.

Recent Updates

Since receiving Royal Assent in April 2021, the Government has published various detailed guidance and secondary legislation in relation to the NSI Act. Some of the most notable are summarised below, along with links to the publications. 

Guidance:

• Guidance on completing and registering a notification form

The most recent guidance on completing and registering a notification form provides guidance on how to complete each of the three notification forms (for mandatory, voluntary notification and retrospective validation) as well as the declaration required to be made when submitting any of the notifications. The forms themselves set out detailed questions related to the transaction, including: (a) acquirer and representative (where applicable) contact information and related notifications; (b) acquisition details; (c) qualifying entity details; and (d) qualifying asset details and are completed via an online portal.

• National Security and Investment Act: guidance on notifiable acquisitions

A key feature of the NSI Act is the ‘notifiable acquisition’ that obliges acquirers to make a notification if an acquisition falls within one of the 17 sensitive areas of the economy. This guidance outlines the 17 areas  including detail as to whether an acquisition would fall within the scope of each sector.

• How the National Security and Investment Act could affect people or acquisitions outside the U.K.

The NSI Act may catch qualifying entities and/or assets that are entirely outside of the U.K. but have a connection to the U.K. This guidance clarifies which acquisitions could be caught and how foreign parties might be affected, including examples of how this could arise. For instance, a foreign entity may be qualifying if it (a) carries on activities in the U.K.; and (b) supplies goods and/or services to individuals in the U.K. Moreover, an asset may be qualifying if it is used in connection with (a) activities carried on in the U.K.; and (b) the supply of goods and/or services to individuals in the U.K.

Secondary Legislation (each coming into force on 4 January 2022): 

• The Notifiable Acquisition Statutory Instrument sets out the detailed definitions the 17 sensitive areas of the economy that will bring a proposed acquisition of a qualifying entity within the mandatory notification regime.
• The Monetary Penalties Statutory Instrument sets out the methods for calculating business turnover where the Secretary of State issues financial penalties for non-compliance as well as provisions clarifying how to determine when a business is to be treated as controlled by another business.
• The Form and Content of Notification Forms Statutory Instrument sets out the specific information required for the mandatory and voluntary notification forms to be submitted to the Government for review as well as the required content of applications to apply for retrospective validation where a transaction failed to gain the required approval prior to completion.

Statement:

The Statement on the use of the call-in power sets out how the Secretary of State expects to use its power to give a call-in notice as well as the three risk factors that will be used when determining whether to call-in an acquisition, including:

• Target risk - concerning whether the entity or asset being acquired could be used in a way that poses a risk to national security;
• Acquirer risk - concerning whether a risk to national security would be raised from the acquirer gaining control of the target; and
• Control risk - concerning the level of control being acquired and whether this might pose a risk to national security.

Comparison with the Committee on Foreign Investment in the United States (“CFIUS”)

In our previous alert, we noted the lessons that could be learned from CFIUS in anticipation of the NSI Act. 

The key distinction between the two is that the NSI Act lacks the foreign investment focus of CFIUS and instead adopts a more “actor-agnostic” regime that applies to both U.K. and foreign acquirers. For instance, whilst CFIUS has a mandatory notification requirement for foreign persons who gain control over a U.S. business (notwithstanding excepted investors), the NSI Act’s mandatory notification requirement covers any party, be it foreign or national, in any of the 17 sensitive sectors.

As the Government guidance explains, it is entirely possible for the NSI Act to capture both acquisitions between two foreign parties but also internal corporate restructurings, even within the same corporate group.

Key takeaways 

Whilst we have previously highlighted key considerations that U.K. market participants should consider, the new Government publications raise a few takeaways.

• Thorough discussions should be conducted, and enhanced due diligence considered, in relation to whether (a) a mandatory notification ought to be made; (b) any pending acquisitions or acquisitions completed since 12 November 2020 might be called-in for review; (c) whether a voluntary notification should be made in cases of doubt; and (d) whether a retrospective validation application needs to be made.
• What effect the NSI Act might have on desired transaction timelines and cost, considering that once a notification form has been accepted, both the initial review period and the assessment period, last up to 30 working days which can be extended by an additional 45 working days. There is no guidance about how this additional period may be used and the Government may stop the clock during this assessment period creating much uncertainty when trying to schedule transactions. An extension could be likely to occur in the short to medium term from 4 January 2022. The online notification portal is now live which will likely result in an increased number of applications and possible backlog of cases given the retrospective applicability, broad nature of the NSI Act (including uncertainty surrounding its applicability to certain transactions) and the severity of penalties applied due to failure to notify. During any extended assessment period, interim orders may be imposed by the U.K. Government such as blocking the exchange of confidential information between parties and access to sensitive sites or assets or otherwise obstructing the progress of the acquisition.
• The scope of the NSI Act and the effect that might have due to the “actor agnostic” factor discussed above including its ability to (a) capture internal corporate restructures; (b) apply to non-U.K. entities and assets; and (c) implement wide powers such as standstill obligations, transaction conditions, request further information, restrict access, block and unwind transactions.

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