The National Security and Investment Act 2021 (“NSI Act”) gives the UK government the power to scrutinise, impose conditions and, in rare cases, block acquisitions of properties and/or companies in the UK on national security grounds. The NSI Act came into force on 4 January 2022 and applies to acquisitions completing after 12 November 2020.
The types of investments affected include corporate acquisitions as well as acquisitions of assets such as land. In order to avoid potential scrutiny and costly delays, mandatory or voluntary notification should be considered prior to exchange of contracts for acquisitions falling within the scope of the Act.
Trigger events
The regime applies to a “qualifying acquisition”. This may be an acquisition of a qualifying entity (such as a company, a trust or any other body corporate) or the acquisition of a qualifying asset (such as land).
In order to be a qualifying acquisition, all of the following “trigger events” must apply:
Acquisitions of an entity
Where a target business is a qualifying entity in one of the 17 identified “sensitive sectors” of the UK economy (which include critical suppliers to government, data infrastructure, defence, energy and transport), approval from the government may be required before completion. This constitutes a “notifiable acquisition”. Completing a notifiable acquisition without approval means it is void and may result in the acquirer being subject to civil or criminal penalties.
Acquisitions of an asset
Notification is not mandatory in respect of asset acquisitions. However, the government will still be able to investigate asset transactions presenting national security risks in relation to the 17 specified sensitive sectors.
In terms of land, this may affect acquisitions of property interests, leasing and financing of property transactions. Land is mainly expected to be an asset of national security interest where it is, or is proximate to, a sensitive site. Examples of such sensitive sites include critical national infrastructure sites or government buildings. However the government may also take into account the intended use of the land. Therefore, it may be advisable to submit a voluntary notification to obtain clearance and certainty of whether or not the acquisition will be “called in” for further assessment.
Is the acquisition notifiable?
If there is significant uncertainty about whether an acquisition is notifiable, you may contact the government to seek a view. If you are seeking a view from the government, you should include as much detail as possible about a qualifying acquisition, explain clearly, in relation to the NSI Act and the underlying regulations, why there is uncertainty in how the NSI Act can be applied to the acquisition at hand. Any timing considerations should also be highlighted at this stage.
Factors the government will take into account when deciding whether to exercise the call in power
In order to assess the likelihood of a qualifying acquisition giving rise to a risk to national security (and therefore whether to call in the acquisition), the government will consider three primary risk factors:
- Target – whether the target of the qualifying acquisition (the entity or asset being acquired) is being used, or could be used, in a way that raises a risk to national security.
- Acquirer – whether the acquirer has characteristics that suggest there is, or may be, a risk to national security from the acquirer having control of the target.
- Control – the amount of control that has been, or will be, acquired through the qualifying acquisition. A higher level of control may increase the level of national security risk.
NSI Act Annual Report
Last year’s report provided a summary of the functioning of the regime established under the NSI Act, covering the first three months of its operation since the commencement of the NSI Act on 4 January 2022 to 31 March 2022. The next NSI Act Annual Report is due to be published in June 2023, and it is anticipated that it will provide further insight into the functioning of the NSI Act regime one year on from the NSI Act commencement, setting out data on notifications made. Further market guidance will draw on the findings of this report.
The key figures from the 2022 report are as follows:
- A total of 222 notifications were received during the reporting period – of these, 196 were mandatory notifications, 25 were voluntary notifications and one was a retrospective validation application.
- A total of 17 notifications were called in – 13 of these were mandatory notifications and four were voluntary notifications.
- 3 final notifications were given and 0 final orders were made.
- The remaining 14 notifications were still undergoing assessments by the reporting deadline, within the timelines set out in the NSI Act.
The five most common sectors of the economy from which mandatory notifications were received were Defence, Military and Dual Use, Critical Suppliers to Government, Artificial Intelligence and Data Infrastructure. Voluntary notifications were most commonly received from acquisitions where the target was active in Professional, Scientific and Technical Activities, Data Infrastructure, Energy and Computing Hardware.
Looking Ahead
It is particularly important to consider the potential for the notification procedure to impact upon the timing of relevant acquisitions. Where a mandatory notification is required in respect of corporate acquisitions, the notification should be made as early as possible to minimise delays and completion of the transaction should be conditional upon clearance.
In terms of corporate acquisitions, deal documentation should be updated. This includes updating due diligence questionnaires and warranties and undertakings under share purchase or investment agreements where relevant.
Overall, the government expects to rarely call-in acquisitions of assets compared to acquisitions of entities. However, particular care should be taken where assets are in or proximate to the specified sensitive sectors. In terms of land acquisitions, it is important to take into account the intended use, location and proximity of the land to sensitive sites.
Key points
- The NSI Act allows the government powers to scrutinise and block acquisitions of entities and assets posing a potential threat to national security.
- It is important to consider the impact of the NSI Act if you are entering into a purchase, sale, or other corporate transaction linked to a sensitive sector.
- Whilst asset acquisitions fall outside of the mandatory notification regime, they could still be called in for review by the government up to five years later. A voluntary notification should be considered prior to completion of acquisitions falling within the scope of the NSI Act.