The new National Security and Investment Act 2021 (NSI Act) received royal assent on 29 April 2021 and, once fully in force, will establish a new, standalone statutory regime for government scrutiny of, and intervention in, acquisitions and investments for the purposes of protecting national security. The new regime will, once in force, replace the national security aspects of the government’s current powers of intervention under the Enterprise Act 2002 (EA) which are not as extensive in their scope. But the NSI Act will not halt a merger assessment by the UK Competition and Markets Authority (CMA) – the two schemes will run in tandem and the CMA will still have the obligation under the EA to inform the Secretary of State for Business, Energy and Industrial Strategy (SoS) if it believes a merger it is investigating raises material public interest considerations.
The NSI Act does not define “national security” nor the factors to which the Secretary of State must have regard when assessing national security risks. These factors will be set out in a statutory statement of policy.
New NSI Act regime
The new regime under the NSI Act applies to specified categories of transaction or investment that involve the acquisition of control over certain qualifying entities or qualifying assets. The “trigger events” include:
- the acquisition of votes or shares in a qualifying entity exceeding a threshold of 25%, 50% or 75%.
- the acquisition of voting rights that enable or prevent the passage of any class of resolution governing the affairs of the qualifying entity.
- the acquisition of material influence over a qualifying entity’s policy.
- the acquisition of a right or interest in, or in relation to, a qualifying asset providing the ability to: (i) use the asset, or use it to a greater extent than prior to the acquisition; or (ii) direct or control how the asset is used, or direct or control how the asset is used to a greater extent than prior to the acquisition.
A qualifying entity is any entity (other than an individual), whether or not a legal person and therefore includes companies, limited liability partnerships, general partnerships, other bodies corporate, trusts and unincorporated associations. A non-UK entity can be a qualifying entity if it carries on activities in the UK, or supplies goods or services to persons in the UK.
Qualifying assets comprise land, tangible movable property and ideas, information or techniques which have industrial, commercial or other economic value, and which are used in connection with either activities carried on the UK, or the supply of goods or services to persons in the UK. The last category would include trade secrets, databases, source code, algorithms, formulae, designs, plans, drawings and specifications and software. Land or movable property located outside the UK is also a qualifying asset for the purposes of the new NSI regime if it is used in connection with activities carried on in the UK, or the supply of goods or services to persons in the UK.
Key features of the NSI Act Regime
The new regime provides for:
- mandatory notification to the SoS by a proposed acquirer of shares or voting rights which exceed the defined thresholds in entities undertaking specified activities in the UK in certain sensitive sectors of the economy to seek authorisation and obtain approval from the SoS before completing their acquisition. A mandatorily notifiable transaction that is completed without being approved by the SoS will be void and of no legal effect (although the NSI Act includes a mechanism enabling the SoS retrospectively to validate non-approved notifiable transactions in certain circumstances. The acquirer may also be subject to criminal or civil penalties for completing the transaction without obtaining clearance;
- voluntary notification (where the mandatory notification requirement does not apply) again to the SoS in order to obtain a call-in decision in relation to the transaction, to encourage acquirers to notify transactions that may raise national security concerns; and
- government call-in powers under which the SoS can call in for review any transaction (whether or not notified) where there is a reasonable suspicion that it could give rise to a risk to national security.
The SoS can impose remedies to address risks to national security including imposing conditions and prohibiting or unwinding the transaction. There are also criminal sanctions including imprisonment and fines for non-compliance.
A new unit, the Investment Security Unit (ISU) which is part of the Department for Business, Energy and Industrial Strategy is being established for the NSI Act.
Interim period
Until the NSI Act has come fully into effect, the notification procedures are not available but parties are being encouraged to contact the ISU for informal advice in the interim. In addition, the government’s call-in powers extend to any trigger event that occurs between 12 November 2020 and the day before section 2 of the NSI Act comes into force except where the relevant transaction is being reviewed under the national security powers of the EA.
If you would like further insight into the topics raised above please contact Catherine Drew or a member of our Corporate and Commercial team.