Warning for key acquisitions and disposals!
What is the UK’s National Security and Investment Act 2021?
The Act came into force on 4 January 2022 and has a wide-ranging impact for proposed transactions in sensitive sectors. The Act permits the UK Government to scrutinise and, where appropriate, intervene in proposed acquisitions that may harm the UK’s national security. A list of sectors the Government has deemed to be of strategic importance is as follows:
- Advanced materials
- Advanced robotics
- Artificial intelligence
- Civil nuclear
- Computing hardware
- Critical suppliers to government
- Cryptographic authentication
- Data infrastructure
- Military and dual-use technologies
- Quantum technologies
- Satellite and space technologies
- Critical suppliers to emergency services
- Synthetic biology
The Act provides for two separate regimes, namely: mandatory and voluntary notification. A mandatory notification obligation will occur for relevant transactions involving target entities within the 17 sectors noted above and is triggered where control over a qualifying entity is acquired. Control is generally defined as an acquisition of more than 25% of the shares or voting rights of the qualifying entity, referred to as a trigger event. The obligations for mandatory notification fall upon the relevant acquiring party.
Failure to gain clearance from the Investment Security Unit (ISU) (an office of the Department for Business, Energy and Industrial Strategy) for certain transactions may lead to significant sanctions, including turnover-based fines and criminal liability. Additionally, an acquisition will be automatically void if it is determined to be subject to the mandatory notification regime and approval from the ISU has not been obtained in advance.
Acquisitions which do not meet the thresholds for mandatory notification but which could give rise to national security concerns may still be called in for review by the UK Government (up to 5 years after they have closed and up to 6 months after a notification is made in relation to the acquisition). In accordance with he NSIA, the UK Government has the power to unwind acquisitions completed without clearance. As such, a voluntary notification may be considered to mitigate this risk. A voluntary notification may be made by the acquirer, seller or qualifying entity in relation to a proposed or completed acquisition.
Insolvency is one area that is immediately affected by the new legislation. This is in light of the fact that the appointment of an office holder and/or creditor enforcement actions may give rise to notification requirements, if the debtor operates in one of the above sectors. Examples of the appointments and creditor enforcement actions where notification may be required include:
- The appointment of a liquidator over the debtor.
- The appointment of a receiver over certain assets of the debtor.
- A mortgagee enforcing its security by entering into possession of charged property.
- The appointment of trustee in bankruptcy over the estate of a bankrupt individual.
- The appointment of foreign insolvency office-holders in other jurisdictions and the recognition of such appointments here.
Please note that there is a carve-out for the appointment of an administrator, who takes control over a qualifying entity. Such an appointment will not itself automatically trigger a notification under the Act. However, where the administrator is seeking to dispose of the assets of, or shares in, a qualifying entity, such disposals will be caught by the provisions of the Act. As such, careful contingency planning in respect of pre-packaged administrations in particular will be required.
This is a serious challenge for anyone seeking to enforce their security, for example by pursuing one of the options set out above, or alternatively when an accelerated sale of a business is being considered, when time can often be of the essence. This is given that both instances may give rise to a notifiable change in control of the qualifying entity, in which case the procedure below will apply.
Deciding whether a transaction requires a notification may be complex and professional advice should be sought at an early stage to mitigate risk and avoid delays with concluding transactions.
What happens once a notification is submitted?
Providing the forms have been properly completed, the notification will be accepted by the ISU. The ISU is not subject to a statutory time limit, but in practice acceptance has been taking place on average within 3-4 working days of submission of a notification.
A 30-day review period will commence following the acceptance of a completed notification by the ISU (usually confirmed by email to the notifying party). During this period, transactions may be subject to “call in” by the ISU for further review. If called in, an assessment period will follow (which is another 30-day period, although that may be extended by an additional 45 days in some circumstances).
