The National Security and Investment Act 2020 is now in force

This article was written by Barri Mendelsohn and Greg Stonefield.

As of 4 January 2022, the National Security and Investment Act (the “NSI Act”) is in force and expected to impact thousands of transactions a year in the UK.

The NSI Act states that its powers will not be used to “interfere arbitrarily with investment” although we see a need for a significant shift in the approach to deal-doing involving UK business, particularly those operating in certain sensitive sectors. Additional diligence, conditionality and time built-in for Government clearance will need to be factored into these transactions.

Despite a new and advance framework, ultimately the Government is not expected to block many transactions but may impose some conditions or safeguarding over sensitive businesses. In other cases, the NSI Act will have very little, or no impact, and deals in non-sensitive areas to UK national security or below the thresholds may proceed mostly as before.

Key points

Below are the key points that parties should be aware of before transacting in the UK:

  • Whilst the Government states that it intends for the UK to remain an open and dynamic economy welcoming of foreign investment, the NSI Act is designed to protect UK national security by preventing hostile actors from acquiring control (or material influence) over sensitive UK entities and assets.
  • The NSI Act not only applies going forward, it will have retrospective effect, applying to all transactions taking place since 12 November 2020 when the draft legislation was first announced.  This gives the UK government powers to call in for review any qualifying transaction with national security concerns for up to 5 years after the deal (or even longer if the business operates in a sensitive sector and a mandatory notification was required to be made for approval of the deal). This reduces to 6 months once the ISU becomes aware of the transaction.
  • Under the NSI Act, the Secretary of State of Department for Business, Energy & Industrial Strategy (“BEIS”), which overseas the new Investment Security Unit (ISU), will be interested in transactions involving specific “trigger events”, defined as the acquisition of “control” over either a qualifying entity or qualifying asset, being:
    1. more than 25%, 50% or 75% of shares or voting rights in a qualifying entity (which includes a company, partnership, unincorporated entity or trust);
    2. voting rights that enable or prevent the passage of any class of resolution governing the affairs of the qualifying entity;
    3. material influence over a qualifying entity’s policy (this could include influence through board seats, veto rights/negative controls or preferential contracts); or
    4. in relation to qualifying assets (e.g. land, other physical property and IP), a right or interest in, or providing the ability to use the asset or direct control of how the asset is used to a greater extent than prior to the acquisition (includes exploitation, alteration, manipulation, disposal or destruction).
  • The reach of the NSI Act is not confined to investments by non-UK persons - it will also apply to any cross-border transactions that involve the indirect acquisition of a UK subsidiary or entities or overseas entities with UK business operations, such as the supply of products or services to the UK. It could even impact group re-organisations.
  • The addition of a trigger event for dealing in assets shows a wider focus on intellectual property and know-how, such as trade secrets, databases, source code, algorithms, designs, plans and software than under previous legislation. Transactions to acquire these outright or by licence or other commercial arrangement may now be caught as was not previously the case.
  • Minority investing in entities below 25% should no longer be caught by the NSI Act (as had been indicated in prior drafts of the law), provided there is not the passing of “material influence” to a new party acquirer.
  • For mandatory notification to the ISU transactions must involve a trigger event and be over targets in 17 sensitive sectors in the UK - those viewed as most likely to give rise to UK national security concerns (the “Key Sectors”). Any transaction which is subject to a mandatory notification and which is completed without clearance will be deemed void.
  • The Key Sectors are currently: (a) Advanced Materials, (b) Advanced Robotics, (c) Artificial Intelligence, (d) Civil Nuclear, (e) Communications, (f) Computing Hardware, (g) Critical Suppliers to Government, (h) Critical Suppliers to the Emergency Services, (i) Cryptographic Authentication, (j) Data Infrastructure, (k) Defence, (l) Energy, (m) Synthetic Biology, (n) Military and Dual Use, (o) Quantum Technologies, (p) Satellite and Space Technologies and (q) Transport.  These sectors are further defined in detailed secondary legislation and guidance from BEIS such that each require critical legal and commercial review when considering a transaction in such sector – the definitions are particularly nuanced and occasionally obscure.
  • It is important to note that there is no financial threshold for a notifiable transaction to the ISU, which means that every transaction that gives rise to a trigger event in one of the Key Sectors must be notified.
  • For transactions with trigger events where there is uncertainty as to whether they are operating in any of the Key Sectors or whether there are any other national security concerns (or to simply seek to reduce the risk of a call-in), a voluntary notification by the potential acquirer should be considered.
  • For real estate only transactions, the Government has stated that it will rarely call-in transactions unless connected to one of the Key Sectors or located close to a sensitive government site or critical infrastructure.
  • It is important to note that just because a transaction may be caught by the NSI Act does not mean that the transaction will not be permitted to proceed.  The Government expects that most transactions will have the ability to proceed as it seeks to balance its powers of review with the desire to promote the UK for foreign investment in a post-Brexit and post-COVID world.
  • Ultimately, to consent to a transaction the ISU will make an assessment of the potential to increase the risk to national security, in consideration of the following risks:
    • Target risk – the importance of the target entity or asset to UK national security i.e mainly whether the transaction is in one of the Key Sectors;
    • Trigger event risk – whether the transaction gives rise to the ability to harm UK national security i.e. control or material influence
    • Acquirer risk – whether the acquirer may seek to use its control to harm UK national security.
  • Assessing acquirer risk carries the most uncertainty – the ISU is required to assess an acquirer and of their potential use of disruptive or destructive actions, espionage activities such as unauthorised access to sensitive information or the use of inappropriate leverage to exploit an investment to influence the UK.  It is expected to be rare for genuine commercial parties, even if abroad, to trigger such risks but the assessment remains subjective in the hands of a newly-formed unit in the Government. There is very little precedent and the NSIA Act remains untested in key areas.
  • BEIS states that it expects parties to do their due diligence on acquirers and consult with or notify the ISU if they have concerns. We recommend that acquirers should be forthcoming with information and able to pre-empt enquiries by having detailed information packs as to the nature and extent of their business around the world as well as their ownership and control, including links to any State entity.
  • BEIS states that it will consider if national security risk is increased with the introduction of any hostile state actors. No individual states have been named and there are no express criteria to determine what makes a state hostile.  According to Government guidance, "the Secretary of State does not regard state-owned entities, sovereign wealth funds or other entities affiliated with foreign states, as being inherently more likely to pose a national security risk". However, the Government has left the statute widely drafted and is giving itself maximum discretion to make an appropriate assessment of the acquirer at any given time.
  • There is an initial 30 working day assessment period for the ISU to review a transaction (the CMA under the Enterprise Act 2002 previously had up to 4 months). It is expected that after this period most transactions will be cleared through a notification of no further action. As a consequence, parties wanting to sign acquisition agreements must include clearance conditions and wait for the outcome of the mandatory or voluntary filing before completing. However, the initial period may be followed by an additional period of 45 working days for a more detailed assessment if there are concerns or a lengthier voluntary period if agreed between the ISU/BEIS and the acquirer.
  • We recommend that parties should build in the entire legislative timeframe into the drafting of the condition precedent and take care to apportion appropriate responsibility in filings and dealing with the ISU as well as any consequences of failure to respond adequately or in time or as to who bears costs if approval is not obtained. 
  • At the end of the review period BEIS will approve the transaction through a notice of no further action, or, if BEIS finds that national security is indeed at risk, it is expected to impose necessary and proportionate remedies - it may limit access to certain information, personnel or sites to only persons with the requisite security clearances and/or enter into deeds of undertaking with key parties to adhere to secrecy (as we have seen in the past under prior legislation).  BEIS could ultimately block or void any deal closed and this is subject to a right of appeal.
  • Where there is a failure by an acquirer to comply with the NSI Act such as failure to make appropriate filings or completing transactions without clearance, necessary sanctions (criminal and civil) will be imposed, such as:
    1. fines up to 5% of the global turnover of the business in question or £10 million (whichever is higher);
    2. imprisonment for up to five years and/or dis for specified directors and officers; and
    3. certain corporate criminal penalties.  

