The impact of the National Security and Investment Act 2021

The National Security and Investment Act (the 'Act') came into force on 4 January 2022. One year on we look at the Act's impact so far. 

Background

The Act created a screening regime for transactions where there may be a national security risk. The scope of the Act is strikingly broad, capturing company takeovers, investments, acquisitions, corporate restructurings, and acquisitions of assets such as land and IP, and applies to non-UK entities carrying on business in the UK as well as UK entities.

The regime is split into two parts – the first part establishes a mandatory notification requirement. Transactions must be notified to BEIS if there is a trigger event and the target is active in one or more of the 17 specified sectors.

A trigger event occurs when the acquirer increases its shareholding or voting rights from 25% or less to more than 25%, from 50% or less to having more than 50% and from less than 75% to having 75% or more or, if there is the acquisition of voting rights that enable or prevent the passage of any class of resolution governing the affairs of the entity being acquired.

The second part allows the Secretary of State to call in a transaction up to five years after the deal closes where a) there is a trigger event; and b) the transaction may pose a risk to national security.  Parties can voluntarily notify BEIS, and apply for clearance, if they think the transaction may be caught under this part of the regime. The two parts of the regime are summarised below. For more details, see here.

The first year

Between 4 January 2022 and 4 January 2023, BEIS published 14 Final Orders under the Act.

• Nine Final Orders imposed conditions on the transaction and five Final Orders prohibited transactions from taking place.
• Four out the nine transactions where conditions were imposed and four out of five of the prohibited transactions, related to acquirers with a connection to China.
• The other six transactions related to acquirers in the UK, US, UAE, Germany and Russia.
• Where conditions have been imposed, there are three categories commonly being seen:
  • information barriers to control the disclosure of sensitive information
  • restrictions on appointments to the target's board or key management positions, and
  • a requirement that certain capabilities (eg R&D) remain in the UK.
• 10 of the 14 transactions have been acquisitions of one company; the remaining four have related to the sale of assets, the grant of a licence and the increase in a shareholding.
• The majority of the Final Orders have related to technology with a dual-use, with transactions in the energy, satellite and space, data infrastructure and communications sectors also caught.

Our experience

Given the Act's broad scope, we are seeing that a significant number of transactions, including non-UK transactions where there is a UK connection, require at least an initial, high-level analysis to determine whether or not the transaction is caught by the Act. It is important that this is undertaken as early as possible to minimise delays to the deal timetable, if the conclusion is that a notification to BEIS should be made. Although the acquiring / investing entity makes the notification to BEIS, the decision of whether or not to notify typically involves input from both the parties' lawyers due to the impact it has on the transaction and the parties.

If the parties decide to notify BEIS, certain information must be submitted in respect of both the target, the acquirer, and their respective groups. Although the information requests are fairly straightforward, the relevant information can take some time to collect. Once a notification is submitted, in our experience, BEIS takes a few days to accept it and will then take most if not all of the 30 business days it has under the legislation in which to complete its initial review, even for unproblematic cases. It seems that particular scrutiny is given to deals involving certain of the specified sectors such as defence; military and dual use; artificial intelligence; and data infrastructure, even if the transaction does not appear to pose any actual national security risk. Where a transaction is called in following the initial review, BEIS has an additional 45 working days to assess the transaction. However, the clock stops each time BEIS requests information from the parties (until they provide such information) and we have seen this 45 day period extend to several months as a result of such requests. Given the time BEIS review takes, it is becoming more common for a split sign and close to be built in to transactions, with clearance from BEIS being a condition to the closing.

In its first year the Act has had a significant impact on a number of transactions. It should be factored into deal timelines from the very beginning.

If you would like to discuss the Act and its impact on any proposed transaction, please let us and know and contact Philip Shepherd, Paolo Palmigiano and Rebecca Le Flufy.