The ISU has recently issued its Market Guidance Notes (MGNs) which outlined commonly raised queries and observations in the process. A key takeaway is that notifiers should provide as much detail as possible in relation to the entity within scope of the notification. Notifications should include detailed structure charts which show the ultimate beneficial ownership of the qualifying entity and the potential acquirer in order for the government to have a full understanding of the current and proposed ownership structure. Failure to provide sufficient information may result in the notification being rejected.
What is happening now?
The ISU published its first annual report in June 2022, which provided statistics in relation to notifications made between January and March this year.
The ISU received 222 notifications between January and March 2022, which is at the lower end of what the ISU anticipated in their impact assessment of approximately 1,000-1,830 notifications per year. 17 of the 222 acquisitions were called-in by the Government for further assessment. Of these, three were cleared with other cases still being assessed at the end of the reporting period.
The ISU called in deals within 24 working days on average after a notification was accepted, and did not exceed the 30-working day limit in any cases.
In particular, the government has exercised its “call in” powers on two transactions:
- The acquisition by Altice of 5.9% of the shares in BT was called in for a full national security assessment by Business Secretary Kwasi Kwarteng on Thursday 26 May;
- The completed acquisition of Newport Wafer Fab by Nexperia, a Dutch subsidiary of a China-based technology firm, was blocked in May this year. This was following the discovery of Nexperia components within Russian missiles deployed in the Ukraine conflict.
The call in’s to date evidence that transactions remain at risk even if certain risk factors are not at first identified. In addition to this, the ISU announced on 17 August 2022 that it had blocked the acquisition of Pulsic Limited, a UK-based company operating in integrated circuits, by Hong Kong-based firm Super Orange HK9. The ISU commented that Pulsic Limited’s technology could be used in “a civilian or military supply chain” and therefore had defense applications.
The lack of notifications may suggest that a significant number of recent acquisitions may be automatically void, as notification is mandatory in certain circumstances and, as above, a failure to notify will lead to the acquisition being void. However, retrospective approval of the transaction can be sort by both the acquirer or the seller.
From a lender perspective, we are starting to see various considerations of the Act incorporated within finance packages. These include conditions precedent to ensure that any required notification under the Act has been made and/or representations to require a borrower to represent that either no notification is required or that the obligations under the Act have been satisfactorily discharged.
Borrowers, on the other hand, should ensure that they are familiar with the requirements under the Act and conduct appropriate due diligence in advance of potential notification events. Qualifying acquisitions as part of a corporate restructuring or reorganisation may also be covered by the Act and careful planning and due diligence by borrowers in advance of such circumstances will be required.
Officeholder and those who appoint them, will need to be mindful of the impact of the Act on transactions, as there is no exemption for sales of the business or assets of a company in an insolvency process. This is a particular area of concern where a “pre-packaged” administration is contemplated. In such circumstances, the onus is on the acquirer to make a notification but it may be prudent for this to be reviewed by the proposed administrator to mitigate the risk of rejection and a transaction being delayed and/or voided post closure.
When contemplating a pre-packaged administration or the appointment of a receiver over shares, the 30-day review period will need to be considered within the pre-acquisition/appointment timeline where mandatory notification is a requirement. As well as the timing risk, there are also other associated risks such as director risk of trading a business which is insolvent pending the requisite approval, cash flow/working capital considerations of trading the qualifying entity for the review period and transaction risk if knowledge of the proposed pre-packaged sale seeps into the market, eroding value and potentially leading to the acquisition falling through. All of these represent significant associated risks when considering the implications of the Act in an insolvency scenario and highlight the need for careful planning.
There is expected to be an increase in notifications compared to the first three months of the year, as the volumes of transactions increases and stakeholders become more familiar with the requirements under the Act.
The ISU appears to be keen to ensure that their powers under the Act remain flexible across a multitude of sectors and has therefore not taken steps to provide an exact definition of national security. It is vital that stakeholders seek expert advice on the Act, and its impact on potential transactions, particularly where time is of the essence.
Whilst the ISU appears to be resolving notifications in a prompt manner, timescales for doing so and the potential timing impact on transactions should continue to be monitored, particularly as the number of notifications is expected to increase.