The National Security and Investment Act 2021

The National Security and Investment Act 2021 (“Act”) has been passed into law and comes into force next year.  In effect, the Government will be able to prohibit or unwind any sale of a company or business that might have an impact on the UK’s national security. If you are involved in buying or selling companies or businesses then this is going to have an impact on you.  The headline points are set out below and words in bold are explained in the glossary at the end of this article.

What is the Act for and what does it cover?

The Act enables the Secretary of State for Business Energy and Industrial Strategy (“SoS”) to review transactions from a national security perspective.  It requires mandatory notification (“mandatory notification”) of certain types of transaction and, separately, enables the SoS to call in a transaction for review if it believes such action is necessary from a national security perspective (“call in”).  

The call in right arises on any acquisition of control of a qualifying entity or qualifying assets. This right can be exercised by the SoS for up to 6 months after becoming aware of the transaction (subject to a long stop of 5 years post completion). 

Who does it affect?

A mandatory notification obligation arises on a person obtaining control of a qualifying entity of a specified description.

In order to avoid the uncertainty around a future call in of a transaction or whether a transaction might actually require a mandatory notification, the Act provides for a voluntary notification to be made.

There is no de minimis exception or safe harbour, so no floor below which the ACT will not apply to any deal.

The mandatory notification obligation applies to the acquisition of any qualifying entity whether it is registered in the UK or not provided that it supplies goods or services into the UK or carries on activities in the UK.  NB the acquisition of assets does not fall within the mandatory notification regime. 

The right to call in a transaction, however, applies to not only the acquisition of a qualifying entity as set above but also the acquisition of qualifying assets if they have been used in connection with activities in the UK or the supply of goods or services in the UK.

What can the Secretary of State do?

Following notification or call in of a transaction the SoS will review it and either permit it to proceed without interference, permit it to proceed subject to certain remedies being made, prohibit the transaction or unwind it.

What happens if I don't comply?

If a buyer completes a transaction (which requires mandatory notification) without notifying the SoS, it will be liable to imprisonment for up to 5 years  as well as being subject to a fine of up to 5% of its global group turnover (or £10 million, if higher).  In addition, the transaction is automatically void. 

If a buyer breaches the ACT with the consent or connivance, or due to the neglect, of any of its officers (ie director, shadow director, partner or manager) that officer is liable to the same range of penalties.

When does it come into force and how will it affect me?

The NSI comes into force on 4 January 2022.  However, the Act also has retrospective effect as it allows the SoS to call in a transaction that completed on or after 12 November 2020.

Due to the severe penalties and the rights available to the SoS on review, this is not an area to gloss over.

If the transaction is obviously notifiable then completion of the transaction will have to be conditional on mandatory notification being made and SoS clearance (or an SoS order requiring remedies to be made) being received.  If the SoS requires remedies to be made to the transaction then to what extent will those be acceptable to the buyer or will the acquisition agreement require the buyer to accept whatever remedies are imposed without being able to pull out of the transaction?  The time required for the SoS review process will also need to be factored into any timetable.

If there is doubt as to whether the transaction is notifiable then it may make sense to make a voluntary notification to the Investment and Security Unit of BEIS (“ISU”) before contracts are exchanged or even after exchange but as a condition to completion.  This will have a timing impact.  

If the transaction does not trigger a notification obligation there might still be a risk of a call in and the parties might want to consider obtaining guidance from the ISU (see above).  Any guidance received is not legally binding though and, again, timing will need to be factored into any timetable.

What about the Competitions and Markets Authority (“CMA”)?

An investigation by the CMA into a transaction will not preclude a call in by the SoS or excuse you from notifying a notifiable transaction.

What should I be doing now?

If you are currently undertaking an acquisition or disposal which is going to complete before 4 January 2022 then you will not fall foul of the mandatory notification regime.  However, the call in regime will still apply (and indeed applies to any deal completed since 12 November 2020). 

Although the current thinking is that a prohibition or unwinding of a transaction is unlikely, we cannot be certain of the SoS/ISU’s approach to the exercise of their powers.  Recent bids have suggested that the Government might be more willing to flex its muscles to prohibit a sale of a company to China or the US especially since Brexit. 

If remedies are required by the SoS then as a buyer are you going to have to accept these without being able to pull out of the deal?  As a seller you are going to want deal certainty and in an auction process you might prefer a buyer who will accept the possibility of remedies being imposed over a buyer who bids more but will not accept any remedies. If the consideration payable has been settled in shares what is the buyer going to do with the shares if the transaction is unwound?  What happens if you have acquired an entity and your seller has itself acquired that entity under a transaction that has been unwound by the SoS under its call in powers?

Whatever you are doing, you need to:-

• obtain proper advice;
• factor in sufficient time to your timetable (either to accommodate a voluntary notification or to allow the ISU review process to be run out under a mandatory notification); and
• work out alternatives if the SoS requires remedies or prohibits or unwinds the transaction.

Glossary of terms

For more information about the Act and its implications, contact Anthony Rudge or another member of the BPE Corporate team.

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.