Consistent with recent investment screening reforms adopted across Europe (see Sidley Update of September 2021), in April 2021, the United Kingdom (UK) passed into law the National Security and Investment Act (NSIA). NSIA, which will start applying in full from January 4, 2022, introduces a comprehensive investment screening regime and complements existing rules under the UK Enterprise Act 2002 (EA02), which already allowed the Secretary of State under certain circumstances to review and restrict transactions that might affect UK national security, media plurality, the stability of the financial system, or the UK’s ability to combat public health emergencies. The new investment screening regime under NSIA has a much broader application and may affect offshore acquisitions with only limited nexus with the UK.
NSIA will be administered by the Investment Security Unit (ISU) within the UK Department for Business, Energy and Industrial Strategy (BEIS), with the ultimate decision-maker being the Secretary of State for BEIS. This past summer, BEIS issued guidance detailing and clarifying the scope and operation of the regime, including: (a) guidance for investors on how to prepare for the new investment screening rules; (b) guidance on how NSIA may affect people or transactions outside the UK; and (c) guidance on how NSIA will interact with existing UK regulatory review mechanisms, such as reviews by the UK’s Competition and Markets Authority (CMA) and public interest interventions under EA02. What to expect: A few practical considerations The breadth of the new UK investment screening regime makes it imperative for those doing mergers and acquisitions that might touch (however marginally) on the UK to consider how NSIA might affect their deal-making.
- Notification requirements: For a wide array of transactions, parties will have to assess whether a pre-closing notification is required and, if not, whether the risk of a call-in warrants a voluntary notification. Given both the imminent full application of NSIA and its retroactive aspects, the impact of NSIA should also be assessed for all ongoing transactions with the requisite UK nexus. Clearly, any such assessment should take into account what the UK government’s view might be on the transaction in question and whether any conditions might be imposed.
- Contractual provisions: Where appropriate, transaction documents should take into account the need to make a mandatory filing or a buyer’s decision to make to make a voluntary filing to mitigate call-in risk. For transactions being negotiated now but that may close after January 4, 2022, buyers should at least consider including a springing condition to allow the investor to seek approval if relevant requirements come into force before completion.
- Timing: For transactions that fall within scope of the mandatory regime and are either still being negotiated or are between signing and closing but are forecast to close on or after January 4, 2022, parties should take into account that (a) there may be a confluence of notifications on or shortly after January 4, 2022, (b) approvals may be delayed, and therefore (c) there may be a benefit to engaging with BEIS in advance of January 4, 2022, to ensure as smooth a process as possible following January 4, 2022.
Key aspects of the new UK investment screening regime
- Mandatory notification and voluntary/call-in review: NSIA introduces two review mechanisms: a. Mandatory notification: Under NSIA, investors in certain sectors deemed of critical importance (see point 4, below) will be required to notify the investment. The notification will be suspensory, with parties being prohibited from completing the transaction pending approval. b. Voluntary/call-in review: NSIA also gives the UK government the power to call in for review transactions that are not subject to mandatory notification, including transactions in sectors other than the critical sectors. The UK government will have such power for up to five years following the transaction’s completion. To mitigate the risk of the UK government calling in a transaction for review and subjecting it (retrospectively) to conditions (or ordering its unwinding), investors will be able to make a voluntary filing and seek approval for transactions that fall outside the scope of the mandatory regime. Voluntary filings are in principle not suspensory, but the UK government may issue orders preventing implementation.
- Qualifying investors: In contrast with most investment screening regimes, which tend to focus on foreign (i.e., non-domestic) investors or foreign shareholders, NSIA will also apply to purely UK investors.
- Qualifying transactions: In terms of the types of transactions covered by NSIA, the mandatory regime applies to deals whereby an investor (a) acquires more than 25%, 50%, or 75% of equity or voting rights, or (b) acquires rights that grant the investor the power to secure or prevent the adoption of resolutions. The voluntary/call-in regime additionally applies to transactions whereby an investor (c) becomes able to materially influence the target (e.g., by being able to direct strategic decisions of such entity) or (d) gains the right to use, or control the use of, relevant assets (e.g., land, tangible property, intellectual property rights). BEIS guidance further clarifies that qualifying transactions that are part of a corporate restructure and reorganization may be caught by NSIA even where occurring within the same group of companies. Therefore, even intra-group transactions would need to be assessed against NSIA to clear any investment screening risks.
- Mandatory critical sectors: Investors will be required to notify qualifying transactions involving a sector deemed of critical importance. The sectors subject to mandatory notification are identified in the current draft regulations on qualifying entities for notifiable acquisitions:
- Extraterritorial application: In contrast to most investment screening regimes, which only apply to investments in domestic entities or assets, NSIA also covers investments in entities or assets established outside the UK but that have a nexus with the UK. BEIS guidance clarifies (to some extent) the instances where offshore targets may be subject to NSIA: a. Entities that carry on activities in the UK (e.g., an offshore entity with a research and development facility in the UK). b. Entities that supply goods or services to people in the UK (e.g., an offshore entity that produces goods for exporting to an entity in the UK). c. Assets used in connection with activities carried on in the UK (e.g., machinery located overseas used to produce equipment that is used in the UK). d. Assets used in connection with the supply of goods or services to people in the UK (e.g., a wind farm used to generate electricity that is supplied to the UK).
- Retroactive application: NSIA will start applying in full from January 4, 2022, but aspects of NSIA will have retroactive application. Parties to transactions that fall within the scope of the mandatory regime and that have signed but not closed by the time the regime starts applying, will need to seek pre-closing approval. This will likely lead to a large number of filings in relation to ongoing deals being submitted on (or immediately after) January 4, 2022. In addition, the UK government will be able to call in for review any transaction that completed on or after November 12, 2020.
- Decision making: Following review of notified or called-in transactions, the UK government may clear, prohibit, or impose conditions – depending on whether a transaction raises any national security concerns and how material such concerns are. Conditions could include, among others, the imposition of a limit on the number of shares the investor may acquire or restrictions on access to intellectual property rights or the possibility to gain insights on certain sensitive activities carried on by the target.
- Penalties: There are significant civil and criminal penalties for breaches of NSIA. For instance, failure to seek pre-closing approval in transactions requiring mandatory notification can be sanctioned with up to five years imprisonment and/or a fine of up to 5% global turnover or £10 million, whichever is greater.