The NSI Act – Where Are We Now?

• NSI Act passed into law - but not expected to be fully effective until Q4
• Significant changes in the UK Government’s ability to review transactions based on national security concerns
• Transacting parties need to be aware of the mandatory notification provisions now
• Parities may also need to consider voluntary notifications including in connection with licencing deals

On 29 April 2021 the National Security and Investment Act 2021 (the “NSI Act”) became law. Notwithstanding, only certain provisions of the NSI Act enabling the making of regulations are currently ‘live’: (i) power to make notifiable acquisitions regulations; (ii) power to make regulations concerning exceptions relating to control of assets; (iii) powers to make regulations prescribing form and content of mandatory notification, validation application and voluntary notification; and (iv) power to make regulations concerning procedure for service. The commencement date(s) for the remaining provisions is not specified but the Department for Business, Energy and Industrial Strategy (“BEIS”) has indicated that this is expected towards the end of this year.

The NSI Act introduces significant legislative reforms regarding the ability of the UK Government to review transactions based on national security concerns, and potentially prohibit their completion or require remedies to allow them to proceed. For a detailed overview of the NSI Act regime, please see our earlier alert here. 

Note that the NSI Act has retrospective applicability to deals which close on or after 12 November 2020, enabling the UK Government to ‘call-in’ transactions, up to 5 years from the commencement date of the relevant section where any ‘trigger events’ have occurred (reduced to 6 months from the time the Secretary of State is made aware of such trigger event). Therefore, there are some significant considerations to bear in mind in the interim period before the NSI Act becomes fully effective.  In the meantime, the UK government continues to use its existing powers to investigate transactions on national security grounds under the Enterprise Act 2002.[1]

Transactions triggering ‘mandatory notification’

Transactions as a result of which the acquisition of shares or voting rights in a target company (which carries out activities within the specified sectors) trigger the 20%, 50% or 75% thresholds, or enable the acquirer to secure or prevent the passage of any class of resolution governing the affairs of the target, will constitute a ‘notifiable acquisition’ regardless of whether national security concerns are apparent and will require a mandatory notification. Such transactions may include enforcement of security over the shares in a company (although that will depend on the enforcement mechanism used and whether it constitutes an acquisition of control), various private equity transactions (for example, a private equity fund acquiring a 25% or greater equity interest in a portfolio company), or the exercise of rights under share charges. Where a transaction or investment involves agreements or arrangements to do something in the future that would result in a trigger event taking place, it is not yet clear whether that agreement/arrangement is deemed ‘in progress or contemplation’ for the purposes of the NSI Act. This will be determined by reference to all the circumstances, including how likely it is in practice that person will undertake the action that would result in a trigger event taking place. The government policy paper notes that although loans, conditional acquisitions, futures, and options are not exempt from scrutiny, these are unlikely to pose concerns of national security and even if so, the Secretary of State generally only expects to intervene when an actual acquisition of control will take place.

Although the NSI Act could potentially capture a wide range of transactions, it is not anticipated to cause many issues in terms of remedies being imposed or completions being blocked. In reality, most transactions are likely to receive unconditional clearance and the only practical concern is the delay this may cause.  Under the final provisions of the NSI Act, the Government retains its power to respond to such notifications “as soon as practicable” as opposed to any specified time period (however once the notification has been accepted, it then has 30 working days to decide whether a more thorough review will be necessary).

For those who are already engaged or plan on engaging in transactions that may constitute a ‘notifiable acquisition’, a new division of the BEIS, the Investment Security Unit (“ISU”), is operational and able to respond to queries albeit on a non-binding basis. Although the ISU is not able to provide any blanket assurances that a deal will not be subject to a ‘call-in’ notice until the NSI Act is fully in effect, it has been advising a number of businesses already and is encouraging parties to keep approaching them.  

Transactions that do not trigger ‘mandatory notification’ but constitute acquisition of ‘material influence’

Where a transaction does not constitute a ‘notifiable acquisition’, there is no automatic prohibition on the transaction. Nonetheless, the Secretary of State may still call in the transaction if it amounts to a ‘qualifying transaction’ and there is a reasonable suspicion that national security concerns may arise.

A ‘qualifying transaction’ is widely defined and includes acquisitions of ‘material influence’. This need not be in a specified sector and extends to non-UK based entities so long as they undertake business in UK (for example, supplying goods or providing services in the UK).  Consequently, these provisions could apply to transactions with ownership or control thresholds below the ‘mandatory notification’ triggers. 

The definitions of ‘qualifying transaction’ and ‘material influence’ mean that a licence of an asset could also trigger the Secretary of State’s power to ‘call-in’ a transaction. In contrast, mandatory filing requirements are only triggered in respect of ‘notifiable acquisitions’ which occur only in respect of ‘qualifying entities’, not ‘qualifying assets’. This leaves parties entering into licence deals in the position of potentially being caught by the NSI Act without having had any obligation to file before going ahead with the transaction. In these circumstances, parties should consider making a voluntary filing. One caveat to the above analysis is that the NSI Act provides that secondary legislation can be enacted to amend or implement the relevant sections in relation to the circumstances under which a ‘notifiable acquisition’ takes place. Interested parties should watch this space for further developments.

Conclusion

As we await Governmental guidance and regulations on full implementation of the NSI Act, it is important to begin considering the relevance of the NSI Act regime in relation to contemplated transactions, as well as those already in play (particularly where an acquisition of control takes place) and whether to contact the ISU for informal discussions and non-binding advice.

If you have any questions, or for further information please contact Mark Dorff, Toby Plowman and Natalie Radcenko.

[1] On 19 April 2021, the Secretary of State for the Department for Culture Media & Sport issued a public interest intervention notice in respect of the proposed acquisition of the UK semi-conductor company ARM Limited by Nvidia Corporation (which interestingly is a US based, NASDAQ listed company). This is an example of a deal that would likely fall within the NSI Act regime and trigger a mandatory notification.

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