The UK National Security and Investment Act
It introduces a mandatory notification system for investments in 17 sectors considered particularly relevant to national security; completing a notifiable acquisition without approval is a criminal offence. It also builds on existing legislation in facilitating ex officio reviews into a broader range of investments (including those that have already completed). The legislation represents a step change to the UK regulatory landscape and is already presenting a series of challenges to dealmakers.
Background and context
The UK Government already had, and still has, the ability under the Enterprise Act 2002 to intervene on specified public interest grounds1 in transactions that are reviewable under UK merger control rules (and certain other deals involving media businesses and government contractors). However, that legislation does not contain any mandatory notification obligation (in line with the broader scheme of UK merger control) and its powers have been used sparingly. Accordingly, a 2018 Governmental White Paper found that it was “no longer sufficient to address the challenging and changing national security threats the UK faces”2 and proposed a reform which ultimately led to the NSIA.
The White Paper also noted that “these reforms will bring the UK closer in line with other countries’ regimes…as many other governments are also updating their powers in light of the same technological, economic and national security related changes.” Whether or not that was an overstatement at the time, it certainly holds true today. The NSIA forms part of a worldwide trend toward increasing governmental screening of investments into sensitive businesses, especially in Europe following the passing of the EU Foreign Direct Investment Regulation in 2019.
The National Security and Investment Act
The NSIA introduces a broad, mandatory notification requirement for qualifying investments:
- The requirement applies to acquisitions of more than 25% of the share capital or voting rights of a legal entity.
- It not only catches entities inside the UK, but also those in other jurisdictions where the target carries out activities in the UK or supplies goods or services into the UK.
- The notification obligation is not affected by the identity of the investor: it applies dispassionately to investors from outside and inside the UK; and it does not discriminate (as is the case in some leading regimes elsewhere in the world) between the private sector and State-controlled investors.
- The legislation does not contain a de minimis turnover or asset value threshold; the notification requirement rather turns on whether the target fits within 17 sectors defined in some 50 pages of technical secondary legislation.3
After accepting a notification, the Government has 30 working days to confirm that it will not take any action, or to “call in” the transaction for more detailed investigation (which takes up to 75 further working days, extendable with the acquirer’s consent). The Government may ultimately clear the transaction, or (where the Secretary of State has identified a “risk to national security”) condition its approval on certain obligations or even block/unwind the deal.
The legislation also grants the Government the power to “call in” transactions that are not subject to the mandatory notification requirement but may give rise to a national security risk. In these situations, the Government has the ability to impose interim orders (e.g., to “hold separate” the target from the acquirer) where necessary to prevent action that would hinder its assessment. Recent experience from UK merger control suggests that the Government may make extensive use of this interim measure power, especially when investigating completed deals.
These provisions are supported by a broad range of information gathering and punitive powers. Notably, completing a notifiable acquisition without approval is a criminal offence – the maximum penalty is five years in prison for individuals and corporate fines up to the higher of £10m or 5% worldwide turnover – and the underlying transaction would be void as a matter of UK law.
The NSIA is a ground-breaking piece of legislation within in the UK that is already presenting several challenges for M&A.
First, the contours of the mandatory notification obligation are challenging to navigate. Notably, it is often not straightforward to determine whether the activities of a given target fall within the sectors set out in secondary legislation. Given the risk of criminal sanctions and the underlying transaction being void, there may be a natural tendency to notify more deals than is strictly necessary. However, this can result in unnecessary delays in borderline cases. Parties will need to walk an appropriate line between the extremes of under- and over-reporting.
Second, the ex officio powers provide the Government with an even broader review mechanism. For example, they capture asset acquisitions; and for share acquisitions they extend below 25% investments to acquisitions of “material influence”, a concept that derives from UK merger control and can capture investments of 15% or even lower.4 The powers also apply retrospectively to investments made since the NSIA was adopted on November 12, 2020. Accordingly, investors looking at targets that could be of interest should consider how best to navigate the risk of UK Government intervention, even where a mandatory filing is not required.
Third, there is considerable uncertainty over the substance of the legislation and how it will be enforced, including with respect to what the substantive test (whether the transaction presents a “risk to national security”) actually means, how many deals will be subject to detailed investigation, and the categories of transaction that the Government may ultimately challenge.
We have already started to gain significant insights into the Government’s practices since the regime came into force. The law and practice in this area will continue to evolve rapidly, but it is already clear that the NSIA will provide an important hurdle for deals to overcome for the years to come.
1 The relevant public interest grounds are national security, media accuracy/freedom/plurality, the stability of the UK financial system, and the need to maintain the capability to combat public health emergencies (Section 58, Enterprise Act 2002).
2 National Security and Investment - A consultation on proposed legislative reform, July 2018.
3 The relevant sectors are set out in the National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021: (1) advanced materials; (2) advanced robotics; (3) artificial intelligence; (4) civil nuclear; (5) communications; (6) computing hardware; (7) critical supplies to the government; (8) cryptographic authentication; (9) data infrastructure; (10) defence; (11) energy; (12) military and dual-use goods and technology; (13) quantum technologies; (14) satellite and space technology; (15) suppliers to the emergency services; (16) synthetic biology; and (17) transport infrastructure.
4 CMA Mergers Guidance on the CMA’s jurisdiction and procedure, paragraphs 4.21 to 4.36.