Will the National Security and Investment Act herald an era of increased Governmental intervention in M&A transactions?
The National Security and Investment Act (“NSIA”) comes into force on 4 January 2022, further adding to the administrative burden for practitioners and creating an additional hurdle for investors. Initially intended to enable scrutiny of investment on national security grounds, the true effect of legislation may reach further.
Those investing, and practitioners, need to be aware that transactions falling within 17 specified “sensitive” sectors (which include artificial intelligence, communications, computing hardware and suppliers to the emergency services) will have mandatory notification requirement where:
- the shareholding stake, voting rights, or entitlement to capital (depending on the nature of the entity) increases:
- from 25% or less to more than 25%;
- from 50% or less to more than 50%; or
- from less than 75% to more than 75%
- there is an acquisition of voting rights which allows the acquirer to pass or block resolutions governing the entity;
- the acquirer is able to materially influence the policy of the entity, which would include for example, the ability to appoint board members who can influence strategy; or
- there is an acquisition of a qualifying asset (which includes land and tangible, moveable property) and intellectual property, which grants the acquirer the right to use, or direct or control the use, of the asset to a greater extent than existed prior to the acquisition.
The obligation to notify falls on the acquirer.
If the acquirer is offshore, it is a qualifying entity if either it carries on activities in the UK, or supplies goods or services to the UK.
Land, moveable property and intellectual property situated outside the UK remains a qualifying asset if it is used in connection with activities carried on in the UK, or used in connection with the supply of goods or services to people within the UK.
Failure to notify
There is a legal obligation to notify acquisitions in the 17 sensitive areas, where the nature of the acquisition falls within paragraphs 1 or 2 within the numbered paragraphs above. The obligation is mandatory and failure to notify prior to completion will mean that the acquisition is void.
Failure to notify also leads to civil and criminal penalties if an acquisition progresses to completion without gaining the necessary approval. The organisation concerned could face a penalty of up to 5% of its global turnover or £10million, whichever is greater.
The legislation gives the Government power to “call in” a transaction which has not been voluntarily notified, but which raises concerns in relation to national security, with a power to do so retrospectively in respect of transactions which completed on or after 12 November 2020.
The approval process
Following a “call in”, and upon notification, the obligation to investigate falls on the Secretary of State for Business, Energy and Industrial Strategy. The Government promises a short investigation which is not overly burdensome.
There will be a review period, applying to all notified acquisitions, and an assessment period which applies where an acquisition is “called in”. The review period and the assessment period each last up to 30 working days, although the assessment period may be extended by 45 working days.
There are various steps which occur in the intervening period, but the ultimate outcome by the 30th working day of the assessment period is intended to be, either the acquisition is cleared to progress, the acquisition is permitted to progress but with conditions, the acquisition is blocked, or an extended 45 working day period is implemented to enable further investigation and determination.
It will be interesting to see the impact of this legislation, not least whether the Government is able to observe the time periods for assessment it has imposed.
Introduced with the stated intention of screening investments for risks to national security, there is the possibility that the scrutinising and intervention powers may well have effects on the UK’s foreign direct and private equity investments. The UK is presently the second largest global economy in terms of inward foreign direct investment, and hence the previous lack of legislation in this area, other than the Enterprise Act 2002, is probably somewhat surprising.
The NSIA will impact not only on foreign direct investment, but also on UK based investors and private equity funds giving powers to the UK Secretary of State akin to those of the Committee on Foreign Investment in the US.
A private equity fund for example, with its main operation based overseas and a target acquisition with operations in the UK will be subject to the provisions of NSIA. It may well be the case that the traditional differentiating between the role of the general partners and the limited partners may give rise to further questions. A fund which looks to diversify its investments by the inclusion of several investment areas may find itself inadvertently creating further scrutiny due to a perceived potential effect on national security where there could be conflicting interests within its portfolio. Additionally, tensions could well develop between an overseas buyer and a UK based buyer, with a perception that the overseas buyer is more likely to cause concern under NSIA.
Under the Enterprise Act of 2002, the Secretary of State was permitted to intervene when there was a potential violation of public interest matters. The regime introduced by NSIA gives authority to the Secretary of State to intervene when the Government contemplates or ‘reasonably suspects’ the existence of a trigger event that could pose risks towards national security. How these powers will be interpreted and the general effect on acquisitions in the 17 sensitive areas will become apparent as NSIA is implemented.
Certainly, deal terms are likely to be re-considered. Not only will it be necessary to introduce conditionality based on NSIA determination, but a buyer is also likely to require a seller’s co-operation in obtaining the necessary determination. From the seller’s point of view the question will be raised as to the extent of obligation affecting its buyer’s commitment to seek a favourable NSIA clearance. A joint venture vehicle may seek to restrict through its shareholders’ agreement the right of a party to acquire an increased stake, if that acquisition will trigger one of the steps regarding increased control when a NSIA referral is required.
Business Minister Lord Callanan said “the UK is world renowned as an attractive place to invest, however we will not hesitate to intervene where necessary to protect our national security”. The extent to which the Government intervenes is yet to be seen, and that in turn may well determine whether the UK continues to be such an attractive place to invest.
If you have any questions about the impact of the Act on your business, please contact Stephen Blair in our Corporate Department.
This briefing is for guidance purposes only. RadcliffesLeBrasseur LLP accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.