The UK National Security And Investment Act: one month on (Part 1 – mandatory notification)

The UK National Security and Investment Act 2021 ('the Act') took full effect on 4 January, giving the Government unprecedented new powers to investigate and block deals it suspects could threaten UK security. Our main experience of the Act's first month of operation is that there can still be surprise at the extent of its scope and application, and that it will take some time for assessment procedures to standardise and become routine. This three-part series gathers together the key questions and issues deal-makers (both in and beyond the UK) need to be aware of, including a recap of some of the issues we have written about extensively over the past year or so.

This Part 1 covers the mandatory notification regime. Part 2 deals with the Government's proactive call-in power. Part 3 sets out the consequences that can apply under the Act and the key risk factors for a deal, as well as the application of the Act to non-UK transactions.

Mandatory notification

Most importantly for those involved in deals, the Act's mandatory notification obligation became 'live' on 4 January. Acquisitions that are within its scope will be void if they complete without first being notified to and approved by the Government, with the acquirer vulnerable to significant civil and criminal penalties.

What entities are covered by the mandatory notificationregime?

The obligation to notify arises where an investor acquires "control" (see below) over a "qualifying entity" (which can be any form of legal entity, such as a company, partnership or trust) that is active in the 17 sectors identified by the Government as key to national security:

The activities within those sectors that will trigger mandatory notification are then further specified in Regulations. Where a target is within scope of those definitions, and one of the control thresholds is met, the parties will need to build Government approval into their deal timing and budget estimates.

While some of the sector definitions incorporate turnover thresholds, there is in general no minimum level of turnover an entity must have before the notification obligation will apply, or indeed any minimum deal value threshold. The obligation is also not limited to UK entities – a target that carries on the relevant activities in the UK will be caught.

What level of control will trigger mandatory notification?

A person gains control over a within-scope entity where they acquire:

• Shares or voting rights that take them above thresholds of 25%, 50% or 75%, with a new notifiable acquisition taking place each time a threshold is passed; or

• Voting rights that enable them to ensure or prevent the passage of any class of resolution governing the entity's affairs.

(Shareholdings in entities with share capital are measured by reference to the shares' nominal value, not simply the number of shares. Voting rights mean rights to vote at general meetings on "all or substantially all matters".)

The 'resolution' threshold creates a grey area, as investors will often secure the ability to veto resolutions over particular matters without necessarily securing a broad veto over the entire affairs of the company. Government guidance states that minority veto rights will only count if they give the holder "a right to vote on all or substantially all matters governing the affairs of the entity" but, given the stark consequences of completing a notifiable acquisition without approval, investors may want to err on the side of caution when considering whether their veto rights qualify.

The identity of the acquirer does not matter for the purposes of mandatory notification. It applies equally to UK and non-UK buyers, and indeed applies even where there is no change in the entity's ultimate ownership – i.e. intra-group reorganisations will be caught. This creates scope for a very large number of deals to have to be notified (the Government initially estimated 1,000 to 1,830 notifications per year, but that was widely suspected to be an underestimate), which may impact on the speed with which notifications can be assessed.

What are the consequences of a deal being notifiable?

A notifiable acquisition that is completed without approval will be void. The Act is largely silent on what that means in practice, but it must mean at least that the transfer of ownership will be treated as never having happened for the purposes of UK law. There is a procedure by which such a deal can be retrospectively validated by the Government, but even an interim 'void' status would be very messy from a legal perspective and certainly best avoided.

Completing without approval can also have significant corporate and personal consequences for the acquirer (including any director, manager etc. of a body corporate), with the risk of a criminal conviction resulting in up to 5 years imprisonment and/or an unlimited fine, or a civil penalty of up to the higher of 5% of turnover or £10 million. There will be a defence if the acquirer had a reasonable excuse for not notifying, so one way for buyers to hedge against this risk is to seek clear warranties confirming that the target's activities do not put it within the scope of the regime.

A notification requires substantial detail about the target and acquirer. The Government's new Investment Security Unit ("ISU") will have an initial 30 working day screening process to decide whether to issue a 'call-in notice' submitting the deal to further review. However, this process will only begin once the ISU is content that the notification form is fully complete, putting the timetable very much within the ISU's control. If a deal is called in the ISU will have a further 30 to 75 working day period (further extendible by agreement) to carry out that more detailed review. While only a minority of notifiable cases should merit a call-in notice, even the initial screening will add delay to deal timetables measured in weeks rather than days. That could even stretch to months if the ISU's capacity is overwhelmed by a higher than expected number of notifications.

Data on the number of notifications processed since the Act's commencement, and the speed with which those have been handled, will hopefully be forthcoming in the near future.