Next steps

  • For private equity or financial investors, you may wish to carry out a review of your portfolio companies to identify any that carry out business in any of the Key Sectors and take steps to safeguard key IP assets with risk assessments, specific policies and ongoing monitoring of risks. You may also wish to “hive-off” or segregate certain sensitive assets from other business units to facilitate future exits. Some investors might use the NSI Act as an opportunity to acquire new assets in sensitive sectors whilst others are looking to exit. Capital markets may become increasingly popular for exits in sensitive sectors.
  • Venture capital investing may not be as broadly impacted, provided new investors participate below the 25% threshold or do not acquire “material influence”. Future exists of a sensitive portfolio company may find fewer international investors wishing to acquire control although provided they have low “acquirer risk” a notification and conditional sale pending approval will become the “new norm”.
  • For UK public takeovers governed by the Takeover Code, all of the above provisions will continue to apply although the Panel has indicated that it would likely treat a NSI Act filing as a "material official authorisation or regulatory clearance", which could trigger a suspension of the Code timetable to allow the review to take place.
  • We are happy to assist market participants with initial consideration of the risks of any potential transaction and with any other preparations needed to comply with the NSI Act. For example, detailed legal and commercial analysis of the definitions of the Key Sectors is needed to form a view of the target entity/asset risk.
  • There remains a possibility for early consultation with the ISU as regards your transaction by writing to a designated email address or calling although this will not comprise formal clearance until a notification is submitted and the ISU responds with a no further action notice.  It is worth bearing in mind that the ISU is expected to be inundated within the first few years and resource allocation is a concern. Therefore, our advice is to act swiftly.
  • For no or low risk transactions outside of the Key Sectors parties may complete their deals without conditions precedent but with the potential (low) risk of a call-in for review.
  • If there is more risk or uncertainty in the deal it is recommended that at least initial consultation or voluntary notification is submitted before proceeding. If the parties wish to enter into binding acquisition agreements, where voluntary or mandatory notifications are submitted, then conditions precedent are required before closing the deal.
  • Ultimately it is for the parties to consider the risks before proceeding however given the volume of cross-border transactions we see and experience in other jurisdictions we are well placed to advise on these complex areas as and when may be required. 
New regulations in China designed to encourage innovation in clinical trials have made it easier to test human samples in a lab setting.

19 May 2022

The preliminary issue before the High Court in Euro Accessories Ltd [2021] EWCH 47 (Ch) concerned the interpretation of ‘fair value’ in the context of a majority shareholder (“Mr Gilsenan”) exercising an option to acquire the shares (“Minority Shares”) of a minority shareholder (“Mr Monoghan”) pursuant to the articles of association of a private limited company, Euro Accessories Ltd (the “Company”).

17 May 2022

Commercial leases commonly feature a clause giving the optical illusion that a tenant has little or no right to make a compensation claim when they vacate a property.

17 May 2022