The UK National Security and Investment Act 2021 – sneaking into force early 2022

Amidst the changing tides of COVID variants, vaccine roll outs, international football tournaments and by-elections, the UK National Security and Investment Act of 2021 (“NSI”) quietly rolled out and comes into force on 4 January 2022.

Arriving relatively unheralded, the NSI will allow the UK Government to scrutinise certain acquisitions where it is believed that there could be harm to the UK’s national security. Depending on the circumstances the UK Government will be able to impose conditions on acquisitions and, in what is expected to be rare occasions, unwind or block acquisitions.

2021 has seen an increase in Private Equity (PE) activity in the UK from 2020 levels. Expectations are that PE led deals will continue to grow and, potentially, fuel the post-COVID environment. Certainly valuations have increased, as evidenced by the recent Morrisons acquisition, which is the largest UK PE deal since the KKR acquisition of Boots in 2007 and represented a 60% premium to share price before the takeover news broke.

Qualifying Acquisitions

When contemplating a transaction, market participants will have to assess if the investment in question would be a considered as a “Qualifying Acquisition” under the terms of the NSI.

Whereas the control thresholds in question are straight forward  ̶  transactions resulting in a stake or voting rights exceeding 25%, 50% and 75%  ̶  the more difficult part is that the entities in question do not necessarily have to be UK domiciled entities. An entity will be considered a “qualifying entity” if it “carries on activities in the UK” or “supplies goods or services to people in the UK.”

Guidance by the BEIS states that should staff of the entity undertake business activities “similar to working in a regional office”, then the entity would therefore be a qualifying entity. Thankfully, having a sales team travelling to the UK does NOT trigger a qualification.

Additionally, should the goods produced by the entity travel through the UK on their way to other destinations, and be used or modified while in the UK, then the entity would become a qualifying entity. Simply passing through the UK may also result in classification as a Qualifying Acquisition and will depend on the specific arrangements.

It is not just entities either that must be considered as the NSI also covers “assets.” As with the entity ownership levels, the thresholds of 25%, 50% and 75% are all triggers for assets as well. These are considered to be land, tangible moveable property, or ideas, information or techniques that have industrial, commercial of other economic value (intellectual property).

Although heavily covered in the national press at the time, the Morrisons deal, though a Qualifying Acquisition, wouldn’t necessarily be viewed as being a threat to UK national security and the NSI lists 17 specific areas of the economy that are considered as being of potential risk:

• Advanced Materials
• Advanced Robotics
• Artificial Intelligence
• Civil Nuclear
• Communications
• Computing Hardware
• Critical Suppliers to Government
• Cryptographic Authentication
• Data Infrastructure
• Defence
• Energy
• Military and Dual-Use Quantum Technologies
• Satellite and Space Technologies
• Suppliers to the Emergency Services
• Synthetic Biology
• Transport

Qualifying Acquisitions in any of these areas are then considered “Notifiable Acquisitions”. These require the Acquirer to notify the UK government of the acquisition via a “Mandatory Notification”. Acquirers will have to be especially cognisant of the specific activities that the target entities perform as there are exclusions.

Taking “Advanced Robotics” as an example, the acquisition of a company that produces self-driving cars (or the technology behind this) is within the scope of the NSI for the purposes of a Mandatory Notification. The automated parking and lane departure warning capabilities, however, are NOT within the scope of the NSI. Guidance has been given by the Department for Business, Energy and Industrial Strategy (“BEIS”) on these areas and can be found here.

What happens if you don’t make the notification?

The acquisition of a Qualifying Entity or Asset that is deemed to require a Mandatory Notification should not be completed without first receiving approval from the UK Government following notification of the pending acquisition. There will be penalties (both civil and criminal) for completing a Notifiable Acquisition without gaining approval. The civil penalty could see acquirers paying a fine of up to 5% of the organisation’s global turnover or £10 million, whichever is greater. Any acquisition that is completed without the necessary approval would be considered void, alongside the fines that could be levied

OK… so what notifications do I make?

Given some of the fine lines associated with the classification of a notifiable acquisition, the UK Government will allow three different types of notification to be made (all of which go live in January 2022).

Firstly, there is the aforementioned Mandatory Notification (i.e. when the proposed acquisition falls into one of the 17 specific areas listed previously).

Alongside this Mandatory Notification is a Voluntary Notification to allow parties to make a notification regarding a completed or planned qualifying acquisition not covered under the mandatory notifications. Whereas the Mandatory Notification must come from the proposed Acquirer, the voluntary notification can be made by any party to the transaction (i.e. buyer, seller or entity in question itself).

Thirdly there is the retrospective validation application. This is applicable when a Notifiable Acquisition is completed without the required mandatory notification having been submitted.

All notifications will be made via an online platform which is to be rolled out in January 2022.

What is the process then?

Once the notification, regardless of type, is made, you will receive a case number and then confirmation if the notification has been accepted or rejected based on the completeness of the information. A 30 day clock starts from the day the UK Government notifies you of this acceptance. By the end of this period one of four things will occur.

1. The acquisition will be approved;
2. The acquisition will be “called in” for a full national security assessment;
3. The UK Government may request additional information (which should be provide as soon as possible); or
4. The UK Government may require individuals involved in the acquisition to attend an in-person meeting.

Calls for meetings or additional information do NOT stop the 30 day clock, which marks a change to some regulatory notification processes. It is expected that the vast majority of acquisitions will be approved within that 30 day period.

However, should an acquisition be “called in” for a full assessment, this will trigger an additional 30 day assessment period. During this period the clock CAN be stopped by requests for meetings or additional information and the Government can put in place interim measures. By the end of the 30 day assessment the acquisition should either be approved or, subject to certain conditions, blocked completely, or the assessment period can be extended for another 45 working days.

Our Guidance

2022 appears to herald the start of a new approach to finance, not only with the implementation of various ESG regulations and reporting, but also with the change to the UK prudential regulatory regime. The addition of the UK National Security and Investment Act and the associated notification requirements, marks yet another level of consideration for those investing across the markets, both public and private given the scope of the act.

While most would agree with the need for appropriate disclosures and security assessments, the timing perhaps could have been better. For the time being, we recommend that deal teams work closely with their respective legal and compliance teams to make sure the appropriate notifications are made and to have that list of 17 sectors handy when prepping for investments.

Questions?

Our experienced private markets team is on hand to help you understand what this new act means for you and to provide support for your ongoing governance, risk and compliance challenges.

Complete this form or call +44 (0) 20 7042 0500 to connect with us.